Barack Obama should stop apologising for America. By Nile Gardiner
It is time for President Obama to recognise that his strategy is weakening his country and making the United States more vulnerable to attack, says Nile Gardiner.
The Telegraph, Jun 02, 2009 10:41AM BST
No leader in American history has gone to greater lengths than Barack Obama to make amends for his own country. From condemnation of American “arrogance” in a speech in Strasbourg to acknowledging U.S. “mistakes” before millions of Muslims on Arab television, Obama has rarely missed an opportunity to apologise for the actions of the American people.
President Obama has elevated the art of national self-loathing to new heights, and seems to delight in prostrating the most powerful nation on the face of the earth before its critics and rivals, especially on foreign soil. The Obama worldview revolves around the central premise that the United States must be humble and “engage” and work with its enemies through the application of “smart power”. There is nothing smart, however, in appeasing rogue states such as North Korea or Iran.
The Obama doctrine is now lying in tatters after North Korean tyrant Kim Jong-Il and Iranian demagogue Mahmoud Ahmadinejad met Obama’s recent overtures with missile tests and even a nuclear blast from Pyongyang. The president’s video message in March offering “a new beginning” to “the people and leaders of the Islamic Republic of Iran” was followed by the launch of a surface-to-surface missile with a range of 1,200 miles capable of reaching southern Europe. Incredibly, the U.S. response has been to slash defense spending, with a dramatic scaling down of plans for a global missile defence shield.
The world today is considerably more dangerous than it was in the days of the Bush Administration, and the Obama White House has nothing to show for its weak-kneed efforts. The brutal truth is that the United States is increasingly viewed as a soft touch by its enemies, increasingly jeered rather than feared.
When he travels to the Middle East and Europe this week, the president will have ample opportunity to do what he does best – atone for America’s past. After a brief visit to Saudi Arabia he will deliver a major address to the Muslim world in Cairo, before travelling to Germany to visit the Buchenwald Nazi concentration camp and meet with Chancellor Angela Merkel in Dresden. His world tour ends with his participation in ceremonies marking the 65th anniversary of the D-Day landings in Normandy.
It will be hugely tempting for the rock star president to play to his Arab and European audiences by scoring points against his hugely unpopular predecessor. He could easily rail against the Bush Administration’s enhanced interrogation techniques, boast of the impending closure of the Guantanamo detention facility, or revive the ghosts of Abu Ghraib. The president’s advisers are no doubt furiously trying to outdo one another with the most original mea culpas.
Obama’s supine approach has become a humiliating spectacle for a country that, together with Great Britain, has done more to advance the cause of liberty and freedom across the world than any nation in the world. Every groveling apology by the president undermines America’s confidence, standing and power, and strengthens the hand of those who seek her destruction.
It is time for President Obama to recognise that his new strategy is weakening his country and making the United States more vulnerable to attack. The dream of America haters who revel in the vision of the humbling of a superpower, is being realised by an administration that has so far fundamentally rejected the idea of American exceptionalism.
The world needs a president who aggressively projects American power on the world stage, rather than seeks the adoration of traditionally hostile foreign audiences. In Egypt, Obama should not be afraid to offend the sensibilities of Muslim leaders, by calling for religious tolerance, freedom of speech, worship and association, and a rejection of Islamist extremism.
In Germany, the president should call on Europe to learn the lessons of the Holocaust and stand and fight against totalitarianism, whether in the form of the Taliban in Afghanistan or the Mullahs of Tehran in their drive for nuclear domination of the Middle East. He must urge the Germans to end their massive investments in Iran, which shamefully help sustain a regime that threatens to wipe the descendents of the survivors of the Final Solution from the face of the earth.
In Normandy, President Obama should take great pride in America’s role in the liberation of Europe and remind his French hosts that Europe is free today because of the huge sacrifice of American, British and Commonwealth forces. This is a moment for the president to recognise American global power and the role it has played as a great force for good, as well as the broader importance of the transatlantic alliance and the Anglo-American Special Relationship.
No one expects Barack Obama to adopt the swagger of a John Wayne or Clint Eastwood when he travels to the Middle East and Western Europe. But he should adopt a more forceful and confident approach to international affairs that marks him as a force to be reckoned with rather than a Jimmy Carter-like pushover. It is not too late for the president to acknowledge that the time for apologies is over, that the world needs robust American leadership that projects strength and power rather than timidity and weakness.
Nile Gardiner is the Director of the Margaret Thatcher Center for Freedom at the Heritage Foundation in Washington, D.C.
Wednesday, June 3, 2009
The Geography of Recession
The Geography of Recession. By Peter Zeihan
Stratfor, June 2, 2009 1844 GMT
The global recession is the biggest development in the global system in the year to date. In the United States, it has become almost dogma that the recession is the worst since the Great Depression. But this is only one of a wealth of misperceptions about whom the downturn is hurting most, and why.
Let’s begin with some simple numbers.
As one can see in the chart, the U.S. recession at this point is only the worst since 1982, not the 1930s, and it pales in comparison to what is occurring in the rest of the world. (Figures for China have not been included, in part because of the unreliability of Chinese statistics, but also because the country’s financial system is so radically different from the rest of the world as to make such comparisons misleading. For more, read the China section below.)
But didn’t the recession begin in the United States? That it did, but the American system is far more stable, durable and flexible than most of the other global economies, in large part thanks to the country’s geography. To understand how place shapes economics, we need to take a giant step back from the gloom and doom of the current moment and examine the long-term picture of why different regions follow different economic paths.
The United States and the Free Market
The most important aspect of the United States is not simply its sheer size, but the size of its usable land. Russia and China may both be similar-sized in absolute terms, but the vast majority of Russian and Chinese land is useless for agriculture, habitation or development. In contrast, courtesy of the Midwest, the United States boasts the world’s largest contiguous mass of arable land — and that mass does not include the hardly inconsequential chunks of usable territory on both the West and East coasts.
Second is the American maritime transport system. The Mississippi River, linked as it is to the Red, Missouri, Ohio and Tennessee rivers, comprises the largest interconnected network of navigable rivers in the world. In the San Francisco Bay, Chesapeake Bay and Long Island Sound/New York Bay, the United States has three of the world’s largest and best natural harbors. The series of barrier islands a few miles off the shores of Texas and the East Coast form a water-based highway — an Intercoastal Waterway — that shields American coastal shipping from all but the worst that the elements can throw at ships and ports.
(click image)
The real beauty is that the two overlap with near perfect symmetry. The Intercoastal Waterway and most of the bays link up with agricultural regions and their own local river systems (such as the series of rivers that descend from the Appalachians to the East Coast), while the Greater Mississippi river network is the circulatory system of the Midwest. Even without the addition of canals, it is possible for ships to reach nearly any part of the Midwest from nearly any part of the Gulf or East coasts. The result is not just a massive ability to grow a massive amount of crops — and not just the ability to easily and cheaply move the crops to local, regional and global markets — but also the ability to use that same transport network for any other economic purpose without having to worry about food supplies.
The implications of such a confluence are deep and sustained. Where most countries need to scrape together capital to build roads and rail to establish the very foundation of an economy, transport capability, geography granted the United States a near-perfect system at no cost. That frees up U.S. capital for other pursuits and almost condemns the United States to be capital-rich. Any additional infrastructure the United States constructs is icing on the cake. (The cake itself is free — and, incidentally, the United States had so much free capital that it was able to go on to build one of the best road-and-rail networks anyway, resulting in even greater economic advantages over competitors.)
Third, geography has also ensured that the United States has very little local competition. To the north, Canada is both much colder and much more mountainous than the United States. Canada’s only navigable maritime network — the Great Lakes-St. Lawrence Seaway —is shared with the United States, and most of its usable land is hard by the American border. Often this makes it more economically advantageous for Canadian provinces to integrate with their neighbor to the south than with their co-nationals to the east and west.
Similarly, Mexico has only small chunks of land, separated by deserts and mountains, that are useful for much more than subsistence agriculture; most of Mexican territory is either too dry, too tropical or too mountainous. And Mexico completely lacks any meaningful river system for maritime transport. Add in a largely desert border, and Mexico as a country is not a meaningful threat to American security (which hardly means that there are not serious and ongoing concerns in the American-Mexican relationship).
With geography empowering the United States and hindering Canada and Mexico, the United States does not need to maintain a large standing military force to counter either. The Canadian border is almost completely unguarded, and the Mexican border is no more than a fence in most locations — a far cry from the sort of military standoffs that have marked more adversarial borders in human history. Not only are Canada and Mexico not major threats, but the U.S. transport network allows the United States the luxury of being able to quickly move a smaller force to deal with occasional problems rather than requiring it to station large static forces on its borders.
Like the transport network, this also helps the U.S. focus its resources on other things.
Taken together, the integrated transport network, large tracts of usable land and lack of a need for a standing military have one critical implication: The U.S. government tends to take a hands-off approach to economic management, because geography has not cursed the United States with any endemic problems. This may mean that the United States — and especially its government — comes across as disorganized, but it shifts massive amounts of labor and capital to the private sector, which for the most part allows resources to flow to wherever they will achieve the most efficient and productive results.
Laissez-faire capitalism has its flaws. Inequality and social stress are just two of many less-than-desirable side effects. The side effects most relevant to the current situation are, of course, the speculative bubbles that cause recessions when they pop. But in terms of long-term economic efficiency and growth, a free capital system is unrivaled. For the United States, the end result has proved clear: The United States has exited each decade since post-Civil War Reconstruction more powerful than it was when it entered it. While there are many forces in the modern world that threaten various aspects of U.S. economic standing, there is not one that actually threatens the U.S. base geographic advantages.
Is the United States in recession? Of course. Will it be forever? Of course not. So long as U.S. geographic advantages remain intact, it takes no small amount of paranoia and pessimism to envision anything but long-term economic expansion for such a chunk of territory. In fact, there are a number of factors hinting that the United States may even be on the cusp of recovery.
Russia and the State
If in economic terms the United States has everything going for it geographically, then Russia is just the opposite. The Russian steppe lies deep in the interior of the Eurasian landmass, and as such is subject to climatic conditions much more hostile to human habitation and agriculture than is the American Midwest. Even in those blessed good years when crops are abundant in Russia, it has no river network to allow for easy transport of products.
Russia has no good warm-water ports to facilitate international trade (and has spent much of its history seeking access to one). Russia does have long rivers, but they are not interconnected as the Mississippi is with its tributaries, instead flowing north to the Arctic Ocean, which can support no more than a token population. The one exception is the Volga, which is critical to Western Russian commerce but flows to the Caspian, a storm-wracked and landlocked sea whose delta freezes in the winter (along with the entire Volga itself). Developing such unforgiving lands requires a massive outlay of funds simply to build the road and rail networks necessary to achieve the most basic of economic development. The cost is so extreme that Russia’s first ever intercontinental road was not completed until the 21st century, and it is little more than a two-lane path for much of its length. Between the lack of ports and the relatively low population densities, little of Russia’s transport system beyond the St. Petersburg/Moscow corridor approaches anything that hints of economic rationality.
Russia also has no meaningful external borders. It sits on the eastern end of the North European Plain, which stretches all the way to Normandy, France, and Russia’s connections to the Asian steppe flow deep into China. Because Russia lacks a decent internal transport network that can rapidly move armies from place to place, geography forces Russia to defend itself following two strategies. First, it requires massive standing armies on all of its borders. Second, it dictates that Russia continually push its boundaries outward to buffer its core against external threats.
Both strategies compromise Russian economic development even further. The large standing armies are a continual drain on state coffers and the country’s labor pool; their cost was a critical economic factor in the Soviet fall. The expansionist strategy not only absorbs large populations that do not wish to be part of the Russian state and so must constantly be policed — the core rationale for Russia’s robust security services — but also inflates Russia’s infrastructure development costs by increasing the amount of relatively useless territory Moscow is responsible for.
Russia’s labor and capital resources are woefully inadequate to overcome the state’s needs and vulnerabilities, which are legion. These endemic problems force Russia toward central planning; the full harnessing of all economic resources available is required if Russia is to achieve even a modicum of security and stability. One of the many results of this is severe economic inefficiency and a general dearth of an internal consumer market. Because capital and other resources can be flung forcefully at problems, however, active management can achieve specific national goals more readily than a hands-off, American-style model. This often gives the impression of significant progress in areas the Kremlin chooses to highlight.
But such achievements are largely limited to wherever the state happens to be directing its attention. In all other sectors, the lack of attention results in atrophy or criminalization. This is particularly true in modern Russia, where the ruling elite comprises just a handful of people, starkly limiting the amount of planning and oversight possible. And unless management is perfect in perception and execution, any mistakes are quickly magnified into national catastrophes. It is therefore no surprise to STRATFOR that the Russian economy has now fallen the furthest of any major economy during the current recession.
China and Separatism
China also faces significant hurdles, albeit none as daunting as Russia’s challenges. China’s core is the farmland of the Yellow River basin in the north of the country, a river that is not readily navigable and is remarkably flood prone. Simply avoiding periodic starvation requires a high level of state planning and coordination. (Wrestling a large river is not the easiest thing one can do.) Additionally, the southern half of the country has a subtropical climate, riddling it with diseases that the southerners are resistant to but the northerners are not. This compromises the north’s political control of the south.
Central control is also threatened by China’s maritime geography. China boasts two other rivers, but they do not link to each other or the Yellow naturally. And China’s best ports are at the mouths of these two rivers: Shanghai at the mouth of the Yangtze and Hong Kong/Macau/Guangzhou at the mouth of the Pearl. The Yellow boasts no significant ocean port. The end result is that other regional centers can and do develop economic means independent of Beijing.
(click image)
With geography complicating northern rule and supporting southern economic independence, Beijing’s age-old problem has been trying to keep China in one piece. Beijing has to underwrite massive (and expensive) development programs to stitch the country together with a common infrastructure, the most visible of which is the Grand Canal that links the Yellow and Yangtze rivers. The cost of such linkages instantly guarantees that while China may have a shot at being unified, it will always be capital-poor.
Beijing also has to provide its autonomy-minded regions with an economic incentive to remain part of Greater China, and “simple” infrastructure will not cut it. Modern China has turned to a state-centered finance model for this. Under the model, all of the scarce capital that is available is funneled to the state, which divvies it out via a handful of large state banks. These state banks then grant loans to various firms and local governments at below the cost of raising the capital. This provides a powerful economic stimulus that achieves maximum employment and growth — think of what you could do with a near-endless supply of loans at below 0 percent interest — but comes at the cost of encouraging projects that are loss-making, as no one is ever called to account for failures. (They can just get a new loan.) The resultant growth is rapid, but it is also unsustainable. It is no wonder, then, that the central government has chosen to keep its $2 trillion of currency reserves in dollar-based assets; the rate of return is greater, the value holds over a long period, and Beijing doesn’t have to worry about the United States seceding.
Because the domestic market is considerably limited by the poor-capital nature of the country, most producers choose to tap export markets to generate income. In times of plenty this works fairly well, but when Chinese goods are not needed, the entire Chinese system can seize up. Lack of exports reduces capital availability, which constrains loan availability. This in turn not only damages the ability of firms to employ China’s legions of citizens, but it also removes the primary reason the disparate Chinese regions pay homage to Beijing. China’s geography hardwires in a series of economic challenges that weaken the coherence of the state and make China dependent upon uninterrupted access to foreign markets to maintain state unity. As a result, China has not been a unified entity for the vast majority of its history, but instead a cauldron of competing regions that cleave along many different fault lines: coastal versus interior, Han versus minority, north versus south.
China’s survival technique for the current recession is simple. Because exports, which account for roughly half of China’s economic activity, have sunk by half, Beijing is throwing the equivalent of the financial kitchen sink at the problem. China has force-fed more loans through the banks in the first four months of 2009 than it did in the entirety of 2008. The long-term result could well bury China beneath a mountain of bad loans — a similar strategy resulted in Japan’s 1991 crash, from which Tokyo has yet to recover. But for now it is holding the country together. The bottom line remains, however: China’s recovery is completely dependent upon external demand for its production, and the most it can do on its own is tread water.
Discordant Europe
Europe faces an imbroglio somewhat similar to China’s.
Europe has a number of rivers that are easily navigable, providing a wealth of trade and development opportunities. But none of them interlinks with the others, retarding political unification. Europe has even more good harbors than the United States, but they are not evenly spread throughout the Continent, making some states capital-rich and others capital-poor. Europe boasts one huge piece of arable land on the North European Plain, but it is long and thin, and so occupied by no fewer than seven distinct ethnic groups.
