Protectionism Exposed. By CHAD P. BOWN
A new database tracks emerging threats to trade.
WSJ, Aug 06, 2009
In May, the United States slapped new tariffs on steel pipe imports from China. In June, China imposed new barriers on U.S. and European Union exports of adipic acid, an industrial chemical used to make nylon and polyester resin. In July, the EU also decided to restrict imports of steel pipe from China.
The important question now is, do these events foreshadow spiraling protectionism and tit-for-tat retaliation that threaten a global trade war? Or is trade policy always like this, and we’re just noticing more now, given the global slowdown and heightened fears of Smoot-Hawley-style protectionism?
A new set of data on protectionism can help answer that question. The World Bank’s newly updated Global Antidumping Database, which I help organize, displays in almost real time emerging trends in this form of protectionism in more than 20 of the largest economies in the World Trade Organization. Some of the numbers are worrying.
The count of newly imposed protectionist policies like antidumping duties and other “safeguard” measures increased by 31% in the first half of 2009 relative to the same period one year ago, which itself is not an alarming number. But many governments take more than a year to make final decisions on such policies after receiving the initial request for protection from a domestic industry. The fact that industry requests for new import restrictions were 34% higher in 2008 relative to 2007 is a worrying trend even though 2007 saw a historical low in such requests. And with the recession continuing, requests for new import restrictions were 19% higher in the first half of 2009 relative to 2008.
This suggests a wave of new protectionist measures may be on the way. While leaders of the Group of 20 large economies unanimously pledged not to resort to protectionism at a Washington summit last November and reaffirmed this in London in April, virtually all of them have slipped at least a little bit.
Nor is it just the U.S., EU and China: Since the beginning of 2008, Indian companies alone are responsible for roughly 25% of all requests for new trade barriers, attacking a range of imports that include steel, DVDs, yarn, tires and a variety of industrial chemicals. While it is too early to know the final resolution of these new investigations, Indian policy makers have imposed at least preliminary barriers on more than 20 different products being investigated.
The burden of this protectionism is not uniformly distributed among exporting countries. In the first half of this year, China’s exporters were specifically named in more than 75% of these economies’ newly initiated investigations. In the second quarter, China’s exporters were targeted in all 17 of the cases in which new trade barriers were imposed around the world.
Despite all this bad news, there is a silver lining. The fact that countries may be resorting to antidumping actions and safeguards in lieu of other protectionist policies, such as across-the-board tariff increases or a proliferation of “Buy-America”-type provisions in national stimulus packages, is a partial sign of the strength and resilience of the rules-based WTO system. It is important to have a reliable trading system that allows for the transparency necessary to clearly see the new trade barriers, because industry demands for protectionism are somewhat inevitable in a recession.
That’s encouraging because “little” acts of protectionism could add up to a big problem. Having accurate data on the extent of the problem is important, but the only solution is for policy makers to recognize the dangers of the path they’re headed down.
Mr. Bown, an economics professor at Brandeis University and fellow at the Brookings Institution, is author of “Self-Enforcing Trade: Developing Countries and WTO Dispute Settlement” (Brookings Press, 2009).
Thursday, August 6, 2009
Autocracy and the Decline of the Arabs
Autocracy and the Decline of the Arabs. By FOUAD AJAMI
The Arab world is plagued by despots. But don’t expect the U.N. to give President Bush any credit for challenging this order.
WSJ, Aug 06, 2009
‘It made me feel so jealous,” said Abdulmonem Ibrahim, a young Egyptian political activist, of the recent upheaval in Iran. “We are amazed at the organization and speed with which the Iranian movement has been functioning. In Egypt you can count the number of activists on your hand.” This degree of “Iran envy” is a telling statement on the stagnation of Arab politics. It is not pretty, Iran’s upheaval, but grant the Iranians their due: They have gone out into the streets to contest the writ of the theocrats.
In contrast, little has stirred in Arab politics of late. The Arabs, by their own testimony, have become spectators to their history. A struggle rages between the Iranian theocracy and the Pax Americana for primacy in the Persian Gulf and the Levant. The Arabs have the demography—360 million people by latest count—and the wealth to balance Iran’s power. But they have taken a pass in the hope that America—or Israel, for that matter—would shatter the Iranian bid for hegemony.
We are now in the midst of one of those periodic autopsies of the Arab condition. The trigger is the publication last month of the Arab Human Development Report 2009, the fifth of a series of reports by the by the United Nations Development Program (UNDP) on the state of the contemporary Arab world.
The first of these reports, published in 2002, was treated with deference. A group of Arab truth-tellers, it was believed, had broken with the evasions and the apologetics to tell of the sordid condition of Arab society—the autocratic political culture, the economic stagnation, the cultural decay. So all Arabs combined had a smaller manufacturing capacity than Finland with its five million people, and a vast Arabic-speaking world translated into Arabic a fifth of the foreign books that Greece with its 11 million people translates. With all the oil in the region, tens of millions of Arabs were living below the poverty line.
Little has altered in the years separating the first of these reports from the most recent. A huge oil windfall came into the region, and it was better handled, it has to be conceded, than earlier oil windfalls. But on balance the grief of the Arabs has deepened, and the autocracies are yet to be brought to account. They remain unloved, but they remain in the saddle.
In a clever turn of phrase, The Economist recently wrote of an Arab Rip Abu Winkle awakening from a slumber into which he had fallen in the early 1980s to marvel at how little has changed. He would find Hosni Mubarak still at the helm in Cairo, the policeman Zine el-Abidine Ben Ali in Tunisia, and Moammar Gadhafi in Libya. He would miss Hafez Assad in Damascus, but he would be reassured that his son Bashar had inherited his father’s dominion. He would of course find the same dynasties in Jordan and in the Arab states of the Peninsula and the Gulf.
Wily rulers, the men at the helm may have failed their peoples. They may have denied them decent educational systems. They may not have figured out a way into the modern world economy. But they have mastered the art of political survival. “He who eats the sultan’s bread, fights with the sultan’s sword,” goes an Arabic maxim. The economic dominance of the rulers, the absence of the countervailing power of property and the private sector, has increased the awesome power of the governments and their security establishments.
It is no mystery, this sorrowful decline of the Arabs. They have invested their hopes in states, and the states have failed. According to the UNDP’s report, government revenues as percentage of GDP are 13% in Third World Countries, but they are 25% in the Middle East and North Africa. The oil states are a world apart in that regard: the comparable figures are 68% in Libya, 45% in Saudi Arabia, and 40% in Algeria, Kuwait and Qatar. Oil is no panacea for these lands. The unemployment rates for the Arab world as a whole are the highest in the world, and no prophecy could foresee these societies providing the 51 million jobs the UNDP report says are needed by 2020 to “absorb young entrants to the labor force who would otherwise face an empty future.”
The simple truth is that the Arab world has terrible rulers and worse oppositionists. There are autocrats on one side and theocrats on the other. A timid and fragile middle class is caught in the middle between regimes it abhors and Islamists it fears.
Indeed, the technocrats and intellectuals associated with these development reports are themselves no angels. On the whole, they are unreconstructed Arab nationalists. The patrons of these reports are the likes of the Algerian diplomat Lakhdar Brahimi and the Palestinian leader Hanan Ashrawi, intellectuals and public figures whose stock-in-trade is presumed Western (read American) guilt for the ills that afflict the Arabs. Anti-Americanism suffuses this report, as it did the earlier ones.
There is cruelty and plunder aplenty in the Arab world, but these writers are particularly exercised about Iraq. “This intervention polarized the country,” they say of Iraq. This is a myth of the Arabs who are yet to grant the Iraqis the right to their own history: There had been a secular culture under the Baath, they insist, but the American war begot the sectarianism. To go by this report, Iraq is a place of mayhem and plunder, a land where militias rule uncontested.
For decades, it was the standard argument of the Arabs that America had cast its power in the region on the side of the autocrats. In Iraq in 2003, and then in Lebanon, an American president bet on the freedom of the Arabs. George W. Bush’s freedom agenda broke with a long history and insisted that the Arabs did not have tyranny in their DNA. A despotism in Baghdad was toppled, a Syrian regime that had all but erased its border with Lebanon was pushed out of its smaller neighbor, bringing an end to three decades of brutal occupation. The “Cedar Revolution” that erupted in the streets of Beirut was but a child of Bush’s diplomacy of freedom.
Arabs know this history even as they say otherwise, even as they tell the pollsters the obligatory things about America the pollsters expect them to say. True, Mr. Bush’s wager on elections in the Palestinian territories rebounded to the benefit of Hamas. But the ballot is not infallible, and the verdict of that election was a statement on the malignancies of Palestinian politics. It was no fault of American diplomacy that the Palestinians, who needed to break with a history of maximalist demands, gave in yet again to radical temptations.
Now the Arabs are face to face with their own history. Instead of George W. Bush there is Barack Hussein Obama, an American leader pledged to a foreign policy of “realism.” The Arabs express fondness for the new American president. In his fashion (and in the fashion of their world and their leaders, it has to be said) President Obama gave the Arabs a speech in Cairo two months ago. It was a moment of theater and therapy. The speech delivered, the foreign visitor was gone. He had put another marker on the globe, another place to which he had taken his astounding belief in his biography and his conviction that another foreign population had been wooed by his oratory and weaned away from anti-Americanism.
The crowd could tell itself that the new standard-bearer of the Pax Americana was a man who understood its concerns, but the embattled modernists and the critics of autocracy knew better. There is no mistaking the animating drive of the new American policy in that Greater Middle East: realism and benign neglect, the safety of the status quo rather than the risks of liberty. (If in doubt, the Arabs could check with their Iranian neighbors. The Persians would tell them of the new mood in Washington.)
One day an Arab chronicle could yet be written, and like all Arab chronicles, it would tell of woes and missed opportunities. It would acknowledge that brief interlude when American power gave Arab autocracies a scare, and when a despotism in Baghdad and a brutal “brotherly” occupation in Beirut were laid to waste. The chroniclers would have to be an honest lot. They would speak the language of daily life, and the truths that Arabs have seen and endured in recent years. On that day, the “human development reports” would be discarded, their writers seen for the purveyors of double-speak and half-truths they were.
Mr. Ajami, a professor at the School of Advanced International Studies at Johns Hopkins University and an adjunct fellow at Stanford University’s Hoover Institution, is the author, among other books, of “The Arab Predicament: Arab Political Thought and Practice since 1967 (Cambridge University Press, 1981).
The Arab world is plagued by despots. But don’t expect the U.N. to give President Bush any credit for challenging this order.
WSJ, Aug 06, 2009
‘It made me feel so jealous,” said Abdulmonem Ibrahim, a young Egyptian political activist, of the recent upheaval in Iran. “We are amazed at the organization and speed with which the Iranian movement has been functioning. In Egypt you can count the number of activists on your hand.” This degree of “Iran envy” is a telling statement on the stagnation of Arab politics. It is not pretty, Iran’s upheaval, but grant the Iranians their due: They have gone out into the streets to contest the writ of the theocrats.
In contrast, little has stirred in Arab politics of late. The Arabs, by their own testimony, have become spectators to their history. A struggle rages between the Iranian theocracy and the Pax Americana for primacy in the Persian Gulf and the Levant. The Arabs have the demography—360 million people by latest count—and the wealth to balance Iran’s power. But they have taken a pass in the hope that America—or Israel, for that matter—would shatter the Iranian bid for hegemony.
We are now in the midst of one of those periodic autopsies of the Arab condition. The trigger is the publication last month of the Arab Human Development Report 2009, the fifth of a series of reports by the by the United Nations Development Program (UNDP) on the state of the contemporary Arab world.
The first of these reports, published in 2002, was treated with deference. A group of Arab truth-tellers, it was believed, had broken with the evasions and the apologetics to tell of the sordid condition of Arab society—the autocratic political culture, the economic stagnation, the cultural decay. So all Arabs combined had a smaller manufacturing capacity than Finland with its five million people, and a vast Arabic-speaking world translated into Arabic a fifth of the foreign books that Greece with its 11 million people translates. With all the oil in the region, tens of millions of Arabs were living below the poverty line.
Little has altered in the years separating the first of these reports from the most recent. A huge oil windfall came into the region, and it was better handled, it has to be conceded, than earlier oil windfalls. But on balance the grief of the Arabs has deepened, and the autocracies are yet to be brought to account. They remain unloved, but they remain in the saddle.
In a clever turn of phrase, The Economist recently wrote of an Arab Rip Abu Winkle awakening from a slumber into which he had fallen in the early 1980s to marvel at how little has changed. He would find Hosni Mubarak still at the helm in Cairo, the policeman Zine el-Abidine Ben Ali in Tunisia, and Moammar Gadhafi in Libya. He would miss Hafez Assad in Damascus, but he would be reassured that his son Bashar had inherited his father’s dominion. He would of course find the same dynasties in Jordan and in the Arab states of the Peninsula and the Gulf.
Wily rulers, the men at the helm may have failed their peoples. They may have denied them decent educational systems. They may not have figured out a way into the modern world economy. But they have mastered the art of political survival. “He who eats the sultan’s bread, fights with the sultan’s sword,” goes an Arabic maxim. The economic dominance of the rulers, the absence of the countervailing power of property and the private sector, has increased the awesome power of the governments and their security establishments.
It is no mystery, this sorrowful decline of the Arabs. They have invested their hopes in states, and the states have failed. According to the UNDP’s report, government revenues as percentage of GDP are 13% in Third World Countries, but they are 25% in the Middle East and North Africa. The oil states are a world apart in that regard: the comparable figures are 68% in Libya, 45% in Saudi Arabia, and 40% in Algeria, Kuwait and Qatar. Oil is no panacea for these lands. The unemployment rates for the Arab world as a whole are the highest in the world, and no prophecy could foresee these societies providing the 51 million jobs the UNDP report says are needed by 2020 to “absorb young entrants to the labor force who would otherwise face an empty future.”
The simple truth is that the Arab world has terrible rulers and worse oppositionists. There are autocrats on one side and theocrats on the other. A timid and fragile middle class is caught in the middle between regimes it abhors and Islamists it fears.
Indeed, the technocrats and intellectuals associated with these development reports are themselves no angels. On the whole, they are unreconstructed Arab nationalists. The patrons of these reports are the likes of the Algerian diplomat Lakhdar Brahimi and the Palestinian leader Hanan Ashrawi, intellectuals and public figures whose stock-in-trade is presumed Western (read American) guilt for the ills that afflict the Arabs. Anti-Americanism suffuses this report, as it did the earlier ones.
There is cruelty and plunder aplenty in the Arab world, but these writers are particularly exercised about Iraq. “This intervention polarized the country,” they say of Iraq. This is a myth of the Arabs who are yet to grant the Iraqis the right to their own history: There had been a secular culture under the Baath, they insist, but the American war begot the sectarianism. To go by this report, Iraq is a place of mayhem and plunder, a land where militias rule uncontested.
For decades, it was the standard argument of the Arabs that America had cast its power in the region on the side of the autocrats. In Iraq in 2003, and then in Lebanon, an American president bet on the freedom of the Arabs. George W. Bush’s freedom agenda broke with a long history and insisted that the Arabs did not have tyranny in their DNA. A despotism in Baghdad was toppled, a Syrian regime that had all but erased its border with Lebanon was pushed out of its smaller neighbor, bringing an end to three decades of brutal occupation. The “Cedar Revolution” that erupted in the streets of Beirut was but a child of Bush’s diplomacy of freedom.
Arabs know this history even as they say otherwise, even as they tell the pollsters the obligatory things about America the pollsters expect them to say. True, Mr. Bush’s wager on elections in the Palestinian territories rebounded to the benefit of Hamas. But the ballot is not infallible, and the verdict of that election was a statement on the malignancies of Palestinian politics. It was no fault of American diplomacy that the Palestinians, who needed to break with a history of maximalist demands, gave in yet again to radical temptations.
Now the Arabs are face to face with their own history. Instead of George W. Bush there is Barack Hussein Obama, an American leader pledged to a foreign policy of “realism.” The Arabs express fondness for the new American president. In his fashion (and in the fashion of their world and their leaders, it has to be said) President Obama gave the Arabs a speech in Cairo two months ago. It was a moment of theater and therapy. The speech delivered, the foreign visitor was gone. He had put another marker on the globe, another place to which he had taken his astounding belief in his biography and his conviction that another foreign population had been wooed by his oratory and weaned away from anti-Americanism.
The crowd could tell itself that the new standard-bearer of the Pax Americana was a man who understood its concerns, but the embattled modernists and the critics of autocracy knew better. There is no mistaking the animating drive of the new American policy in that Greater Middle East: realism and benign neglect, the safety of the status quo rather than the risks of liberty. (If in doubt, the Arabs could check with their Iranian neighbors. The Persians would tell them of the new mood in Washington.)
One day an Arab chronicle could yet be written, and like all Arab chronicles, it would tell of woes and missed opportunities. It would acknowledge that brief interlude when American power gave Arab autocracies a scare, and when a despotism in Baghdad and a brutal “brotherly” occupation in Beirut were laid to waste. The chroniclers would have to be an honest lot. They would speak the language of daily life, and the truths that Arabs have seen and endured in recent years. On that day, the “human development reports” would be discarded, their writers seen for the purveyors of double-speak and half-truths they were.
Mr. Ajami, a professor at the School of Advanced International Studies at Johns Hopkins University and an adjunct fellow at Stanford University’s Hoover Institution, is the author, among other books, of “The Arab Predicament: Arab Political Thought and Practice since 1967 (Cambridge University Press, 1981).
Wednesday, August 5, 2009
Vegetables don’t want to be eaten and other lessons from Britain's organic food war
Vegetables don’t want to be eaten and other lessons from Britain's organic food war. By Trevor Butterworth
STATS.org, August 4, 2009
A major British study recently turned conventional wisdom on organic food on its head, triggering a war between science writers, reporters, activists and chefs. Was it a “myth” that organic produce was nutritionally superior to conventional food – or did an agency with an agenda cook up some flawed science to appease big agribusiness?
Bad Science, a book by Ben Goldacre, has become an unusual bestseller in the British Isles, powering its way into the higher reaches of nationally and locally compiled bestseller lists since its publication in the Fall of 2008. Goldacre is a doctor for Britain’s National Health Service (though he plays this down on the grounds that arguments from positions of expertise are often self-defeating with the public), and the book is a continuum of a column by the same name he writes for the left-leaning Guardian newspaper. The Royal Statistical Society awarded him first prize in their inaugural 2007 award for statistical excellence in journalism, and the British Medical Journal, in reviewing “Bad Science,” declared that Goldacre “is fighting what sometimes seems like a one man battle against a tide of pseudoscience and an army of quacks,” and that the country was lucky to have him.
