The Organic Food Nutrition Wars. By Joseph D. Rosen, Ph.D.
ACSH, Sep 08, 2009
A few weeks ago, the world of organic food proponents was rocked by new research that organic food was not any more nutritious than conventionally-grown food. Consumers have long been interested in knowing if the extra money they have been shelling out for organic food is justified and the subject, therefore, is of much interest.
A Little Bit of Background
Food nutrients include minerals (trace elements), vitamins and antioxidants. Up until about ten years ago, people interested in nutritional differences between organic and conventional food concentrated on nutrients such as minerals and vitamins. Nitrates were not thought of as a nutrient but were included in many studies. In recent years, emphasis has shifted to differences in antioxidant content.
Dating back to 1924, numerous studies dealing with the nutritive advantages, or lack thereof, of organic food have been published. These studies were reviewed by Katrin Woese and her colleagues in 1997 (Journal of the Science of Food and Agriculture Volume 74, pp. 281-293), Virginia Worthington in 2001 (Journal of Alternative and Complementary Medicine, Volume 7, pp. 161-173), Diane Bourn and John Prescott in 2002 (Critical Reviews in Food science and Nutrition, Volume 42, pp. 1-34) and Faidon Magkos and co-authors in 2003 (International Journal of Food Sciences and Nutrition, Volume 34, pp. 357-371). Except for higher nitrate content and lower vitamin C content in some conventionally-grown vegetables, Woese et al. concluded (after examining about 150 publications) that “with regard to all other desirable nutritional values...no major differences were observed” between organically- and conventionally-grown vegetables. Worthington’s review of forty-one publications noted increased vitamin C, magnesium, iron and phosphorus as well as lower nitrate content in organic vegetables. She found no differences between organic and conventional vegetables for any other minerals or vitamins.
Bourn and Prescott looked at forty-nine publications and found that “with the possible exception of nitrate content, there is no strong evidence that organic and conventional foods differ in concentrations of various nutrients.” (They also reported that organic food did not taste any better than conventional food in blind taste tests.) The Magkos review concluded that “a balanced diet rich in fruits and vegetables, and adequate in foods from the other groups, is unequivocally able to maintain and improve health, regardless of its organic or conventional origin.” A recent article in the Journal of the Science of Food and Agriculture concluded organic food did not contain any more trace elements than conventional food.
In recent years, the emphasis has shifted to antioxidants. It is widely believed that antioxidant chemicals may be important in the control of free radicals, chemical species that we produce as part of normal metabolic processes, which may be responsible for the initiation of certain cancers as well as contributing to hardening of the arteries. There are several types of antioxidants found in food: beta-carotene, lycopene, vitamin C; phenolic acids such as caffeic acid and flavonoids such as quercetin. Phenolic acids and flavonoids are many times measured together and the results are referred to as total phenols.
The Soil Association
The Soil Association is a British charity (roughly the same as a not for profit organization in the US) dedicated to the growth of the organic food industry. According to the latest available figures, the association derives its annual income, about $31M, from grants, certification of organic farms, membership dues, sales of agricultural reports and donations. More than one-third of its income is derived from certifying organic farms.
The association was founded in 1946 by Lady Eve Balfour who had become a convert to organic farming. She started a thirty-year experiment at her farm at Haughey in order to prove the nutritional superiority of organic food. Experimental results, however, failed to provide any evidence for this hypothesis. In spite of that setback, the association has, over the years, claimed that organic food is nutritionally superior to conventional food.
The current policy director of the association is Lord Peter Melchett . He is the owner of an 890-acre organic farm in the UK and served as Executive Director of Greenpeace UK between 1989 and 2000. He is the grandson of the founder of Imperial Chemicals Industry and the son of the founder of the British Steel Corporation. In 1999, Lord Melchett was arrested for trespassing and destroying crops on a farm where genetically modified crops were being experimentally grown. He beat the rap by convincing the jurors he feared that pollen from the GM crops would “contaminate” the crops on his own farm.
A Great Day for Lord Melchett
October 30, 2007 was a great day for Lord Melchett. For the past few days, the major London newspapers had carried stories about new discoveries proving the nutritional superiority of organic food. These results had been announced by Dr. Carlo Leifert, Professor of Ecological Agriculture at the University of Newcastle and the head of the Tesco Centre for Organic Agriculture which he set up in 2001 with an $870,000 investment from Tesco, the largest seller of organic food in the UK. Dr. Leifert also headed the Quality Low Input Food (QLIF) Project, a four-year, $25M project funded by the European Union that “aims to improve quality, ensure safety and reduce cost along the organic and low input food supply chains through research, dissemination and training activities.” The project included scientists from thirty-three research institutions, companies and universities throughout Europe
According to information supplied by Dr. Leifert, organic fruits and vegetables were grown alongside conventional produce on a 725-acre experimental farm near Newcastle University, and their nutritional qualities were compared. Professor Leifert said that the organic produce contained “up to 40% more beneficial compounds in vegetable crops and up to 90% more in milk.” High levels of minerals such as iron and zinc were also found in organic produce.