These groups have constantly struggled — as have the various groups up and down Europe’s seemingly endless list of river valleys — but none has been able to emerge dominant, due to the webwork of mountains and peninsulas that make it nigh impossible to fully root out any particular group. And Europe’s wealth of islands close to the Continent, with Great Britain being only the most obvious, guarantee constant intervention to ensure that mainland Europe never unifies under a single power.
Every part of Europe has a radically different geography than the other parts, and thus the economic models the Europeans have adopted have little in common. The United Kingdom, with few immediate security threats and decent rivers and ports, has an almost American-style laissez-faire system. France, with three unconnected rivers lying wholly in its own territory, is a somewhat self-contained world, making economic nationalism its credo. Not only do the rivers in Germany not connect, but Berlin has to share them with other states. The Jutland Peninsula interrupts the coastline of Germany, which finds its sea access limited by the Danes, the Swedes and the British. Germany must plan in great detail to maximize its resource use to build an infrastructure that can compensate for its geographic deficiencies and link together its good — but disparate — geographic blessings. The result is a state that somewhat favors free enterprise, but within the limits framed by national needs.
And the list of differences goes on: Spain has long coasts and is arid; Austria is landlocked and quite wet; most of Greece is almost too mountainous to build on; it doesn’t get flatter than the Netherlands; tiny Estonia faces frozen seas in the winter; mammoth Italy has never even seen an icebreaker. Even if there were a supranational authority in Europe that could tax or regulate the banking sector or plan transnational responses, the propriety of any singular policy would be questionable at best.
Such stark regional differences give rise to such variant policies that many European states have a severe (and understandable) trust deficit when it comes to any hint of anything supranational. We are not simply taking about the European Union here, but rather a general distrust of anything cross-border in nature. One of the many outcomes of this is a preference for using local banks rather than stock exchanges for raising capital. After all, local banks tend to use local capital and are subject to local regulations, while stock exchanges tend to be internationalized in all respects. Spain, Italy, Sweden, Greece and Austria get more than 90 percent of their financing from banks, the United Kingdom 84 percent and Germany 76 percent — while for the United States it is only 40 percent.
And this has proved unfortunate in the extreme for today’s Europe. The current recession has its roots in a financial crisis that has most dramatically impacted banks, and European banks have proved far from immune. Until Europe’s banks recover, Europe will remain mired in recession. And since there cannot be a Pan-European solution, Europe’s recession could well prove to be the worst of all this time around.
Stratfor, June 2, 2009 1844 GMT
The global recession is the biggest development in the global system in the year to date. In the United States, it has become almost dogma that the recession is the worst since the Great Depression. But this is only one of a wealth of misperceptions about whom the downturn is hurting most, and why.
Let’s begin with some simple numbers.
As one can see in the chart, the U.S. recession at this point is only the worst since 1982, not the 1930s, and it pales in comparison to what is occurring in the rest of the world. (Figures for China have not been included, in part because of the unreliability of Chinese statistics, but also because the country’s financial system is so radically different from the rest of the world as to make such comparisons misleading. For more, read the China section below.)
But didn’t the recession begin in the United States? That it did, but the American system is far more stable, durable and flexible than most of the other global economies, in large part thanks to the country’s geography. To understand how place shapes economics, we need to take a giant step back from the gloom and doom of the current moment and examine the long-term picture of why different regions follow different economic paths.
The United States and the Free Market
The most important aspect of the United States is not simply its sheer size, but the size of its usable land. Russia and China may both be similar-sized in absolute terms, but the vast majority of Russian and Chinese land is useless for agriculture, habitation or development. In contrast, courtesy of the Midwest, the United States boasts the world’s largest contiguous mass of arable land — and that mass does not include the hardly inconsequential chunks of usable territory on both the West and East coasts.
Second is the American maritime transport system. The Mississippi River, linked as it is to the Red, Missouri, Ohio and Tennessee rivers, comprises the largest interconnected network of navigable rivers in the world. In the San Francisco Bay, Chesapeake Bay and Long Island Sound/New York Bay, the United States has three of the world’s largest and best natural harbors. The series of barrier islands a few miles off the shores of Texas and the East Coast form a water-based highway — an Intercoastal Waterway — that shields American coastal shipping from all but the worst that the elements can throw at ships and ports.
(click image)
The real beauty is that the two overlap with near perfect symmetry. The Intercoastal Waterway and most of the bays link up with agricultural regions and their own local river systems (such as the series of rivers that descend from the Appalachians to the East Coast), while the Greater Mississippi river network is the circulatory system of the Midwest. Even without the addition of canals, it is possible for ships to reach nearly any part of the Midwest from nearly any part of the Gulf or East coasts. The result is not just a massive ability to grow a massive amount of crops — and not just the ability to easily and cheaply move the crops to local, regional and global markets — but also the ability to use that same transport network for any other economic purpose without having to worry about food supplies.
The implications of such a confluence are deep and sustained. Where most countries need to scrape together capital to build roads and rail to establish the very foundation of an economy, transport capability, geography granted the United States a near-perfect system at no cost. That frees up U.S. capital for other pursuits and almost condemns the United States to be capital-rich. Any additional infrastructure the United States constructs is icing on the cake. (The cake itself is free — and, incidentally, the United States had so much free capital that it was able to go on to build one of the best road-and-rail networks anyway, resulting in even greater economic advantages over competitors.)
Third, geography has also ensured that the United States has very little local competition. To the north, Canada is both much colder and much more mountainous than the United States. Canada’s only navigable maritime network — the Great Lakes-St. Lawrence Seaway —is shared with the United States, and most of its usable land is hard by the American border. Often this makes it more economically advantageous for Canadian provinces to integrate with their neighbor to the south than with their co-nationals to the east and west.
Similarly, Mexico has only small chunks of land, separated by deserts and mountains, that are useful for much more than subsistence agriculture; most of Mexican territory is either too dry, too tropical or too mountainous. And Mexico completely lacks any meaningful river system for maritime transport. Add in a largely desert border, and Mexico as a country is not a meaningful threat to American security (which hardly means that there are not serious and ongoing concerns in the American-Mexican relationship).
With geography empowering the United States and hindering Canada and Mexico, the United States does not need to maintain a large standing military force to counter either. The Canadian border is almost completely unguarded, and the Mexican border is no more than a fence in most locations — a far cry from the sort of military standoffs that have marked more adversarial borders in human history. Not only are Canada and Mexico not major threats, but the U.S. transport network allows the United States the luxury of being able to quickly move a smaller force to deal with occasional problems rather than requiring it to station large static forces on its borders.
Like the transport network, this also helps the U.S. focus its resources on other things.
Taken together, the integrated transport network, large tracts of usable land and lack of a need for a standing military have one critical implication: The U.S. government tends to take a hands-off approach to economic management, because geography has not cursed the United States with any endemic problems. This may mean that the United States — and especially its government — comes across as disorganized, but it shifts massive amounts of labor and capital to the private sector, which for the most part allows resources to flow to wherever they will achieve the most efficient and productive results.
Laissez-faire capitalism has its flaws. Inequality and social stress are just two of many less-than-desirable side effects. The side effects most relevant to the current situation are, of course, the speculative bubbles that cause recessions when they pop. But in terms of long-term economic efficiency and growth, a free capital system is unrivaled. For the United States, the end result has proved clear: The United States has exited each decade since post-Civil War Reconstruction more powerful than it was when it entered it. While there are many forces in the modern world that threaten various aspects of U.S. economic standing, there is not one that actually threatens the U.S. base geographic advantages.
Is the United States in recession? Of course. Will it be forever? Of course not. So long as U.S. geographic advantages remain intact, it takes no small amount of paranoia and pessimism to envision anything but long-term economic expansion for such a chunk of territory. In fact, there are a number of factors hinting that the United States may even be on the cusp of recovery.
Russia and the State
If in economic terms the United States has everything going for it geographically, then Russia is just the opposite. The Russian steppe lies deep in the interior of the Eurasian landmass, and as such is subject to climatic conditions much more hostile to human habitation and agriculture than is the American Midwest. Even in those blessed good years when crops are abundant in Russia, it has no river network to allow for easy transport of products.
Russia has no good warm-water ports to facilitate international trade (and has spent much of its history seeking access to one). Russia does have long rivers, but they are not interconnected as the Mississippi is with its tributaries, instead flowing north to the Arctic Ocean, which can support no more than a token population. The one exception is the Volga, which is critical to Western Russian commerce but flows to the Caspian, a storm-wracked and landlocked sea whose delta freezes in the winter (along with the entire Volga itself). Developing such unforgiving lands requires a massive outlay of funds simply to build the road and rail networks necessary to achieve the most basic of economic development. The cost is so extreme that Russia’s first ever intercontinental road was not completed until the 21st century, and it is little more than a two-lane path for much of its length. Between the lack of ports and the relatively low population densities, little of Russia’s transport system beyond the St. Petersburg/Moscow corridor approaches anything that hints of economic rationality.
Russia also has no meaningful external borders. It sits on the eastern end of the North European Plain, which stretches all the way to Normandy, France, and Russia’s connections to the Asian steppe flow deep into China. Because Russia lacks a decent internal transport network that can rapidly move armies from place to place, geography forces Russia to defend itself following two strategies. First, it requires massive standing armies on all of its borders. Second, it dictates that Russia continually push its boundaries outward to buffer its core against external threats.
Both strategies compromise Russian economic development even further. The large standing armies are a continual drain on state coffers and the country’s labor pool; their cost was a critical economic factor in the Soviet fall. The expansionist strategy not only absorbs large populations that do not wish to be part of the Russian state and so must constantly be policed — the core rationale for Russia’s robust security services — but also inflates Russia’s infrastructure development costs by increasing the amount of relatively useless territory Moscow is responsible for.
Russia’s labor and capital resources are woefully inadequate to overcome the state’s needs and vulnerabilities, which are legion. These endemic problems force Russia toward central planning; the full harnessing of all economic resources available is required if Russia is to achieve even a modicum of security and stability. One of the many results of this is severe economic inefficiency and a general dearth of an internal consumer market. Because capital and other resources can be flung forcefully at problems, however, active management can achieve specific national goals more readily than a hands-off, American-style model. This often gives the impression of significant progress in areas the Kremlin chooses to highlight.
But such achievements are largely limited to wherever the state happens to be directing its attention. In all other sectors, the lack of attention results in atrophy or criminalization. This is particularly true in modern Russia, where the ruling elite comprises just a handful of people, starkly limiting the amount of planning and oversight possible. And unless management is perfect in perception and execution, any mistakes are quickly magnified into national catastrophes. It is therefore no surprise to STRATFOR that the Russian economy has now fallen the furthest of any major economy during the current recession.
China and Separatism
China also faces significant hurdles, albeit none as daunting as Russia’s challenges. China’s core is the farmland of the Yellow River basin in the north of the country, a river that is not readily navigable and is remarkably flood prone. Simply avoiding periodic starvation requires a high level of state planning and coordination. (Wrestling a large river is not the easiest thing one can do.) Additionally, the southern half of the country has a subtropical climate, riddling it with diseases that the southerners are resistant to but the northerners are not. This compromises the north’s political control of the south.
Central control is also threatened by China’s maritime geography. China boasts two other rivers, but they do not link to each other or the Yellow naturally. And China’s best ports are at the mouths of these two rivers: Shanghai at the mouth of the Yangtze and Hong Kong/Macau/Guangzhou at the mouth of the Pearl. The Yellow boasts no significant ocean port. The end result is that other regional centers can and do develop economic means independent of Beijing.
(click image)
With geography complicating northern rule and supporting southern economic independence, Beijing’s age-old problem has been trying to keep China in one piece. Beijing has to underwrite massive (and expensive) development programs to stitch the country together with a common infrastructure, the most visible of which is the Grand Canal that links the Yellow and Yangtze rivers. The cost of such linkages instantly guarantees that while China may have a shot at being unified, it will always be capital-poor.
Beijing also has to provide its autonomy-minded regions with an economic incentive to remain part of Greater China, and “simple” infrastructure will not cut it. Modern China has turned to a state-centered finance model for this. Under the model, all of the scarce capital that is available is funneled to the state, which divvies it out via a handful of large state banks. These state banks then grant loans to various firms and local governments at below the cost of raising the capital. This provides a powerful economic stimulus that achieves maximum employment and growth — think of what you could do with a near-endless supply of loans at below 0 percent interest — but comes at the cost of encouraging projects that are loss-making, as no one is ever called to account for failures. (They can just get a new loan.) The resultant growth is rapid, but it is also unsustainable. It is no wonder, then, that the central government has chosen to keep its $2 trillion of currency reserves in dollar-based assets; the rate of return is greater, the value holds over a long period, and Beijing doesn’t have to worry about the United States seceding.
Because the domestic market is considerably limited by the poor-capital nature of the country, most producers choose to tap export markets to generate income. In times of plenty this works fairly well, but when Chinese goods are not needed, the entire Chinese system can seize up. Lack of exports reduces capital availability, which constrains loan availability. This in turn not only damages the ability of firms to employ China’s legions of citizens, but it also removes the primary reason the disparate Chinese regions pay homage to Beijing. China’s geography hardwires in a series of economic challenges that weaken the coherence of the state and make China dependent upon uninterrupted access to foreign markets to maintain state unity. As a result, China has not been a unified entity for the vast majority of its history, but instead a cauldron of competing regions that cleave along many different fault lines: coastal versus interior, Han versus minority, north versus south.
China’s survival technique for the current recession is simple. Because exports, which account for roughly half of China’s economic activity, have sunk by half, Beijing is throwing the equivalent of the financial kitchen sink at the problem. China has force-fed more loans through the banks in the first four months of 2009 than it did in the entirety of 2008. The long-term result could well bury China beneath a mountain of bad loans — a similar strategy resulted in Japan’s 1991 crash, from which Tokyo has yet to recover. But for now it is holding the country together. The bottom line remains, however: China’s recovery is completely dependent upon external demand for its production, and the most it can do on its own is tread water.
Discordant Europe
Europe faces an imbroglio somewhat similar to China’s.
Europe has a number of rivers that are easily navigable, providing a wealth of trade and development opportunities. But none of them interlinks with the others, retarding political unification. Europe has even more good harbors than the United States, but they are not evenly spread throughout the Continent, making some states capital-rich and others capital-poor. Europe boasts one huge piece of arable land on the North European Plain, but it is long and thin, and so occupied by no fewer than seven distinct ethnic groups.
These groups have constantly struggled — as have the various groups up and down Europe’s seemingly endless list of river valleys — but none has been able to emerge dominant, due to the webwork of mountains and peninsulas that make it nigh impossible to fully root out any particular group. And Europe’s wealth of islands close to the Continent, with Great Britain being only the most obvious, guarantee constant intervention to ensure that mainland Europe never unifies under a single power.
Every part of Europe has a radically different geography than the other parts, and thus the economic models the Europeans have adopted have little in common. The United Kingdom, with few immediate security threats and decent rivers and ports, has an almost American-style laissez-faire system. France, with three unconnected rivers lying wholly in its own territory, is a somewhat self-contained world, making economic nationalism its credo. Not only do the rivers in Germany not connect, but Berlin has to share them with other states. The Jutland Peninsula interrupts the coastline of Germany, which finds its sea access limited by the Danes, the Swedes and the British. Germany must plan in great detail to maximize its resource use to build an infrastructure that can compensate for its geographic deficiencies and link together its good — but disparate — geographic blessings. The result is a state that somewhat favors free enterprise, but within the limits framed by national needs.
And the list of differences goes on: Spain has long coasts and is arid; Austria is landlocked and quite wet; most of Greece is almost too mountainous to build on; it doesn’t get flatter than the Netherlands; tiny Estonia faces frozen seas in the winter; mammoth Italy has never even seen an icebreaker. Even if there were a supranational authority in Europe that could tax or regulate the banking sector or plan transnational responses, the propriety of any singular policy would be questionable at best.
Such stark regional differences give rise to such variant policies that many European states have a severe (and understandable) trust deficit when it comes to any hint of anything supranational. We are not simply taking about the European Union here, but rather a general distrust of anything cross-border in nature. One of the many outcomes of this is a preference for using local banks rather than stock exchanges for raising capital. After all, local banks tend to use local capital and are subject to local regulations, while stock exchanges tend to be internationalized in all respects. Spain, Italy, Sweden, Greece and Austria get more than 90 percent of their financing from banks, the United Kingdom 84 percent and Germany 76 percent — while for the United States it is only 40 percent.
And this has proved unfortunate in the extreme for today’s Europe. The current recession has its roots in a financial crisis that has most dramatically impacted banks, and European banks have proved far from immune. Until Europe’s banks recover, Europe will remain mired in recession. And since there cannot be a Pan-European solution, Europe’s recession could well prove to be the worst of all this time around.