The book’s popularity seems to speak to increasing consumer frustration with information promoted as “scientific,” whether in news stories, government pronouncements, or advertisements for pills and panaceas, and to the hopeful sign that people want to know – or want someone to examine on their behalf – the underlying principles that determine whether such research claims can be considered reliable or unreliable.
These principles came to the forefront in Britain last week – and the rest of the world – with the publication of a new study claiming that there was no reliable evidence that organically-produced food was better, nutritionally, than conventionally-produced food.
The study, “Nutritional quality of organic foods: a systematic review,” was funded by Britain’s Food Standards Agency (FSA), and conducted by researchers from the Nutrition and Public Health Intervention Research Unit at the Department of Epidemiology and Population Health, London School of Hygiene & Tropical Medicine; it was published in the peer-reviewed American Journal of Clinical Nutrition.
Senior reporter Karen McVeigh told readers of the Guardian in the opening paragraph of its news report on June 30 that the review’s “conclusions have been called into question by experts and organic food campaigners,” and more than half of the article focused on criticisms of the study, namely that the researchers had been “selective in the extreme,” used “questionable methodology, were contradicted by numerous other studies, and neglected to mention the risks of pesticides and fertilizers in conventional farming. As Peter Melchett, policy director at the Soil Association, the non-profit that advocates for and certifies organic farming in Britain, told the paper, “The review rejected almost all of the existing studies of comparisons between organic and non-organic nutritional differences.”
Given the way the story was reported, with the validity of the study immediately questioned in the opening paragraph (and with the paper being home to Goldacre’s column), readers could have been forgiven for concluding that the FSA had indeed funded some dodgy research, peer-review notwithstanding.
But at the Guardian’s sister, Sunday paper, The Observer, science editor, Robin McKie, defended the study. “[I]t is certainly not the work of dogmatic and intractably hostile opponents of the cause,” he wrote before weighing in on one of the key criticisms of the study, namely, that it did not take pesticide and fertilizer residues on conventional food into consideration.
“For a start, the idea that organic fruit and veg contain no harmful chemicals compared with non-organic produce is simply wrong, scientists argue. Certainly, there are pesticide residues in the latter but there is no evidence these are cumulatively harmful.
More to the point, organic crops - because they are untreated with chemicals - have correspondingly high levels of natural fungal toxins. Thus they balance out: artificial pesticide residues in non-organic crops, natural fungal toxins in organic.”
As Professor Ottoline Leyser, a molecular biologist at York University told McKie:
“People think that the more natural something is, the better it is for them. That is simply not the case. In fact, it is the opposite that is the true: the closer a plant is to its natural state, the more likely it is that it will poison you. Naturally, plants do not want to be eaten, so we have spent 10,000 years developing agriculture and breeding out harmful traits from crops. ‘Natural agriculture’ is a contradiction in terms.”
Over at the Times of London, science editor Mark Henderson took a similar position, as well as noting that
“Research that appears to support health claims for organic food also suffers from a quality problem. Many studies lack proper controls or fail to detail the organic regime and crop variety being evaluated or the analytical techniques used for assessment.
Studies that fail to meet these standards cannot provide useful evidence and are rightfully excluded from systematic reviews. It is no coincidence that the school had to throw out about two thirds of the available literature.”
The Times also noted that previous reviews by the French and Swedish food standards agencies had come to the same conclusion as this new study.
But as the Observer called into question the thrust of the Guardian’s initial news report, so the Times sister paper, The Sunday Times seemed to question the daily paper’s characterization of the study.
“We dig out the facts from the manure,” said the article’s sub head, but as reporter Chris Gourlay dug away, he seemed less convinced by the FSA’s evidence: The new study’s findings were “controversial” and the Food Standards Agency “claimed a comprehensive review,” but as Carlo Leifert, Professor of Ecological Agriculture at Newcastle University told Gourlay, the researchers “have ignored all the recent literature as well as new primary research which show the health advantages of organic.” He added that he intended “to rip their study apart in scientific journals.”
Other newspapers, such as the Daily Mail, warned that “studies have found” that children born to farmers in summer, when pesticide use was highest, were “less intelligent.” One columnist rued the focus on nutrition in the Daily Telegraph noting that “All food is nutritious; having no food is what kills. The wider benefits of organic foods are still worth pursuing. It is what food does not contain and the effects that it does not have that really matter.” The Telegraph’s gossip columnist warned that the pro-organic produce Prince Charles had reportedly taken a dim view of the FSA study and was girding for battle.
One notable pattern emerged in the coverage: If the reporter specialized in science, they thought the study well done and conclusive; if the reporter was a generalist, the study was flawed and controversial. So what did the scourge of bad science make of the review and the media coverage?
Goldacre began his column by noting that news coverage had given organic advocates a blanket right of reply to the study. This, he said, was “testament to the lobbying power of this £2bn [$3.38 billion dollars] industry, and the cultural values of people who work in the media.”
He pointed out one of the salient aspects of the study, namely, that it was only about the nutritional content of organic and conventional food, and not about any other kind of benefit. Critics of the study, however, only wanted to talk about other kinds of benefits to prove that the study was flawed; this was, he said, “gamesmanship.” And it was gamesmanship that worked to undermine the public’s understanding and ability to engage in a debate on the evidence by claiming that key evidence was ignored by the FSA.
“The accusation is one of ‘cherry-picking’, and it is hard to see how it can be valid in the kind of study conducted by the FSA, because in a ‘systematic review’, before you begin collecting papers, you specify how you will search for evidence, what databases you will use, what types of studies you will use, how you will grade the quality of the evidence (to see if it was a ‘fair test’), and so on.
What is it that the FSA ignored which so angered the Soil Association? As an example, from their press release, they are ‘disappointed that the FSA failed to include the results of a major European Union-funded study involving 31 research and university institutes and the publication, so far, of more than 100 scientific papers, at a cost of €18m [$25.9 million dollars], which ended in April this year’. They gave the link to qlif.org.
I followed this link and found the list of 120 papers. Almost all are irrelevant. The first 14 are on ‘consumer expectations and attitudes’, which are correctly not included in a systematic review of the evidence on food composition. Then there are 22 on ‘effects of production methods’: here you might expect to find more relevant research, but no.
The first paper (‘The effect of medium term feeding with organic, low input and conventional diet on selected immune parameters in rat’), while interesting, will plainly not be relevant to a systematic review on nutrient content. The same is true of the next paper, ‘Salmonella infection level in Danish indoor and outdoor pig production systems measured by antibodies in meat juice and fecal shedding on-farm and at slaughter’: it is not relevant.
Furthermore, the overwhelming majority of these are unpublished conference papers, and some of them are just a description of the fact that somebody made an oral presentation at a meeting. The systematic review correctly looked only at good-quality data published in peer-reviewed academic journals.”
This is a devastating indictment, not just of the Soil Association’s position, but the degree to which reporters did little more than act as stenographers to its criticisms of the FSA study. [Yes, we too followed the link to http://www.qlif.org/ and found that Goldacre was correct in his categorization of the research]. Readers of the Guardian may have been forgiven for wondering why they bothered to read the initial news story, given that the reporter’s focus on what was wrong with the study turned out to be more spin than science.
The uncomfortable question for the media – and the Guardian in particular – is to what degree would Goldacre’s rearguard defense of science be needed if the journalists who reported on the latest data did a better job of analysis before presenting it to the public?
STATS.org, August 4, 2009
A major British study recently turned conventional wisdom on organic food on its head, triggering a war between science writers, reporters, activists and chefs. Was it a “myth” that organic produce was nutritionally superior to conventional food – or did an agency with an agenda cook up some flawed science to appease big agribusiness?
Bad Science, a book by Ben Goldacre, has become an unusual bestseller in the British Isles, powering its way into the higher reaches of nationally and locally compiled bestseller lists since its publication in the Fall of 2008. Goldacre is a doctor for Britain’s National Health Service (though he plays this down on the grounds that arguments from positions of expertise are often self-defeating with the public), and the book is a continuum of a column by the same name he writes for the left-leaning Guardian newspaper. The Royal Statistical Society awarded him first prize in their inaugural 2007 award for statistical excellence in journalism, and the British Medical Journal, in reviewing “Bad Science,” declared that Goldacre “is fighting what sometimes seems like a one man battle against a tide of pseudoscience and an army of quacks,” and that the country was lucky to have him.
The book’s popularity seems to speak to increasing consumer frustration with information promoted as “scientific,” whether in news stories, government pronouncements, or advertisements for pills and panaceas, and to the hopeful sign that people want to know – or want someone to examine on their behalf – the underlying principles that determine whether such research claims can be considered reliable or unreliable.
These principles came to the forefront in Britain last week – and the rest of the world – with the publication of a new study claiming that there was no reliable evidence that organically-produced food was better, nutritionally, than conventionally-produced food.
The study, “Nutritional quality of organic foods: a systematic review,” was funded by Britain’s Food Standards Agency (FSA), and conducted by researchers from the Nutrition and Public Health Intervention Research Unit at the Department of Epidemiology and Population Health, London School of Hygiene & Tropical Medicine; it was published in the peer-reviewed American Journal of Clinical Nutrition.
Senior reporter Karen McVeigh told readers of the Guardian in the opening paragraph of its news report on June 30 that the review’s “conclusions have been called into question by experts and organic food campaigners,” and more than half of the article focused on criticisms of the study, namely that the researchers had been “selective in the extreme,” used “questionable methodology, were contradicted by numerous other studies, and neglected to mention the risks of pesticides and fertilizers in conventional farming. As Peter Melchett, policy director at the Soil Association, the non-profit that advocates for and certifies organic farming in Britain, told the paper, “The review rejected almost all of the existing studies of comparisons between organic and non-organic nutritional differences.”
Given the way the story was reported, with the validity of the study immediately questioned in the opening paragraph (and with the paper being home to Goldacre’s column), readers could have been forgiven for concluding that the FSA had indeed funded some dodgy research, peer-review notwithstanding.
But at the Guardian’s sister, Sunday paper, The Observer, science editor, Robin McKie, defended the study. “[I]t is certainly not the work of dogmatic and intractably hostile opponents of the cause,” he wrote before weighing in on one of the key criticisms of the study, namely, that it did not take pesticide and fertilizer residues on conventional food into consideration.
“For a start, the idea that organic fruit and veg contain no harmful chemicals compared with non-organic produce is simply wrong, scientists argue. Certainly, there are pesticide residues in the latter but there is no evidence these are cumulatively harmful.
More to the point, organic crops - because they are untreated with chemicals - have correspondingly high levels of natural fungal toxins. Thus they balance out: artificial pesticide residues in non-organic crops, natural fungal toxins in organic.”
As Professor Ottoline Leyser, a molecular biologist at York University told McKie:
“People think that the more natural something is, the better it is for them. That is simply not the case. In fact, it is the opposite that is the true: the closer a plant is to its natural state, the more likely it is that it will poison you. Naturally, plants do not want to be eaten, so we have spent 10,000 years developing agriculture and breeding out harmful traits from crops. ‘Natural agriculture’ is a contradiction in terms.”
Over at the Times of London, science editor Mark Henderson took a similar position, as well as noting that
“Research that appears to support health claims for organic food also suffers from a quality problem. Many studies lack proper controls or fail to detail the organic regime and crop variety being evaluated or the analytical techniques used for assessment.
Studies that fail to meet these standards cannot provide useful evidence and are rightfully excluded from systematic reviews. It is no coincidence that the school had to throw out about two thirds of the available literature.”
The Times also noted that previous reviews by the French and Swedish food standards agencies had come to the same conclusion as this new study.
But as the Observer called into question the thrust of the Guardian’s initial news report, so the Times sister paper, The Sunday Times seemed to question the daily paper’s characterization of the study.
“We dig out the facts from the manure,” said the article’s sub head, but as reporter Chris Gourlay dug away, he seemed less convinced by the FSA’s evidence: The new study’s findings were “controversial” and the Food Standards Agency “claimed a comprehensive review,” but as Carlo Leifert, Professor of Ecological Agriculture at Newcastle University told Gourlay, the researchers “have ignored all the recent literature as well as new primary research which show the health advantages of organic.” He added that he intended “to rip their study apart in scientific journals.”
Other newspapers, such as the Daily Mail, warned that “studies have found” that children born to farmers in summer, when pesticide use was highest, were “less intelligent.” One columnist rued the focus on nutrition in the Daily Telegraph noting that “All food is nutritious; having no food is what kills. The wider benefits of organic foods are still worth pursuing. It is what food does not contain and the effects that it does not have that really matter.” The Telegraph’s gossip columnist warned that the pro-organic produce Prince Charles had reportedly taken a dim view of the FSA study and was girding for battle.
One notable pattern emerged in the coverage: If the reporter specialized in science, they thought the study well done and conclusive; if the reporter was a generalist, the study was flawed and controversial. So what did the scourge of bad science make of the review and the media coverage?
Goldacre began his column by noting that news coverage had given organic advocates a blanket right of reply to the study. This, he said, was “testament to the lobbying power of this £2bn [$3.38 billion dollars] industry, and the cultural values of people who work in the media.”
He pointed out one of the salient aspects of the study, namely, that it was only about the nutritional content of organic and conventional food, and not about any other kind of benefit. Critics of the study, however, only wanted to talk about other kinds of benefits to prove that the study was flawed; this was, he said, “gamesmanship.” And it was gamesmanship that worked to undermine the public’s understanding and ability to engage in a debate on the evidence by claiming that key evidence was ignored by the FSA.
“The accusation is one of ‘cherry-picking’, and it is hard to see how it can be valid in the kind of study conducted by the FSA, because in a ‘systematic review’, before you begin collecting papers, you specify how you will search for evidence, what databases you will use, what types of studies you will use, how you will grade the quality of the evidence (to see if it was a ‘fair test’), and so on.
What is it that the FSA ignored which so angered the Soil Association? As an example, from their press release, they are ‘disappointed that the FSA failed to include the results of a major European Union-funded study involving 31 research and university institutes and the publication, so far, of more than 100 scientific papers, at a cost of €18m [$25.9 million dollars], which ended in April this year’. They gave the link to qlif.org.
I followed this link and found the list of 120 papers. Almost all are irrelevant. The first 14 are on ‘consumer expectations and attitudes’, which are correctly not included in a systematic review of the evidence on food composition. Then there are 22 on ‘effects of production methods’: here you might expect to find more relevant research, but no.
The first paper (‘The effect of medium term feeding with organic, low input and conventional diet on selected immune parameters in rat’), while interesting, will plainly not be relevant to a systematic review on nutrient content. The same is true of the next paper, ‘Salmonella infection level in Danish indoor and outdoor pig production systems measured by antibodies in meat juice and fecal shedding on-farm and at slaughter’: it is not relevant.
Furthermore, the overwhelming majority of these are unpublished conference papers, and some of them are just a description of the fact that somebody made an oral presentation at a meeting. The systematic review correctly looked only at good-quality data published in peer-reviewed academic journals.”
This is a devastating indictment, not just of the Soil Association’s position, but the degree to which reporters did little more than act as stenographers to its criticisms of the FSA study. [Yes, we too followed the link to http://www.qlif.org/ and found that Goldacre was correct in his categorization of the research]. Readers of the Guardian may have been forgiven for wondering why they bothered to read the initial news story, given that the reporter’s focus on what was wrong with the study turned out to be more spin than science.
The uncomfortable question for the media – and the Guardian in particular – is to what degree would Goldacre’s rearguard defense of science be needed if the journalists who reported on the latest data did a better job of analysis before presenting it to the public?
Tuesday, August 4, 2009
The SEC vs. CEO Pay
The SEC vs. CEO Pay. By RUSSELL G. RYAN
The agency stretches the law to confiscate a bonus.
WSJ, Aug 05, 2009
A lawsuit filed on July 22 by the Securities and Exchange Commission (SEC) should send a mid-summer chill down the spine of every chief executive and chief financial officer of a U.S. public company.
Exploiting an ambiguously worded phrase in Sarbanes-Oxley, the agency has for the first time claimed that it may under that law “claw back”—some might say confiscate—bonus money and stock sale proceeds from CEOs and CFOs even when it lacks evidence to charge them with wrongdoing.
Sarbanes-Oxley was rushed through Congress in the summer of 2002 in reaction to public outrage over notorious corporate accounting failures at Enron, WorldCom and other companies. As is often the case with such far-reaching and hastily conceived legislation, many of its details were half-baked, poorly worded, and riddled with ambiguity.
A prime example was the so-called clawback feature of Section 304, which was designed to prevent crooked CEOs and CFOs from taking home big bonuses and cashing out company stock while they were knowingly defrauding shareholders. It empowered the SEC to force these executives to reimburse their companies for all bonuses and stock sale proceeds received during any financial period for which their company was later required to restate its financial statements due to “misconduct.”
But in its haste to “do something” about the scandal of the day, Congress muddied the question of whether the “misconduct” required for such a clawback had to be committed by the executive himself (or at least known to him), or could be that of a subordinate, completely unbeknownst to the executive.
Many executives and legal advisers have cautiously assumed that bonuses and stock proceeds were at risk only for executives who actually engaged in misconduct themselves—or at least were aware of it and acquiesced. In fact, the SEC itself has rarely used this feature of Sarbanes-Oxley at all, and had done so only in cases where it alleged personal misconduct by the targeted chief executives or chief financial officers. A prominent example was the agency’s stock-option backdating case against Dr. William McGuire, the former CEO of UnitedHealth Group.
But the SEC has abruptly changed course. It has sued Maynard Jenkins, the former CEO of CSK Auto Corporation, an auto-parts company that had previously settled with the agency on charges of accounting fraud after restating three years’ worth of financial statements.
Several subordinate executives have been charged with both civil and criminal securities law violations. But the SEC has never accused Mr. Jenkins of any wrongdoing. In a press release announcing this case, the agency highlighted its novel position that no such accusation—much less proof—was necessary to claw back his bonuses and stock sale proceeds for the three years in question, which totaled more than $4 million.
Mr. Jenkins is contesting the lawsuit, and he has grounds for optimism. On a visceral level, it seems shocking that a U.S. law enforcement agency could take more than $4 million from any citizen without so much as an accusation of personal misconduct, or at least knowing acquiescence in someone else’s misconduct. Indeed, according to a report by Bloomberg, two of the SEC’s five commissioners voted not to file the lawsuit at all.