In addition, Leifert said that moving to organic food was like “eating an extra portion of fruit and vegetables every day” and implied that conventional produce was responsible for obesity and heart disease. He told the BBC that the study, whose results were “due to be published over the next twelve months,” showed “more of certain nutritionally desirable compounds and less of the baddies in organic foods,” but “the study showed some variations,” the nature of which he did not explain.The UK media were ecstatic. “Eat your words, all who scoff at organic food,” headlined The Times; “Organic food is healthier and safer, four-year EU investigation shows,” wrote The Independent; “Organic produce ‘better for you,’” said the BBC. The Telegraph chimed in with “Organic food better than ordinary produce,” while The Guardian used the more subdued headline “Organic food is healthier: study.” None of the media reporters asked Leifert for independent proof of these findings, which he claimed would be published within the next twelve months (i.e., by November 1, 2008).
The fact that Leifert had no data to back up his claims did not appear to bother the media reporters, who were much more interested in the running battle between the UK government and the Soil Association, intimating that the government would soon have to recognize that it was wrong. In an opinion piece that appeared in the The Guardian on October 30, Melchett chided the FSA and its chief scientist, Andrew Wadge to admit that organic food was better.
By this time, the FSA had commissioned an independent group of scientists to study and evaluate the relevant literature dealing with nutritional differences, a. study that was vitally needed to confirm or to counter assertions by the Soil Association and the media that organic food was nutritionally superior to conventional food.
A Press Release from the Soil Association -- October 30, 2007
Also on that day, the Soil Association weighed in with a demand that the FSA “publicly acknowledge the nutritional benefits of organic food,” a demand that was based on five points that essentially summarized the Soil Association’s case:
1-a 2001 report written by an “independent nutritionist” who “reviewed over 400 scientific papers” and found “indicative evidence” for higher levels of “vitamin C, minerals and trace elements”
2-three presentations by French and Polish scientists at a QLIF Symposium held at the University of Hohenheim in Germany March 20-23, 2007 (according to the UK press, higher concentrations of antioxidants were found in organic peaches, tomatoes and apples)
3-a peer-reviewed article written by University of California scientists suggesting that organic kiwis had more vitamin C and antioxidants than conventional kiwis
4-research at several UK farms that found higher levels of “beneficial” vitamins, antioxidants and omega-3 fatty acids in the milk of cows that were raised on grass and clover
5-the results from the QLIF study announced by Dr. Leifert just a day or two earlier that were going to be published in peer-reviewed journals during the next twelve months.
A Closer Look at the Soil Association October 30, 2007 Press Release
1. The 2001 Report
In 2000, Sir John Krebs, at that time Head of the UK Food Standards Agency (the FSA was set up to ensure food safety and to protect consumer interest) said that there was not enough scientific information available to be able to say that organic food is nutritionally different from non-organic food. In order to counter the damage done by the FSA pronouncement, the Soil Association commissioned a report titled “Organic Farming, Food Quality, and Human Health: a review of the Evidence.” The author, Shane Heaton, was described as a nutritionist, but there is no record of his ever graduating with a degree in nutrition or any other scientific discipline, for that matter.
An August 6th press release (no longer available on the Internet) accompanied the report and claimed that “over 400 published papers” were examined and that “on average” organic crops “are not only higher in vitamin C and essential minerals,” but also higher in chemicals that “are often beneficial in the treatment of cancer.” A second press release claimed that “alternative cancer therapies have achieved good results relying on the exclusive consumption of organic food.” One would think that the report would spend more than 105 words discussing a subject of such import. The major UK newspapers treated the report favorably, using only the Soil Association August 6th press release for information.
Had the reporters read the actual report instead of relying on the Soil Association for analysis of its own publication, they would have found that of the over 400 published papers only ninety-nine compared organic to conventional food and seventy of these were rejected by the author because they did not fit his self-imposed criteria for valid comparisons or for proper organic certification. Of the twenty-nine remaining studies, only sixteen had been published in peer-reviewed journals. Five publications dealing with antioxidant differences were found, but only two of them were published in scientific journals and the reported differences were not statistically significant.
Note: Pre-publication peer review is extremely important in science because it allows other scientists to examine the research methodology that was used and to determine if the manuscript’s conclusions are warranted based on the data submitted. Responsible scientists do not pay attention to published information that has not gone through the peer-review process. In addition, results must show statistical significance to be considered as meaningful.