Federal President's Visit to Germany: Mythologies of Dresden Must Be Rejected
President Obama's Visit to Germany: Mythologies of Dresden Must Be Rejected. By Ted R. Bromund
Heritage WebMemo #2460, May 28, 2009
On June 5, President Obama will visit the German city of Dresden. This visit will be intensely controversial. Dresden is most famous for the Anglo-American bombing raid against it on February 13, 1945. The Dresden raid did cause serious loss of life, but in the Second World War it was not unprecedented or unusual. The myths that have grown up about the raid were fostered by the Nazis and spread by post-war Soviet propaganda.
Because of this spurious symbolism, President Obama's decision to visit Dresden is ill-advised. During his visit, the President must absolutely reject any equation of the Western Allies and the Nazis. He must avoid accepting as true the claims of the Nazi and Soviet propagandists about the Dresden raid. Finally, he must stoutly defend the Anglo-American air campaign, which served vital military purposes and which led to the liberation of Western Europe from the Nazis in 1945, and, ultimately, of Eastern Europe from the Soviet Union in 1989.
The Raid on Dresden
On February 13, 1945, 1,100 British and American bombers attacked the city of Dresden, which lies south of Berlin. The bombers dropped a mix of high explosives and incendiary bombs, which created a firestorm that destroyed the center of the city. The number of casualties will never be known, but at the time Nazi authorities privately estimated that 25,000 people lost their lives. A 2004 study of the raid by British historian Frederick Taylor sets the toll at between 25,000 and 40,000 killed,[1] while in 2008 an authoritative commission of German historians estimated the likely toll at 18,000 and definitely no more than 25,000.[2]
The attack on Dresden was not unusual. In July 1943, a British raid on Hamburg created a similar firestorm that destroyed 56 percent of the city's dwellings and killed 40,000 people.[3] Both attacks were part of the Anglo-American strategic bombing campaign that was launched after U.S. President Franklin Roosevelt and British Prime Minister Winston Churchill met at the Casablanca Conference in January 1943. That campaign followed the German bombing of Warsaw in September 1939 and Rotterdam in May 1940, the Nazi blitz against London in the summer and fall of 1940, the German destruction of Belgrade from the air in April 1941, and the British bombing campaign against Germany that began in May 1940 and intensified in 1942.
The raid on Dresden was made at the request of the Soviet Union, which wanted the city's railway junction destroyed to prevent the Germans from concentrating forces against advancing Soviet armies.[4] Dresden also contained over a hundred factories engaged in war-related work. As Taylor sums up, "Dresden was ranked high among the Reich's wartime industrial centers." This work included firms that made parts for torpedoes and machine guns.[5] Though Dresden was known as a cultural center, it was not, as later myth had it, a city of no military importance.
The Myths Surrounding Dresden
The Nazi regime, frustrated by its inability to stop the Anglo-American attacks, countered by waging a propaganda campaign against them. After the raid on Dresden, Propaganda Minister Joseph Goebbels, instead of downplaying it, decided to exaggerate the attack. He leaked falsified documents to the press that multiplied German casualties in the attack by 10: 25,000 became 250,000. He also played on Dresden's reputation by claiming that it was a city of cultural and artistic treasures only, not a center of war work.[6]
Goebbels's lies were widely accepted. As Taylor concludes, "The extent of the wide, long-lasting ripple of international outrage that followed the Dresden bombing represents, at least in part, Goebbels's final, dark masterpiece."[7]
After the war, Dresden was part of the Soviet zone of occupation and, later, East Germany. The Soviet and East German authorities used the Nazi myth of Dresden as part of their Cold War propaganda campaign against the U.S., Britain, and West Germany. By 1953, mass meetings in East Germany were being told that former Allied Commander Dwight Eisenhower--by then, President of the United States--was personally responsible for the attack of the "Anglo-American Air Gangsters," a term invented by Goebbels. In 1954, the death toll for the raid was officially set by the Communist regime at "hundreds of thousands."[8]
This Nazi-inspired falsehood was widely accepted. It was repeated in Kurt Vonnegut's Slaughterhouse-Five (1969), which was informed by David Irving's The Destruction of Dresden (1963). In a 2000 libel trial in Britain, Irving was described by the judge as an "active Holocaust denier" who "for his own ideological reasons persistently and deliberately misrepresented and manipulated historical evidence."[9] Irving's treatment of the Dresden raid marked the beginning of an ideological assault on the morality of the war and of the Western Allies.
The Achievements of the Air Campaign
In reality, the raid on Dresden was part of the broader Anglo-American strategic bombing campaign. This campaign achieved five vital objectives that were central to the defeat of Nazi Germany.
First, from 1940 through 1942, it demonstrated that Britain retained the will to fight back. This was vital for British relations with the U.S. and, after June 1941, with the U.S.S.R.
Second, as eminent historian Richard J. Evans argues, the campaign "did even more than the defeats at Stalingrad and in North Africa to spread popular disillusion about the Nazi Party."[10]
Third, the campaign did immense damage to German war production: The Germans calculated in January 1945 that bombing had reduced their tank production by 25 percent.[11]
Fourth, the campaign compelled Germany to expend substantial resources on an air defense system, resources that could have been devoted to fighting the Western and Soviet armies. It also led Hitler to emphasize the development of the V-1 and V-2 rockets. Both were amazing technological achievements but military irrelevancies that consumed scarce resources.
Finally, the air campaign drew the German Luftwaffe away from the Eastern Front--so aiding the Soviet advance--and ultimately destroyed it in the West. Without this air superiority, the D-Day landings would not have been possible. It was those landings that liberated Western Europe from the Nazis and created a base of freedom that led to the collapse of Communist Eastern Europe in 1989. The air campaign did not win the war on its own, but its contributions were immense, and they did not end in 1945.
The Symbolism of Dresden and of Obama's Visit
But for many critics, the Dresden raid has come to symbolize the wrongs of the entire Anglo-American air war against Nazi Germany. For these critics, who are as strong on the far left as on the far right, the attack on Dresden was only the most egregious example of the Anglo-American conduct of that campaign, which they allege constituted a war crime.
The city of Dresden, thus, is the focal point of an effort to establish a degree of moral equivalence between the Western Allies and Nazi Germany and, more broadly, to discredit and criminalize U.S. and British foreign policy when--as in 2003 in the Iraq War--it moves in a direction the critics dislike.
This effort began with the Communist propaganda after 1945. As long as the Cold War lasted, it made little headway, but with the fall of the U.S.S.R. and the reunification of Germany, it grew in popularity. By 2002, with the publication of Jörg Friedrich's Der Brand, which subtly equates the air war on Germany with the Holocaust, the campaign had reached best-seller status.
The symbolism of Dresden, even if it is poorly grounded in the facts of history, is a reality: It stands in mythology for the supposed war crimes committed by the Americans and the British in their war against the Nazis and, by implication, for their supposed offenses since 1945. By choosing to visit Dresden, of all Germany's cities, President Obama will have this myth as his backdrop. He would have been better advised to avoid Dresden.
Obama's decision to visit the city raises the concern that he will use the opportunity to apologize for the Dresden raid. As that raid has come to symbolize the supposed evils of the entire air war, an apology for Dresden would have far reaching implications about the morality of the Second World War itself. It is particularly unfortunate that Obama will visit Dresden and the Buchenwald concentration camp on the same day. The fact that both the camp and Dresden have been deemed worthy of a presidential visit could be taken to imply the moral equivalence between them that revisionists like Friedrich have sought to create.
What Obama Must Do
The President must not fall for the Nazi- or Communist-inspired myths about Dresden, such as the number of people killed in the raid or the importance of the war-related work being done in the city.
He must also avoid giving any credence whatsoever to efforts to equate the Western Allies and the Nazis, or the air war and the Holocaust. Indeed, he should counter the unfortunate scheduling of his visit to the Buchenwald camp by making an explicit statement that Dresden was part of the broader Anglo-American air campaign against the Nazi regime and that this campaign was vital to the defeat of the Nazis and the victory of the West in 1945.
Finally, he should make the broader point that the lesson of the Second World War is not that there should never again be a war nor that pacifism is a moral choice. The lessons of that war are that evil is a reality, that appeasement is not a virtue, and that no war--even in pursuit of just ends like the defeat of Nazi Germany--can be won without difficult but necessary choices.
Ted R. Bromund, Ph.D., is Senior Research Fellow in the Margaret Thatcher Center for Freedom, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation.
References
[1]Frederick Taylor, Dresden: Tuesday, February 13, 1945 (New York: HarperCollins, 2004), pp. 443-48.
[2]Frederick Taylor, "How Many Died in the Bombing of Dresden?" Spiegel Online, October 2, 2008, at http://www.spiegel.de/international/germany/0,1518,581992,00.html (May 27, 2009).
[3]Richard J. Evans, The Third Reich at War (New York: Penguin Press, 2009), p. 446.
[4]Taylor, Dresden, pp. 190-191.
[5]See Taylor, Dresden, ch. 13, and in particular p. 148.
[6]Ibid., pp. 370-371.
[7]Ibid., p. 372.
[8]Ibid., pp. 392-393.
[9]"The Ruling Against David Irving," The Guardian, April 11, 2000, at http://www.guardian.co.uk/irving/article/0,,181049,00.html (May 27, 2009).
[10]Evans, Third Reich, p. 463.
[11]Ibid., p. 462.
Heritage WebMemo #2460, May 28, 2009
On June 5, President Obama will visit the German city of Dresden. This visit will be intensely controversial. Dresden is most famous for the Anglo-American bombing raid against it on February 13, 1945. The Dresden raid did cause serious loss of life, but in the Second World War it was not unprecedented or unusual. The myths that have grown up about the raid were fostered by the Nazis and spread by post-war Soviet propaganda.
Because of this spurious symbolism, President Obama's decision to visit Dresden is ill-advised. During his visit, the President must absolutely reject any equation of the Western Allies and the Nazis. He must avoid accepting as true the claims of the Nazi and Soviet propagandists about the Dresden raid. Finally, he must stoutly defend the Anglo-American air campaign, which served vital military purposes and which led to the liberation of Western Europe from the Nazis in 1945, and, ultimately, of Eastern Europe from the Soviet Union in 1989.
The Raid on Dresden
On February 13, 1945, 1,100 British and American bombers attacked the city of Dresden, which lies south of Berlin. The bombers dropped a mix of high explosives and incendiary bombs, which created a firestorm that destroyed the center of the city. The number of casualties will never be known, but at the time Nazi authorities privately estimated that 25,000 people lost their lives. A 2004 study of the raid by British historian Frederick Taylor sets the toll at between 25,000 and 40,000 killed,[1] while in 2008 an authoritative commission of German historians estimated the likely toll at 18,000 and definitely no more than 25,000.[2]
The attack on Dresden was not unusual. In July 1943, a British raid on Hamburg created a similar firestorm that destroyed 56 percent of the city's dwellings and killed 40,000 people.[3] Both attacks were part of the Anglo-American strategic bombing campaign that was launched after U.S. President Franklin Roosevelt and British Prime Minister Winston Churchill met at the Casablanca Conference in January 1943. That campaign followed the German bombing of Warsaw in September 1939 and Rotterdam in May 1940, the Nazi blitz against London in the summer and fall of 1940, the German destruction of Belgrade from the air in April 1941, and the British bombing campaign against Germany that began in May 1940 and intensified in 1942.
The raid on Dresden was made at the request of the Soviet Union, which wanted the city's railway junction destroyed to prevent the Germans from concentrating forces against advancing Soviet armies.[4] Dresden also contained over a hundred factories engaged in war-related work. As Taylor sums up, "Dresden was ranked high among the Reich's wartime industrial centers." This work included firms that made parts for torpedoes and machine guns.[5] Though Dresden was known as a cultural center, it was not, as later myth had it, a city of no military importance.
The Myths Surrounding Dresden
The Nazi regime, frustrated by its inability to stop the Anglo-American attacks, countered by waging a propaganda campaign against them. After the raid on Dresden, Propaganda Minister Joseph Goebbels, instead of downplaying it, decided to exaggerate the attack. He leaked falsified documents to the press that multiplied German casualties in the attack by 10: 25,000 became 250,000. He also played on Dresden's reputation by claiming that it was a city of cultural and artistic treasures only, not a center of war work.[6]
Goebbels's lies were widely accepted. As Taylor concludes, "The extent of the wide, long-lasting ripple of international outrage that followed the Dresden bombing represents, at least in part, Goebbels's final, dark masterpiece."[7]
After the war, Dresden was part of the Soviet zone of occupation and, later, East Germany. The Soviet and East German authorities used the Nazi myth of Dresden as part of their Cold War propaganda campaign against the U.S., Britain, and West Germany. By 1953, mass meetings in East Germany were being told that former Allied Commander Dwight Eisenhower--by then, President of the United States--was personally responsible for the attack of the "Anglo-American Air Gangsters," a term invented by Goebbels. In 1954, the death toll for the raid was officially set by the Communist regime at "hundreds of thousands."[8]
This Nazi-inspired falsehood was widely accepted. It was repeated in Kurt Vonnegut's Slaughterhouse-Five (1969), which was informed by David Irving's The Destruction of Dresden (1963). In a 2000 libel trial in Britain, Irving was described by the judge as an "active Holocaust denier" who "for his own ideological reasons persistently and deliberately misrepresented and manipulated historical evidence."[9] Irving's treatment of the Dresden raid marked the beginning of an ideological assault on the morality of the war and of the Western Allies.
The Achievements of the Air Campaign
In reality, the raid on Dresden was part of the broader Anglo-American strategic bombing campaign. This campaign achieved five vital objectives that were central to the defeat of Nazi Germany.
First, from 1940 through 1942, it demonstrated that Britain retained the will to fight back. This was vital for British relations with the U.S. and, after June 1941, with the U.S.S.R.
Second, as eminent historian Richard J. Evans argues, the campaign "did even more than the defeats at Stalingrad and in North Africa to spread popular disillusion about the Nazi Party."[10]
Third, the campaign did immense damage to German war production: The Germans calculated in January 1945 that bombing had reduced their tank production by 25 percent.[11]
Fourth, the campaign compelled Germany to expend substantial resources on an air defense system, resources that could have been devoted to fighting the Western and Soviet armies. It also led Hitler to emphasize the development of the V-1 and V-2 rockets. Both were amazing technological achievements but military irrelevancies that consumed scarce resources.
Finally, the air campaign drew the German Luftwaffe away from the Eastern Front--so aiding the Soviet advance--and ultimately destroyed it in the West. Without this air superiority, the D-Day landings would not have been possible. It was those landings that liberated Western Europe from the Nazis and created a base of freedom that led to the collapse of Communist Eastern Europe in 1989. The air campaign did not win the war on its own, but its contributions were immense, and they did not end in 1945.
The Symbolism of Dresden and of Obama's Visit
But for many critics, the Dresden raid has come to symbolize the wrongs of the entire Anglo-American air war against Nazi Germany. For these critics, who are as strong on the far left as on the far right, the attack on Dresden was only the most egregious example of the Anglo-American conduct of that campaign, which they allege constituted a war crime.
The city of Dresden, thus, is the focal point of an effort to establish a degree of moral equivalence between the Western Allies and Nazi Germany and, more broadly, to discredit and criminalize U.S. and British foreign policy when--as in 2003 in the Iraq War--it moves in a direction the critics dislike.
This effort began with the Communist propaganda after 1945. As long as the Cold War lasted, it made little headway, but with the fall of the U.S.S.R. and the reunification of Germany, it grew in popularity. By 2002, with the publication of Jörg Friedrich's Der Brand, which subtly equates the air war on Germany with the Holocaust, the campaign had reached best-seller status.
The symbolism of Dresden, even if it is poorly grounded in the facts of history, is a reality: It stands in mythology for the supposed war crimes committed by the Americans and the British in their war against the Nazis and, by implication, for their supposed offenses since 1945. By choosing to visit Dresden, of all Germany's cities, President Obama will have this myth as his backdrop. He would have been better advised to avoid Dresden.
Obama's decision to visit the city raises the concern that he will use the opportunity to apologize for the Dresden raid. As that raid has come to symbolize the supposed evils of the entire air war, an apology for Dresden would have far reaching implications about the morality of the Second World War itself. It is particularly unfortunate that Obama will visit Dresden and the Buchenwald concentration camp on the same day. The fact that both the camp and Dresden have been deemed worthy of a presidential visit could be taken to imply the moral equivalence between them that revisionists like Friedrich have sought to create.
What Obama Must Do
The President must not fall for the Nazi- or Communist-inspired myths about Dresden, such as the number of people killed in the raid or the importance of the war-related work being done in the city.