In an unrelated case earlier this year, the SEC unsuccessfully argued an equally aggressive interpretation of Section 304. Stretching the law’s wording that clawbacks are appropriate only when a company is “required to prepare an accounting restatement,” the agency argued that Section 304 also allows clawbacks when no restatement is actually prepared, so long as the SEC later concluded the company should have done so.
A federal judge in St. Louis rejected that theory and threw out the charge. In recent years, courts have similarly rejected the agency’s overly aggressive interpretations of laws preventing “selective disclosure,” insider trading, aiding and abetting, and other violations.
The irony is this. Despite all the recent criticism the SEC has taken for supposed laxity in its enforcement program, the agency has in fact consistently taken very aggressive positions in its enforcement cases, such as with laws concerning foreign bribery, market timing of mutual funds, and many forms of insider trading.
For the most part, investors expect the SEC to push the envelope to protect their interests. But the wisdom and fairness of pursuing no-fault clawbacks from unaccused executives is dubious at best.
Mr. Ryan is a securities lawyer and was an assistant director of the Securities and Exchange Commission’s division of enforcement from 2000-2004.
The agency stretches the law to confiscate a bonus.
WSJ, Aug 05, 2009
A lawsuit filed on July 22 by the Securities and Exchange Commission (SEC) should send a mid-summer chill down the spine of every chief executive and chief financial officer of a U.S. public company.
Exploiting an ambiguously worded phrase in Sarbanes-Oxley, the agency has for the first time claimed that it may under that law “claw back”—some might say confiscate—bonus money and stock sale proceeds from CEOs and CFOs even when it lacks evidence to charge them with wrongdoing.
Sarbanes-Oxley was rushed through Congress in the summer of 2002 in reaction to public outrage over notorious corporate accounting failures at Enron, WorldCom and other companies. As is often the case with such far-reaching and hastily conceived legislation, many of its details were half-baked, poorly worded, and riddled with ambiguity.
A prime example was the so-called clawback feature of Section 304, which was designed to prevent crooked CEOs and CFOs from taking home big bonuses and cashing out company stock while they were knowingly defrauding shareholders. It empowered the SEC to force these executives to reimburse their companies for all bonuses and stock sale proceeds received during any financial period for which their company was later required to restate its financial statements due to “misconduct.”
But in its haste to “do something” about the scandal of the day, Congress muddied the question of whether the “misconduct” required for such a clawback had to be committed by the executive himself (or at least known to him), or could be that of a subordinate, completely unbeknownst to the executive.
Many executives and legal advisers have cautiously assumed that bonuses and stock proceeds were at risk only for executives who actually engaged in misconduct themselves—or at least were aware of it and acquiesced. In fact, the SEC itself has rarely used this feature of Sarbanes-Oxley at all, and had done so only in cases where it alleged personal misconduct by the targeted chief executives or chief financial officers. A prominent example was the agency’s stock-option backdating case against Dr. William McGuire, the former CEO of UnitedHealth Group.
But the SEC has abruptly changed course. It has sued Maynard Jenkins, the former CEO of CSK Auto Corporation, an auto-parts company that had previously settled with the agency on charges of accounting fraud after restating three years’ worth of financial statements.
Several subordinate executives have been charged with both civil and criminal securities law violations. But the SEC has never accused Mr. Jenkins of any wrongdoing. In a press release announcing this case, the agency highlighted its novel position that no such accusation—much less proof—was necessary to claw back his bonuses and stock sale proceeds for the three years in question, which totaled more than $4 million.
Mr. Jenkins is contesting the lawsuit, and he has grounds for optimism. On a visceral level, it seems shocking that a U.S. law enforcement agency could take more than $4 million from any citizen without so much as an accusation of personal misconduct, or at least knowing acquiescence in someone else’s misconduct. Indeed, according to a report by Bloomberg, two of the SEC’s five commissioners voted not to file the lawsuit at all.
In an unrelated case earlier this year, the SEC unsuccessfully argued an equally aggressive interpretation of Section 304. Stretching the law’s wording that clawbacks are appropriate only when a company is “required to prepare an accounting restatement,” the agency argued that Section 304 also allows clawbacks when no restatement is actually prepared, so long as the SEC later concluded the company should have done so.
A federal judge in St. Louis rejected that theory and threw out the charge. In recent years, courts have similarly rejected the agency’s overly aggressive interpretations of laws preventing “selective disclosure,” insider trading, aiding and abetting, and other violations.
The irony is this. Despite all the recent criticism the SEC has taken for supposed laxity in its enforcement program, the agency has in fact consistently taken very aggressive positions in its enforcement cases, such as with laws concerning foreign bribery, market timing of mutual funds, and many forms of insider trading.
For the most part, investors expect the SEC to push the envelope to protect their interests. But the wisdom and fairness of pursuing no-fault clawbacks from unaccused executives is dubious at best.
Mr. Ryan is a securities lawyer and was an assistant director of the Securities and Exchange Commission’s division of enforcement from 2000-2004.
‘Blue Dogs’ or Corporate Shills?
‘Blue Dogs’ or Corporate Shills? By Thomas Frank
WSJ, Aug 05, 2009
Capitalism is said to be in terrible trouble these days, with the profit motive suffering rampant badmouthing. Entrepreneurs are facing criticism, damnable criticism. And this criticism must stop.
If we don’t watch what we say, some warn, the supermen who shoulder the world will soon grow tired of our taunting, will shrug off their burden and walk righteously away, leaving us lesser mortals to stew in our resentment and envy.
So far have things gone that the editors of the Washington Post, ever vigilant against deteriorating public morals, apparently decided last week that Americans required a strong dose of instruction in the basic principles of their old-time economic religion. Stephen L. Carter, the famous law professor from Yale University, took the pulpit. And from the heights of the Post’s op-ed page, he instructed us to cheer whenever we discovered that someone was making money.
“High profits are excellent news,” he intoned. “The only way a firm can make money is to sell people what they want at a price they are willing to pay.”
Since that’s the one and only way a firm can make a profit—fraud isn’t a problem, I guess, nor are subsidies or cherry-picking or price-fixing or conflicts of interest—profit is a foolproof sign of civic uprightness.
Professor Carter’s essay was supposed to be a word of caution in a dark, anticapitalist time. But if you read your newspaper closely, it’s not hard to spot glimmers of profit-taking here and there. For example, while some see the city of Washington as a stage for anticorporate posturing, in fact it is ingeniously entrepreneurial.
Consider the “Blue Dog” Democrats, whose money-making ways were the subject of a page-one story in the Washington Post on the very day after Mr. Carter’s sermon. The Blue Dogs, as the world knows, are the caucus of conservative House Democrats who have been much in the news of late for their role in weakening the Obama administration’s plans for a public health-insurance option.
Much of the writing about the Blue Dogs revolves around the question of why they do what they do. What makes the Dogs run? Where did they get their peculiar name? And why do they chase this car but not that one?
The Blue Dogs’s official caucus Web site answers with rhetorical tail-chasing in which “centrism” is so exalted that it justifies any position the centrist takes by virtue of the label itself. The slightly more sophisticated explanation currently in vogue with the media—the Dogs come from heartland districts where the culture wars are a big deal—helps even less.
As the syndicated columnist David Sirota pointed out last week on the OpenLeft blog, having constituents who care deeply about, say, gun rights doesn’t really have anything to do with the pro-corporate stands on mortgage modification and health insurance that have made the Blue Dogs famous.
Friday’s page-one Post story about the Blue Dogs suggests a far simpler explanation: Entrepreneurship. In addition to everything else, the Dogs are champion fund raisers. Individual Dogs do far better than garden-variety Democrats when it comes to bringing in contributions from folks with business before Congress, like the insurance industry and the medical industry. According to CQ, their political action committee is the only Democratic PAC to rival the big Republican dogs; in 2009 fund raising it has been bested only by Mitt Romney’s gang.
So this is the Blue Dogs’ day, with games of fetch down on K Street that had me reminiscing, as I read the Post’s description, about the times when Tom DeLay and his pack did their own tricks for industry’s table scraps.
My guess is that the Blue Dogs, like Jack Abramoff’s Republicans before them, are more keenly attuned than their colleagues to that force of universal goodness, the profit motive. Theirs is simply a less ferocious version of what we had before, with cuddly bipartisan righteousness replacing the fierce red-state righteousness of DeLay’s dogs. But the master is the same as ever, and surely we can still count on the profit motive to deliver the very best in public policy.
Still, there remains the problem of the senseless moniker, “Blue Dog.” In the interests of improved political nicknames, let me propose an alternative. Back in 1932, the future Illinois Sen. Paul Douglas advised progressives not to expect too much from the Democratic Party. It was, he wrote, “maintained by the business interests” as a kind of “lifeboat.” Whenever the GOP ship sprung a leak—whenever Republicans were no longer willing or able to do business’s bidding—the interests simply piled into the other party and made their escape.
The Democrats have improved considerably since those days, at least from a progressive standpoint. But there are still branches of the party willing to carry out the ancestral mission. Let’s call them what they are: the lifeboat caucus.
WSJ, Aug 05, 2009
Capitalism is said to be in terrible trouble these days, with the profit motive suffering rampant badmouthing. Entrepreneurs are facing criticism, damnable criticism. And this criticism must stop.
If we don’t watch what we say, some warn, the supermen who shoulder the world will soon grow tired of our taunting, will shrug off their burden and walk righteously away, leaving us lesser mortals to stew in our resentment and envy.
So far have things gone that the editors of the Washington Post, ever vigilant against deteriorating public morals, apparently decided last week that Americans required a strong dose of instruction in the basic principles of their old-time economic religion. Stephen L. Carter, the famous law professor from Yale University, took the pulpit. And from the heights of the Post’s op-ed page, he instructed us to cheer whenever we discovered that someone was making money.
“High profits are excellent news,” he intoned. “The only way a firm can make money is to sell people what they want at a price they are willing to pay.”
Since that’s the one and only way a firm can make a profit—fraud isn’t a problem, I guess, nor are subsidies or cherry-picking or price-fixing or conflicts of interest—profit is a foolproof sign of civic uprightness.
Professor Carter’s essay was supposed to be a word of caution in a dark, anticapitalist time. But if you read your newspaper closely, it’s not hard to spot glimmers of profit-taking here and there. For example, while some see the city of Washington as a stage for anticorporate posturing, in fact it is ingeniously entrepreneurial.
Consider the “Blue Dog” Democrats, whose money-making ways were the subject of a page-one story in the Washington Post on the very day after Mr. Carter’s sermon. The Blue Dogs, as the world knows, are the caucus of conservative House Democrats who have been much in the news of late for their role in weakening the Obama administration’s plans for a public health-insurance option.
Much of the writing about the Blue Dogs revolves around the question of why they do what they do. What makes the Dogs run? Where did they get their peculiar name? And why do they chase this car but not that one?
The Blue Dogs’s official caucus Web site answers with rhetorical tail-chasing in which “centrism” is so exalted that it justifies any position the centrist takes by virtue of the label itself. The slightly more sophisticated explanation currently in vogue with the media—the Dogs come from heartland districts where the culture wars are a big deal—helps even less.
As the syndicated columnist David Sirota pointed out last week on the OpenLeft blog, having constituents who care deeply about, say, gun rights doesn’t really have anything to do with the pro-corporate stands on mortgage modification and health insurance that have made the Blue Dogs famous.
Friday’s page-one Post story about the Blue Dogs suggests a far simpler explanation: Entrepreneurship. In addition to everything else, the Dogs are champion fund raisers. Individual Dogs do far better than garden-variety Democrats when it comes to bringing in contributions from folks with business before Congress, like the insurance industry and the medical industry. According to CQ, their political action committee is the only Democratic PAC to rival the big Republican dogs; in 2009 fund raising it has been bested only by Mitt Romney’s gang.
So this is the Blue Dogs’ day, with games of fetch down on K Street that had me reminiscing, as I read the Post’s description, about the times when Tom DeLay and his pack did their own tricks for industry’s table scraps.
My guess is that the Blue Dogs, like Jack Abramoff’s Republicans before them, are more keenly attuned than their colleagues to that force of universal goodness, the profit motive. Theirs is simply a less ferocious version of what we had before, with cuddly bipartisan righteousness replacing the fierce red-state righteousness of DeLay’s dogs. But the master is the same as ever, and surely we can still count on the profit motive to deliver the very best in public policy.
Still, there remains the problem of the senseless moniker, “Blue Dog.” In the interests of improved political nicknames, let me propose an alternative. Back in 1932, the future Illinois Sen. Paul Douglas advised progressives not to expect too much from the Democratic Party. It was, he wrote, “maintained by the business interests” as a kind of “lifeboat.” Whenever the GOP ship sprung a leak—whenever Republicans were no longer willing or able to do business’s bidding—the interests simply piled into the other party and made their escape.
The Democrats have improved considerably since those days, at least from a progressive standpoint. But there are still branches of the party willing to carry out the ancestral mission. Let’s call them what they are: the lifeboat caucus.
Germany’s Recession vs. America’s: Doing Worse, but Feeling Better
Germany’s Recession vs. America’s: Doing Worse, but Feeling Better. By Douglas J. Elliott, Fellow, Economic Studies, Initiative on Business and Public Policy
The Brookings Institution, Jul 28, 2009
The world recession that began in the U.S. is hitting Germany much harder than us, due to a collapse in world trade that has damaged an economy that Germans constantly refer to as “the World Export Champion.” Their economy will have shrunk by about 8% by the time it bottoms, whereas America’s GDP should fall less than 4% from its peak. Intriguingly, the German public and elites feel much better about their situation than Americans do about ours. The key question is whether this represents: a justified faith in a system that works well for them; government measures that delay the pain; German complacency; or some combination of these factors.
I spent a week in Germany recently meeting with dozens of policymakers, academics, journalists, and policy analysts, as a guest of the Konrad Adenauer Foundation[1], a German public policy institute. The overwhelming impression I received was of a fundamental disconnect between the horrible recession and the calmness with which the Germans were facing it. This paper will briefly explore that disconnect, but is not intended as an overall criticism of Germany and its economy. An American observer should be humble indeed in these times about giving economic advice to other countries. However, it still seems to me that the extraordinary recent decline of the German economy should foster more serious questioning than has occurred to date. There seem to be three principal factors behind the phlegmatic German reactions.
First, the public has yet to feel the pain directly and is unlikely to do so until after the Federal elections on September 27th that will determine the make-up of the new parliament. Government programs are providing major subsidies to keep redundant employees on the payroll, at substantially reduced hours. This still has some cost for businesses, but they generally do not want to lay off significant numbers of employees prior to the elections, both out of a desire to support the more business-friendly parties and because they would not wish to be singled out by the politicians in the frenzy of a close election campaign. The clear consensus of those with whom we spoke was that there would be a massive spike in unemployment starting in the Fall.
I was told that a private poll found that only 6% of respondents had felt a significant direct effect from the recession. Another 20-30% had close friends or relatives who were affected, which still left a clear majority who just were not seeing the impact. In fact, about a third of respondents did not think they would ever see significant harm to themselves or others close to them from the recession. In addition to the delayed reaction caused by the temporary unemployment measures, the level of anxiety is almost certainly reduced by Germany’s generous social safety net, which provides a considerable degree of cushioning for those who do end up unemployed.
These polling figures contrast sharply with those for American attitudes. Here, fear is widespread, in part because unemployment has risen sharply already and is poised to go higher still. We have also been struck by the housing crisis that affects tens of millions of Americans directly or indirectly and which does not plague Germany. (Germany had a massive construction bubble after Reunification. The bursting of that bubble played a major role in preventing them from following in the over-optimistic path of the U.S., the U.K., and Spain in recent times.)
Second, Germans have great faith in their overall economic model. There is a very widespread belief, across the great middle ground of the political landscape, that their “social market” system is right for Germany. The term is amorphous, but refers to a consensus approach in which business is allowed to operate in a fundamentally capitalist manner, but with high levels of taxes/social contributions and a number of operating limitations. These limitations include such things as restricted opening hours for shops and a requirement that many corporate decisions are approved by a Supervisory Board that includes union representation.
Equally importantly, Germany is justifiably proud of its prowess in exports, particularly industrial machinery and automobiles. Somewhere between 40% and 50% of Germany’s GDP comes from exports, depending on when and how you measure it. This is more than three times that of the U.S., although it is important to note that Germany is a considerably smaller country and is closely integrated with its European neighbors, who are the largest importers of German products. (If the U.S. counted sales from the Northeast to California as exports, our figure would be sharply higher than it is.) Germans view their trade surplus as a sign of virtue and the source of overseas investments that will carry the country through a future in which their aging population cuts back on output and necessarily lives more on the fruits of past labor.
Third, Germans are somewhat puzzled when pushed by outsiders to make changes to their overall model. They believe it has worked extremely well for them and consequently were resistant in the past to all but the most compelling changes when foreigners were lecturing them about rigidities in their system, even though those foreigners were then enjoying better growth and lower unemployment than Germany. Now that it appears to Germans that the advice was coming from people who have massively messed up their own systems, they are even less inclined to change. In addition, I believe that there is a sense of resignation about being able to change very much while staying consistent with the social market approach and the reality of their business systems.
The largest vulnerability of the German economy is their heavy reliance on exports. However, there is great resistance to changing this. Germans often seem to interpret the suggestion to do so as a call to do a worse job of exporting, which would indeed be a mistake. The real advice is to free up their service sector more and to reduce the disincentives to consume. If domestic consumption and the service sector grew, Germans would become less dependent on the success of their manufacturing exports.
It seems ironic to an American that Germans, generally so careful, would build an economy so exposed to a single factor. There appears to be an almost unconscious belief that since the world crisis was not their fault, there is no need to change their model. However, this ignores the likelihood that other major countries will have problems in the future. Germany will remain exposed to the mistakes of others as long as exports dominate their economy. Even a great German driver in one of their best cars is exposed to the risks posed by drunk drivers on the road, which is one reason for the many safety features built into their autos.
In sum, the German views can be over-simplified, indeed caricatured, as follows. The U.S. and the U.K. created a catastrophe in the financial system, leading to a severe recession in those countries, which then spread around the world. The global recession created an “export shock” for Germany as world trade fell by about a quarter. The effects of that one-time shock should stabilize soon, allowing Germany to find its feet and then shift to growth, albeit slow growth. The economy will be 8% smaller at the bottom, but the basic German model of export orientation and a social market will remain intact and provide a good future. It makes sense for Germany to make a few changes around the edges, such as somewhat tougher financial regulation, but there is no need to pursue anything more sweeping.