So what had been touted as a thorough review of the literature turned out to be a review of only sixteen articles. And even in these precious few studies, the results were inconsistent. Combining all reports that fit the author’s criteria for consideration revealed that organic produce had higher levels of minerals in only seven out of fourteen studies and higher levels of vitamin C in only seven out of thirteen studies, hardly a reason to rush out to the store for over-priced organic food.
2. Reports from the QLIF Symposium
On March 28, 2007, The Daily Mail (“Proof at last that organic apples can be better for you”) said that studies in several countries had shown organic tomatoes, apples and peaches contained greater concentrations of nutrients “said to protect the body against heart attacks and cancer-causing chemicals.”
Later that week, The Independent (“It’s not just a fad -- organic food is better for you, say scientists”) reported new research that organically grown peaches and apples contained higher levels of chemicals that “protect against heart attacks and cancer” than conventional fruits. Both newspaper articles implied that UK government officials were wrong in not admitting how healthful organic food was, and both articles contained errors which indicated to me that neither newspaper reporter had ever attended the symposium at which these results were presented or had even spoken to the scientists who made the presentations.
Reading the summaries written by the scientists, however, provides more accurate accounts of the symposium. For example, one QLIF investigator wrote that organic peaches grown in 2004 had 46% higher total phenol content than conventional peaches, but there were “no significant differences in 2005.”
If you do a little simple algebra with the data provided by the investigators, you can calculate that conventional peaches contained 30% more total phenolics than the organic peaches in 2005. This information is available on the Internet but was not in any of the newspaper stories, Soil Association writings or the 2008 Organic Center report (which will be discussed later).
A second lecture compared organic and conventionally-grown tomatoes cultivated at different farms in Poland. But the distance (thirty-six miles) between the farms and the fact that the organic tomatoes were grown in a soil of a different type than the soil in which the conventional tomatoes were grown made meaningful interpretation of the results impossible. A graduate student involved with this research “found different levels of the nutritional compounds in every year of her studies” and “concluded that organic production methods did not guarantee a higher quality product”
A third presentation reported higher antioxidant capacity in three different varieties of varieties of organic apples, but no statistical data was given, making the data useless. Some of the data made no sense. For example, total polyphenol content, an important factor in antioxidant capacity, was not significantly higher in the organic than in the conventional apples.
More than two years have passed since these three presentations were made but none has ever been published in a peer-reviewed scientific journal.
3. Comparison Between Organic and Conventional Kiwis
The University of California investigators made two serious errors. First, the test they used measured not only antioxidants but also vitamin C. They did not subtract vitamin C content (which was 14% higher in the organic kiwis) from the antioxidant (17% higher in the organic kiwis) content, thus coming up with too high a value for organic kiwi antioxidant content. Second, antioxidant concentrations are usually higher in the peel of a fruit than in the flesh. In this experiment, the organic kiwi peels were 35% thicker than the peels from the conventional kiwis, suggesting that most, if not all, of the antioxidant increase observed in the organic kiwis were in the peel. Since kiwi peels are inedible, it would have been more meaningful to measure only the edible portions of the kiwi.
4. Omega-3 Fatty Acids
Research published between 2003 and 2006 reported increased (about 64-71%) amounts of an omega-3 fatty acid, alpha-linoleic acid (ALA), in the milk of cows that had grazed on red clover and grass as opposed to those cows that were fed corn and hay. Omega-3 fatty acids have gotten good press in recent years, and there is some evidence that two of these acids, eicosapentanoic acid (EPA) and docosahexaenoinoic acid (DHA), which are found in salmon and tuna fish, may be helpful in preventing cancer and heart disease. ALA is also an omega-3 fatty acid but is not the same as EPA or DHA. A publication authored by world-class epidemiologists has warned that while EPA and DHA may reduce the risk of advanced prostate cancer, ALA may increase the risk. True, ALA is converted to EPA and DHA in humans, but the conversion is very low (about 8%). The bottom line is that a huge ALA increase in cow milk is meaningless because ALA is found in very small amounts in milk to begin with and increasing that small amount by 71% will not result in any appreciable health benefit.
For example, nutritionists recommend that we eat two three-ounce portions of salmon per week. If we preferred instead to get our EPA and DHA from conventional milk, we would have to drink 185 quarts of conventional milk every week. Drinking organic milk would cut our weekly intake to 110 quarts.
But the pro-organic folks were undaunted. Sally Bagnal of the UK’s Organic Milk Suppliers Cooperative called on the FSA to “start recommending organic milk as part of a healthy diet.” Kathryn Ellis, a University of Glasgow scientist who was the lead author on one of the studies, published an open letter signed by thirteen other scientists requesting the FSA change its stance on organic milk and “recognize that there are differences that exist between organic and nonorganic milk.”