He must also avoid giving any credence whatsoever to efforts to equate the Western Allies and the Nazis, or the air war and the Holocaust. Indeed, he should counter the unfortunate scheduling of his visit to the Buchenwald camp by making an explicit statement that Dresden was part of the broader Anglo-American air campaign against the Nazi regime and that this campaign was vital to the defeat of the Nazis and the victory of the West in 1945.
Finally, he should make the broader point that the lesson of the Second World War is not that there should never again be a war nor that pacifism is a moral choice. The lessons of that war are that evil is a reality, that appeasement is not a virtue, and that no war--even in pursuit of just ends like the defeat of Nazi Germany--can be won without difficult but necessary choices.
Ted R. Bromund, Ph.D., is Senior Research Fellow in the Margaret Thatcher Center for Freedom, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation.
References
[1]Frederick Taylor, Dresden: Tuesday, February 13, 1945 (New York: HarperCollins, 2004), pp. 443-48.
[2]Frederick Taylor, "How Many Died in the Bombing of Dresden?" Spiegel Online, October 2, 2008, at http://www.spiegel.de/international/germany/0,1518,581992,00.html (May 27, 2009).
[3]Richard J. Evans, The Third Reich at War (New York: Penguin Press, 2009), p. 446.
[4]Taylor, Dresden, pp. 190-191.
[5]See Taylor, Dresden, ch. 13, and in particular p. 148.
[6]Ibid., pp. 370-371.
[7]Ibid., p. 372.
[8]Ibid., pp. 392-393.
[9]"The Ruling Against David Irving," The Guardian, April 11, 2000, at http://www.guardian.co.uk/irving/article/0,,181049,00.html (May 27, 2009).
[10]Evans, Third Reich, p. 463.
[11]Ibid., p. 462.
Tuesday, June 2, 2009
Regulating and Resolving Institutions Considered “Too Big to Fail”
Regulating and Resolving Institutions Considered “Too Big to Fail”. By Martin Neil Baily & Robert E. Litan
Testimony, Senate Committee on Banking, Housing and Urban Affairs
May 06, 2009
Thank you Mr. Chairman and members of the Committee for asking us to discuss with you the appropriate policy response to what has come to be widely known as the “too big to fail” (TBTF) problem. We will first outline some threshold thoughts on this question and then answer the questions that you posed in requesting this testimony.
The Key Points
Too Big to Fail and the Current Financial Crisis
Testimony, Senate Committee on Banking, Housing and Urban Affairs
May 06, 2009
Thank you Mr. Chairman and members of the Committee for asking us to discuss with you the appropriate policy response to what has come to be widely known as the “too big to fail” (TBTF) problem. We will first outline some threshold thoughts on this question and then answer the questions that you posed in requesting this testimony.
The Key Points
Too Big to Fail and the Current Financial Crisis
- The US economy has been in free fall. Hopefully the pace of decline is now easing, but the transition to sustained growth will not be possible without a restoration of the financial sector to health.
- The largest US financial institutions hold most of the financial assets and liabilities of the sector as a whole and, despite encouraging signs, many of them remain very fragile.
- Many banks in the UK, Ireland, Switzerland, Austria, Germany, Spain and Greece are troubled and there is no European counterpart to the US Treasury to stand behind them. The global financial sector is in a very precarious state.
- In this situation policymakers must deal with “too big to fail” institutions because we cannot afford to see the disorderly failure of another major financial institution, which would exacerbate systemic risk and threaten economic recovery.
- The stress tests are being completed and some banks will be told to raise or take additional capital. There is a lot more to be done after this, however, as large volumes of troubled or toxic assets remain on the books and more such assets are being created as the recession continues.
- It is possible that one or two of the very large banks will become irretrievably insolvent and must be taken over by the authorities and, if so, they will have to deal with that problem even though the cost to taxpayers will be high. But pre-emptive nationalization of the large banks is a terrible idea on policy grounds and is clouded by thicket of legal problems.
- Getting the US financial sector up and running again is essential, but will be very expensive and is deeply unpopular. If Americans want a growing economy next year with an improving labor market, Congress will have to bite the bullet and provide more Treasury TARP funds, maybe on a large scale. The costs to taxpayers and the country will be lower than nationalizing the banks.
- Congress recently removed from the President’s budget the funds to expand the TARP, a move that can only deepen the recession and delay the recovery.
- Should regulation prevent financial institutions from becoming too big to fail? We need very large financial institutions given the scale of the global capital markets and, of necessity, some of these may be "too big to fail" (TBTF) because of systemic risks. For US institutions to operate in global capital markets, they will need to be large. Congress should not punish or prevent organic growth that may result in an institution having TBTF status.
- At the same time, however, TBTF institutions can be regulated in a way that at least partially offsets the risks they pose to the rest of the financial system by virtue of their potential TBTF status. Capital standards for large banks should be raised progressively as they increase in size, for example. In addition, financial regulators should have the ability to prevent a financial merger on the grounds that it would unduly increase systemic risk (this judgment would be separate from the traditional competition analysis that is conducted by the Department of Justice’s Antitrust Division).
- Should Existing Institutions be Broken Up? Organic growth should not be discouraged since it is a vital part of improving efficiency. If, however, the FDIC (or another resolution authority) assumes control of a weakened TBTF financial institution and later returns it to the private sector, the agency should operate under a presumption that it break the institution into pieces that are not considered TBTF. And it should also avoid selling any one of the pieces to an acquirer that will create a new TBTF institution. The presumption could be overcome, however, if the agency determines that the costs of breakup would be large or the immediate need to avoid systemic consequences requires an immediate sale to another large institution.
- What Requirements Should be Imposed on Too Big to Fail Institutions? TBTF or systemically important financial institutions (SIFIs) can and should be specially regulated, ideally by a single systemic risk regulator. This is a challenging task, as we discuss further below, but we believe it is both one that can be met and is clearly necessary in light of recent events.
- Too big to fail institutions have an advantage in that their cost of capital is lower than that of small institutions. At a recent Brookings meeting, Alan Greenspan estimated informally that TBTF banks can borrow at lower cost than other banks, a cost advantage of 50 basis points. This means that some degree of additional regulatory costs (in the form of higher capital requirements, for example) can be imposed on large financial institutions without rendering them uncompetitive.
- Improved Resolution Procedures for Systemically Important Banks. This is an important issue that should be addressed soon. When large financial firms become distressed, it is difficult to restructure them as ongoing institutions and governments end up spending large amounts to support the financial sector, just as is happening now. The Squam Lake Working group has proposed one solution to this problem: that systemically important banks (and other financial institutions) be required to issue a long-term debt instrument that converts to equity under specific conditions. Institutions would issue these bonds before a crisis and, if triggered, the automatic conversion of debt into equity would transform an undercapitalized or insolvent institution, at least in principle, into a well capitalized one at no cost to taxpayers.
- Where the losses are so severe that they deplete even the newly converted capital, there should be a bank-like process for orderly resolving the institution by placing it in receivership. Treasury Secretary Geithner has outlined a process for doing this, which we generally support. There are other important resolution-related issues that must be addressed and we discuss them below.
- The Origin of the Crisis and the Structure of the Solution. The financial crisis was the result of market failure and regulatory failure. Market failure occurred because wealth-holders in many cases failed to take the most rudimentary precautions to protect their own interests. Compensation structures were established in companies that rewarded excessive risk taking. Banks bought mortgages knowing that lending standards had become lax.
- At the same time, there were thousands of regulators who were supposed to be watching the store, literally rooms full of regulators policing the large institutions. Warnings were given to regulators of impending crisis but they chose to ignore them, believing instead that the market could regulate itself.
- In the future we must seek a system that takes advantage of market incentives and makes use of well-paid highly-qualified regulators. Creating such a system will take time and commitment, but it is clearly necessary.
Libertarians: Stimulus Package Shrinks Economy, Destroys Private Sector Jobs
Stimulus Package Shrinks Economy, Destroys Private Sector Jobs, by Hans Bader
OpenMarket/CEI, May 31, 2009 @ 4:14 pm
Excerpts:
Most of the $800 billion stimulus package has yet to be spent, but it’s already harming the economy, both by triggering trade wars [...], and by driving up interest rates for businesses that need to borrow money to expand or create jobs. (The government is keeping down interest rates on its own debt by printing vast sums of money to buy its own bonds, in order to finance the exploding national debt, which will result in massively higher taxes).
As economist Arnold Kling explains, “most of the stimulus spending does not take place until next year and beyond, so the short-run gains are puny. On the other hand, the big increase in the projected deficit creates the expectation of higher interest rates, which raises interest rates now. These higher interest rates serve to weaken the economy. According to this standard analysis, the stimulus is going to hurt GDP now, when we could use the most help. Much of the spending will kick in a year or more from now,” when the economy will already be in recovery, and “when the economy will need little, if any, stimulus. This is the flaw with using spending rather than tax cuts as a stimulus. The lags are longer when you use spending. Of course, if the real goal is to promote government at the expense of civil society” through “political favoritism, then the stimulus is working exactly as intended.”
1.2 million Americans have lost their jobs since Obama signed the stimulus package into law. The Congressional Budget Office predicted it would shrink the economy “in the long run” (contrary to Obama’s claim that it would prevent “irreversible decline“), but create jobs in the short run.
But the stimulus package turned out to be harmful even in the short run, because it was so badly designed. It poured money into sectors of the economy where no help is needed because unemployment is low, while siphoning money out of sectors where unemployment is high. Moreover, “states hit hardest by the recession are getting the least amount of stimulus spending.”
The stimulus package is just one example of the Obama Administration running up the national debt to bail out the more fortunate while sticking less fortunate people with the bill. The auto bailouts are another. They run up the national debt to keep unskilled auto workers enjoying wages and benefits that are much better than those enjoyed by the average American (while ripping off pension funds and bondholders). As Mickey Kaus notes, “Why should the government tax unskilled workers making $18 an hour, who haven’t bankrupted their employers, in order to protect unskilled workers making $28 an hour, and who have bankrupted their employers, from having to take a pay cut?”
The stimulus package has directly destroyed tens of thousands of jobs. A provision in the stimulus package that blocked a mere 97 Mexican truckers from U.S. roads “caused Mexico to retaliate with tariffs on 90 goods affecting $2.4 billion in U.S. trade,” destroying 40,000 American jobs. And its vague “buy American” provisions, despite doing little to promote purchases of U.S. products, managed to ignite a trade war with Canada.
[...]. One of Obama’s own advisers admits that “the barrage of tax increases proposed in President Barack Obama’s budget could, if enacted by Congress, kill any chance of an early and sustained recovery.” Even the Washington Post, which endorsed Obama and once supported his auto bailouts, now has soured on them and their waste of taxpayer money.
OpenMarket/CEI, May 31, 2009 @ 4:14 pm
Excerpts:
Most of the $800 billion stimulus package has yet to be spent, but it’s already harming the economy, both by triggering trade wars [...], and by driving up interest rates for businesses that need to borrow money to expand or create jobs. (The government is keeping down interest rates on its own debt by printing vast sums of money to buy its own bonds, in order to finance the exploding national debt, which will result in massively higher taxes).
As economist Arnold Kling explains, “most of the stimulus spending does not take place until next year and beyond, so the short-run gains are puny. On the other hand, the big increase in the projected deficit creates the expectation of higher interest rates, which raises interest rates now. These higher interest rates serve to weaken the economy. According to this standard analysis, the stimulus is going to hurt GDP now, when we could use the most help. Much of the spending will kick in a year or more from now,” when the economy will already be in recovery, and “when the economy will need little, if any, stimulus. This is the flaw with using spending rather than tax cuts as a stimulus. The lags are longer when you use spending. Of course, if the real goal is to promote government at the expense of civil society” through “political favoritism, then the stimulus is working exactly as intended.”
1.2 million Americans have lost their jobs since Obama signed the stimulus package into law. The Congressional Budget Office predicted it would shrink the economy “in the long run” (contrary to Obama’s claim that it would prevent “irreversible decline“), but create jobs in the short run.
But the stimulus package turned out to be harmful even in the short run, because it was so badly designed. It poured money into sectors of the economy where no help is needed because unemployment is low, while siphoning money out of sectors where unemployment is high. Moreover, “states hit hardest by the recession are getting the least amount of stimulus spending.”
The stimulus package is just one example of the Obama Administration running up the national debt to bail out the more fortunate while sticking less fortunate people with the bill. The auto bailouts are another. They run up the national debt to keep unskilled auto workers enjoying wages and benefits that are much better than those enjoyed by the average American (while ripping off pension funds and bondholders). As Mickey Kaus notes, “Why should the government tax unskilled workers making $18 an hour, who haven’t bankrupted their employers, in order to protect unskilled workers making $28 an hour, and who have bankrupted their employers, from having to take a pay cut?”
The stimulus package has directly destroyed tens of thousands of jobs. A provision in the stimulus package that blocked a mere 97 Mexican truckers from U.S. roads “caused Mexico to retaliate with tariffs on 90 goods affecting $2.4 billion in U.S. trade,” destroying 40,000 American jobs. And its vague “buy American” provisions, despite doing little to promote purchases of U.S. products, managed to ignite a trade war with Canada.
[...]. One of Obama’s own advisers admits that “the barrage of tax increases proposed in President Barack Obama’s budget could, if enacted by Congress, kill any chance of an early and sustained recovery.” Even the Washington Post, which endorsed Obama and once supported his auto bailouts, now has soured on them and their waste of taxpayer money.
How to Stop Another GM: Abolish Pensions
How to Stop Another GM: Abolish Pensions, by Eli Lehrer
OpenMarket/CEI, June 01, 2009 @ 4:27 pm
GM, of course, declared bankruptcy today. A number of things—bad management, poor products and screwy labor relations—hurt the company. But in the end, the biggest problem GM couldn’t solve related to the company’s liabilities to retirees. The company, which currently employs about 150,000 hourly workers, was responsible for the health care of over 1 million people and pension obligations for over 650,000 people. These pension obligations were probably the largest factor in GM’s demise and public policy should, at minimum, stop encouraging companies to take on anything like them.
The lure of pensions is obvious. A pension is another benefit that a company can provide to its workforce and, although quite attractive (“We’ll support you for life!”) it imposes few up front costs. A company that offers pensions has more money to invest in new products, pay dividends, and meet payroll while simultaneously being able to do well by its existing work force. The problem, however, is that all companies go through a lifecycle: they start small, become big, decline, and eventually go out of business. Of the 100 largest companies in 1900, only 7 existed in the same form by 2000. And this cycle of creative destruction is accelerating, of the 100 largest companies in 2000, by my count, at least 19 have either merged with a similarly-sized company, been bought out, gone bankrupt, or needed a government bailout to stay afloat.
To make matters worse, life expectancy continues to increase meaning that the number of retired people will also increases.Quite simply, pensions are almost always a bad idea for any private company. It’s likely that a company will offer the most generous pensions when it is at the height of its power, influence, and payroll. As things change in the company’s market, it will end up—as GM did—with enormous obligations to people who don’t work for it and no resources or market share to pay for them. As a result, it would make sense, from a public policy perspective, to change the tax code to create disincentives for any promise that a corporation wants to make to its employees down the road. Quite simply, it’s bad for corporations, bad for the economy, and bad for employees. Corporations should not receive any preferential tax treatment, writeoffs, or anything else for any obligations to employees beyond a year or two in the future. A typical corporation just isn’t going to be around to make good on any promises it makes in for the distant future.
Companies that want to offer pensions or retiree health care, of course, would remain free to do so but the tax code should, at minimum, look at this with extreme skepticism. It might well even exact a penalty on companies that chose to compensate their employees this way. As a corollary to this, the federal government should also stop accepting new participants in the Pension Benefit Guaranty Corporation (the federal agency that provides partial backing for private pensions) and look for ways to wind down its operations over time. (Since it has promised to manage certain pension funds and creates a certain reliance interest, it wouldn’t be fair to abolish it right away.)
At the margins, ending tax incentives for pensions and retiree health care would almost certainly increase Medicare costs and might well result in somewhat more people relying on Medicaid for nursing home care. But the alternative—endless bailout of pension funds and the companies that provide them—seems a lot worse.
OpenMarket/CEI, June 01, 2009 @ 4:27 pm
GM, of course, declared bankruptcy today. A number of things—bad management, poor products and screwy labor relations—hurt the company. But in the end, the biggest problem GM couldn’t solve related to the company’s liabilities to retirees. The company, which currently employs about 150,000 hourly workers, was responsible for the health care of over 1 million people and pension obligations for over 650,000 people. These pension obligations were probably the largest factor in GM’s demise and public policy should, at minimum, stop encouraging companies to take on anything like them.