To an American ear, it sounds unreasonable to be so little inclined to examine your core assumptions at a time when your economy is suffering twice as badly as the supposedly severely mismanaged U.S. economy and your experience is significantly worse than anything since the trauma of World War II and the immediate post-war period. It does not make it any more understandable that the only other major economy suffering so badly is Japan, which has been struggling for many years to find its way economically.
Of course, the Germans could be right in their two core premises: (a) the German way of doing things provides them the right balance of security and growth over the long haul and (b) the export shock will pass soon and they will be able to gradually move back to their pre-crisis growth rates. Only time will tell.
However, if I were a betting man, I would put my money on a significantly less complacent Germany in six months to a year. By that point, the Germans are likely to have discontinued their expensive labor subsidies, given their horror of budget deficits. That horror is exemplified by a recent constitutional amendment to phase them out over time. Unemployment will have shot up by at least a million people, largely undoing one of the proud achievements of the current government in bringing unemployment down from about 5 million to well under 4 million. This unemployment shock should bring home the magnitude of the crisis to most Germans, even with the strong safety net available to protect the unemployed. All of this will be worse still if, as I fear, the rest of the world does not resume its imports of German cars and machinery as quickly as is hoped. A slowdown in consumption could hold auto purchases down more than expected and it is likely that parts of the world over-invested in industrial machinery in the recent past and will take some time to resume buying in volume.
The German economy has done extremely well in some respects, particularly in exports, and the Germans have shown an admirable thrift. However, all economic models should be re-examined periodically and a period of extreme stress such as today seems an especially good time to review one’s assumptions.
[1] The Konrad Adenaeur Foundation is closely associated with the Christian Democratic Union, the party of Chancellor Angela Merkel. However, I do not believe this created a significant bias in the messages that we heard. The meetings included a wide range of people in and out of politics and the views expressed about the economy were consistent with media accounts of German views
The Brookings Institution, Jul 28, 2009
The world recession that began in the U.S. is hitting Germany much harder than us, due to a collapse in world trade that has damaged an economy that Germans constantly refer to as “the World Export Champion.” Their economy will have shrunk by about 8% by the time it bottoms, whereas America’s GDP should fall less than 4% from its peak. Intriguingly, the German public and elites feel much better about their situation than Americans do about ours. The key question is whether this represents: a justified faith in a system that works well for them; government measures that delay the pain; German complacency; or some combination of these factors.
I spent a week in Germany recently meeting with dozens of policymakers, academics, journalists, and policy analysts, as a guest of the Konrad Adenauer Foundation[1], a German public policy institute. The overwhelming impression I received was of a fundamental disconnect between the horrible recession and the calmness with which the Germans were facing it. This paper will briefly explore that disconnect, but is not intended as an overall criticism of Germany and its economy. An American observer should be humble indeed in these times about giving economic advice to other countries. However, it still seems to me that the extraordinary recent decline of the German economy should foster more serious questioning than has occurred to date. There seem to be three principal factors behind the phlegmatic German reactions.
First, the public has yet to feel the pain directly and is unlikely to do so until after the Federal elections on September 27th that will determine the make-up of the new parliament. Government programs are providing major subsidies to keep redundant employees on the payroll, at substantially reduced hours. This still has some cost for businesses, but they generally do not want to lay off significant numbers of employees prior to the elections, both out of a desire to support the more business-friendly parties and because they would not wish to be singled out by the politicians in the frenzy of a close election campaign. The clear consensus of those with whom we spoke was that there would be a massive spike in unemployment starting in the Fall.
I was told that a private poll found that only 6% of respondents had felt a significant direct effect from the recession. Another 20-30% had close friends or relatives who were affected, which still left a clear majority who just were not seeing the impact. In fact, about a third of respondents did not think they would ever see significant harm to themselves or others close to them from the recession. In addition to the delayed reaction caused by the temporary unemployment measures, the level of anxiety is almost certainly reduced by Germany’s generous social safety net, which provides a considerable degree of cushioning for those who do end up unemployed.
These polling figures contrast sharply with those for American attitudes. Here, fear is widespread, in part because unemployment has risen sharply already and is poised to go higher still. We have also been struck by the housing crisis that affects tens of millions of Americans directly or indirectly and which does not plague Germany. (Germany had a massive construction bubble after Reunification. The bursting of that bubble played a major role in preventing them from following in the over-optimistic path of the U.S., the U.K., and Spain in recent times.)
Second, Germans have great faith in their overall economic model. There is a very widespread belief, across the great middle ground of the political landscape, that their “social market” system is right for Germany. The term is amorphous, but refers to a consensus approach in which business is allowed to operate in a fundamentally capitalist manner, but with high levels of taxes/social contributions and a number of operating limitations. These limitations include such things as restricted opening hours for shops and a requirement that many corporate decisions are approved by a Supervisory Board that includes union representation.
Equally importantly, Germany is justifiably proud of its prowess in exports, particularly industrial machinery and automobiles. Somewhere between 40% and 50% of Germany’s GDP comes from exports, depending on when and how you measure it. This is more than three times that of the U.S., although it is important to note that Germany is a considerably smaller country and is closely integrated with its European neighbors, who are the largest importers of German products. (If the U.S. counted sales from the Northeast to California as exports, our figure would be sharply higher than it is.) Germans view their trade surplus as a sign of virtue and the source of overseas investments that will carry the country through a future in which their aging population cuts back on output and necessarily lives more on the fruits of past labor.
Third, Germans are somewhat puzzled when pushed by outsiders to make changes to their overall model. They believe it has worked extremely well for them and consequently were resistant in the past to all but the most compelling changes when foreigners were lecturing them about rigidities in their system, even though those foreigners were then enjoying better growth and lower unemployment than Germany. Now that it appears to Germans that the advice was coming from people who have massively messed up their own systems, they are even less inclined to change. In addition, I believe that there is a sense of resignation about being able to change very much while staying consistent with the social market approach and the reality of their business systems.
The largest vulnerability of the German economy is their heavy reliance on exports. However, there is great resistance to changing this. Germans often seem to interpret the suggestion to do so as a call to do a worse job of exporting, which would indeed be a mistake. The real advice is to free up their service sector more and to reduce the disincentives to consume. If domestic consumption and the service sector grew, Germans would become less dependent on the success of their manufacturing exports.
It seems ironic to an American that Germans, generally so careful, would build an economy so exposed to a single factor. There appears to be an almost unconscious belief that since the world crisis was not their fault, there is no need to change their model. However, this ignores the likelihood that other major countries will have problems in the future. Germany will remain exposed to the mistakes of others as long as exports dominate their economy. Even a great German driver in one of their best cars is exposed to the risks posed by drunk drivers on the road, which is one reason for the many safety features built into their autos.
In sum, the German views can be over-simplified, indeed caricatured, as follows. The U.S. and the U.K. created a catastrophe in the financial system, leading to a severe recession in those countries, which then spread around the world. The global recession created an “export shock” for Germany as world trade fell by about a quarter. The effects of that one-time shock should stabilize soon, allowing Germany to find its feet and then shift to growth, albeit slow growth. The economy will be 8% smaller at the bottom, but the basic German model of export orientation and a social market will remain intact and provide a good future. It makes sense for Germany to make a few changes around the edges, such as somewhat tougher financial regulation, but there is no need to pursue anything more sweeping.
To an American ear, it sounds unreasonable to be so little inclined to examine your core assumptions at a time when your economy is suffering twice as badly as the supposedly severely mismanaged U.S. economy and your experience is significantly worse than anything since the trauma of World War II and the immediate post-war period. It does not make it any more understandable that the only other major economy suffering so badly is Japan, which has been struggling for many years to find its way economically.
Of course, the Germans could be right in their two core premises: (a) the German way of doing things provides them the right balance of security and growth over the long haul and (b) the export shock will pass soon and they will be able to gradually move back to their pre-crisis growth rates. Only time will tell.
However, if I were a betting man, I would put my money on a significantly less complacent Germany in six months to a year. By that point, the Germans are likely to have discontinued their expensive labor subsidies, given their horror of budget deficits. That horror is exemplified by a recent constitutional amendment to phase them out over time. Unemployment will have shot up by at least a million people, largely undoing one of the proud achievements of the current government in bringing unemployment down from about 5 million to well under 4 million. This unemployment shock should bring home the magnitude of the crisis to most Germans, even with the strong safety net available to protect the unemployed. All of this will be worse still if, as I fear, the rest of the world does not resume its imports of German cars and machinery as quickly as is hoped. A slowdown in consumption could hold auto purchases down more than expected and it is likely that parts of the world over-invested in industrial machinery in the recent past and will take some time to resume buying in volume.
The German economy has done extremely well in some respects, particularly in exports, and the Germans have shown an admirable thrift. However, all economic models should be re-examined periodically and a period of extreme stress such as today seems an especially good time to review one’s assumptions.
[1] The Konrad Adenaeur Foundation is closely associated with the Christian Democratic Union, the party of Chancellor Angela Merkel. However, I do not believe this created a significant bias in the messages that we heard. The meetings included a wide range of people in and out of politics and the views expressed about the economy were consistent with media accounts of German views
Reducing Systemic Risk in the Financial Sector
Reducing Systemic Risk in the Financial Sector. By Alice M. Rivlin, Senior Fellow, Economic Studies. Testimony: House Committee on Financial Services & Senate Committee on Banking, Housing and Urban Affairs
July 21, 2009 —
Mr. Chairman and members of the Committee: I am happy to be back before this Committee to give my views on reducing systemic risk in financial services. I will focus on changes in our regulatory structure that might prevent another catastrophic financial meltdown and what role the Federal Reserve should play in a new financial regulatory system.
It is hard to overstate the importance of the task facing this Committee. Market capitalism is a powerful system for enhancing human economic wellbeing and allocating savings to their most productive uses. But markets cannot be counted on to police themselves. Irrational herd behavior periodically produces rapid increases in asset values, lax lending and over-borrowing, excessive risk taking, and out-sized profits followed by crashing asset values, rapid deleveraging, risk aversion, and huge loses. Such a crash can dry up normal credit flows and undermine confidence, triggering deep recession and massive unemployment. When the financial system fails on the scale we have experienced recently the losers are not just the wealthy investors and executives of financial firms who took excessive risks. They are average people here and around the world whose jobs, livelihoods, and life savings are destroyed and whose futures are ruined by the effect of financial collapse on the world economy. We owe it to them to ferret out the flaws in the financial system and the failures of regulatory response that allowed this unnecessary crisis to happen and to mend the system so to reduce the chances that financial meltdowns imperil the world’s economic wellbeing.
Approaches to Reducing Systemic Risk
The crisis was a financial “perfect storm” with multiple causes. Different explanations of why the system failed—each with some validity—point to at least three different approaches to reducing systemic risk in the future.
The highly interconnected system failed because no one was in charge of spotting the risks that could bring it down. This explanation suggests creating a Macro System Stabilizer with broad responsibility for the whole financial system charged with spotting perverse incentives, regulatory gaps and market pressures that might destabilize the system and taking steps to fix them. The Obama Administration would create a Financial Services Oversight Council (an interagency group with its own staff) to perform this function. I think this responsibility should be lodged at the Fed and supported by a Council.
The system failed because expansive monetary policy and excessive leverage fueled a housing price bubble and an explosion of risky investments in asset backed securities. While low interest rates contributed to the bubble, monetary policy has multiple objectives. It is often impossible to stabilize the economy and fight asset price bubbles with a single instrument. Hence, this explanation suggests stricter regulation of leverage throughout the financial system. Since monetary policy is an ineffective tool for controlling asset price bubbles, it should be supplemented by the power to change leverage ratios when there is evidence of an asset price bubble whose bursting that could destabilize the financial sector. Giving the Fed control of leverage would enhance the effectiveness of monetary policy. The tool should be exercised in consultation with a Financial Services Oversight Council.
The system crashed because large inter-connected financial firms failed as a result of taking excessive risks, and their failure affected other firms and markets. This explanation might lead to policies to restrain the growth of large interconnected financial firms—or even break them up—and to expedited resolution authority for large financial firms (including non-banks) to lessen the impact of their failure on the rest of the system. Some have argued for the creation of a single consolidated regulator with responsibility for all systemically important financial institutions. The Obama Administration proposes making the Fed the consolidated regulator of all Tier One Financial Institutions. I believe it would be a mistake to identify specific institutions as too big to fail and an even greater mistake to give this responsibility to the Fed. Making the Fed the consolidated prudential regulator of big interconnected institutions would weaken its focus on monetary policy and the overall stability of the financial system and could threaten its independence.
The Case for a Macro System Stabilizer
One reason that regulators failed to head off the recent crisis is that no one was explicitly charged with spotting the regulatory gaps and perverse incentives that had crept into our rapidly changing financial structure in recent decades. In recent years, anti-regulatory ideology kept the United States from modernizing the rules of the capitalist game in a period of intense financial innovation and perverse incentives to creep in.
Perverse incentives. Lax lending standards created the bad mortgages that were securitized into the toxic assets now weighting down the books of financial institutions. Lax lending standards by mortgage originators should have been spotted as a threat to stability by a Macro System Stabilizer—the Fed should have played this role and failed to do so—and corrected by tightening the rules (minimum down payments, documentation, proof that the borrow understands the terms of the loan and other no-brainers). Even more important, a Macro System Stabilizer should have focused on why the lenders had such irresistible incentives to push mortgages on people unlikely to repay. Perverse incentives were inherent in the originate-to-distribute model which left the originator with no incentive to examine the credit worthiness of the borrower. The problem was magnified as mortgage-backed securities were re-securitized into more complex instruments and sold again and again. The Administration proposes fixing that system design flaw by requiring loan originators and securitizers to retain five percent of the risk of default. This seems to me too low, especially in a market boom, but it is the right idea.
The Macro System Stabilizer should also seek other reasons why securitization of asset-backed loans—long thought to be a benign way to spread the risk of individual loans—became a monster that brought the world financial system to its knees. Was it partly because the immediate fees earned by creating and selling more and more complex collateralized debt instruments were so tempting that this market would have exploded even if the originators retained a significant portion of the risk? If so, we need to change the reward structure for this activity so that fees are paid over a long enough period to reflect actual experience with the securities being created.
Other examples, of perverse incentives that contributed to the violence of the recent perfect financial storm include Structured Investment Vehicles (SIV’s) that hid risks off balance sheets and had to be either jettisoned or brought back on balance sheet at great cost; incentives of rating agencies to produce excessively high ratings; and compensation structures of corporate executives that incented focus on short-term earnings at the expense the longer run profitability of the company.
The case for creating a new role of Macro System Stabilizer is that gaps in regulation and perverse incentives cannot be permanently corrected. Whatever new rules are adopted will become obsolete as financial innovation progresses and market participants find ways around the rules in the pursuit of profit. The Macro System Stabilizer should be constantly searching for gaps, weak links and perverse incentives serious enough to threaten the system. It should make its views public and work with other regulators and Congress to mitigate the problem.
The Treasury makes the case for a regulator with a broad mandate to collect information from all financial institutions and “identify emerging risks.” It proposes putting that responsibility in a Financial Services Oversight Council, chaired by the Treasury, with its own permanent expert staff. The Council seems to me likely to be cumbersome. Interagency councils are usually rife with turf battles and rarely get much done. I think the Fed should have the clear responsibility for spotting emerging risks and trying to head them off before it has to pump trillions into the system to avert disaster. The Fed should make a periodic report to the Congress on the stability of the financial system and possible threats to it. The Fed should consult regularly with the Treasury and other regulators (perhaps in a Financial Services Oversight Council), but should have the lead responsibility. Spotting emerging risks would fit naturally with the Fed’s efforts to monitor the state of the economy and the health of the financial sector in order to set and implement monetary policy. Having explicit responsibility for monitoring systemic risk—and more information on which to base judgments would enhance its effectiveness as a central bank.
Controlling Leverage. The biggest challenge to restructuring the incentives is: How to avoid excessive leverage that magnified the upswing and turned the downswing into a rout? The aspect of the recent financial extravaganza that made it truly lethal was the over-leveraged superstructure of complex derivatives erected on the shaky foundation of America’s housing prices. By itself, the housing boom and bust would have created distress in the residential construction, real estate, and mortgage lending sectors, as well as consumer durables and other housing related markets, but would not have tanked the economy. What did us in was the credit crunch that followed the collapse of the highly leveraged financial superstructure that pumped money into the housing sector and became a bloated monster.
One approach to controlling serious asset–price bubbles fueled by leverage would be to give the Fed the responsibility for creating a bubble Threat Warning System that would trigger changes in permissible leverage ratios across financial institutions. The warnings would be public like hurricane or terrorist threat warnings. When the threat was high—as demonstrated by rapid price increases in an important class of assets, such as land, housing, equities, and other securities without an underlying economic justification--the Fed would raise the threat level from, say, Three to Four or Yellow to Orange. Investors and financial institutions would be required to put in more of their own money or sell assets to meet the requirements. As the threat moderated, the Fed would reduce the warning level.
The Fed already has the power to set margin requirements—the percentage of his own money that an investor is required to put up to buy a stock if he is borrowing the rest from his broker. Policy makers in the 1930s, seeking to avoid repetition of the stock price bubble that preceded the 1929 crash, perceived that much of the stock market bubble of the late 1920s had been financed with money borrowed on margin from broker dealers and that the Fed needed a tool distinct from monetary policy to control such borrowing in the future.
During the stock market bubble of the late 1990s, when I was Vice Chair of the Fed’s Board of Governors, we talked briefly about raising the margin requirement, but realized that the whole financial system had changed dramatically since the 1920s. Stock market investors in the 1990s had many sources of funds other than borrowing on margin. While raising the margin requirements would have been primarily symbolic, I believe with hindsight that we should have done it anyway in hopes of showing that we were worried about the bubble.
The 1930’s legislators were correct: monetary policy is a poor instrument for counteracting asset price bubbles; controlling leverage is likely to be more effective. The Fed has been criticized for not raising interest rates in 1998 and the first half of 1999 to discourage the accelerating tech stock bubble. But it would have had to raise rates dramatically to slow the market’s upward momentum—a move that conditions in the general economy did not justify. Productivity growth was increasing, inflation was benign and responding to the Asian financial crisis argued for lowering rates, not raising them. Similarly, the Fed might have raised rates from their extremely low levels in 2003 or raised them earlier and more steeply in 2004-5 to discourage the nascent housing price bubble. But such action would have been regarded as a bizarre attempt to abort the economy’s still slow recovery. At the time there was little understanding of the extent to which the highly leveraged financial superstructure was building on the collective delusion that U.S. housing prices could not fall. Even with hindsight, controlling leverage (along with stricter regulation of mortgage lending standards) would have been a more effective response to the housing bubble than raising interest rates. But regulators lacked the tools to control excessive leverage across the financial system.