In the USA, the Whole Foods website proclaimed that the UK studies confirmed that “organic milk is a good source of omega-3”, neglecting to mention that the organic milk you would need to drink was also a good source of saturated fat and that ALA had been linked to advanced prostate cancer.
(Another article on this subject was published in 2008 in the Journal of the Science of Food and Agriculture by scientists from Newcastle University and the Danish Institute for Agricultural Science (DIAS). Large increases in contents of vitamin E (33%), beta-carotene (30%), lutein (67%), zeaxantin (45%) conjugated linoleic acid (60%), and the omega-3 fatty acid, ALA (39%) were found in milk from cows that had been raised on pasture grass and clover as compared to cows fed standard grain. Again, the UK media sprang into action. “Drinking organic milk may cut the risk of heart disease and cancer” headlined the Daily Mail. Similar reports were also published in the other major UK newspapers except for The Guardian, which apparently had caught on to the scam. An article published by the UK National Health Service explaining that it had “not been demonstrated that any type of milk protects against cancer or heart disease” was totally ignored by the media. And, as I pointed out in The Guardian, a person would have to drink between 3 and 170 quarts of organic milk every day in order to get the currently recommended quantities for these nutrients. What’s more, the consumer would have to drink milk that contained a full complement of saturated fats. There is nothing magical about the organic milk produced at the Newcastle University farm -- when you remove the artery-clogging saturated fats you also remove all the “beneficial” constituents.)
5. The QLIF Four-Year European Union Project “Results”
By the end of this August, it will have been twenty-two months since Dr. Leifert told reporters that peer-reviewed publications detailing the nutritional superiority of organic produce would be published within a year. If any of these reporters had bothered to ask just a few questions, they would have discovered, as had Dr. Todd Carroll of the Skeptik’s Dictionary, that there was no new data for produce! (Note: you will have to scroll down to the section headed by “update Nov. 2, 2007” in the Skeptik’s Dictionary for this information). About a year later, Leifert confirmed this when he told the Montreal Gazette that “the data are quite clear on livestock products,” but there was less evidence for the nutritional benefits of organic produce. “It’s not as clear a story on the cropping side,” Leifert said. And if there is still any doubt, the QLIF Workshop 1 Report of June 2008 stated, “while there is a trend for more of the nutritionally desirable secondary metabolites (i.e., antioxidants) to be found at higher levels...some compounds were unaffected and some were increased when conventional fertilization and/or crop protection schemes were applied.” In other words, when ALL the data are examined, conventional crops are just as high in beneficial nutrients, if not higher, than organic crops.
A Summary of the Soil Association’s Five Points
The five points picked by the Soil Association to advance its argument that organic food is nutritionally superior fall apart upon examination. The 2001 report turned out to be eighty-eight pages of nothing; the milk studies demonstrated that organic production methods give much higher quantities of chemicals that some consider good for us, but not high enough to make us healthier; the kiwi study had two serious flaws that made its conclusions questionable; there was a wide gulf between the Soil Association interpretations of the QLIF peach, tomato and apple studies and what the scientists actually reported; and the Leifert study was actually a classic study of media manipulation.
The Empire Strikes Back
The conclusions of the scientific review commissioned by the FSA to respond to the Soil Association attacks were made public on July 29, 2009. According to Dr. Alan Dangour, a senior lecturer in nutrition at the London School of Hygiene and Tropical Medicine, after a thorough review of all the available literature, he and his research group found “no evidence of a difference in nutrient quality between organically and conventionally produced foodstuffs.” Unlike Dr. Leifert and some of the QLIF investigators, Dr. Dangour laid out his results in a respected, peer-reviewed publication, The American Journal of Clinical Nutrition for comment and criticism.
Criticism was not long in coming. Leading the charge, of course was the Soil Association. Their major complaint was that the study “failed to include the results” of the QLIF project and the “publication, so far, of more than 100 scientific papers.”
Never mind that these publications are not concerned with nutritional differences between organic and conventional produce. Writing in The Guardian on August 1, Dr. Ben Goldacre found that almost all of these publications were “irrelevant” and the overwhelming majority of them were “unpublished conference reports.” But this had no effect whatsoever on Melchett who wrote that “The full results of the five years of EU research, presented at a conference in April, and including a positive review of nutritional differences, will be peer-reviewed and published next spring.”
The Soil Association also complained that the Dangour study failed to consider pesticides, but Dangour was asked to look only at Soil Association claims about nutritional superiority. In fact, it was the Soil Association’s unfounded claims about nutritional superiority that led to this study in the first place. Lord Melchett had the chutzpah to tell the BBC that the Dangour review “rejected almost all of the existing studies of comparisons between organic and non-organic nutritional differences,” ignoring that many of those studies were of poor scientific quality, omitted important information or found large increases of constituents that would be of no benefit to human health. Leifert, for his part, thought the “conclusions of the study were selective” -- apparently because his non-existent data was not included.