The lure of pensions is obvious. A pension is another benefit that a company can provide to its workforce and, although quite attractive (“We’ll support you for life!”) it imposes few up front costs. A company that offers pensions has more money to invest in new products, pay dividends, and meet payroll while simultaneously being able to do well by its existing work force. The problem, however, is that all companies go through a lifecycle: they start small, become big, decline, and eventually go out of business. Of the 100 largest companies in 1900, only 7 existed in the same form by 2000. And this cycle of creative destruction is accelerating, of the 100 largest companies in 2000, by my count, at least 19 have either merged with a similarly-sized company, been bought out, gone bankrupt, or needed a government bailout to stay afloat.
To make matters worse, life expectancy continues to increase meaning that the number of retired people will also increases.Quite simply, pensions are almost always a bad idea for any private company. It’s likely that a company will offer the most generous pensions when it is at the height of its power, influence, and payroll. As things change in the company’s market, it will end up—as GM did—with enormous obligations to people who don’t work for it and no resources or market share to pay for them. As a result, it would make sense, from a public policy perspective, to change the tax code to create disincentives for any promise that a corporation wants to make to its employees down the road. Quite simply, it’s bad for corporations, bad for the economy, and bad for employees. Corporations should not receive any preferential tax treatment, writeoffs, or anything else for any obligations to employees beyond a year or two in the future. A typical corporation just isn’t going to be around to make good on any promises it makes in for the distant future.
Companies that want to offer pensions or retiree health care, of course, would remain free to do so but the tax code should, at minimum, look at this with extreme skepticism. It might well even exact a penalty on companies that chose to compensate their employees this way. As a corollary to this, the federal government should also stop accepting new participants in the Pension Benefit Guaranty Corporation (the federal agency that provides partial backing for private pensions) and look for ways to wind down its operations over time. (Since it has promised to manage certain pension funds and creates a certain reliance interest, it wouldn’t be fair to abolish it right away.)
At the margins, ending tax incentives for pensions and retiree health care would almost certainly increase Medicare costs and might well result in somewhat more people relying on Medicaid for nursing home care. But the alternative—endless bailout of pension funds and the companies that provide them—seems a lot worse.
Ignatius on Kerry's visit to Syria and Midde East policy
Kerry's Unusual Role in Mediating U.S.-Syria Relations. By David Ignatius
WaPo, June 1, 2009; 5:30 PM ET
The long-stalled U.S. diplomatic engagement with Syria is moving forward -- thanks to an unusual bit of mediation by Sen. John Kerry.
A mini-breakthrough in U.S.-Syria relations came Sunday in a telephone conversation between Secretary of State Hillary Clinton and Syrian Foreign Minister Walid Moallem, according to U.S. and Syrian sources. Moallem said that Syria would welcome a visit by U.S. Central Command officers to Damascus this month to discuss joint efforts to stabilize Iraq. In return, Clinton promised to develop a joint “road map” for improving bilateral relations between the two countries.
Kerry reportedly played a key role in breaking the logjam between the two countries, which had worsened after the Obama administration announced last month that it was renewing sanctions against Damascus under the Syria Accountability Act. The Syrians had been expecting that move, but they were upset by a presidential statement accompanying the renewal, which repeated harsh Bush administration language that said Syria posed an “unusual and extraordinary threat to the national security, foreign policy, and economy of the United States.” The Syrians said that unless this sharp language was withdrawn and the bilateral relationship improved, they wouldn’t provide the security assistance that Centcom wanted.
Enter the chairman of the Senate Foreign Relations Committee.
According to Syrian diplomatic sources, Kerry and Syrian President Bashar Assad have been developing a relationship of “respect and friendship,” including a long private dinner between the two men and their wives at the Narenj restaurant in the old city of Damascus when Kerry was there in March.
Kerry is said to have called Assad twice over the past two weeks to explore ways to improve relations; at the same time, he was talking to the Obama White House and State Department. In these and other conversations, apparently, the gap between the two countries was narrowed. Kerry’s office had no comment today.
The result of this mediation was Sunday’s carefully scripted conversation between Clinton and Moallem. Clinton told her Syrian counterpart, “We will be prepared to discuss with you all issues related to Syrian-American relations,” according to one transcript of the conversation. The U.S. pledged to “focus our efforts on forming a new sort of relationship,” according to this transcript. There was no pledge about when the U.S. will send an ambassador back to Damascus; the ambassador was withdrawn after the assassination of Lebanese Prime Minister Rafik Hariri in 2005, an attack for which many Lebanese blamed Syria.
The road map toward better relations will be discussed when Sen. George Mitchell, the U.S. special envoy for the Middle East, visits Damascus, probably this week. He will be the most senior U.S. official to visit Syria since relations went into the deep freeze three four years ago.
The Syria opening is part of a larger effort toward engagement by the Obama administration in the Middle East. President Obama will take that message to the heart of the Arab world Thursday in a Cairo speech that will discuss America’s desire for better relations, including contact with longtime adversaries, such as Syria and Iran.
Kerry’s role in all this is intriguing for two reasons: First, it shows that the former Democratic presidential candidate is carving out a role for himself as a foreign-policy player -- courageously taking on issues that are sensitive in political and policy terms. Second, it shows a fluid and creative foreign-policy process in the Obama administration, in which people outside the White House inner circle are able to get the president’s attention and push the envelope.
WaPo, June 1, 2009; 5:30 PM ET
The long-stalled U.S. diplomatic engagement with Syria is moving forward -- thanks to an unusual bit of mediation by Sen. John Kerry.
A mini-breakthrough in U.S.-Syria relations came Sunday in a telephone conversation between Secretary of State Hillary Clinton and Syrian Foreign Minister Walid Moallem, according to U.S. and Syrian sources. Moallem said that Syria would welcome a visit by U.S. Central Command officers to Damascus this month to discuss joint efforts to stabilize Iraq. In return, Clinton promised to develop a joint “road map” for improving bilateral relations between the two countries.
Kerry reportedly played a key role in breaking the logjam between the two countries, which had worsened after the Obama administration announced last month that it was renewing sanctions against Damascus under the Syria Accountability Act. The Syrians had been expecting that move, but they were upset by a presidential statement accompanying the renewal, which repeated harsh Bush administration language that said Syria posed an “unusual and extraordinary threat to the national security, foreign policy, and economy of the United States.” The Syrians said that unless this sharp language was withdrawn and the bilateral relationship improved, they wouldn’t provide the security assistance that Centcom wanted.
Enter the chairman of the Senate Foreign Relations Committee.
According to Syrian diplomatic sources, Kerry and Syrian President Bashar Assad have been developing a relationship of “respect and friendship,” including a long private dinner between the two men and their wives at the Narenj restaurant in the old city of Damascus when Kerry was there in March.
Kerry is said to have called Assad twice over the past two weeks to explore ways to improve relations; at the same time, he was talking to the Obama White House and State Department. In these and other conversations, apparently, the gap between the two countries was narrowed. Kerry’s office had no comment today.
The result of this mediation was Sunday’s carefully scripted conversation between Clinton and Moallem. Clinton told her Syrian counterpart, “We will be prepared to discuss with you all issues related to Syrian-American relations,” according to one transcript of the conversation. The U.S. pledged to “focus our efforts on forming a new sort of relationship,” according to this transcript. There was no pledge about when the U.S. will send an ambassador back to Damascus; the ambassador was withdrawn after the assassination of Lebanese Prime Minister Rafik Hariri in 2005, an attack for which many Lebanese blamed Syria.
The road map toward better relations will be discussed when Sen. George Mitchell, the U.S. special envoy for the Middle East, visits Damascus, probably this week. He will be the most senior U.S. official to visit Syria since relations went into the deep freeze three four years ago.
The Syria opening is part of a larger effort toward engagement by the Obama administration in the Middle East. President Obama will take that message to the heart of the Arab world Thursday in a Cairo speech that will discuss America’s desire for better relations, including contact with longtime adversaries, such as Syria and Iran.
Kerry’s role in all this is intriguing for two reasons: First, it shows that the former Democratic presidential candidate is carving out a role for himself as a foreign-policy player -- courageously taking on issues that are sensitive in political and policy terms. Second, it shows a fluid and creative foreign-policy process in the Obama administration, in which people outside the White House inner circle are able to get the president’s attention and push the envelope.
Ethanol's Grocery Bill - Two federal studies add up the corn fuel's exorbitant cost
Ethanol's Grocery Bill. WSJ Editorial
Two federal studies add up the corn fuel's exorbitant cost.
WSJ, Jun 02, 2009
The Obama Administration is pushing a big expansion in ethanol, including a mandate to increase the share of the corn-based fuel required in gasoline to 15% from 10%. Apparently no one in the Administration has read a pair of new studies, one from its own EPA, that expose ethanol as a bad deal for consumers with little environmental benefit.
The biofuels industry already receives a 45 cent tax credit for every gallon of ethanol produced, or about $3 billion a year. Meanwhile, import tariffs of 54 cents a gallon and an ad valorem tariff of four to seven cents a gallon keep out sugar-based ethanol from Brazil and the Caribbean. The federal 10% blending requirement insures a market for ethanol whether consumers want it or not -- a market Congress has mandated will double to 20.5 billion gallons in 2015.
The Congressional Budget Office reported last month that Americans pay another surcharge for ethanol in higher food prices. CBO estimates that from April 2007 to April 2008 "the increased use of ethanol accounted for about 10 percent to 15 percent of the rise in food prices." Ethanol raises food prices because millions of acres of farmland and three billion bushels of corn were diverted to ethanol from food production. Americans spend about $1.1 trillion a year on food, so in 2007 the ethanol subsidy cost families between $5.5 billion and $8.8 billion in higher grocery bills.
A second study -- by the Environmental Protection Agency's Office of Transportation and Air Quality -- explains that the reduction in CO2 emissions from burning ethanol are minimal and maybe negative. Making ethanol requires new land from clearing forest and grasslands that would otherwise sequester carbon emissions. "As with petroleum based fuels," the report concludes: "GHG [greenhouse gas] emissions are associated with the conversion and combustion of bio-fuels and every year they are produced GHG emissions could be released through time if new acres are needed to produce corn or other crops for biofuels."
The EPA study also explores a series of alternative scenarios over 30 to 100 years. In some cases ethanol leads to a net reduction in carbon relative to using gasoline. But many other long-term scenarios observe a net increase in CO2 relative to burning fossil fuels. Ethanol produced in a "basic natural gas fired dry mill" will over a 30-year horizon produce "a 5% increase in GHG emissions compared to petroleum gasoline." When ethanol is produced with coal burning mills, the process "significantly worsens the lifecycle GHG impact of ethanol" creating 34% more greenhouse gases than gasoline does over 30 years.
Both CBO and EPA find that in theory cellulosic ethanol -- from wood chips, grasses and biowaste -- would reduce carbon emissions. However, as CBO emphasizes, "current technologies for producing cellulosic ethanol are not commercially viable." The ethanol lobby is attempting a giant bait-and-switch: Keep claiming that cellulosic ethanol is just around the corner, even as it knows the only current technology to meet federal mandates is corn ethanol (or sugar, if it didn't face an import tariff).
As public policy, ethanol is like the joke about the baseball prospect who is a poor hitter but a bad fielder. It doesn't reduce CO2 but it does cost more. Imagine how many subsidies the Beltway would throw at ethanol if the fuel actually had any benefits.
Two federal studies add up the corn fuel's exorbitant cost.
WSJ, Jun 02, 2009
The Obama Administration is pushing a big expansion in ethanol, including a mandate to increase the share of the corn-based fuel required in gasoline to 15% from 10%. Apparently no one in the Administration has read a pair of new studies, one from its own EPA, that expose ethanol as a bad deal for consumers with little environmental benefit.
The biofuels industry already receives a 45 cent tax credit for every gallon of ethanol produced, or about $3 billion a year. Meanwhile, import tariffs of 54 cents a gallon and an ad valorem tariff of four to seven cents a gallon keep out sugar-based ethanol from Brazil and the Caribbean. The federal 10% blending requirement insures a market for ethanol whether consumers want it or not -- a market Congress has mandated will double to 20.5 billion gallons in 2015.
The Congressional Budget Office reported last month that Americans pay another surcharge for ethanol in higher food prices. CBO estimates that from April 2007 to April 2008 "the increased use of ethanol accounted for about 10 percent to 15 percent of the rise in food prices." Ethanol raises food prices because millions of acres of farmland and three billion bushels of corn were diverted to ethanol from food production. Americans spend about $1.1 trillion a year on food, so in 2007 the ethanol subsidy cost families between $5.5 billion and $8.8 billion in higher grocery bills.
A second study -- by the Environmental Protection Agency's Office of Transportation and Air Quality -- explains that the reduction in CO2 emissions from burning ethanol are minimal and maybe negative. Making ethanol requires new land from clearing forest and grasslands that would otherwise sequester carbon emissions. "As with petroleum based fuels," the report concludes: "GHG [greenhouse gas] emissions are associated with the conversion and combustion of bio-fuels and every year they are produced GHG emissions could be released through time if new acres are needed to produce corn or other crops for biofuels."
The EPA study also explores a series of alternative scenarios over 30 to 100 years. In some cases ethanol leads to a net reduction in carbon relative to using gasoline. But many other long-term scenarios observe a net increase in CO2 relative to burning fossil fuels. Ethanol produced in a "basic natural gas fired dry mill" will over a 30-year horizon produce "a 5% increase in GHG emissions compared to petroleum gasoline." When ethanol is produced with coal burning mills, the process "significantly worsens the lifecycle GHG impact of ethanol" creating 34% more greenhouse gases than gasoline does over 30 years.
Both CBO and EPA find that in theory cellulosic ethanol -- from wood chips, grasses and biowaste -- would reduce carbon emissions. However, as CBO emphasizes, "current technologies for producing cellulosic ethanol are not commercially viable." The ethanol lobby is attempting a giant bait-and-switch: Keep claiming that cellulosic ethanol is just around the corner, even as it knows the only current technology to meet federal mandates is corn ethanol (or sugar, if it didn't face an import tariff).
As public policy, ethanol is like the joke about the baseball prospect who is a poor hitter but a bad fielder. It doesn't reduce CO2 but it does cost more. Imagine how many subsidies the Beltway would throw at ethanol if the fuel actually had any benefits.
Monday, June 1, 2009
Remember Ozawa: "If Japan desires, it can possess thousands of nuclear warheads"
The Axis of Evil, Again. By BRET STEPHENS
WSJ, Jun 02, 2009
Not 24 hours after North Korea's nuclear test last week, Iranian President Mahmoud Ahmadinejad issued a statement insisting "we don't have any cooperation [with North Korea] in this field." The lady doth protest too much.
When it comes to nuclear weapons and the means to deliver them, history offers two hard lessons. First, nearly every nuclear power has been a secret sharer of nuclear technology. Second, every action creates an equal and opposite reaction -- a Newtonian law of proliferation that is only broken with the intercession of an overwhelming outside force.
On the first point, it's worth recalling that every nuclear-weapons state got that way with the help of foreign friends. The American bomb was conceived by European scientists and built in a consortium with Britain and Canada. The Soviets got their bomb thanks largely to atomic spies, particularly Germany's Klaus Fuchs. The Chinese nuclear program got its start with Soviet help.
Britain gave France the secret of the hydrogen bomb, hoping French President Charles de Gaulle would return the favor by admitting the U.K. into the European Economic Community. (He Gallicly refused.) France shared key nuclear technology with Israel and then with Iraq. South Africa got its bombs (since dismantled) with Israeli help. India made illegal use of plutonium from a U.S.-Canadian reactor to build its first bomb. The Chinese lent the design of one of their early atomic bombs to Pakistan, which then gave it to Libya, North Korea and probably Iran.
Now it's Pyongyang's turn to be the link in the nuclear daisy chain. Its ties to Syria were exposed by an Israeli airstrike in 2007. As for Iran, its military and R&D links to the North go back more than 20 years, when Iran purchased 100 Scud-B missiles for use in the Iran-Iraq war.
Since then, Iranians have reportedly been present at a succession of North Korean missile tests. North Korea also seems to have off-shored its missile testing to Iran after it declared a "moratorium" on its own tests in the late 1990s.
In a 2008 paper published by the Korea Economic Institute, Dr. Christina Lin of Jane's Information Group noted that "Increased visits to Iran by DPRK [North Korea] nuclear specialists in 2003 reportedly led to a DPRK-Iran agreement for the DPRK to either initiate or accelerate work with Iranians to develop nuclear warheads that could be fitted on the DPRK No-dong missiles that the DPRK and Iran were jointly developing. Thus, despite the 2007 National Intelligence Estimate stating that Iran in 2003 had halted weaponization of its nuclear program, this was the time that Iran outsourced to the DPRK for proxy development of nuclear warheads."