In the wake of the current crisis, financial system reformers have approached the leverage control problem in pieces, which is appropriate since financial institutions play diverse roles. However the Federal Reserve—as Macro System Stabilizer—could be given the power to tie the system together so that various kinds of leverage ratios move in the same direction simultaneously as the threat changes.
With respect to large commercial banks and other systemically important financial institutions, for example, there is emerging consensus that higher capital ratios would have helped them weather the recent crisis, that capital requirements should be higher for larger, more interconnected institutions than for smaller, less interconnected ones, and that these requirements should rise as the systemic threat level (often associated with asset price bubbles) goes up.
With respect to hedge funds and other private investment funds, there is also emerging consensus that they should be more transparent and that financial derivatives should be traded on regulated exchanges or at least cleared on clearinghouses. But such funds might also be subject to leverage limitations that would move with the perceived threat level and could disappear if the threat were low.
One could also tie asset securitization into this system. The percent of risk that the originator or securitizer was required to retain could vary with the perceived threat of an asset price bubble. This percentage could be low most of the time, but rise automatically if Macro System Stabilizer deemed the threat of a major asset price bubble was high. One might even apply the system to rating agencies. In addition to requiring rating agencies to be more transparent about their methods and assumptions, they might be subjected to extra scrutiny or requirements when the bubble threat level was high.
Designing and coordinating such a leverage control system would not be an easy thing to do. It would require create thinking and care not to introduce new loopholes and perverse incentives. Nevertheless, it holds hope for avoiding the run away asset price exuberance that leads to financial disaster.
Systemically Important Institutions
The Obama Administration has proposed that there should be a consolidated prudential regulator of large interconnected financial institutions (Tier One Financial Holding Companies) and that this responsibility be given to the Federal Reserve. I think this is the wrong way to go.
It is certainly important to reduce the risk that large interconnected institutions fail as a result of engaging in highly risky behavior and that the contagion of their failure brings down others. However, there are at least three reasons for questioning the wisdom of identifying a specific list of such institutions and giving them their own consolidated regulator and set of regulations. First, as the current crisis has amply illustrated, it is very difficult to identify in advance institutions that pose systemic risk. The regulatory system that failed us was based on the premise that commercial banks and thrift institutions that take deposits and make loans should be subject to prudential regulation because their deposits are insured by the federal government and they can borrow from the Federal Reserve if they get into trouble. But in this crisis, not only did the regulators fail to prevent excessive risk-taking by depository institutions, especially thrifts, but systemic threats came from other quarters. Bear Stearns and Lehman Brothers had no insured deposits and no claim on the resources of the Federal Reserve. Yet when they made stupid decisions and were on the edge of failure the authorities realized they were just as much a threat to the system as commercial banks and thrifts. So was the insurance giant, AIG, and, in an earlier decade, the large hedge fund, LTCM. It is hard to identify a systemically important institution until it is on the point of bringing the system down and then it may be too late.
Second, if we visibly cordon off the systemically important institutions and set stricter rules for them than for other financial institutions, we will drive risky behavior outside the strictly regulated cordon. The next systemic crisis will then likely come from outside the ring, as it came this time from outside the cordon of commercial banks.
Third, identifying systemically important institutions and giving them their own consolidated regulator tends to institutionalize ‘Too Big to Fail’ and create a new set of GSE-like institutions. There is a risk that the consolidated regulator will see its job as not allowing any of its charges to go down the tubes and is prepared to put taxpayer money at risk to prevent such failures.
Higher capital requirements and stricter regulations for large interconnected institutions make sense, but I would favor a continuum rather than a defined list of institutions with its own special regulator. Since there is no obvious place to put such a responsibility, I think we should seriously consider creating a new financial regulator. This new institution could be similar to the UK’s FSA, but structured to be more effective than the FSA proved in the current crisis. In the US one might start by creating a new consolidated regulator of all financial holding companies. It should be an independent agency but might report to a board composed of other regulators, similar to the Treasury proposal for a Council for Financial Oversight. As the system evolves the consolidated regulator might also subsume the functional regulation of nationally chartered banks, the prudential regulation of broker-dealers and nationally chartered insurance companies.
I don’t pretend to have a definitive answer to how the regulatory boxes should best be arranged, but it seems to me a mistake to give the Federal Reserve responsibility for consolidated prudential regulation of Tier One Financial Holding Companies, as proposed by the Obama Administration. I believe the skills needed by an effective central bank are quite different from those needed to be an effective financial institution regulator. Moreover, the regulatory responsibility would likely grow with time, distract the Fed from its central banking functions, and invite political interference that would eventually threaten the independence of monetary policy.
Especially in recent decades, the Federal Reserve has been a successful and widely respected central bank. It has been led by a series of strong macro economists—Paul Volcker, Alan Greenspan, Ben Bernanke—who have been skillful at reading the ups and downs of the economy and steering a monetary policy course that contained inflation and fostered sustainable economic growth. It has played its role as banker to the banks and lender of last resort—including aggressive action with little used tools in the crisis of 2008-9. It has kept the payments system functioning even in crises such as 9/11, and worked effectively with other central banks to coordinate responses to credit crunches, especially the current one. Populist resentment of the Fed’s control of monetary policy has faded as understanding of the importance of having an independent institution to contain inflation has grown—and the Fed has been more transparent about its objectives. Although respect for the Fed’s monetary policy has grown in recent years, its regulatory role has diminished. As regulator of Bank Holding Companies, it did not distinguish itself in the run up to the current crisis (nor did other regulators). It missed the threat posed by the deterioration of mortgage lending standards and the growth of complex derivatives.
If the Fed were to take on the role of consolidated prudential regulator of Tier One Financial Holding Companies, it would need strong, committed leadership with regulatory skills—lawyers, not economists. This is not a job for which you would look to a Volcker, Greenspan or Bernanke. Moreover, the regulatory responsibility would likely grow as it became clear that the number and type of systemically important institutions was increasing. My fear is that a bifurcated Fed would be less effective and less respected in monetary policy. Moreover, the concentration of that much power in an institution would rightly make the Congress nervous unless it exercised more oversight and accountability. The Congress would understandably seek to appropriate the Fed’s budget and require more reporting and accounting. This is not necessarily bad, but it could result in more Congressional interference with monetary policy, which could threaten the Fed’s effectiveness and credibility in containing inflation.
In summary, Mr. Chairman: I believe that we need an agency with specific responsibility for spotting regulatory gaps, perverse incentives, and building market pressures that could pose serious threats to the stability of the financial system. I would give the Federal Reserve clear responsibility for Macro System Stability, reporting periodically to Congress and coordinating with a Financial System Oversight Council. I would also give the Fed new powers to control leverage across the system—again in coordination with the Council. I would not create a special regulator for Tier One Financial Holding Companies, and I would certainly not give that responsibility to the Fed, lest it become a less effective and less independent central bank.
Thank you, Mr. Chairman and members of the Committee.
July 21, 2009 —
Mr. Chairman and members of the Committee: I am happy to be back before this Committee to give my views on reducing systemic risk in financial services. I will focus on changes in our regulatory structure that might prevent another catastrophic financial meltdown and what role the Federal Reserve should play in a new financial regulatory system.
It is hard to overstate the importance of the task facing this Committee. Market capitalism is a powerful system for enhancing human economic wellbeing and allocating savings to their most productive uses. But markets cannot be counted on to police themselves. Irrational herd behavior periodically produces rapid increases in asset values, lax lending and over-borrowing, excessive risk taking, and out-sized profits followed by crashing asset values, rapid deleveraging, risk aversion, and huge loses. Such a crash can dry up normal credit flows and undermine confidence, triggering deep recession and massive unemployment. When the financial system fails on the scale we have experienced recently the losers are not just the wealthy investors and executives of financial firms who took excessive risks. They are average people here and around the world whose jobs, livelihoods, and life savings are destroyed and whose futures are ruined by the effect of financial collapse on the world economy. We owe it to them to ferret out the flaws in the financial system and the failures of regulatory response that allowed this unnecessary crisis to happen and to mend the system so to reduce the chances that financial meltdowns imperil the world’s economic wellbeing.
Approaches to Reducing Systemic Risk
The crisis was a financial “perfect storm” with multiple causes. Different explanations of why the system failed—each with some validity—point to at least three different approaches to reducing systemic risk in the future.
The highly interconnected system failed because no one was in charge of spotting the risks that could bring it down. This explanation suggests creating a Macro System Stabilizer with broad responsibility for the whole financial system charged with spotting perverse incentives, regulatory gaps and market pressures that might destabilize the system and taking steps to fix them. The Obama Administration would create a Financial Services Oversight Council (an interagency group with its own staff) to perform this function. I think this responsibility should be lodged at the Fed and supported by a Council.
The system failed because expansive monetary policy and excessive leverage fueled a housing price bubble and an explosion of risky investments in asset backed securities. While low interest rates contributed to the bubble, monetary policy has multiple objectives. It is often impossible to stabilize the economy and fight asset price bubbles with a single instrument. Hence, this explanation suggests stricter regulation of leverage throughout the financial system. Since monetary policy is an ineffective tool for controlling asset price bubbles, it should be supplemented by the power to change leverage ratios when there is evidence of an asset price bubble whose bursting that could destabilize the financial sector. Giving the Fed control of leverage would enhance the effectiveness of monetary policy. The tool should be exercised in consultation with a Financial Services Oversight Council.
The system crashed because large inter-connected financial firms failed as a result of taking excessive risks, and their failure affected other firms and markets. This explanation might lead to policies to restrain the growth of large interconnected financial firms—or even break them up—and to expedited resolution authority for large financial firms (including non-banks) to lessen the impact of their failure on the rest of the system. Some have argued for the creation of a single consolidated regulator with responsibility for all systemically important financial institutions. The Obama Administration proposes making the Fed the consolidated regulator of all Tier One Financial Institutions. I believe it would be a mistake to identify specific institutions as too big to fail and an even greater mistake to give this responsibility to the Fed. Making the Fed the consolidated prudential regulator of big interconnected institutions would weaken its focus on monetary policy and the overall stability of the financial system and could threaten its independence.
The Case for a Macro System Stabilizer
One reason that regulators failed to head off the recent crisis is that no one was explicitly charged with spotting the regulatory gaps and perverse incentives that had crept into our rapidly changing financial structure in recent decades. In recent years, anti-regulatory ideology kept the United States from modernizing the rules of the capitalist game in a period of intense financial innovation and perverse incentives to creep in.
Perverse incentives. Lax lending standards created the bad mortgages that were securitized into the toxic assets now weighting down the books of financial institutions. Lax lending standards by mortgage originators should have been spotted as a threat to stability by a Macro System Stabilizer—the Fed should have played this role and failed to do so—and corrected by tightening the rules (minimum down payments, documentation, proof that the borrow understands the terms of the loan and other no-brainers). Even more important, a Macro System Stabilizer should have focused on why the lenders had such irresistible incentives to push mortgages on people unlikely to repay. Perverse incentives were inherent in the originate-to-distribute model which left the originator with no incentive to examine the credit worthiness of the borrower. The problem was magnified as mortgage-backed securities were re-securitized into more complex instruments and sold again and again. The Administration proposes fixing that system design flaw by requiring loan originators and securitizers to retain five percent of the risk of default. This seems to me too low, especially in a market boom, but it is the right idea.
The Macro System Stabilizer should also seek other reasons why securitization of asset-backed loans—long thought to be a benign way to spread the risk of individual loans—became a monster that brought the world financial system to its knees. Was it partly because the immediate fees earned by creating and selling more and more complex collateralized debt instruments were so tempting that this market would have exploded even if the originators retained a significant portion of the risk? If so, we need to change the reward structure for this activity so that fees are paid over a long enough period to reflect actual experience with the securities being created.
Other examples, of perverse incentives that contributed to the violence of the recent perfect financial storm include Structured Investment Vehicles (SIV’s) that hid risks off balance sheets and had to be either jettisoned or brought back on balance sheet at great cost; incentives of rating agencies to produce excessively high ratings; and compensation structures of corporate executives that incented focus on short-term earnings at the expense the longer run profitability of the company.
The case for creating a new role of Macro System Stabilizer is that gaps in regulation and perverse incentives cannot be permanently corrected. Whatever new rules are adopted will become obsolete as financial innovation progresses and market participants find ways around the rules in the pursuit of profit. The Macro System Stabilizer should be constantly searching for gaps, weak links and perverse incentives serious enough to threaten the system. It should make its views public and work with other regulators and Congress to mitigate the problem.
The Treasury makes the case for a regulator with a broad mandate to collect information from all financial institutions and “identify emerging risks.” It proposes putting that responsibility in a Financial Services Oversight Council, chaired by the Treasury, with its own permanent expert staff. The Council seems to me likely to be cumbersome. Interagency councils are usually rife with turf battles and rarely get much done. I think the Fed should have the clear responsibility for spotting emerging risks and trying to head them off before it has to pump trillions into the system to avert disaster. The Fed should make a periodic report to the Congress on the stability of the financial system and possible threats to it. The Fed should consult regularly with the Treasury and other regulators (perhaps in a Financial Services Oversight Council), but should have the lead responsibility. Spotting emerging risks would fit naturally with the Fed’s efforts to monitor the state of the economy and the health of the financial sector in order to set and implement monetary policy. Having explicit responsibility for monitoring systemic risk—and more information on which to base judgments would enhance its effectiveness as a central bank.
Controlling Leverage. The biggest challenge to restructuring the incentives is: How to avoid excessive leverage that magnified the upswing and turned the downswing into a rout? The aspect of the recent financial extravaganza that made it truly lethal was the over-leveraged superstructure of complex derivatives erected on the shaky foundation of America’s housing prices. By itself, the housing boom and bust would have created distress in the residential construction, real estate, and mortgage lending sectors, as well as consumer durables and other housing related markets, but would not have tanked the economy. What did us in was the credit crunch that followed the collapse of the highly leveraged financial superstructure that pumped money into the housing sector and became a bloated monster.
One approach to controlling serious asset–price bubbles fueled by leverage would be to give the Fed the responsibility for creating a bubble Threat Warning System that would trigger changes in permissible leverage ratios across financial institutions. The warnings would be public like hurricane or terrorist threat warnings. When the threat was high—as demonstrated by rapid price increases in an important class of assets, such as land, housing, equities, and other securities without an underlying economic justification--the Fed would raise the threat level from, say, Three to Four or Yellow to Orange. Investors and financial institutions would be required to put in more of their own money or sell assets to meet the requirements. As the threat moderated, the Fed would reduce the warning level.
The Fed already has the power to set margin requirements—the percentage of his own money that an investor is required to put up to buy a stock if he is borrowing the rest from his broker. Policy makers in the 1930s, seeking to avoid repetition of the stock price bubble that preceded the 1929 crash, perceived that much of the stock market bubble of the late 1920s had been financed with money borrowed on margin from broker dealers and that the Fed needed a tool distinct from monetary policy to control such borrowing in the future.
During the stock market bubble of the late 1990s, when I was Vice Chair of the Fed’s Board of Governors, we talked briefly about raising the margin requirement, but realized that the whole financial system had changed dramatically since the 1920s. Stock market investors in the 1990s had many sources of funds other than borrowing on margin. While raising the margin requirements would have been primarily symbolic, I believe with hindsight that we should have done it anyway in hopes of showing that we were worried about the bubble.
The 1930’s legislators were correct: monetary policy is a poor instrument for counteracting asset price bubbles; controlling leverage is likely to be more effective. The Fed has been criticized for not raising interest rates in 1998 and the first half of 1999 to discourage the accelerating tech stock bubble. But it would have had to raise rates dramatically to slow the market’s upward momentum—a move that conditions in the general economy did not justify. Productivity growth was increasing, inflation was benign and responding to the Asian financial crisis argued for lowering rates, not raising them. Similarly, the Fed might have raised rates from their extremely low levels in 2003 or raised them earlier and more steeply in 2004-5 to discourage the nascent housing price bubble. But such action would have been regarded as a bizarre attempt to abort the economy’s still slow recovery. At the time there was little understanding of the extent to which the highly leveraged financial superstructure was building on the collective delusion that U.S. housing prices could not fall. Even with hindsight, controlling leverage (along with stricter regulation of mortgage lending standards) would have been a more effective response to the housing bubble than raising interest rates. But regulators lacked the tools to control excessive leverage across the financial system.
In the wake of the current crisis, financial system reformers have approached the leverage control problem in pieces, which is appropriate since financial institutions play diverse roles. However the Federal Reserve—as Macro System Stabilizer—could be given the power to tie the system together so that various kinds of leverage ratios move in the same direction simultaneously as the threat changes.
With respect to large commercial banks and other systemically important financial institutions, for example, there is emerging consensus that higher capital ratios would have helped them weather the recent crisis, that capital requirements should be higher for larger, more interconnected institutions than for smaller, less interconnected ones, and that these requirements should rise as the systemic threat level (often associated with asset price bubbles) goes up.
With respect to hedge funds and other private investment funds, there is also emerging consensus that they should be more transparent and that financial derivatives should be traded on regulated exchanges or at least cleared on clearinghouses. But such funds might also be subject to leverage limitations that would move with the perceived threat level and could disappear if the threat were low.
One could also tie asset securitization into this system. The percent of risk that the originator or securitizer was required to retain could vary with the perceived threat of an asset price bubble. This percentage could be low most of the time, but rise automatically if Macro System Stabilizer deemed the threat of a major asset price bubble was high. One might even apply the system to rating agencies. In addition to requiring rating agencies to be more transparent about their methods and assumptions, they might be subjected to extra scrutiny or requirements when the bubble threat level was high.
Designing and coordinating such a leverage control system would not be an easy thing to do. It would require create thinking and care not to introduce new loopholes and perverse incentives. Nevertheless, it holds hope for avoiding the run away asset price exuberance that leads to financial disaster.
Systemically Important Institutions
The Obama Administration has proposed that there should be a consolidated prudential regulator of large interconnected financial institutions (Tier One Financial Holding Companies) and that this responsibility be given to the Federal Reserve. I think this is the wrong way to go.