The Organic Center is Heard From
On this side of the Atlantic, the Organic Center (OC) has also been trying to convince us of the nutritional superiority of organic food. The OC is a “not for profit” organization supported mainly by the organic food industry which is now controlled by the same large food companies we were previously told were poisoning us. These relationships may be found here.
The Organic Center is an entity set up by the Organic Trade Association (OTA) for the promotion and the sale of organic food. According to the Organic Center’s website, donors of $50,000 or more include Aurora Organic Dairy, Horizon Organic, Organic Valley Cooperative, Silk Soy, Stonyfield Farm, White Wave and Whole Foods Market, the leading organic food retailer in the world. Individual donors of $50,000 and above include Walter Robb, co-president of Whole Foods; Eugene Kahn, a General Mills vice president and founder of their subsidiary, Cascadian Farm; Mark Retzloff, founder of Horizon Dairies; and Steve Demos, president of combined operations for White Wave, Horizon Organics and Dean Foods.
In a 2008 report, the OC claimed organic food was 25% more nutritious than conventional food, a finding at odds with the Dangour study. That finding is also at odds with my own evaluation of the OC’s report, in which I pointed out how they erroneously arrived at conclusions based on results from publications that had not been peer-reviewed and contained data that was not statistically significant. And, just like the Soil Association, the OC report ignored results not to their liking. A detailed version of my criticisms was published in July 2008 by the American Council on Science and Health. The OC rebuttal is here and my reply to their rebuttal is here.
The OC had several complaints about the Dangour report. One complaint was that an important nutrient quality, total antioxidant capacity, was not addressed by the British scientists. However, the OC listed only eight publications in this category in their own report. One was favorable to conventional food; five were not peer-reviewed; one contained data favorable to both organic and conventional pac choi, but the OC did not include the latter; one was the questionable kiwi study that I discussed earlier.
A second complaint was that the Dangour study found no differences in the phenolic content of the “twenty-five” matched crops that the OC had studied. But according to the OC report, they had identified only twenty-one such studies. There were no statistically significant data for thirteen of the matched crops. Of the remaining eight studies, two were not peer-reviewed; one was the kiwi study; another was a study of organic flea- beetle infested pac choi, which may have contained more phenolics but was inedible.
Dietary Nitrate Is Not Only Safe...
A third complaint was that Dangour and his group did not consider lower nitrate concentrations in organic crops, supposedly a nutritional advantage. The problem with nitrate, according to the OC is that “most scientists” (was there an election I missed?) regard nitrate “as a public health hazard because of the potential for cancer-causing chemicals to be formed in the human GI tract.”
Several months ago I called the OC’s attention to the fact that nitrate in conventional food was not as bad as they were making it out to be, but they chose to ignore my arguments. Several months later they still maintain this fiction, so I’ll try again. Perhaps some of the references I’ve added will cause them to change their minds.
There is no epidemiological evidence for a connection between nitrate in food and human cancer. Current scientific belief is that people who eat lots of fruits and vegetables (even with nitrates) have lower cancer rates than those who do not. The European Food Safety Authority has declared that “the estimated exposures to nitrate from vegetables are unlikely to result in appreciable health risks.”
Carlo Leifert, when he was still publishing results in peer-reviewed scientific journals was a key member of a team that found no epidemiological evidence for an increased risk of gastric and intestinal cancer in population groups with high nitrate intake.
...It’s Good for You!!
He and his co-workers also discovered that nitrate fueled an important mammalian resistance mechanism against infectious disease. A study published in the New England Journal of Medicine reported a statistically significant drop in systolic blood pressure after ingestion of sodium nitrate. Drinking a glass or two of beet juice substantially lowered blood pressure. Scientists writing in the Proceedings of the National Academy of Sciences reported that mice fed a high nitrate/nitrite diet were more likely to survive an induced heart attack.
Nitrate has also been shown to protect against stomach ulcers and the gastric side effects of aspirin and other non-steroidal anti-inflammatory drugs. A comprehensive review in The American Journal of Clinical Nutrition concludes that “the data on nitrate and nitrite contents of vegetables and fruit bolster the strength of existing evidence to recommend their consumption for health benefits” and that plant origin nitrates and nitrites “play essential physiologic roles supporting cardiovascular health and gastrointestinal immune function.” An on-line article published recently in _Medical Hypotheses_ suggested that ingestion of high nitrate-containing fruits and vegetables such as pomegranates, lettuce, spinach and beets might be useful in lowering obesity, diabetes, hypertension, and coronary artery disease.