Another noteworthy detail: According to a 2003 report in the L.A. Times, "So many North Koreans are working on nuclear and missile projects in Iran that a resort on the Caspian coast is set aside for their exclusive use."
Now the North seems to be gearing up for yet another test of its long-range Taepodong missile, and it's a safe bet Iranians will again be on the receiving end of the flight data. Nothing prevents them from sharing nuclear-weapons material or data, either, and the thought occurs that the North's second bomb test last week might also have been Iran's first. If so, the only thing between Iran and a bomb is a long-range cargo plane.
Which brings us to our second nuclear lesson. Secretary of Defense Robert Gates has lately been in Asia taking a tough rhetorical line on the North's nuclear activities. But it's hard to deliver the message credibly after Mr. Gates rejected suggestions that the U.S. shoot down the Taepodong just prior to its April test, or when the U.S. flubbed the diplomacy at the U.N. So other countries will have to draw their own conclusions.
One such country is Japan. In 2002, Ichiro Ozawa, then the leader of the country's Liberal Party, told Chinese leaders that "If Japan desires, it can possess thousands of nuclear warheads. Japan has enough plutonium in use at its nuclear plants for three to four thousand. . . . If that should happen, we wouldn't lose to China in terms of military strength."
This wasn't idle chatter. As Christopher Hughes notes in his new book, "Japan's Remilitarization," "The nuclear option is gaining greater credence in Japan because of growing concerns over the basic strategic conditions that have allowed for nuclear restraint in the past. . . . Japanese analysts have questioned whether the U.S. would really risk Los Angeles for Tokyo in a nuclear confrontation with North Korea."
There are still good reasons why Japan would not want to go nuclear: Above all, it doesn't want to simultaneously antagonize China and the U.S. But the U.S. has even better reasons not to want to tempt Japan in that direction. Transparently feckless and time-consuming U.S. diplomacy with North Korea is one such temptation. Refusing to modernize our degraded stockpile of nuclear weapons while seeking radical cuts in the overall arsenal through a deal with Russia is another.
This, however, is the course the Obama administration has set for itself. Allies and enemies alike will draw their own conclusions.
WSJ, Jun 02, 2009
Not 24 hours after North Korea's nuclear test last week, Iranian President Mahmoud Ahmadinejad issued a statement insisting "we don't have any cooperation [with North Korea] in this field." The lady doth protest too much.
When it comes to nuclear weapons and the means to deliver them, history offers two hard lessons. First, nearly every nuclear power has been a secret sharer of nuclear technology. Second, every action creates an equal and opposite reaction -- a Newtonian law of proliferation that is only broken with the intercession of an overwhelming outside force.
On the first point, it's worth recalling that every nuclear-weapons state got that way with the help of foreign friends. The American bomb was conceived by European scientists and built in a consortium with Britain and Canada. The Soviets got their bomb thanks largely to atomic spies, particularly Germany's Klaus Fuchs. The Chinese nuclear program got its start with Soviet help.
Britain gave France the secret of the hydrogen bomb, hoping French President Charles de Gaulle would return the favor by admitting the U.K. into the European Economic Community. (He Gallicly refused.) France shared key nuclear technology with Israel and then with Iraq. South Africa got its bombs (since dismantled) with Israeli help. India made illegal use of plutonium from a U.S.-Canadian reactor to build its first bomb. The Chinese lent the design of one of their early atomic bombs to Pakistan, which then gave it to Libya, North Korea and probably Iran.
Now it's Pyongyang's turn to be the link in the nuclear daisy chain. Its ties to Syria were exposed by an Israeli airstrike in 2007. As for Iran, its military and R&D links to the North go back more than 20 years, when Iran purchased 100 Scud-B missiles for use in the Iran-Iraq war.
Since then, Iranians have reportedly been present at a succession of North Korean missile tests. North Korea also seems to have off-shored its missile testing to Iran after it declared a "moratorium" on its own tests in the late 1990s.
In a 2008 paper published by the Korea Economic Institute, Dr. Christina Lin of Jane's Information Group noted that "Increased visits to Iran by DPRK [North Korea] nuclear specialists in 2003 reportedly led to a DPRK-Iran agreement for the DPRK to either initiate or accelerate work with Iranians to develop nuclear warheads that could be fitted on the DPRK No-dong missiles that the DPRK and Iran were jointly developing. Thus, despite the 2007 National Intelligence Estimate stating that Iran in 2003 had halted weaponization of its nuclear program, this was the time that Iran outsourced to the DPRK for proxy development of nuclear warheads."
Another noteworthy detail: According to a 2003 report in the L.A. Times, "So many North Koreans are working on nuclear and missile projects in Iran that a resort on the Caspian coast is set aside for their exclusive use."
Now the North seems to be gearing up for yet another test of its long-range Taepodong missile, and it's a safe bet Iranians will again be on the receiving end of the flight data. Nothing prevents them from sharing nuclear-weapons material or data, either, and the thought occurs that the North's second bomb test last week might also have been Iran's first. If so, the only thing between Iran and a bomb is a long-range cargo plane.
Which brings us to our second nuclear lesson. Secretary of Defense Robert Gates has lately been in Asia taking a tough rhetorical line on the North's nuclear activities. But it's hard to deliver the message credibly after Mr. Gates rejected suggestions that the U.S. shoot down the Taepodong just prior to its April test, or when the U.S. flubbed the diplomacy at the U.N. So other countries will have to draw their own conclusions.
One such country is Japan. In 2002, Ichiro Ozawa, then the leader of the country's Liberal Party, told Chinese leaders that "If Japan desires, it can possess thousands of nuclear warheads. Japan has enough plutonium in use at its nuclear plants for three to four thousand. . . . If that should happen, we wouldn't lose to China in terms of military strength."
This wasn't idle chatter. As Christopher Hughes notes in his new book, "Japan's Remilitarization," "The nuclear option is gaining greater credence in Japan because of growing concerns over the basic strategic conditions that have allowed for nuclear restraint in the past. . . . Japanese analysts have questioned whether the U.S. would really risk Los Angeles for Tokyo in a nuclear confrontation with North Korea."
There are still good reasons why Japan would not want to go nuclear: Above all, it doesn't want to simultaneously antagonize China and the U.S. But the U.S. has even better reasons not to want to tempt Japan in that direction. Transparently feckless and time-consuming U.S. diplomacy with North Korea is one such temptation. Refusing to modernize our degraded stockpile of nuclear weapons while seeking radical cuts in the overall arsenal through a deal with Russia is another.
This, however, is the course the Obama administration has set for itself. Allies and enemies alike will draw their own conclusions.
Egypt Needs Democracy and Term Limits
Egypt Needs Democracy and Term Limits. By Saad Eddin Ibrahim
Mubarak competes with Ramses II for time in office.
WSJ, Jun 02, 2009
Egyptians have traditionally thought of their country as the "Mother of the World." President Barack Obama says he wants to change the world. Egypt may very well be a good place to start.
Egyptians at home and abroad have been clamoring for change. Kefaya, which literally means "enough," is a slogan, an outcry, and a grassroots movement that has been organizing to reform our antique regime. Over 1,000 acts of civil disobedience have taken place all over Egypt in recent months. Participants have included the Bedouins of Sinai, the Nubians of Aswan, and even the Coptic monks of Upper Egypt.
Obviously, an American president elected on a platform of change is music to Egyptians' ears, and Mr. Obama will be a welcome guest. He is universally popular with Egyptians, Arabs and Muslims. But will average Egyptians really connect with him, let alone get a chance to meet him? With only 10 hours in the country, his visit will be carefully choreographed. Security forces will understandably separate him from the eager Egyptian crowds. Mr. Obama should consider scheduling a town meeting with representatives of Egyptian civil society. He had such a meeting when he visited France.
Mr. Obama will meet an Egyptian president who is still grieving over the untimely death in May of his 13-year-old grandson Mohammed. Despite the special bond between the two, Hosni Mubarak did not appear at the boy's funeral, or at that of the prime minister's wife a week earlier. This has led to widespread rumors about his health. Yet no native reporter dared to raise a question about the matter, as it is against the law to do so.
Mr. Mubarak is the third-longest serving Egyptian ruler in the country's last 2,000 years of recorded history. He has refused to step down or even appoint a vice president. There is widespread apprehension that he is grooming his son Gamal (46) to inherit the "throne." Over 60% of Egypt's population was born during Mr. Mubarak's tenure and have not known any other ruler. Many of them want "change" and are waiting anxiously for someone to help them bring it about.
Let's hope that whatever else he may have pressing -- Palestine, Iran, Iraq and Afghanistan -- Mr. Obama will try to be that change agent. One remarkable thing he can do for Egypt and the rest of the Muslim world is to offer American help in making governance more sound. He should promote the rule of law by promoting democratic elections and term limits for democratically elected presidents.
This may appear to be long shot. Mr. Obama's advisers will likely argue against it to avoid offending his host. But such a bold move would win him the hearts and minds of the world's 1.4 billion Muslims forever. With his legendary gift for communication, Mr. Obama should find a way to propose the idea and offer a Marshall-like plan of financial incentives. He can then call on Egyptians and other Muslims to do the rest.
Mr. Ibrahim, an Egyptian sociologist and human rights advocate, was imprisoned by the Mubarak regime. He has lived in exile since 2007 and is currently a visiting professor at Harvard.
Mubarak competes with Ramses II for time in office.
WSJ, Jun 02, 2009
Egyptians have traditionally thought of their country as the "Mother of the World." President Barack Obama says he wants to change the world. Egypt may very well be a good place to start.
Egyptians at home and abroad have been clamoring for change. Kefaya, which literally means "enough," is a slogan, an outcry, and a grassroots movement that has been organizing to reform our antique regime. Over 1,000 acts of civil disobedience have taken place all over Egypt in recent months. Participants have included the Bedouins of Sinai, the Nubians of Aswan, and even the Coptic monks of Upper Egypt.
Obviously, an American president elected on a platform of change is music to Egyptians' ears, and Mr. Obama will be a welcome guest. He is universally popular with Egyptians, Arabs and Muslims. But will average Egyptians really connect with him, let alone get a chance to meet him? With only 10 hours in the country, his visit will be carefully choreographed. Security forces will understandably separate him from the eager Egyptian crowds. Mr. Obama should consider scheduling a town meeting with representatives of Egyptian civil society. He had such a meeting when he visited France.
Mr. Obama will meet an Egyptian president who is still grieving over the untimely death in May of his 13-year-old grandson Mohammed. Despite the special bond between the two, Hosni Mubarak did not appear at the boy's funeral, or at that of the prime minister's wife a week earlier. This has led to widespread rumors about his health. Yet no native reporter dared to raise a question about the matter, as it is against the law to do so.
Mr. Mubarak is the third-longest serving Egyptian ruler in the country's last 2,000 years of recorded history. He has refused to step down or even appoint a vice president. There is widespread apprehension that he is grooming his son Gamal (46) to inherit the "throne." Over 60% of Egypt's population was born during Mr. Mubarak's tenure and have not known any other ruler. Many of them want "change" and are waiting anxiously for someone to help them bring it about.
Let's hope that whatever else he may have pressing -- Palestine, Iran, Iraq and Afghanistan -- Mr. Obama will try to be that change agent. One remarkable thing he can do for Egypt and the rest of the Muslim world is to offer American help in making governance more sound. He should promote the rule of law by promoting democratic elections and term limits for democratically elected presidents.
This may appear to be long shot. Mr. Obama's advisers will likely argue against it to avoid offending his host. But such a bold move would win him the hearts and minds of the world's 1.4 billion Muslims forever. With his legendary gift for communication, Mr. Obama should find a way to propose the idea and offer a Marshall-like plan of financial incentives. He can then call on Egyptians and other Muslims to do the rest.
Mr. Ibrahim, an Egyptian sociologist and human rights advocate, was imprisoned by the Mubarak regime. He has lived in exile since 2007 and is currently a visiting professor at Harvard.
The Justice Department's Antitrust Bomb: Assistant Attorney General for Antitrust Christine Varney
The Justice Department's Antitrust Bomb. By George L Priest
Microsoft and Intel will find refuge in the courts.
WSJ, Jun 02, 2009
As if commandeering the banking, finance and auto industries weren't enough, a couple of weeks ago the Obama administration decided to throw a bomb at modern antitrust law.
Assistant Attorney General for Antitrust Christine Varney claims that the Justice Department can aid economic recovery by prosecuting businesses that have been successful in gaining large market shares. In her announcement last month she argued that "many observers agree" that our current recession reflects "a failure of antitrust" and "inadequate antitrust oversight."
This is news to most economists. The cause of the recession is not easy money by the Fed, or the bursting of the housing bubble, or excessive risk-taking through complicated financial instruments? It's insufficient antitrust prosecution? The claim is hardly plausible. Prosecuting successful businesses will help the recovery? Again, hard to believe.
Why prosecute firms whose products large majorities of consumers have found most valuable? Ms. Varney gives no principled reason. She defends the change in policy on the grounds that it contradicts recommendations of a Justice Department report issued during the Bush administration, and because it appears consistent with the European approach to antitrust.
On her first point, the Justice department, aided by the Federal Trade Commission, issued a report in 2008 addressing the appropriate antitrust approach to potential monopoly behavior. It's fair enough for a succeeding administration to reject policies of its predecessor. But the Justice Department report was not authored by John Yoo or Alberto Gonzales. It was the work of a year-long study that considered recommendations from 29 panels and 119 witnesses, most of them critical of the minimalist Chicago School approach to antitrust law. The report's conclusions basically track Supreme Court law with modest extensions in areas where the Supreme Court has not ruled. Ms. Varney denounced the report in its entirety.
What does Ms. Varney propose as an alternative approach? Not much. Her basic proposal is to transform American antitrust law to more closely resemble that of Europe. She states that American antitrust policies have "diverged too frequently" from those of the Europe, and that "[w]e will focus our efforts on working through our previously divergent policies regarding single-firm conduct and pursuing vigorous enforcement on the [monopolization] front."
This is a huge mistake. The principal reasons American and European approaches to antitrust diverge are that the operative legal standards are different and that the Europeans have not adopted a tradition of rigorous economic analysis.
U.S. antitrust laws condemn practices that are "in restraint of trade," which has been interpreted to mean harm to competition. The European Union, in contrast, condemns practices that constitute "abuse of a dominant position."
The European emphasis on "dominance" has consistently led to confusion. A good example is the way the proposed GE-Honeywell merger was treated in 2001. It was uncontested both in the U.S. and in Europe that the proposed merger would create economic efficiencies, lowering product costs to the benefit of consumers. In the U.S. this was reason to approve -- if not applaud -- the merger. But in Europe the expected cost savings would make the merged firms even more dominant. The EU blocked the merger, to the harm of U.S. and European consumers.
Another example is the recent $1.45 billion fine levied by the EU against Intel. Although the EU has not released its full report documenting what violations it found, it appears that the principal concern was Intel's practice of giving "loyalty discounts" to repeat customers, presumably increasing Intel's dominance in the microprocessor business.
Should a firm be punished for giving discounts? A discount to a repeat customer is a ubiquitous business practice from local delis to auto repair shops, hardly monopolists in any sense. At various points in her presentation Ms. Varney stated that the ambition of antitrust law is to secure low prices for consumers.
Intel, of course, operates on a different scale than a deli. But the fact that it has been able to maintain roughly an 80% market share for decades provides strong evidence that it is producing a valuable product. The antitrust questions with regard to dominant firms should be: What is the source of dominance and how has it survived over time?
The EU complaint claims that Intel has practiced a variation of predatory pricing. As is well-established in U.S. law, predatory pricing claims are highly questionable in the intellectual property field. Although the EU competition unit has added economists to its staff since GE-Honeywell, its antitrust theories are roughly 30 years behind those in the U.S.
The antitrust problem is likely to become increasingly troublesome over time. In a dynamic economy we should expect the development of novel business practices as firms attempt to attract consumers in order to maximize product sales. In the U.S. -- Ms. Varney's views aside -- success in competition is rewarded. In Europe it is suspect, a particularly perverse presumption given that national and international competition has been increasing and will continue to increase.
The saving grace here is that, unlike her European counterpart Neelie Kroes (who is antitrust prosecutor and judge at once), Ms. Varney is only the director of an administrative agency. She and her department can prosecute cases but they cannot convict. The positions put forth in the now-rejected 2008 Justice Department study derive largely from opinions of the Supreme Court. And in the last three monopolization cases considered by the Supreme Court (spanning over a decade) there were no dissenting opinions. Even if President Obama makes the court more liberal the court's antitrust opinions are secure.