It is certainly important to reduce the risk that large interconnected institutions fail as a result of engaging in highly risky behavior and that the contagion of their failure brings down others. However, there are at least three reasons for questioning the wisdom of identifying a specific list of such institutions and giving them their own consolidated regulator and set of regulations. First, as the current crisis has amply illustrated, it is very difficult to identify in advance institutions that pose systemic risk. The regulatory system that failed us was based on the premise that commercial banks and thrift institutions that take deposits and make loans should be subject to prudential regulation because their deposits are insured by the federal government and they can borrow from the Federal Reserve if they get into trouble. But in this crisis, not only did the regulators fail to prevent excessive risk-taking by depository institutions, especially thrifts, but systemic threats came from other quarters. Bear Stearns and Lehman Brothers had no insured deposits and no claim on the resources of the Federal Reserve. Yet when they made stupid decisions and were on the edge of failure the authorities realized they were just as much a threat to the system as commercial banks and thrifts. So was the insurance giant, AIG, and, in an earlier decade, the large hedge fund, LTCM. It is hard to identify a systemically important institution until it is on the point of bringing the system down and then it may be too late.
Second, if we visibly cordon off the systemically important institutions and set stricter rules for them than for other financial institutions, we will drive risky behavior outside the strictly regulated cordon. The next systemic crisis will then likely come from outside the ring, as it came this time from outside the cordon of commercial banks.
Third, identifying systemically important institutions and giving them their own consolidated regulator tends to institutionalize ‘Too Big to Fail’ and create a new set of GSE-like institutions. There is a risk that the consolidated regulator will see its job as not allowing any of its charges to go down the tubes and is prepared to put taxpayer money at risk to prevent such failures.
Higher capital requirements and stricter regulations for large interconnected institutions make sense, but I would favor a continuum rather than a defined list of institutions with its own special regulator. Since there is no obvious place to put such a responsibility, I think we should seriously consider creating a new financial regulator. This new institution could be similar to the UK’s FSA, but structured to be more effective than the FSA proved in the current crisis. In the US one might start by creating a new consolidated regulator of all financial holding companies. It should be an independent agency but might report to a board composed of other regulators, similar to the Treasury proposal for a Council for Financial Oversight. As the system evolves the consolidated regulator might also subsume the functional regulation of nationally chartered banks, the prudential regulation of broker-dealers and nationally chartered insurance companies.
I don’t pretend to have a definitive answer to how the regulatory boxes should best be arranged, but it seems to me a mistake to give the Federal Reserve responsibility for consolidated prudential regulation of Tier One Financial Holding Companies, as proposed by the Obama Administration. I believe the skills needed by an effective central bank are quite different from those needed to be an effective financial institution regulator. Moreover, the regulatory responsibility would likely grow with time, distract the Fed from its central banking functions, and invite political interference that would eventually threaten the independence of monetary policy.
Especially in recent decades, the Federal Reserve has been a successful and widely respected central bank. It has been led by a series of strong macro economists—Paul Volcker, Alan Greenspan, Ben Bernanke—who have been skillful at reading the ups and downs of the economy and steering a monetary policy course that contained inflation and fostered sustainable economic growth. It has played its role as banker to the banks and lender of last resort—including aggressive action with little used tools in the crisis of 2008-9. It has kept the payments system functioning even in crises such as 9/11, and worked effectively with other central banks to coordinate responses to credit crunches, especially the current one. Populist resentment of the Fed’s control of monetary policy has faded as understanding of the importance of having an independent institution to contain inflation has grown—and the Fed has been more transparent about its objectives. Although respect for the Fed’s monetary policy has grown in recent years, its regulatory role has diminished. As regulator of Bank Holding Companies, it did not distinguish itself in the run up to the current crisis (nor did other regulators). It missed the threat posed by the deterioration of mortgage lending standards and the growth of complex derivatives.
If the Fed were to take on the role of consolidated prudential regulator of Tier One Financial Holding Companies, it would need strong, committed leadership with regulatory skills—lawyers, not economists. This is not a job for which you would look to a Volcker, Greenspan or Bernanke. Moreover, the regulatory responsibility would likely grow as it became clear that the number and type of systemically important institutions was increasing. My fear is that a bifurcated Fed would be less effective and less respected in monetary policy. Moreover, the concentration of that much power in an institution would rightly make the Congress nervous unless it exercised more oversight and accountability. The Congress would understandably seek to appropriate the Fed’s budget and require more reporting and accounting. This is not necessarily bad, but it could result in more Congressional interference with monetary policy, which could threaten the Fed’s effectiveness and credibility in containing inflation.
In summary, Mr. Chairman: I believe that we need an agency with specific responsibility for spotting regulatory gaps, perverse incentives, and building market pressures that could pose serious threats to the stability of the financial system. I would give the Federal Reserve clear responsibility for Macro System Stability, reporting periodically to Congress and coordinating with a Financial System Oversight Council. I would also give the Fed new powers to control leverage across the system—again in coordination with the Council. I would not create a special regulator for Tier One Financial Holding Companies, and I would certainly not give that responsibility to the Fed, lest it become a less effective and less independent central bank.
Thank you, Mr. Chairman and members of the Committee.
Why Revive the Cold War? - Russia and the U.S. were reducing their nuclear arsenals without ‘arms control’
Why Revive the Cold War? By DOUGLAS J. FEITH AND ABRAM N. SHULSKY
Russia and the U.S. were reducing their nuclear arsenals without ‘arms control.’
WSJ, Aug 04, 2009
The Cold War ended nearly 20 years ago. Isn’t it time we abandoned policies specifically designed to deal with it? Arms-control talks are a case in point. Why should U.S. officials act as if only a Cold War-style treaty can save the United States and Russia from a destabilizing nuclear arms race?
Despite President Barack Obama’s strange, pre-Moscow summit remark last month in a New York Times interview that the U.S. and Russia are continuing to “grow” their nuclear stockpiles, both countries have in fact reduced their stockpiles drastically since the Soviet Union disintegrated in 1991. Those reductions resulted from unilateral decisions, not from arms-control bargaining.
Thus, on Nov. 13, 2001, President George W. Bush announced that the U.S. would unilaterally reduce its “operationally deployed strategic nuclear warheads to a level between 1,700 and 2,200 over the next decade.” This was far less than the 6,000 limit allowed under the 1991 Strategic Arms Reduction Treaty (START). Russian President Vladimir Putin promptly said in December 2001 that Russia would similarly reduce its nuclear forces.
Thus, benefiting from the happy reality that the Cold War was over, each country felt free to cut its arsenal, whether or not the other committed itself to do so. The 2002 Moscow Treaty, which simply made legally binding the reduction pledges each president had already announced, was negotiated as a friendly gesture to Russia. U.S. officials did not see it as a strategic necessity, but Mr. Putin wanted formal acknowledgment that Russia retained nuclear-arms parity with the U.S., though it could no longer be seen as America’s peer overall.
Now, with START set to expire in December, it is Mr. Obama who’s intent on signing a new treaty. He says U.S.-Russian arms reductions will help stem nuclear proliferation.
Mr. Obama here is mixing up pretext and policy. When criticized for pursuing nuclear weapons, proliferators like North Korea and Iran make diplomatic talking points out of the size of the great powers’ arsenals. They try to shift the focus away from themselves by complaining that the Americans and Russians aren’t working hard enough to reach disarmament goals envisioned in the Nuclear Non-Proliferation Treaty. But depriving proliferators of such talking points won’t affect their incentives to acquire nuclear weapons—or the world’s incentives to counter the dangers that the North Korean and Iranian nuclear programs pose to international peace.
Nor would cutting the U.S. and Russian arsenals by a few hundred weapons do anything significant to achieve Mr. Obama’s goal of a world without nuclear weapons. The roadblock is the fact of U.S. dependence on nuclear deterrence. So long as the security of the U.S. and of our allies and friends requires such dependence, a non-nuclear world will remain out of reach. Inventing a way to dispense with nuclear deterrence will require a political or technological breakthrough of major magnitude. Retaining our dependence on nuclear weapons even at somewhat lower levels is an admission by the Obama administration that the proposed reductions don’t actually bring us closer to a non-nuclear world.
With Mr. Obama openly eager for a START follow-on treaty, Russian leaders have chosen to play coy and become demanding. So what might the U.S. have to pay for it? The price is likely to be high, as suggested by the “Joint Understanding” the U.S. and Russian presidents announced last month in Moscow.
Point 5 of the Understanding specifies that the new treaty is to contain “a provision on the interrelationship of strategic offensive and strategic defensive arms.” Russia will use this language (which Bush administration officials repeatedly rejected) to try to derail U.S. plans for a Europe-based missile system designed to counter Iranian missile threats. If Russia succeeds here, the new treaty would increase the value to Iran of acquiring nuclear weapons. By making it easier for a nuclear-armed Iran to threaten all of Europe and eventually the U.S., the new treaty would promote rather than discourage nuclear proliferation.
Similarly, according to Point 6, the new treaty is to contain a provision on how non-nuclear, long-range strike weapons may affect strategic stability. Russia wants this to impede U.S. development of such weapons, probably by requiring that they be counted as if they had nuclear warheads. Hence the new treaty could shut down one of the more promising avenues for reducing U.S. dependence on nuclear arms for strategic strike.
All in all, the Obama administration’s nuclear weapons policies appear confused and self-defeating. Mr. Obama seems willing to pay for arms reductions that Russian officials have made clear will occur soon, due to aging or the planned modernization of systems, with or without a new treaty. Moreover, the Obama administration is opposing modernization measures designed to protect against the risk that the aging of U.S. weapons will compromise their safety or reliability.
There is an important connection between proliferation risks and modernization. But the Obama administration seems to have it backwards. If the U.S. fails to ensure the continuing safety and reliability of its arsenal, it could cause the collapse of the U.S. nuclear umbrella. Countries such as Japan, South Korea, Taiwan, Australia and others might decide that their security requires them to acquire their own nuclear arsenals, rather than rely indefinitely on the U.S. The world could reach a tipping point, with cascading nuclear proliferation, as the bipartisan Congressional Strategic Posture Commission warned in its May 2009 report.
The Obama administration’s nuclear weapons policies—including its treaty talks with Russia—affect the way America’s friends and potential adversaries view the integrity of the U.S. deterrent. The wrong policies can endanger the U.S. directly. They can also cause other states to lose confidence in the American nuclear umbrella and to seek security in national nuclear capabilities.
If that happens, the dangers of a nuclear war somewhere in the world would go up substantially. It would not be the first time a U.S. government helped bring about the opposite of its intended result—but it might be one of the costliest mistakes ever.
Mr. Feith, a former under secretary of defense for policy (2001-05), is the author of “War and Decision: Inside the Pentagon at the Dawn of the War on Terrorism” (HarperCollins, 2008). Mr. Shulsky is a former Defense Department official who dealt with arms control issues. Both are senior fellows at the Hudson Institute.
Russia and the U.S. were reducing their nuclear arsenals without ‘arms control.’
WSJ, Aug 04, 2009
The Cold War ended nearly 20 years ago. Isn’t it time we abandoned policies specifically designed to deal with it? Arms-control talks are a case in point. Why should U.S. officials act as if only a Cold War-style treaty can save the United States and Russia from a destabilizing nuclear arms race?
Despite President Barack Obama’s strange, pre-Moscow summit remark last month in a New York Times interview that the U.S. and Russia are continuing to “grow” their nuclear stockpiles, both countries have in fact reduced their stockpiles drastically since the Soviet Union disintegrated in 1991. Those reductions resulted from unilateral decisions, not from arms-control bargaining.
Thus, on Nov. 13, 2001, President George W. Bush announced that the U.S. would unilaterally reduce its “operationally deployed strategic nuclear warheads to a level between 1,700 and 2,200 over the next decade.” This was far less than the 6,000 limit allowed under the 1991 Strategic Arms Reduction Treaty (START). Russian President Vladimir Putin promptly said in December 2001 that Russia would similarly reduce its nuclear forces.
Thus, benefiting from the happy reality that the Cold War was over, each country felt free to cut its arsenal, whether or not the other committed itself to do so. The 2002 Moscow Treaty, which simply made legally binding the reduction pledges each president had already announced, was negotiated as a friendly gesture to Russia. U.S. officials did not see it as a strategic necessity, but Mr. Putin wanted formal acknowledgment that Russia retained nuclear-arms parity with the U.S., though it could no longer be seen as America’s peer overall.
Now, with START set to expire in December, it is Mr. Obama who’s intent on signing a new treaty. He says U.S.-Russian arms reductions will help stem nuclear proliferation.
Mr. Obama here is mixing up pretext and policy. When criticized for pursuing nuclear weapons, proliferators like North Korea and Iran make diplomatic talking points out of the size of the great powers’ arsenals. They try to shift the focus away from themselves by complaining that the Americans and Russians aren’t working hard enough to reach disarmament goals envisioned in the Nuclear Non-Proliferation Treaty. But depriving proliferators of such talking points won’t affect their incentives to acquire nuclear weapons—or the world’s incentives to counter the dangers that the North Korean and Iranian nuclear programs pose to international peace.
Nor would cutting the U.S. and Russian arsenals by a few hundred weapons do anything significant to achieve Mr. Obama’s goal of a world without nuclear weapons. The roadblock is the fact of U.S. dependence on nuclear deterrence. So long as the security of the U.S. and of our allies and friends requires such dependence, a non-nuclear world will remain out of reach. Inventing a way to dispense with nuclear deterrence will require a political or technological breakthrough of major magnitude. Retaining our dependence on nuclear weapons even at somewhat lower levels is an admission by the Obama administration that the proposed reductions don’t actually bring us closer to a non-nuclear world.
With Mr. Obama openly eager for a START follow-on treaty, Russian leaders have chosen to play coy and become demanding. So what might the U.S. have to pay for it? The price is likely to be high, as suggested by the “Joint Understanding” the U.S. and Russian presidents announced last month in Moscow.
Point 5 of the Understanding specifies that the new treaty is to contain “a provision on the interrelationship of strategic offensive and strategic defensive arms.” Russia will use this language (which Bush administration officials repeatedly rejected) to try to derail U.S. plans for a Europe-based missile system designed to counter Iranian missile threats. If Russia succeeds here, the new treaty would increase the value to Iran of acquiring nuclear weapons. By making it easier for a nuclear-armed Iran to threaten all of Europe and eventually the U.S., the new treaty would promote rather than discourage nuclear proliferation.
Similarly, according to Point 6, the new treaty is to contain a provision on how non-nuclear, long-range strike weapons may affect strategic stability. Russia wants this to impede U.S. development of such weapons, probably by requiring that they be counted as if they had nuclear warheads. Hence the new treaty could shut down one of the more promising avenues for reducing U.S. dependence on nuclear arms for strategic strike.
All in all, the Obama administration’s nuclear weapons policies appear confused and self-defeating. Mr. Obama seems willing to pay for arms reductions that Russian officials have made clear will occur soon, due to aging or the planned modernization of systems, with or without a new treaty. Moreover, the Obama administration is opposing modernization measures designed to protect against the risk that the aging of U.S. weapons will compromise their safety or reliability.
There is an important connection between proliferation risks and modernization. But the Obama administration seems to have it backwards. If the U.S. fails to ensure the continuing safety and reliability of its arsenal, it could cause the collapse of the U.S. nuclear umbrella. Countries such as Japan, South Korea, Taiwan, Australia and others might decide that their security requires them to acquire their own nuclear arsenals, rather than rely indefinitely on the U.S. The world could reach a tipping point, with cascading nuclear proliferation, as the bipartisan Congressional Strategic Posture Commission warned in its May 2009 report.
The Obama administration’s nuclear weapons policies—including its treaty talks with Russia—affect the way America’s friends and potential adversaries view the integrity of the U.S. deterrent. The wrong policies can endanger the U.S. directly. They can also cause other states to lose confidence in the American nuclear umbrella and to seek security in national nuclear capabilities.
If that happens, the dangers of a nuclear war somewhere in the world would go up substantially. It would not be the first time a U.S. government helped bring about the opposite of its intended result—but it might be one of the costliest mistakes ever.
Mr. Feith, a former under secretary of defense for policy (2001-05), is the author of “War and Decision: Inside the Pentagon at the Dawn of the War on Terrorism” (HarperCollins, 2008). Mr. Shulsky is a former Defense Department official who dealt with arms control issues. Both are senior fellows at the Hudson Institute.
Monday, August 3, 2009
Views from India: the “haughty,” “condescending,” “arrogant,” and “patronizing” NYT editorial of last July 18, 2009
An Editorial and Its (Mal) Contents. By S. Samuel C. Rajiv
IDSA, July 25, 2009
An editorial in the New York Times on July 18, 2009 ahead of US Secretary of State Hillary Clinton’s visit to India - ‘Secretary Clinton goes to India’, has generated a lot of interest. A prominent Indian-American Democratic politician from Maryland, Kumar Barve, who is also a Majority leader in the House of Delegates, criticized the tone and tenor of the write-up as “haughty”, “condescending”, “arrogant”, and “patronizing.” Barve points out that the editorial’s first sentence, which defines India as “a longtime nuclear scofflaw,” is factually incorrect, as India had never violated any nuclear agreements it has signed.
The editorial goes on to describe India as a “major contributor to global warming,” which again can be contested very convincingly. India contributes less than 4 per cent of global emissions, and has one of the lowest per capita emissions in the world (less than 2 tonnes of CO2 per annum). The United States and China on the other hand are together responsible for 40 per cent of global emissions. In the same paragraph, it calls on India “to do a lot more to constrain its arms race with Pakistan and global proliferation.”
India and Pakistan are neither involved in any competitive arms racing nor can Pakistan afford to do so and go down the route of the Union of Soviet Socialist Republics. Indian’s defence budget as a percentage of GDP has come down from over 3 per cent in 1988-89 to under 2 per cent in 2008-09. This has to be seen against the background of defence budgets in India’s neighbourhood – nearly 5 per cent of GDP for Pakistan and 7 per cent for China. Given the lack of transparency in these figures, compounded by a whole range of internal and external security threats, arguments in favour of increasing India’s defence budget have actually more weight.
Urging India to take “more responsibility internationally,” the supporting arguments the editorial gives in favour of this ‘advice’ is the strong mandate secured by Prime Minister Manmohan Singh and the fact that the country has weathered a global recession better than others. The reasons responsible for the re-election of Dr. Singh are varied. This writer is not sure if taking on greater responsibilities overseas was a factor for the Indian electorate to choose him. To do more internationally to help the world ride out the financial storm is labouring the point. Despite the size of its economy (worth more than a trillion dollars), India still has a negligible share of world trade. Its strengths have primarily been its growing domestic demand, a high savings rate, among other factors, which have helped weather the crisis that has gripped the rest of the world.