If any group has reason to complain to Professor Dangour, it’s the conventional farmers who use fertilizers that deliver high nitrate doses to soil. It turns out that high dietary nitrate is not only safe, but provides a health benefit that the Dangour team was apparently unaware of.
Conclusions
Table 1 gives a concise summary of the numerical claims for the nutritional superiority of organic produce, claims that have no basis in fact. Organic food proponents have learned that they do not need to provide evidence for their assertions. All they have to do is publish any plausible evidence, keep on repeating it ad infinitum and it will be magnified by news organizations and their self-serving commercial organic and environmental allies on the Internet.
Table1. Numerical Estimates for Nutritional Superiority of Organic Produce
AUTHOR: Brandt, 2001
CLAIM: 10-50% more nutrients
COMMENT: No data, just a “guess”
AUTHOR: The Organic Center, 2005CLAIM: 30% more nutrientsCOMMENT: Only 5 studies: 2 did not meet standards for inclusion in 2008 OC report; 1 not peer-reviewed; 1 comparison invalid
AUTHOR: Leifert, 2007
CLAIM: “up to 40%” more nutrients
COMMENT: No data to support claim and it appears that there never will be
AUTHOR: The Organic Center, 2008
CLAIM: 25% more nutrients; a good part of this number depends on mistaken claim that nitrate is harmful
COMMENT: Included key publications that were not peer reviewed; many results were not statistically significant; included several invalid comparisons; ignored some unfavorable data; entire report not peer-reviewed
AUTHOR: Rosen, 2008
CLAIM: Essentially no difference
COMMENT: Not peer-reviewed either
AUTHOR: Dangour, 2009
CLAIM: No difference
COMMENT: Methods and results peer-reviewed
Organic food proponents such as the Soil Association and the Organic Center are organizations with missions to promote and sell organic food and they have done an incredible job, as borne out by the large year to year increases in organic food sales.
But in their zeal to fulfill their missions they many times stretch the truth. In my opinion, any reporters who rely on organizations such as the Soil Association or the Organic Center for information without checking the facts are complicit in defrauding their readers.
Organic food proponents do more than act as unreliable sources of information. They may actually cause harm. For example, in order to obtain the supposed nutritional benefits of organic milk, you must drink copious quantities of high-fat milk. And then there is the alarm sounded by the epidemiological study that too much ALA may increase the risk of advanced prostate cancer. Those who are so concerned with human health should stop promoting the sale of organic milk until that question is resolved.
Organic food proponents are so concerned with distinguishing their products from conventional food that they have campaigned against useful practices such as food irradiation and genetic engineering. In addition, organic food proponents cause unnecessary guilt and angst in parents who cannot afford to buy overpriced (and completely useless) organic food for their children.
In the United States, some food activists have demanded that because organic food is “more nutritious,” it should be provided to mothers and children in the government–funded WIC Program. WIC stands for “Women, Infants and Children” and its mission is to support low-income women who are at nutritional risk by providing food to supplement diets. Government funding is a zero-sum game, and if money is provided for more expensive (and unneeded) organic food there will be less food to go around. Although it is a federally-funded program, WIC is administered separately in each state. Washington State was assailed earlier this year for not giving organic food to the program participants. Their replies provide a perfect way to end this article:
1-The American Academy of Pediatrics and the American Medical Association have not supported the need for organic food.
2-The Mayo Clinic and the American Dietetic Association state that there are no benefits from organic food.
3-The US Department of Agriculture states there is no conclusion about the need for or benefit from organic food.
4-After a thorough study of WIC foods, the National Academy of Sciences, Institute of Medicine made no reference to the need for organic food.
Joseph D. Rosen, Ph.D., is Emeritus Professor of Food Toxicology at Rutgers University School of Environmental and Biological Sciences and an ACSH Advisor.
Wednesday, September 9, 2009
Tuesday, September 8, 2009
The Fed Can't Monitor 'Systemic Risk'
The Fed Can't Monitor 'Systemic Risk'. By PETER J. WALLISON
That's like asking a thief to police himself.
WSJ, Sep 09, 2009
Using the financial crisis as a pretext, the Obama administration is determined to enact massive financial regulatory reforms this year. But the centerpiece of its proposal—putting the Fed in charge of regulating or monitoring systemic risk—is a serious error.
The problem is the Fed itself can create systemic risk. Many scholars, for example, have argued that by keeping interest rates too low for too long the Fed created the housing bubble that gave us the current mortgage meltdown, financial crisis and recession.
Regardless of whether one believes this analysis, it is not difficult to see that a Fed focused on preventing deflation in the wake of the dot-com bubble's collapse in the early 2000s might ignore the sharp rise in housing prices that later gave us a bubble.
There is also the so-called Greenspan put. That's a term that refers to investors taking greater risks than they otherwise would because they believed the Fed would protect them by flooding the financial system with liquidity in the event of a downturn. If there really was a Greenspan put, it has now been supplanted by a "Bernanke put."