Ms. Varney's proposed change in direction of antitrust policy may impose extraordinary litigation costs on the government and on her targets. It is unlikely to have a significant effect on U.S. antitrust law.
Mr. Priest teaches antitrust law at Yale Law School.
Microsoft and Intel will find refuge in the courts.
WSJ, Jun 02, 2009
As if commandeering the banking, finance and auto industries weren't enough, a couple of weeks ago the Obama administration decided to throw a bomb at modern antitrust law.
Assistant Attorney General for Antitrust Christine Varney claims that the Justice Department can aid economic recovery by prosecuting businesses that have been successful in gaining large market shares. In her announcement last month she argued that "many observers agree" that our current recession reflects "a failure of antitrust" and "inadequate antitrust oversight."
This is news to most economists. The cause of the recession is not easy money by the Fed, or the bursting of the housing bubble, or excessive risk-taking through complicated financial instruments? It's insufficient antitrust prosecution? The claim is hardly plausible. Prosecuting successful businesses will help the recovery? Again, hard to believe.
Why prosecute firms whose products large majorities of consumers have found most valuable? Ms. Varney gives no principled reason. She defends the change in policy on the grounds that it contradicts recommendations of a Justice Department report issued during the Bush administration, and because it appears consistent with the European approach to antitrust.
On her first point, the Justice department, aided by the Federal Trade Commission, issued a report in 2008 addressing the appropriate antitrust approach to potential monopoly behavior. It's fair enough for a succeeding administration to reject policies of its predecessor. But the Justice Department report was not authored by John Yoo or Alberto Gonzales. It was the work of a year-long study that considered recommendations from 29 panels and 119 witnesses, most of them critical of the minimalist Chicago School approach to antitrust law. The report's conclusions basically track Supreme Court law with modest extensions in areas where the Supreme Court has not ruled. Ms. Varney denounced the report in its entirety.
What does Ms. Varney propose as an alternative approach? Not much. Her basic proposal is to transform American antitrust law to more closely resemble that of Europe. She states that American antitrust policies have "diverged too frequently" from those of the Europe, and that "[w]e will focus our efforts on working through our previously divergent policies regarding single-firm conduct and pursuing vigorous enforcement on the [monopolization] front."
This is a huge mistake. The principal reasons American and European approaches to antitrust diverge are that the operative legal standards are different and that the Europeans have not adopted a tradition of rigorous economic analysis.
U.S. antitrust laws condemn practices that are "in restraint of trade," which has been interpreted to mean harm to competition. The European Union, in contrast, condemns practices that constitute "abuse of a dominant position."
The European emphasis on "dominance" has consistently led to confusion. A good example is the way the proposed GE-Honeywell merger was treated in 2001. It was uncontested both in the U.S. and in Europe that the proposed merger would create economic efficiencies, lowering product costs to the benefit of consumers. In the U.S. this was reason to approve -- if not applaud -- the merger. But in Europe the expected cost savings would make the merged firms even more dominant. The EU blocked the merger, to the harm of U.S. and European consumers.
Another example is the recent $1.45 billion fine levied by the EU against Intel. Although the EU has not released its full report documenting what violations it found, it appears that the principal concern was Intel's practice of giving "loyalty discounts" to repeat customers, presumably increasing Intel's dominance in the microprocessor business.
Should a firm be punished for giving discounts? A discount to a repeat customer is a ubiquitous business practice from local delis to auto repair shops, hardly monopolists in any sense. At various points in her presentation Ms. Varney stated that the ambition of antitrust law is to secure low prices for consumers.
Intel, of course, operates on a different scale than a deli. But the fact that it has been able to maintain roughly an 80% market share for decades provides strong evidence that it is producing a valuable product. The antitrust questions with regard to dominant firms should be: What is the source of dominance and how has it survived over time?
The EU complaint claims that Intel has practiced a variation of predatory pricing. As is well-established in U.S. law, predatory pricing claims are highly questionable in the intellectual property field. Although the EU competition unit has added economists to its staff since GE-Honeywell, its antitrust theories are roughly 30 years behind those in the U.S.
The antitrust problem is likely to become increasingly troublesome over time. In a dynamic economy we should expect the development of novel business practices as firms attempt to attract consumers in order to maximize product sales. In the U.S. -- Ms. Varney's views aside -- success in competition is rewarded. In Europe it is suspect, a particularly perverse presumption given that national and international competition has been increasing and will continue to increase.
The saving grace here is that, unlike her European counterpart Neelie Kroes (who is antitrust prosecutor and judge at once), Ms. Varney is only the director of an administrative agency. She and her department can prosecute cases but they cannot convict. The positions put forth in the now-rejected 2008 Justice Department study derive largely from opinions of the Supreme Court. And in the last three monopolization cases considered by the Supreme Court (spanning over a decade) there were no dissenting opinions. Even if President Obama makes the court more liberal the court's antitrust opinions are secure.
Ms. Varney's proposed change in direction of antitrust policy may impose extraordinary litigation costs on the government and on her targets. It is unlikely to have a significant effect on U.S. antitrust law.
Mr. Priest teaches antitrust law at Yale Law School.
GM: Timid management and coddled workers couldn't compete with Toyota
How GM Lost Its Way. By Paul Ingrassia
Timid management and coddled workers couldn't compete with Toyota.
WSJ, Jun 02, 2009
Decades of dumb decisions helped send General Motors to a bankruptcy court yesterday, but one stands out.
The year was 1998, and the United Auto Workers was striking at two factories in Flint, Mich., that made components critical to every GM assembly plant in the country. The union was defending production quotas that workers could fill in five or six hours, after which they would get overtime pay or just, you know, go home.
Most strikes are forbidden during the life of a labor contract, so to provide legal cover the union started filing grievances. GM lawyers contended the walkouts violated the contract anyway and drafted a lawsuit -- the first by the company against the UAW in more than 60 years. But GM's labor-relations department freaked out because the lawsuit would antagonize the union.
Just think about that. The union had shut down virtually all of GM, costing the company and its shareholders billions of dollars, and yet the company's labor negotiators were afraid of giving offense. After heated internal arguments, the suit was filed and GM seemed on the verge of winning. But the company settled just before the judge ruled.
UAW members marched victoriously through downtown Flint. GM executives who advocated a tougher stand got pushed out of the company.
The picture of a heedless union and a feckless management says a lot about what went wrong at GM. There were many more mistakes, of course -- look-alike cars, lapses in quality, misguided acquisitions, and betting on big SUVs just before gas prices soared. They were all born of a uniquely insular corporate culture.
The GM bailout probably will cost close to $100 billion, counting money from the governments of the U.S., Canada and Germany. On paper, the new company should emerge from Chapter 11 fully able to compete in the brutally competitive auto industry. Whether it will actually prosper is far less certain, but some things are beyond dispute. Bankruptcy didn't have to happen and the fact that it did happen is incredibly sad given GM's many contributions to American society and culture.
General Motors invented the modern corporation by developing the concept of giving operating executives power and responsibility to run far-flung operations subject to central financial control. While Henry Ford invented mass manufacturing, GM's long-time president and chairman of the board, Alfred P. Sloan Jr., developed mass marketing: a "car for every purse and purpose," as he put it in the company's 1924 annual report. This meant a hierarchy of brands ranging from practical Chevrolets to prestigious Cadillacs. GM's industrial might helped win a world war and made America rich in its aftermath.
For half a century, between the 1920s and the 1970s, GM seemed to have an instinctive feel for what Americans wanted before consumers themselves even knew it. Chrome, tail fins, muscle cars and even the first catalytic converters that let cars run on lead-free gasoline were developed at GM.
But the company signed generous labor deals during the 1970s, including the right to retire after 30 years with full pension and benefits, partly because it believed the contracts would cripple its smaller competitors, Ford and Chrysler. Then along came Honda, Nissan and Toyota, which didn't have to deal with labor contracts at all. That was the beginning of the agonizing decline.
This fate could have been avoided with better foresight and less hubris, but by 18 months ago bankruptcy was inevitable. GM's U.S. market share had declined to 22% from 52% in the early 1960s. There were too many brands, too much debt, a cumbersome union contract as big as a phone book, and an enormous dealer network built for the glory years of yesterday instead of the market share of today.
The question for Presidents George W. Bush and Barack Obama was whether to stand by and watch, or instead to use the public purse to shape the bankruptcies of both Chrysler and GM to mitigate the damage to a shaky U.S. economy. They intervened, which was the unpleasant but correct decision.
By and large, Mr. Obama's automotive task force has done its job pretty well, forcing the companies and the UAW to make difficult decisions that they should have made themselves long ago. GM will shed four of its eight U.S. brands -- Saab, Saturn, Pontiac and Hummer -- thousands of dealers, 11 factories, and much of its debt. It is no small irony that a Democratic administration brought in a bunch of private-equity types to impose rational management on big business.
That said, a couple of aspects of the GM and Chrysler bailouts could come back to haunt U.S. taxpayers and the Obama administration.
The company that controls Chrysler, Italy's Fiat, is getting a special government incentive -- a potential increase in its Chrysler ownership stake -- to build a small car in America that will get 40 miles per gallon. General Motors made a similar decision to build a high-mileage small car in the U.S. of its own accord, but certainly with an eye toward current political "realities."
Both moves fit the green agenda of Mr. Obama and congressional Democrats. They're also egregious examples of mission creep. GM and Chrysler should get just one marching order from the government: Earn enough money so taxpayers will recover as much as their investment as possible. If the new small cars flop because gas prices drop, the result will be more losses and, potentially, Bailout II.
The other questionable call is the government's big ownership stake in both companies -- 60% of General Motors and a much smaller share of Chrysler. The rationale is reasonable. The government is providing the $50 billion of financing needed to restructure GM so taxpayers might as well get something for their money. But this relegates unsecured lenders to the back of the line behind the government and the union. More worrisome, it invokes the question famously asked before the U.S. invasion of Iraq: You can go in, but can you get out?
The answer will depend on the success of GM, which in turn will hinge on whether the new company can cast off the culture of the old one. One encouraging sign is that, thanks to the labor contract amendments imposed by the Treasury's task force, UAW members will be required to work 40 hours a week before getting overtime pay. Less encouraging is that workers still will be allowed six unexcused absences before being fired. It doesn't take that many at a Honda plant.
As for management, not long ago a group of executives was reviewing a prototype new Buick model, about the size of a BMW 3 Series, at GM's design studios. The sporty styling had been developed in China for sale both there and in the U.S. But the company's cautious product planners suggested conducting customer clinics to gauge reaction to the design and possibly changing both the front and back end. It would have delayed the project and cost tens of millions of dollars.
CEO Fritz Henderson wisely said no. But the very next day the product planners were charging ahead with their clinic plans anyway, just in case the boss wanted to see the results of their research. Maybe the new Buick should be named the CYA. Neither billions in losses nor the brink of bankruptcy, it seems, have been enough to change many traditional ways of doing things at GM.
Heaven only knows what will be enough. But a company with a cautious, slow-moving management and a union committed to defending ridiculous work rules won't have a chance of succeeding. Perhaps everyone remaining at the new GM will realize that. The rest of us can only hope for the best.
Mr. Ingrassia won a Pulitzer Prize in 1993 for covering the last crisis at GM. His book on Detroit's current crisis, "Crash Course," will be published by Random House in January.
Timid management and coddled workers couldn't compete with Toyota.
WSJ, Jun 02, 2009
Decades of dumb decisions helped send General Motors to a bankruptcy court yesterday, but one stands out.
The year was 1998, and the United Auto Workers was striking at two factories in Flint, Mich., that made components critical to every GM assembly plant in the country. The union was defending production quotas that workers could fill in five or six hours, after which they would get overtime pay or just, you know, go home.
Most strikes are forbidden during the life of a labor contract, so to provide legal cover the union started filing grievances. GM lawyers contended the walkouts violated the contract anyway and drafted a lawsuit -- the first by the company against the UAW in more than 60 years. But GM's labor-relations department freaked out because the lawsuit would antagonize the union.
Just think about that. The union had shut down virtually all of GM, costing the company and its shareholders billions of dollars, and yet the company's labor negotiators were afraid of giving offense. After heated internal arguments, the suit was filed and GM seemed on the verge of winning. But the company settled just before the judge ruled.
UAW members marched victoriously through downtown Flint. GM executives who advocated a tougher stand got pushed out of the company.
The picture of a heedless union and a feckless management says a lot about what went wrong at GM. There were many more mistakes, of course -- look-alike cars, lapses in quality, misguided acquisitions, and betting on big SUVs just before gas prices soared. They were all born of a uniquely insular corporate culture.
The GM bailout probably will cost close to $100 billion, counting money from the governments of the U.S., Canada and Germany. On paper, the new company should emerge from Chapter 11 fully able to compete in the brutally competitive auto industry. Whether it will actually prosper is far less certain, but some things are beyond dispute. Bankruptcy didn't have to happen and the fact that it did happen is incredibly sad given GM's many contributions to American society and culture.
General Motors invented the modern corporation by developing the concept of giving operating executives power and responsibility to run far-flung operations subject to central financial control. While Henry Ford invented mass manufacturing, GM's long-time president and chairman of the board, Alfred P. Sloan Jr., developed mass marketing: a "car for every purse and purpose," as he put it in the company's 1924 annual report. This meant a hierarchy of brands ranging from practical Chevrolets to prestigious Cadillacs. GM's industrial might helped win a world war and made America rich in its aftermath.
For half a century, between the 1920s and the 1970s, GM seemed to have an instinctive feel for what Americans wanted before consumers themselves even knew it. Chrome, tail fins, muscle cars and even the first catalytic converters that let cars run on lead-free gasoline were developed at GM.
But the company signed generous labor deals during the 1970s, including the right to retire after 30 years with full pension and benefits, partly because it believed the contracts would cripple its smaller competitors, Ford and Chrysler. Then along came Honda, Nissan and Toyota, which didn't have to deal with labor contracts at all. That was the beginning of the agonizing decline.
This fate could have been avoided with better foresight and less hubris, but by 18 months ago bankruptcy was inevitable. GM's U.S. market share had declined to 22% from 52% in the early 1960s. There were too many brands, too much debt, a cumbersome union contract as big as a phone book, and an enormous dealer network built for the glory years of yesterday instead of the market share of today.
The question for Presidents George W. Bush and Barack Obama was whether to stand by and watch, or instead to use the public purse to shape the bankruptcies of both Chrysler and GM to mitigate the damage to a shaky U.S. economy. They intervened, which was the unpleasant but correct decision.
By and large, Mr. Obama's automotive task force has done its job pretty well, forcing the companies and the UAW to make difficult decisions that they should have made themselves long ago. GM will shed four of its eight U.S. brands -- Saab, Saturn, Pontiac and Hummer -- thousands of dealers, 11 factories, and much of its debt. It is no small irony that a Democratic administration brought in a bunch of private-equity types to impose rational management on big business.
That said, a couple of aspects of the GM and Chrysler bailouts could come back to haunt U.S. taxpayers and the Obama administration.
The company that controls Chrysler, Italy's Fiat, is getting a special government incentive -- a potential increase in its Chrysler ownership stake -- to build a small car in America that will get 40 miles per gallon. General Motors made a similar decision to build a high-mileage small car in the U.S. of its own accord, but certainly with an eye toward current political "realities."
Both moves fit the green agenda of Mr. Obama and congressional Democrats. They're also egregious examples of mission creep. GM and Chrysler should get just one marching order from the government: Earn enough money so taxpayers will recover as much as their investment as possible. If the new small cars flop because gas prices drop, the result will be more losses and, potentially, Bailout II.
The other questionable call is the government's big ownership stake in both companies -- 60% of General Motors and a much smaller share of Chrysler. The rationale is reasonable. The government is providing the $50 billion of financing needed to restructure GM so taxpayers might as well get something for their money. But this relegates unsecured lenders to the back of the line behind the government and the union. More worrisome, it invokes the question famously asked before the U.S. invasion of Iraq: You can go in, but can you get out?
The answer will depend on the success of GM, which in turn will hinge on whether the new company can cast off the culture of the old one. One encouraging sign is that, thanks to the labor contract amendments imposed by the Treasury's task force, UAW members will be required to work 40 hours a week before getting overtime pay. Less encouraging is that workers still will be allowed six unexcused absences before being fired. It doesn't take that many at a Honda plant.
As for management, not long ago a group of executives was reviewing a prototype new Buick model, about the size of a BMW 3 Series, at GM's design studios. The sporty styling had been developed in China for sale both there and in the U.S. But the company's cautious product planners suggested conducting customer clinics to gauge reaction to the design and possibly changing both the front and back end. It would have delayed the project and cost tens of millions of dollars.