The editorial then calls on India to help allay Pakistani fears, without defining what those fears are – a grand Indian design to break up the country may be! The editorial does make the right noises about Pakistan and the need for the US administration to keep the pressure on it so that it prosecutes those involved in the heinous Mumbai terror attacks. The K-word however does find its customary place, as it perhaps should in any discussion involving the two countries. But the editorial notes the possible difficulties in finding a solution to the issue “while Pakistan is battling the Taliban.” It can actually be argued that this is the right time for Islamabad to face the reality of the dangers from the Frankenstein monsters operating with impunity within its territory and strive for a negotiated settlement to the vexing issue rather than otherwise. The organic linkages between the demons that the Pakistan Army has taken on in certain parts of its territory and the pervasive culture of ‘jihad’ that official instruments of the state continue to employ to bleed India are ignored.
The argument about Kashmir also does not take account of the fact that it is just a symptom of the disease between the two countries and not the cause. The raison d’etre of Pakistan as a separate and distinct homeland of the major minority religion of the Indian sub-continent is too stark a reality to be ignored. The same logic is extended to imply that a functioning, stable, multi-ethnic, multi-religious and diverse India is an anathema to the very existence of Pakistan. Pakistani society is in itself a hotch-potch of mutually antagonistic ethnic and tribal groups seemingly held together by artificial hatred towards India. These tensions threaten to rip the country apart any time soon. Ignoring these factors to imply that all will be hunky-dory between the two countries if Kashmir were resolved is at once naïve and immature. The argument also resounds with similar such formulations that the Israeli-Palestinian conflict is the root cause of all that is wrong in the Middle East, ignoring such facts as the Iran-Iraq war, the cruel lack of development of economic and human resources, heavy-handed dictatorships and autocratic regimes, lack of freedom and democracy, among other factors.
On the issue of the Indo-US nuclear deal, the editorial reiterates the contention aired by the paper earlier as well as by non-proliferation ayatollahs that it frees up India to use its domestic sources of uranium solely for weapons production. It therefore urges the Obama administration to press India to cap its production of fissile material so that Pakistan can be pressured to do the same. Secretary Clinton is also urged to press India to pursue regional arms talks with Pakistan and China and sign the CTBT. This, at a time when the US has still not ratified the CTBT, a point acknowledged by Clinton in her interactions with the media on her visit here.
The agreement between Presidents Obama and Medvedev in Moscow to undertake further cuts in their weapons stockpile is held as an important negotiating point to convince India on this score. While the sequel to the START-1 treaty needs to be appreciated, as also the new administration’s right noises on disarmament, Indian concerns regarding these issues remain. Achieving comprehensive and universal nuclear disarmament is still a long way to go, despite the personal interventions of the US President who has made disarmament one of the pillars of his administration’s foreign policy. Continuing and robust nuclear force modernization programmes of nuclear weapon states are a huge stumbling block in any effort to convince New Delhi of the merits of arguments regarding FMCT and CTBT. Most reports also indicate that Pakistan has a greater stockpile of weapons material and more bombs in its arsenal than India, though it may not have as many delivery systems.
The editorial then derides India and Pakistan for not being able to define what they mean by a ‘credible, minimum’ nuclear deterrent. The US (and the then USSR) lurched alternatively from having a credible deterrent to massive retaliation to flexible response, all the time building thousands of weapons and delivery systems worth many billions of dollars without exactly seeming to know the exact numbers required to keep each other at bay. Concerns about the ‘missile gap’ (which turned out to be untrue in the first assessment carried out by the ‘whizkids’ led by the then Defence Secretary Robert McNamara) illustrate the difficulties in deciphering what the other person is up to in the nuclear realm, given the inherent nature of the nuclear weapon as not a war-fighting tool but a war-prevention ‘asset’. This is not to argue that India and Pakistan need another 50 years to figure out how not to fight a nuclear war but to keep things in perspective given the nature of the issues involved.
On Iran, acknowledging India’s “grudging” support to earlier UNSC Resolutions, it urges India to do more and hopes that India’s “arm will not be twisted this time around” in order to get this support. India has already stated that it is not in its interest to see any more nuclear weapon powers in its neighbourhood. At the same time, it has upheld Iran’s right to peacefully exploit the power of the atom. Given its strong civilisational and trade links, and Iran being Pakistan’s and Afghanistan’s neighbour – both countries of concern and vital interest to it, coupled with its energy requirements, it will be difficult to expect India to be more strident on the issue than what it has already been. Engaging and assuaging the Iranian regime’s sense of security and convincing/forcing it to give up its nuclear weapon ambitions, if any, through diplomatic and economic sanctions, seem to be the only way forward on the issue.
The editorial ends by lecturing India to “stop its pretensions to non-alignment” and calls on Clinton and Obama to encourage India to “behave” like a vital partner of the US “in building a stable world.” At the end of it, one begins to wonder if talking out loud, shooting with the mouth (or pen/keypad) and carrying a big stick (‘danda’ in Hindi) are the only characteristics of a great power. By the way, these are usually the defining hallmarks of a typical local cop in Delhi.
S. Samuel C. Rajiv is a researcher at the Institute for Defence Studies and Analyses (IDSA), New Delhi.
IDSA, July 25, 2009
An editorial in the New York Times on July 18, 2009 ahead of US Secretary of State Hillary Clinton’s visit to India - ‘Secretary Clinton goes to India’, has generated a lot of interest. A prominent Indian-American Democratic politician from Maryland, Kumar Barve, who is also a Majority leader in the House of Delegates, criticized the tone and tenor of the write-up as “haughty”, “condescending”, “arrogant”, and “patronizing.” Barve points out that the editorial’s first sentence, which defines India as “a longtime nuclear scofflaw,” is factually incorrect, as India had never violated any nuclear agreements it has signed.
The editorial goes on to describe India as a “major contributor to global warming,” which again can be contested very convincingly. India contributes less than 4 per cent of global emissions, and has one of the lowest per capita emissions in the world (less than 2 tonnes of CO2 per annum). The United States and China on the other hand are together responsible for 40 per cent of global emissions. In the same paragraph, it calls on India “to do a lot more to constrain its arms race with Pakistan and global proliferation.”
India and Pakistan are neither involved in any competitive arms racing nor can Pakistan afford to do so and go down the route of the Union of Soviet Socialist Republics. Indian’s defence budget as a percentage of GDP has come down from over 3 per cent in 1988-89 to under 2 per cent in 2008-09. This has to be seen against the background of defence budgets in India’s neighbourhood – nearly 5 per cent of GDP for Pakistan and 7 per cent for China. Given the lack of transparency in these figures, compounded by a whole range of internal and external security threats, arguments in favour of increasing India’s defence budget have actually more weight.
Urging India to take “more responsibility internationally,” the supporting arguments the editorial gives in favour of this ‘advice’ is the strong mandate secured by Prime Minister Manmohan Singh and the fact that the country has weathered a global recession better than others. The reasons responsible for the re-election of Dr. Singh are varied. This writer is not sure if taking on greater responsibilities overseas was a factor for the Indian electorate to choose him. To do more internationally to help the world ride out the financial storm is labouring the point. Despite the size of its economy (worth more than a trillion dollars), India still has a negligible share of world trade. Its strengths have primarily been its growing domestic demand, a high savings rate, among other factors, which have helped weather the crisis that has gripped the rest of the world.
The editorial then calls on India to help allay Pakistani fears, without defining what those fears are – a grand Indian design to break up the country may be! The editorial does make the right noises about Pakistan and the need for the US administration to keep the pressure on it so that it prosecutes those involved in the heinous Mumbai terror attacks. The K-word however does find its customary place, as it perhaps should in any discussion involving the two countries. But the editorial notes the possible difficulties in finding a solution to the issue “while Pakistan is battling the Taliban.” It can actually be argued that this is the right time for Islamabad to face the reality of the dangers from the Frankenstein monsters operating with impunity within its territory and strive for a negotiated settlement to the vexing issue rather than otherwise. The organic linkages between the demons that the Pakistan Army has taken on in certain parts of its territory and the pervasive culture of ‘jihad’ that official instruments of the state continue to employ to bleed India are ignored.
The argument about Kashmir also does not take account of the fact that it is just a symptom of the disease between the two countries and not the cause. The raison d’etre of Pakistan as a separate and distinct homeland of the major minority religion of the Indian sub-continent is too stark a reality to be ignored. The same logic is extended to imply that a functioning, stable, multi-ethnic, multi-religious and diverse India is an anathema to the very existence of Pakistan. Pakistani society is in itself a hotch-potch of mutually antagonistic ethnic and tribal groups seemingly held together by artificial hatred towards India. These tensions threaten to rip the country apart any time soon. Ignoring these factors to imply that all will be hunky-dory between the two countries if Kashmir were resolved is at once naïve and immature. The argument also resounds with similar such formulations that the Israeli-Palestinian conflict is the root cause of all that is wrong in the Middle East, ignoring such facts as the Iran-Iraq war, the cruel lack of development of economic and human resources, heavy-handed dictatorships and autocratic regimes, lack of freedom and democracy, among other factors.
On the issue of the Indo-US nuclear deal, the editorial reiterates the contention aired by the paper earlier as well as by non-proliferation ayatollahs that it frees up India to use its domestic sources of uranium solely for weapons production. It therefore urges the Obama administration to press India to cap its production of fissile material so that Pakistan can be pressured to do the same. Secretary Clinton is also urged to press India to pursue regional arms talks with Pakistan and China and sign the CTBT. This, at a time when the US has still not ratified the CTBT, a point acknowledged by Clinton in her interactions with the media on her visit here.
The agreement between Presidents Obama and Medvedev in Moscow to undertake further cuts in their weapons stockpile is held as an important negotiating point to convince India on this score. While the sequel to the START-1 treaty needs to be appreciated, as also the new administration’s right noises on disarmament, Indian concerns regarding these issues remain. Achieving comprehensive and universal nuclear disarmament is still a long way to go, despite the personal interventions of the US President who has made disarmament one of the pillars of his administration’s foreign policy. Continuing and robust nuclear force modernization programmes of nuclear weapon states are a huge stumbling block in any effort to convince New Delhi of the merits of arguments regarding FMCT and CTBT. Most reports also indicate that Pakistan has a greater stockpile of weapons material and more bombs in its arsenal than India, though it may not have as many delivery systems.
The editorial then derides India and Pakistan for not being able to define what they mean by a ‘credible, minimum’ nuclear deterrent. The US (and the then USSR) lurched alternatively from having a credible deterrent to massive retaliation to flexible response, all the time building thousands of weapons and delivery systems worth many billions of dollars without exactly seeming to know the exact numbers required to keep each other at bay. Concerns about the ‘missile gap’ (which turned out to be untrue in the first assessment carried out by the ‘whizkids’ led by the then Defence Secretary Robert McNamara) illustrate the difficulties in deciphering what the other person is up to in the nuclear realm, given the inherent nature of the nuclear weapon as not a war-fighting tool but a war-prevention ‘asset’. This is not to argue that India and Pakistan need another 50 years to figure out how not to fight a nuclear war but to keep things in perspective given the nature of the issues involved.
On Iran, acknowledging India’s “grudging” support to earlier UNSC Resolutions, it urges India to do more and hopes that India’s “arm will not be twisted this time around” in order to get this support. India has already stated that it is not in its interest to see any more nuclear weapon powers in its neighbourhood. At the same time, it has upheld Iran’s right to peacefully exploit the power of the atom. Given its strong civilisational and trade links, and Iran being Pakistan’s and Afghanistan’s neighbour – both countries of concern and vital interest to it, coupled with its energy requirements, it will be difficult to expect India to be more strident on the issue than what it has already been. Engaging and assuaging the Iranian regime’s sense of security and convincing/forcing it to give up its nuclear weapon ambitions, if any, through diplomatic and economic sanctions, seem to be the only way forward on the issue.
The editorial ends by lecturing India to “stop its pretensions to non-alignment” and calls on Clinton and Obama to encourage India to “behave” like a vital partner of the US “in building a stable world.” At the end of it, one begins to wonder if talking out loud, shooting with the mouth (or pen/keypad) and carrying a big stick (‘danda’ in Hindi) are the only characteristics of a great power. By the way, these are usually the defining hallmarks of a typical local cop in Delhi.
S. Samuel C. Rajiv is a researcher at the Institute for Defence Studies and Analyses (IDSA), New Delhi.
Is the White House's Organic Garden Toxic to Kids?
Is the White House's Organic Garden Toxic to Kids? By Jeff Stier, Esq.
No, according to toxicologists. It ought to be, according to environmentalists.
Thursday, July 23, 2009
This piece first appeared on July 23, 2009 on Forbes.com:
Michelle Obama's "organic" White House garden was designed to promote a green agenda. In order to provide safe food to children in the community, the First Lady wouldn't use chemical pesticides or fertilizers. Green groups cheered. In an ironic twist, all of that has now backfired.
The garden was created using a "green" approach, based on the belief that exposure to even minute levels of synthetic chemicals and contaminants such as lead is dangerous. Indeed, when environmental activist groups lobbied for a drastic consumer product safety law known as the Consumer Product Safety Improvement Act (CPSIA), they repeated the frightening but unscientific mantra that "there is no safe level of exposure" to the synthetic chemicals and contaminants they sought to ban.
The law passed, but it won't make anyone safer; the idea that the level of exposure doesn't matter flouts every known precept of toxicology. CPSIA is putting the squeeze on already threatened small businesses, forcing them to discard products with the tiniest trace of forbidden substances -- and it turns out the White House is getting a taste of the same medicine.
Earlier this month, The New York Times reported that the National Park Service found lead in the White House garden soil. In fact, tests found somewhere between 450% and 900% of the normal amount of lead in U.S. soil. The White House did not dispute the findings but defended the lead in the garden, calling it "completely safe." They are right. Though lead at higher levels can be dangerous, the garden, like the products banned by CPSIA, is well within safety limits. But the White House's defense rings of self-serving hypocrisy. Where were the White House reassurances when environmentalists were pushing CPSIA restrictions on other fronts?
Greenpeace, the Environmental Working Group, and others who were behind CPSIA -- along with their allies in Congress and in the administration -- manipulate the fears of concerned parents by contradicting established rules of toxicology, claiming that all lead needs to be eliminated. Aside from causing needless panic, their agenda could end up taking an expensive toll on industry and driving up prices for consumers.
The consequences of environmentalist fear-mongering are already spreading quickly. Bisphenol-A (BPA) and phthalates in plastics have been thoroughly demonized by junk-science reports -- so much so that people forget these chemicals have never been shown to be harmful to humans. Likewise, the organic approach endorsed by the White House unjustly contests the proven safety of properly applied chemical pesticides and fertilizers.
Now that they've seen the light, will the White House join thousands of small businesses and consumers calling for the repeal of the CPSIA? The Bush Food and Drug Administration found BPA to be safe, but the Obama FDA called for a do-over. Will their findings be consistent with the White House's newfound appreciation for basic tenets of toxicology? Will the new regime at the EPA halt its trumped-up health claims and halt their unprecedented attack on America's producers?
If so, something truly beneficial will have grown out of the White House's "organic" garden after all.
Jeff Stier is an associate director of the American Council on Science and Health.
No, according to toxicologists. It ought to be, according to environmentalists.
Thursday, July 23, 2009
This piece first appeared on July 23, 2009 on Forbes.com:
Michelle Obama's "organic" White House garden was designed to promote a green agenda. In order to provide safe food to children in the community, the First Lady wouldn't use chemical pesticides or fertilizers. Green groups cheered. In an ironic twist, all of that has now backfired.
The garden was created using a "green" approach, based on the belief that exposure to even minute levels of synthetic chemicals and contaminants such as lead is dangerous. Indeed, when environmental activist groups lobbied for a drastic consumer product safety law known as the Consumer Product Safety Improvement Act (CPSIA), they repeated the frightening but unscientific mantra that "there is no safe level of exposure" to the synthetic chemicals and contaminants they sought to ban.
The law passed, but it won't make anyone safer; the idea that the level of exposure doesn't matter flouts every known precept of toxicology. CPSIA is putting the squeeze on already threatened small businesses, forcing them to discard products with the tiniest trace of forbidden substances -- and it turns out the White House is getting a taste of the same medicine.
Earlier this month, The New York Times reported that the National Park Service found lead in the White House garden soil. In fact, tests found somewhere between 450% and 900% of the normal amount of lead in U.S. soil. The White House did not dispute the findings but defended the lead in the garden, calling it "completely safe." They are right. Though lead at higher levels can be dangerous, the garden, like the products banned by CPSIA, is well within safety limits. But the White House's defense rings of self-serving hypocrisy. Where were the White House reassurances when environmentalists were pushing CPSIA restrictions on other fronts?
Greenpeace, the Environmental Working Group, and others who were behind CPSIA -- along with their allies in Congress and in the administration -- manipulate the fears of concerned parents by contradicting established rules of toxicology, claiming that all lead needs to be eliminated. Aside from causing needless panic, their agenda could end up taking an expensive toll on industry and driving up prices for consumers.
The consequences of environmentalist fear-mongering are already spreading quickly. Bisphenol-A (BPA) and phthalates in plastics have been thoroughly demonized by junk-science reports -- so much so that people forget these chemicals have never been shown to be harmful to humans. Likewise, the organic approach endorsed by the White House unjustly contests the proven safety of properly applied chemical pesticides and fertilizers.
Now that they've seen the light, will the White House join thousands of small businesses and consumers calling for the repeal of the CPSIA? The Bush Food and Drug Administration found BPA to be safe, but the Obama FDA called for a do-over. Will their findings be consistent with the White House's newfound appreciation for basic tenets of toxicology? Will the new regime at the EPA halt its trumped-up health claims and halt their unprecedented attack on America's producers?
If so, something truly beneficial will have grown out of the White House's "organic" garden after all.
Jeff Stier is an associate director of the American Council on Science and Health.
What’s Different About the Obama Foreign Policy? The continuities with Bush are striking
What’s Different About the Obama Foreign Policy? By ELIOT COHEN
The continuities with Bush are striking. But what happens when diplomacy fails?
WSJ, Aug 03, 2009
President Barack Obama has put some miles on Air Force One. He and Secretary of State Hillary Clinton have made major foreign policy speeches. The national security team is in place. It’s time to make a preliminary judgment about Mr. Obama and the world. Just how different is this administration’s foreign policy from its predecessor? And will such departures where they exist make much difference?