These puts may or may not be real, but there is no doubt that the Fed has the power to create incentives for greater risk taking. In other words, simply by doing its job to stabilize the economy, the Fed can create the risk-taking mindset that many blame for the current crisis.
And finally, there are those—including some at the Fed itself—who argue that the Fed does not have, and will never have, sufficient information to recognize a real bubble. As a result, the Fed is just as likely to stifle economic growth as it is to sit idly by while a serious asset bubble develops.
All of this means just one thing: If we are to have a mechanism to prevent systemic risk it should be independent of the Fed. That is probably one reason why creating a systemic-risk council made up of all of the federal government's financial regulatory agencies, including the Fed, has the support of Senate Banking Committee Chairman Christ Dodd (D., Conn.) and others on the committee.
The current administration isn't the only one that has been willing to hand too much power to the Fed. The idea that the Fed should have some responsibility to detect systemic risk originated with the Bush Treasury Department's "Blueprint for a Modern Financial Regulatory Structure," issued in March 2008. In that plan, the regulation of bank holding companies would be transferred from the Fed to the comptroller of the currency and the Federal Deposit Insurance Corporation. The Fed would be charged with detecting the development of systemic risk in the economy.
The idea was that the Fed's authority would be pared back in those areas where it is actually supervising specific financial institutions but expanded where its responsibilities dealt with the economy as a whole. This is a plausible idea. There is every reason to remove from the Fed's plate the supervision of specific financial institutions as well as the regulation of businesses such as mortgage brokers. As a matter of government organization, it makes a tidy package for the Fed to handle issues that affect the economy as a whole.
But piling yet more responsibilities on the Fed raises the question of whether we are serious about discovering incipient systemic risk. If we are, then an agency outside of the Fed should be tasked with that responsibility. Tasking the Fed with that responsibility would bury it among many other inconsistent roles and give the agency incentives to ignore warning signals that an independent body would be likely to spot.
Unlike balancing its current competing assignments—price stability and promoting full employment—detecting systemic risk would require the Fed to see the subtle flaws in its own policies. Errors that are small at first could grow into major problems. It is simply too much to expect any human institution to step outside of itself and see the error of its ways when it can plausibly ignore those errors in the short run. If we are going to have a systemic-risk monitor, it should be an independent council of regulators.
It is one thing to set a thief to catch a thief—as President Franklin Delano Roosevelt is said to have done when he put Joe Kennedy in charge of the newly created Securities and Exchange Commission in the 1930s. But to set a thief to catch himself is quite a different matter.
Mr. Wallison is a senior fellow at the American Enterprise Institute.
That's like asking a thief to police himself.
WSJ, Sep 09, 2009
Using the financial crisis as a pretext, the Obama administration is determined to enact massive financial regulatory reforms this year. But the centerpiece of its proposal—putting the Fed in charge of regulating or monitoring systemic risk—is a serious error.
The problem is the Fed itself can create systemic risk. Many scholars, for example, have argued that by keeping interest rates too low for too long the Fed created the housing bubble that gave us the current mortgage meltdown, financial crisis and recession.
Regardless of whether one believes this analysis, it is not difficult to see that a Fed focused on preventing deflation in the wake of the dot-com bubble's collapse in the early 2000s might ignore the sharp rise in housing prices that later gave us a bubble.
There is also the so-called Greenspan put. That's a term that refers to investors taking greater risks than they otherwise would because they believed the Fed would protect them by flooding the financial system with liquidity in the event of a downturn. If there really was a Greenspan put, it has now been supplanted by a "Bernanke put."
These puts may or may not be real, but there is no doubt that the Fed has the power to create incentives for greater risk taking. In other words, simply by doing its job to stabilize the economy, the Fed can create the risk-taking mindset that many blame for the current crisis.
And finally, there are those—including some at the Fed itself—who argue that the Fed does not have, and will never have, sufficient information to recognize a real bubble. As a result, the Fed is just as likely to stifle economic growth as it is to sit idly by while a serious asset bubble develops.
All of this means just one thing: If we are to have a mechanism to prevent systemic risk it should be independent of the Fed. That is probably one reason why creating a systemic-risk council made up of all of the federal government's financial regulatory agencies, including the Fed, has the support of Senate Banking Committee Chairman Christ Dodd (D., Conn.) and others on the committee.
The current administration isn't the only one that has been willing to hand too much power to the Fed. The idea that the Fed should have some responsibility to detect systemic risk originated with the Bush Treasury Department's "Blueprint for a Modern Financial Regulatory Structure," issued in March 2008. In that plan, the regulation of bank holding companies would be transferred from the Fed to the comptroller of the currency and the Federal Deposit Insurance Corporation. The Fed would be charged with detecting the development of systemic risk in the economy.