CEO Fritz Henderson wisely said no. But the very next day the product planners were charging ahead with their clinic plans anyway, just in case the boss wanted to see the results of their research. Maybe the new Buick should be named the CYA. Neither billions in losses nor the brink of bankruptcy, it seems, have been enough to change many traditional ways of doing things at GM.
Heaven only knows what will be enough. But a company with a cautious, slow-moving management and a union committed to defending ridiculous work rules won't have a chance of succeeding. Perhaps everyone remaining at the new GM will realize that. The rest of us can only hope for the best.
Mr. Ingrassia won a Pulitzer Prize in 1993 for covering the last crisis at GM. His book on Detroit's current crisis, "Crash Course," will be published by Random House in January.
Busy Not Running GM - And not choosing GM's office space
Busy Not Running GM. WSJ Editorial
And not choosing GM's office space.
WSJ, Jun 02, 2009
President Obama announced the bankruptcy of General Motors yesterday before GM's CEO even spoke, and the feds will soon own 60% of the company. But whatever you do, please don't think the government is now running GM.
"What we are not doing -- what I have no interest in doing -- is running GM," Mr. Obama said in yesterday's bankruptcy announcement. "When a difficult decision has to be made on matters like where to open a new plant or what type of new car to make, the new GM, not the United States government, will make that decision."
The President is so busy not running GM that he had time the night before to call and reassure Detroit Mayor Dave Bing about the new GM's future location. GM is being courted to move its headquarters to nearby Warren, Michigan. And Mr. Bing told the Detroit News that he had received a call Sunday evening from the President "informing me of his support for GM to stay in the city of Detroit with its headquarters at the Renaissance [Center]."
The newspaper went on to report that "The mayor said he's more secure in knowing GM will stay in Detroit, a move paved by several conversations Bing and his administration had with several top White House officials in recent days."
We don't know whether GM should stay in Detroit. But we do know that the location of a company's headquarters is one of those decisions typically not made by people who are busy not running the company.
And not choosing GM's office space.
WSJ, Jun 02, 2009
President Obama announced the bankruptcy of General Motors yesterday before GM's CEO even spoke, and the feds will soon own 60% of the company. But whatever you do, please don't think the government is now running GM.
"What we are not doing -- what I have no interest in doing -- is running GM," Mr. Obama said in yesterday's bankruptcy announcement. "When a difficult decision has to be made on matters like where to open a new plant or what type of new car to make, the new GM, not the United States government, will make that decision."
The President is so busy not running GM that he had time the night before to call and reassure Detroit Mayor Dave Bing about the new GM's future location. GM is being courted to move its headquarters to nearby Warren, Michigan. And Mr. Bing told the Detroit News that he had received a call Sunday evening from the President "informing me of his support for GM to stay in the city of Detroit with its headquarters at the Renaissance [Center]."
The newspaper went on to report that "The mayor said he's more secure in knowing GM will stay in Detroit, a move paved by several conversations Bing and his administration had with several top White House officials in recent days."
We don't know whether GM should stay in Detroit. But we do know that the location of a company's headquarters is one of those decisions typically not made by people who are busy not running the company.
A Victory in Pakistan
A Victory in Pakistan - WSJ.com
The army retakes Swat from the Taliban, but don't stop there.
WSJ, Jun 02, 2009
The army retakes Swat from the Taliban, but don't stop there.
WSJ, Jun 02, 2009
D.C. Should Create Its Own School Voucher Program
D.C. Should Create Its Own School Voucher Program. By Andrew J. Coulson
This article appeared in the DC Examiner on May 29, 2009.
Thousands rallied in DC earlier this month to save a federal program that helps low-income families afford private schooling. On the same day, President Obama signaled that he opposes school vouchers, but will seek funding so that students already attending private schools may continue to do so through the end of high school. When they've graduated, the voucher program would die. That isn't good enough.
The voucher students have little brothers and sisters. They have neighbors and friends. Under the president's proposal, none of those children would ever enjoy the chances that voucher recipients like Mercedes Campbell have had.
In an interview with ReasonTV, Mercedes said the opportunity to attend a private school has transformed her. "It's different, now that I go to Visitation.... It's like a whole new world."
Unless something is done, most poor kids in DC will never glimpse that world, let alone live in it. House Minority Leader John Boehner, of Ohio, has proposed a bill to reauthorize the voucher program, but it faces a stiff headwind as long as Democrats in Congress defer to teacher union opposition.
But there is another option: The District of Columbia can create its own scholarship program.
Can DC afford it? Average tuition at voucher-accepting schools is about $6,600, according to a federal study released last month. By contrast, the city is currently spending about $1.3 billion on k-12 education, for fewer than 49,000 students.
That works out to well over $26,000 per pupil -- comparable to tuition at the prestigious Sidwell Friends school to which the president sends his own daughters, Sasha and Malia. So DC could easily offer a voucher even larger than the one currently provided by the federal government.
Is it politically viable? Perhaps. Though Democrats in Congress are almost universally opposed to school choice programs, the same is not true at the state and local levels. Speakers at the rally to save the voucher program included DC councilman Marion Barry, former mayor Anthony Williams (who was instrumental in creating the federal program), former councilman Kevin Chavous, and civil rights leader Benjamin Chavis.
And just two weeks ago, the Florida legislature passed a bill strengthening that state's private school choice tax credit program, with the support of nearly half the Democratic caucus in the house, and two thirds of African American Democrats. The biggest champions of a similar program in New Jersey are Democratic Mayor Corey Booker, and fellow Democratic state senator Raymond Lesniak.
The political dynamics are different in city halls and statehouses than they are on Capitol Hill. The unions may lobby just as fiercely in every case, but the pushback from constituents is stronger at lower levels of government.
Few seats in the U.S. House or Senate are decided on the basis of education platforms, but education plays a larger role in the election of state and local officials. As parents get angrier and demand educational alternatives for their kids, politicians outside of Congress are more apt to take notice.
What's more, DC already has what amounts to a targeted school voucher program -- and it's larger than the federal voucher program that President Obama wishes to phase out. The District currently sends nearly 2,500 special needs students to private schools because it is not able to serve them itself. The program is uncontroversial.
Why not extend to all families a choice currently enjoyed by so few? The Department of Education's recent study shows that students who have been in the voucher program since it began in 2004 are performing more than two school years ahead of their public school counterparts in reading. There is unconscionable to deny that benefit to other students.
When the "common school" reformers began their campaign for state-run schooling more than 200 years ago, one of their core goals was to ensure that the education of America's poorest citizens did not fall by the wayside.
Despite the best efforts of generation after generation of subsequent reformers, that goal remains unmet for far too many children. We can't wait any longer. DC kids can't wait any longer.
This article appeared in the DC Examiner on May 29, 2009.
Thousands rallied in DC earlier this month to save a federal program that helps low-income families afford private schooling. On the same day, President Obama signaled that he opposes school vouchers, but will seek funding so that students already attending private schools may continue to do so through the end of high school. When they've graduated, the voucher program would die. That isn't good enough.
The voucher students have little brothers and sisters. They have neighbors and friends. Under the president's proposal, none of those children would ever enjoy the chances that voucher recipients like Mercedes Campbell have had.
In an interview with ReasonTV, Mercedes said the opportunity to attend a private school has transformed her. "It's different, now that I go to Visitation.... It's like a whole new world."
Unless something is done, most poor kids in DC will never glimpse that world, let alone live in it. House Minority Leader John Boehner, of Ohio, has proposed a bill to reauthorize the voucher program, but it faces a stiff headwind as long as Democrats in Congress defer to teacher union opposition.
But there is another option: The District of Columbia can create its own scholarship program.
Can DC afford it? Average tuition at voucher-accepting schools is about $6,600, according to a federal study released last month. By contrast, the city is currently spending about $1.3 billion on k-12 education, for fewer than 49,000 students.
That works out to well over $26,000 per pupil -- comparable to tuition at the prestigious Sidwell Friends school to which the president sends his own daughters, Sasha and Malia. So DC could easily offer a voucher even larger than the one currently provided by the federal government.
Is it politically viable? Perhaps. Though Democrats in Congress are almost universally opposed to school choice programs, the same is not true at the state and local levels. Speakers at the rally to save the voucher program included DC councilman Marion Barry, former mayor Anthony Williams (who was instrumental in creating the federal program), former councilman Kevin Chavous, and civil rights leader Benjamin Chavis.
And just two weeks ago, the Florida legislature passed a bill strengthening that state's private school choice tax credit program, with the support of nearly half the Democratic caucus in the house, and two thirds of African American Democrats. The biggest champions of a similar program in New Jersey are Democratic Mayor Corey Booker, and fellow Democratic state senator Raymond Lesniak.
The political dynamics are different in city halls and statehouses than they are on Capitol Hill. The unions may lobby just as fiercely in every case, but the pushback from constituents is stronger at lower levels of government.
Few seats in the U.S. House or Senate are decided on the basis of education platforms, but education plays a larger role in the election of state and local officials. As parents get angrier and demand educational alternatives for their kids, politicians outside of Congress are more apt to take notice.
What's more, DC already has what amounts to a targeted school voucher program -- and it's larger than the federal voucher program that President Obama wishes to phase out. The District currently sends nearly 2,500 special needs students to private schools because it is not able to serve them itself. The program is uncontroversial.
Why not extend to all families a choice currently enjoyed by so few? The Department of Education's recent study shows that students who have been in the voucher program since it began in 2004 are performing more than two school years ahead of their public school counterparts in reading. There is unconscionable to deny that benefit to other students.
When the "common school" reformers began their campaign for state-run schooling more than 200 years ago, one of their core goals was to ensure that the education of America's poorest citizens did not fall by the wayside.
Despite the best efforts of generation after generation of subsequent reformers, that goal remains unmet for far too many children. We can't wait any longer. DC kids can't wait any longer.
The 'Unseen' Deserve Empathy, Too
The 'Unseen' Deserve Empathy, Too. By John Hasnas
This article appeared in The Wall Street Journal on May 29, 2009
While announcing Sonia Sotomayor as his nominee to the Supreme Court, President Barack Obama praised her as a judge who combined a mastery of the law with "a common touch, a sense of compassion, and an understanding of how the world works and how ordinary people live." This is in keeping with his earlier statement that he wanted to appoint a justice who possessed the "quality of empathy, of understanding and identifying with people's hopes and struggles."
Without casting aspersions on Judge Sotomayor, we may ask whether these are really the characteristics we want in a judge. Clearly, a good judge must have "an understanding of how the world works and how ordinary people live." Judicial decision-making involves the application of abstract rules to concrete facts; it is impossible to render a proper judicial decision without understanding its practical effect on both the litigants and the wider community.
But what about compassion and empathy? Compassion is defined as a feeling of deep sympathy for those stricken by misfortune, accompanied by a strong desire to alleviate the suffering; empathy is the ability to share in another's emotions, thoughts and feelings. Hence, a compassionate judge would tend to base his or her decisions on sympathy for the unfortunate; an empathetic judge on how the people directly affected by the decision would think and feel. What could be wrong with that?
Frederic Bastiat answered that question in his famous 1850 essay, "What is Seen and What is Not Seen." There the economist and member of the French parliament pointed out that law "produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them." Bastiat further noted that "[t]here is only one difference between a bad economist and a good one: The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen."
This observation is just as true for judges as it is for economists. As important as compassion and empathy are, one can have these feelings only for people that exist and that one knows about -- that is, for those who are "seen."
One can have compassion for workers who lose their jobs when a plant closes. They can be seen. One cannot have compassion for unknown persons in other industries who do not receive job offers when a compassionate government subsidizes an unprofitable plant. The potential employees not hired are unseen.
One can empathize with innocent children born with birth defects. Such children and the adversity they face can be seen. One cannot empathize with as-yet-unborn children in rural communities who may not have access to pediatricians if a judicial decision based on compassion raises the cost of medical malpractice insurance. These children are unseen.
One can feel for unfortunate homeowners about to lose their homes through foreclosure. One cannot feel for unknown individuals who may not be able to afford a home in the future if the compassionate and empathetic protection of current homeowners increases the cost of a mortgage.
In general, one can feel compassion for and empathize with individual plaintiffs in a lawsuit who are facing hardship. They are visible. One cannot feel compassion for or empathize with impersonal corporate defendants, who, should they incur liability, will pass the costs on to consumers, reduce their output, or cut employment. Those who must pay more for products, or are unable to obtain needed goods or services, or cannot find a job are invisible.
The law consists of abstract rules because we know that, as human beings, judges are unable to foresee all of the long-term consequences of their decisions and may be unduly influenced by the immediate, visible effects of these decisions. The rules of law are designed in part to strike the proper balance between the interests of those who are seen and those who are not seen. The purpose of the rules is to enable judges to resist the emotionally engaging temptation to relieve the plight of those they can see and empathize with, even when doing so would be unfair to those they cannot see.
Calling on judges to be compassionate or empathetic is in effect to ask them to undo this balance and favor the seen over the unseen. Paraphrasing Bastiat, if the difference between the bad judge and the good judge is that the bad judge focuses on the visible effects of his or her decisions while the good judge takes into account both the effects that can be seen and those that are unseen, then the compassionate, empathetic judge is very likely to be a bad judge. For this reason, let us hope that Judge Sotomayor proves to be a disappointment to her sponsor.
This article appeared in The Wall Street Journal on May 29, 2009
While announcing Sonia Sotomayor as his nominee to the Supreme Court, President Barack Obama praised her as a judge who combined a mastery of the law with "a common touch, a sense of compassion, and an understanding of how the world works and how ordinary people live." This is in keeping with his earlier statement that he wanted to appoint a justice who possessed the "quality of empathy, of understanding and identifying with people's hopes and struggles."
Without casting aspersions on Judge Sotomayor, we may ask whether these are really the characteristics we want in a judge. Clearly, a good judge must have "an understanding of how the world works and how ordinary people live." Judicial decision-making involves the application of abstract rules to concrete facts; it is impossible to render a proper judicial decision without understanding its practical effect on both the litigants and the wider community.
But what about compassion and empathy? Compassion is defined as a feeling of deep sympathy for those stricken by misfortune, accompanied by a strong desire to alleviate the suffering; empathy is the ability to share in another's emotions, thoughts and feelings. Hence, a compassionate judge would tend to base his or her decisions on sympathy for the unfortunate; an empathetic judge on how the people directly affected by the decision would think and feel. What could be wrong with that?
Frederic Bastiat answered that question in his famous 1850 essay, "What is Seen and What is Not Seen." There the economist and member of the French parliament pointed out that law "produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them." Bastiat further noted that "[t]here is only one difference between a bad economist and a good one: The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen."
This observation is just as true for judges as it is for economists. As important as compassion and empathy are, one can have these feelings only for people that exist and that one knows about -- that is, for those who are "seen."
One can have compassion for workers who lose their jobs when a plant closes. They can be seen. One cannot have compassion for unknown persons in other industries who do not receive job offers when a compassionate government subsidizes an unprofitable plant. The potential employees not hired are unseen.
One can empathize with innocent children born with birth defects. Such children and the adversity they face can be seen. One cannot empathize with as-yet-unborn children in rural communities who may not have access to pediatricians if a judicial decision based on compassion raises the cost of medical malpractice insurance. These children are unseen.
One can feel for unfortunate homeowners about to lose their homes through foreclosure. One cannot feel for unknown individuals who may not be able to afford a home in the future if the compassionate and empathetic protection of current homeowners increases the cost of a mortgage.
In general, one can feel compassion for and empathize with individual plaintiffs in a lawsuit who are facing hardship. They are visible. One cannot feel compassion for or empathize with impersonal corporate defendants, who, should they incur liability, will pass the costs on to consumers, reduce their output, or cut employment. Those who must pay more for products, or are unable to obtain needed goods or services, or cannot find a job are invisible.
The law consists of abstract rules because we know that, as human beings, judges are unable to foresee all of the long-term consequences of their decisions and may be unduly influenced by the immediate, visible effects of these decisions. The rules of law are designed in part to strike the proper balance between the interests of those who are seen and those who are not seen. The purpose of the rules is to enable judges to resist the emotionally engaging temptation to relieve the plight of those they can see and empathize with, even when doing so would be unfair to those they cannot see.
Calling on judges to be compassionate or empathetic is in effect to ask them to undo this balance and favor the seen over the unseen. Paraphrasing Bastiat, if the difference between the bad judge and the good judge is that the bad judge focuses on the visible effects of his or her decisions while the good judge takes into account both the effects that can be seen and those that are unseen, then the compassionate, empathetic judge is very likely to be a bad judge. For this reason, let us hope that Judge Sotomayor proves to be a disappointment to her sponsor.
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