Set aside the administration’s conceit of “smart power,” since only fools (read: Team Obama’s predecessors) would prefer stupid power. Continuity is the dominant note.
The Iraq drawdown moves more quickly and definitively than the Bush administration had desired, but it is not the repudiation the folks from MoveOn.org desired. The Bush-appointed Secretary of Defense Robert Gates and his Bush-promoted generals have implemented a build-up in Afghanistan that began in the last years of the previous administration. Strikes within Pakistan from unmanned aerial vehicles continue, and the administration reassuringly laces its rhetoric about al Qaeda with words like “eliminate,” “destroy” and “kill.”
Relationships with Europe have warmed. But that defrosting also began in the last years of the Bush administration, as it secured an increase in French forces in Afghanistan while easing that country’s re-entry into NATO, and backed a European-led response to the Russian invasion of Georgia.
Middle East peace process? Sure. Special envoys instead of large peace conferences, but the idea is the same.
Multinational diplomacy? Continuity there too, judging by the stacks of ineffective U.N. resolutions on North Korea and Iran.
Increased emphasis on foreign aid? We will see if the Obama administration can top the large and effective AIDS relief effort in Africa launched by President George W. Bush.
The rhetoric about the core of American foreign policy also remains consistent. Consider Mrs. Clinton’s recent speech at the Council on Foreign Relations. “The question is not whether our nation can or should lead, but how it will lead in the 21st century.” Not much bashfulness about American pre-eminence there. “We will not hesitate to defend our friends, our interests, and above all, our people vigorously and when necessary with the world’s strongest military.” Suspiciously muscular. And what animates the whole? “Liberty, democracy, justice and opportunity underlie our priorities.” Hardly Metternichean realism at work.
As for modesty about what America can do, Mrs. Clinton said this: “More than 230 years ago, Thomas Paine said, ‘We have it within our power to start the world over again.’ Today, in a new and very different era, we are called upon to use that power.” Sentiments to make an unrepentant neoconservative blush.
A few differences, however, do stand out. Mr. Obama has pledged to close Gitmo, once he figures out what to do with the enemy combatants detained there. Whereas the Bush administration only grudgingly accepted the perils of climate change, preferring the invisible hand of high energy prices and entrepreneurial innovation to combat it, the Obama administration has embraced cap and trade, with windfalls to favored clients and hidden taxes galore. It remains to be seen how Team Obama will bring the burgeoning Indian and Chinese economies, with their vast production of carbon, into a system of controls.
The Obama administration has shunned a free trade agreement with a critical democratic ally, Colombia, out of deference to its union constituencies—even as it tries to mend fences with Hugo Chávez’s Venezuela. It decided to begin its Middle East peacemaking by picking a gratuitous fight with another close ally, Israel.
It has also committed itself to the fantastic notion of abolishing nuclear weapons. It took the first step along that path to nowhere by starting an arms control process with Russia, without any evidence that doing so would produce Russian cooperation on anything at all, although it would further degrade America’s nuclear arsenal.
Mostly, though, the underlying structure of the policy remains the same. Nor should this surprise us: The United States has interests dictated by its physical location, its economy, its alliances, and above all, its values. Naive realists, a large tribe, fail to understand that ideals will inevitably guide American foreign policy, even if they do not always determine it. Moreover, because the Obama foreign and defense policy senior team consists of centrist experts from the Democratic Party, it is unlikely to make radically different judgments about the world, and about American interests in it, than its predecessors.
Differences in the execution of policy, however, make all the difference. Take, for example, outreach to Iran.
The Bush administration mulled this, and even tried it, diplomats warily meeting Iranians in various venues. But when Mr. Obama said to the leaders of Iran and other despotisms, “We will extend a hand if you are willing to unclench your fist” he did not expect to find the Supreme Leader’s paws sticky with the blood of freshly slaughtered protestors. Remarkably, rather than adjust the policy, the administration almost immediately released five Iranian “diplomats”—in truth, members of the Revolutionary Guard Corps—that we held in Iraq.
The Iranian policy shows a faith in diplomacy that might be understandable coming from process-obsessed diplomats who live for démarches, talking points, working groups, back channels, dialogues and summits.
But this policy will soon encounter the reality, a looming choice between war with Iran or acceptance of its status as a nuclear power. Is the administration prepared to act if diplomacy fails, as so often it does?
The confidence in diplomacy reflects a deeper theme here, namely, the repudiation of the Bush era. Even as stubborn facts cause the administration to claim many of the same executive privileges (e.g., a proper secrecy about some CIA activities) as its predecessor, and continue or expand the same policies, it suffers from its desire to be un-Bush.
Believing (incorrectly) that the Bush administration did not do diplomacy, it does so promiscuously, complete with such tomfoolery as a misspelled reset button given to the Russian foreign minister. Abhorring Bush’s freedom agenda, it will avoid anything of the kind until, of course, being Americans, the president, the vice president or the secretary of state blurt out their faith in universal ideals, and their indignation at the behavior of thugs, dictators and tyrants.
The biggest difference between the Obama and Bush administrations, though, is Messrs. Obama and Bush, or rather, their images at home and abroad. Mr. Obama is popular, and he dominates American foreign policy.
Brimming with confidence in his abilities and certain of the rightness of his views, he has undertaken a wildly ambitious agenda at home and abroad. He will bring peace between Arab and Israeli, wean Iran from its nuclear ambitions, restructure the international financial system, set us on the path to the abolition of nuclear weapons, reconcile Islam and Christendom, and end global warming, while introducing universal health care at home and bringing the country out of the deepest economic crisis since the Great Depression.
Lord Salisbury, British prime minister and foreign secretary in the last years of the 19th century, famously defined foreign policy as the art of drifting “lazily down a stream occasionally putting out a diplomatic boat-hook to avoid collisions.” This does not suit our times. But the patter of applause from a press whose sycophancy would embarrass a Renaissance court should not hide the dangers inherent in Mr. Obama’s style, which is characterized by an easy assumption of foreign policy omniscience and omnicompetence.
Some of his ambitions will come crashing into ruin, and surely ghastly surprises lie athwart our path. The Bush administration, many of its critics said, fell victim to hubris, the fatal arrogance punished, according to the ancients, by the goddess Nemesis. The Greeks would understand the irony if we discovered that cold-eyed lady, always hovering closer than politicians realize, turning an increasingly disapproving gaze on today’s White House.
Mr. Cohen teaches at Johns Hopkins University’s School of Advanced International Studies. He served as counselor of the State Department during the last two years of the George W. Bush administration.
The continuities with Bush are striking. But what happens when diplomacy fails?
WSJ, Aug 03, 2009
President Barack Obama has put some miles on Air Force One. He and Secretary of State Hillary Clinton have made major foreign policy speeches. The national security team is in place. It’s time to make a preliminary judgment about Mr. Obama and the world. Just how different is this administration’s foreign policy from its predecessor? And will such departures where they exist make much difference?
Set aside the administration’s conceit of “smart power,” since only fools (read: Team Obama’s predecessors) would prefer stupid power. Continuity is the dominant note.
The Iraq drawdown moves more quickly and definitively than the Bush administration had desired, but it is not the repudiation the folks from MoveOn.org desired. The Bush-appointed Secretary of Defense Robert Gates and his Bush-promoted generals have implemented a build-up in Afghanistan that began in the last years of the previous administration. Strikes within Pakistan from unmanned aerial vehicles continue, and the administration reassuringly laces its rhetoric about al Qaeda with words like “eliminate,” “destroy” and “kill.”
Relationships with Europe have warmed. But that defrosting also began in the last years of the Bush administration, as it secured an increase in French forces in Afghanistan while easing that country’s re-entry into NATO, and backed a European-led response to the Russian invasion of Georgia.
Middle East peace process? Sure. Special envoys instead of large peace conferences, but the idea is the same.
Multinational diplomacy? Continuity there too, judging by the stacks of ineffective U.N. resolutions on North Korea and Iran.
Increased emphasis on foreign aid? We will see if the Obama administration can top the large and effective AIDS relief effort in Africa launched by President George W. Bush.
The rhetoric about the core of American foreign policy also remains consistent. Consider Mrs. Clinton’s recent speech at the Council on Foreign Relations. “The question is not whether our nation can or should lead, but how it will lead in the 21st century.” Not much bashfulness about American pre-eminence there. “We will not hesitate to defend our friends, our interests, and above all, our people vigorously and when necessary with the world’s strongest military.” Suspiciously muscular. And what animates the whole? “Liberty, democracy, justice and opportunity underlie our priorities.” Hardly Metternichean realism at work.
As for modesty about what America can do, Mrs. Clinton said this: “More than 230 years ago, Thomas Paine said, ‘We have it within our power to start the world over again.’ Today, in a new and very different era, we are called upon to use that power.” Sentiments to make an unrepentant neoconservative blush.
A few differences, however, do stand out. Mr. Obama has pledged to close Gitmo, once he figures out what to do with the enemy combatants detained there. Whereas the Bush administration only grudgingly accepted the perils of climate change, preferring the invisible hand of high energy prices and entrepreneurial innovation to combat it, the Obama administration has embraced cap and trade, with windfalls to favored clients and hidden taxes galore. It remains to be seen how Team Obama will bring the burgeoning Indian and Chinese economies, with their vast production of carbon, into a system of controls.
The Obama administration has shunned a free trade agreement with a critical democratic ally, Colombia, out of deference to its union constituencies—even as it tries to mend fences with Hugo Chávez’s Venezuela. It decided to begin its Middle East peacemaking by picking a gratuitous fight with another close ally, Israel.
It has also committed itself to the fantastic notion of abolishing nuclear weapons. It took the first step along that path to nowhere by starting an arms control process with Russia, without any evidence that doing so would produce Russian cooperation on anything at all, although it would further degrade America’s nuclear arsenal.
Mostly, though, the underlying structure of the policy remains the same. Nor should this surprise us: The United States has interests dictated by its physical location, its economy, its alliances, and above all, its values. Naive realists, a large tribe, fail to understand that ideals will inevitably guide American foreign policy, even if they do not always determine it. Moreover, because the Obama foreign and defense policy senior team consists of centrist experts from the Democratic Party, it is unlikely to make radically different judgments about the world, and about American interests in it, than its predecessors.
Differences in the execution of policy, however, make all the difference. Take, for example, outreach to Iran.
The Bush administration mulled this, and even tried it, diplomats warily meeting Iranians in various venues. But when Mr. Obama said to the leaders of Iran and other despotisms, “We will extend a hand if you are willing to unclench your fist” he did not expect to find the Supreme Leader’s paws sticky with the blood of freshly slaughtered protestors. Remarkably, rather than adjust the policy, the administration almost immediately released five Iranian “diplomats”—in truth, members of the Revolutionary Guard Corps—that we held in Iraq.
The Iranian policy shows a faith in diplomacy that might be understandable coming from process-obsessed diplomats who live for démarches, talking points, working groups, back channels, dialogues and summits.
But this policy will soon encounter the reality, a looming choice between war with Iran or acceptance of its status as a nuclear power. Is the administration prepared to act if diplomacy fails, as so often it does?
The confidence in diplomacy reflects a deeper theme here, namely, the repudiation of the Bush era. Even as stubborn facts cause the administration to claim many of the same executive privileges (e.g., a proper secrecy about some CIA activities) as its predecessor, and continue or expand the same policies, it suffers from its desire to be un-Bush.
Believing (incorrectly) that the Bush administration did not do diplomacy, it does so promiscuously, complete with such tomfoolery as a misspelled reset button given to the Russian foreign minister. Abhorring Bush’s freedom agenda, it will avoid anything of the kind until, of course, being Americans, the president, the vice president or the secretary of state blurt out their faith in universal ideals, and their indignation at the behavior of thugs, dictators and tyrants.
The biggest difference between the Obama and Bush administrations, though, is Messrs. Obama and Bush, or rather, their images at home and abroad. Mr. Obama is popular, and he dominates American foreign policy.
Brimming with confidence in his abilities and certain of the rightness of his views, he has undertaken a wildly ambitious agenda at home and abroad. He will bring peace between Arab and Israeli, wean Iran from its nuclear ambitions, restructure the international financial system, set us on the path to the abolition of nuclear weapons, reconcile Islam and Christendom, and end global warming, while introducing universal health care at home and bringing the country out of the deepest economic crisis since the Great Depression.
Lord Salisbury, British prime minister and foreign secretary in the last years of the 19th century, famously defined foreign policy as the art of drifting “lazily down a stream occasionally putting out a diplomatic boat-hook to avoid collisions.” This does not suit our times. But the patter of applause from a press whose sycophancy would embarrass a Renaissance court should not hide the dangers inherent in Mr. Obama’s style, which is characterized by an easy assumption of foreign policy omniscience and omnicompetence.
Some of his ambitions will come crashing into ruin, and surely ghastly surprises lie athwart our path. The Bush administration, many of its critics said, fell victim to hubris, the fatal arrogance punished, according to the ancients, by the goddess Nemesis. The Greeks would understand the irony if we discovered that cold-eyed lady, always hovering closer than politicians realize, turning an increasingly disapproving gaze on today’s White House.
Mr. Cohen teaches at Johns Hopkins University’s School of Advanced International Studies. He served as counselor of the State Department during the last two years of the George W. Bush administration.
Sunday, August 2, 2009
Charter schools, The Ujima Village Academy, teachers' unions
Pay Your Teachers Well. WSJ Editorial
Their children’s hell will slowly go by.
The Wall Street Journal, p A10, Aug 03, 2009
The conflicting interests of teachers unions and students is an underreported education story, so we thought we’d highlight two recent stories in Baltimore and New York City that illustrate the problem.
The Ujima Village Academy is one of the best public schools in Baltimore and all of Maryland. Students at the charter middle school are primarily low-income minorities; 98% are black and 84% qualify for free or reduced-price school meals. Yet Ujima Village students regularly outperform the top-flight suburban schools on state tests. In 2006, 2007 and 2008, Ujima Village students earned the highest eighth-grade math scores in Maryland. Started in 2002, the school has met or exceeded state academic standards every year—a rarity in a city that boasts one of the lowest-performing school districts in the country.
Ujima Village is part of the KIPP network of charter schools, which now extends to 19 states and Washington, D.C. KIPP excels at raising academic achievement among disadvantaged children who often arrive two or three grade-levels behind in reading and math. KIPP educators cite longer school days and a longer school year as crucial to their success. At KIPP schools, kids start as early as 7:30 a.m., stay as late as 5 p.m., and attend school every other Saturday and three weeks in the summer.
However, Maryland’s charter law requires teachers to be part of the union. And the Baltimore Teachers Union is demanding that the charter school pay its teachers 33% more than other city teachers, an amount that the school says it can’t afford. Ujima Village teachers are already paid 18% above the union salary scale, reflecting the extra hours they work. To meet the union demands, the school recently told the Baltimore Sun that it has staggered staff starting times, shortened the school day, canceled Saturday classes and laid off staffers who worked with struggling students. For teachers unions, this outcome is a victory; how it affects the quality of public education in Baltimore is beside the point.
Meanwhile, in New York City, some public schools have raised money from parents to hire teaching assistants. Last year, the United Federation of Teachers filed a grievance about the hiring, and city education officials recently ordered an end to the practice. “It’s hurting our union members,” said a UFT spokesman, even though it’s helping kids and saving taxpayers money. The aides typically earned from $12 to $15 an hour. Their unionized equivalents cost as much as $23 an hour, plus benefits.
“School administrators said that hiring union members not only would cost more, but would also probably bring in people with less experience,” reported the New York Times. Many of the teaching assistants hired directly by schools had graduate degrees in education and state teaching licenses, while the typical unionized aide lacks a four-year degree.
The actions of the teachers unions in both Baltimore and New York make sense from their perspective. Unions exist to advance the interests of their members. The problem is that unions present themselves as student advocates while pushing education policies that work for their members even if they leave kids worse off. Until school choice puts more money and power in the hands of parents, public education will continue to put teachers ahead of students.
Their children’s hell will slowly go by.
The Wall Street Journal, p A10, Aug 03, 2009
The conflicting interests of teachers unions and students is an underreported education story, so we thought we’d highlight two recent stories in Baltimore and New York City that illustrate the problem.
The Ujima Village Academy is one of the best public schools in Baltimore and all of Maryland. Students at the charter middle school are primarily low-income minorities; 98% are black and 84% qualify for free or reduced-price school meals. Yet Ujima Village students regularly outperform the top-flight suburban schools on state tests. In 2006, 2007 and 2008, Ujima Village students earned the highest eighth-grade math scores in Maryland. Started in 2002, the school has met or exceeded state academic standards every year—a rarity in a city that boasts one of the lowest-performing school districts in the country.
Ujima Village is part of the KIPP network of charter schools, which now extends to 19 states and Washington, D.C. KIPP excels at raising academic achievement among disadvantaged children who often arrive two or three grade-levels behind in reading and math. KIPP educators cite longer school days and a longer school year as crucial to their success. At KIPP schools, kids start as early as 7:30 a.m., stay as late as 5 p.m., and attend school every other Saturday and three weeks in the summer.
However, Maryland’s charter law requires teachers to be part of the union. And the Baltimore Teachers Union is demanding that the charter school pay its teachers 33% more than other city teachers, an amount that the school says it can’t afford. Ujima Village teachers are already paid 18% above the union salary scale, reflecting the extra hours they work. To meet the union demands, the school recently told the Baltimore Sun that it has staggered staff starting times, shortened the school day, canceled Saturday classes and laid off staffers who worked with struggling students. For teachers unions, this outcome is a victory; how it affects the quality of public education in Baltimore is beside the point.
Meanwhile, in New York City, some public schools have raised money from parents to hire teaching assistants. Last year, the United Federation of Teachers filed a grievance about the hiring, and city education officials recently ordered an end to the practice. “It’s hurting our union members,” said a UFT spokesman, even though it’s helping kids and saving taxpayers money. The aides typically earned from $12 to $15 an hour. Their unionized equivalents cost as much as $23 an hour, plus benefits.
“School administrators said that hiring union members not only would cost more, but would also probably bring in people with less experience,” reported the New York Times. Many of the teaching assistants hired directly by schools had graduate degrees in education and state teaching licenses, while the typical unionized aide lacks a four-year degree.
The actions of the teachers unions in both Baltimore and New York make sense from their perspective. Unions exist to advance the interests of their members. The problem is that unions present themselves as student advocates while pushing education policies that work for their members even if they leave kids worse off. Until school choice puts more money and power in the hands of parents, public education will continue to put teachers ahead of students.
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