The idea was that the Fed's authority would be pared back in those areas where it is actually supervising specific financial institutions but expanded where its responsibilities dealt with the economy as a whole. This is a plausible idea. There is every reason to remove from the Fed's plate the supervision of specific financial institutions as well as the regulation of businesses such as mortgage brokers. As a matter of government organization, it makes a tidy package for the Fed to handle issues that affect the economy as a whole.
But piling yet more responsibilities on the Fed raises the question of whether we are serious about discovering incipient systemic risk. If we are, then an agency outside of the Fed should be tasked with that responsibility. Tasking the Fed with that responsibility would bury it among many other inconsistent roles and give the agency incentives to ignore warning signals that an independent body would be likely to spot.
Unlike balancing its current competing assignments—price stability and promoting full employment—detecting systemic risk would require the Fed to see the subtle flaws in its own policies. Errors that are small at first could grow into major problems. It is simply too much to expect any human institution to step outside of itself and see the error of its ways when it can plausibly ignore those errors in the short run. If we are going to have a systemic-risk monitor, it should be an independent council of regulators.
It is one thing to set a thief to catch a thief—as President Franklin Delano Roosevelt is said to have done when he put Joe Kennedy in charge of the newly created Securities and Exchange Commission in the 1930s. But to set a thief to catch himself is quite a different matter.
Mr. Wallison is a senior fellow at the American Enterprise Institute.
Beijing Plays Hedge Ball - A contract should be a contract
Beijing Plays Hedge Ball. WSJ Editorial
A contract should be a contract.
WSJ, Sep 09, 2009
Beijing needs to clarify whether a contract is a contract, and fast. Recent suggestions that the government might allow or even encourage companies to challenge derivatives contracts that went against them send a bad signal to foreign companies and countries doing business with China.
The controversy stems from commodities hedges gone wrong. When fuel prices were high, airlines like China Eastern, Air China and Shanghai Airlines and shippers like China Ocean Shipping crafted derivatives contracts with foreign banks to protect the companies from even higher fuel prices. Instead the price of oil has fallen, leaving the companies on the hook for the downside risk of their hedge—a total of about $2 billion for the airlines alone, by some counts.
The companies are crying foul, and several reportedly sent a letter to the banks that sold them the derivatives suggesting they may be "void, invalid or unenforceable." Worse, the government is getting into the act. The state-owned Assets Supervision and Administration Commission, which oversees these companies, on Monday posted a statement on its Web site suggesting that Beijing might countenance efforts to sue to nullify the contracts.
China has been down this road before, pushing foreign counterparties several times over the past decade to back down from derivatives contracts that had turned against a Chinese company. In those cases, the companies or the government variously argued that the firms had been illegally speculating or had not understood the risks they were taking—or even that the people signing the papers on behalf of the Chinese companies hadn't been authorized to do so. It's hard to see how such arguments could apply to the kind of bread-and-butter fuel hedging at issue here.
Policy makers might think the government holds a lot of cards in this case, and in some respects it does. While the derivatives contracts would be tough to wriggle out of legally since they're enforceable through courts in Hong Kong, Singapore or Britain, it would be hard for the banks to collect on any judgment unless they're willing to seize planes at Heathrow or Changi airports.
The banks would have strong incentives not to try, too. Regulators in Beijing decide whether the foreign banks receive various business licenses, for instance, and state-owned enterprises constitute some of the biggest bank clients. Especially since the goal could only be to renegotiate the contracts instead of canceling them, policy makers and executives might think the banks will be willing to pay that price to continue doing business in China.
But this kind of bullying is not free. Most immediately, hedging is a risk-management tool that many Chinese companies can't afford to live without. It works on trust between counterparties that each side will hold up its end of the bargain. Already banks reportedly are demanding higher collateral for derivatives contracts like those at issue here to compensate for the loss of trust. That's an added cost of doing business not faced by other airlines that take their lumps when hedges go wrong. like Hong Kong's Cathay Pacific or America's United.
This incident will leave foreign investors wondering where China stands on its road to commercial rule of law. Following the arrests of Rio Tinto executives in a dispute over ore prices, foreign businesses already have to wonder about their physical safety if they run afoul of Chinese companies in contract negotiations. Now it appears foreign companies can be in financial danger simply for ending up on the "wrong" side of a standard off-the-shelf derivatives transaction.
Beijing officials may not realize the potential effects of this controversy on Chinese companies investing abroad. Chinese mergers and acquisitions in countries like America or Australia have been controversial in large part because politicians in those countries have worried about a lack of transparency within Chinese companies, and whether those companies would play by the rules once they hit foreign shores. Politicians already predisposed to oppose Chinese investment—and perhaps some who'd otherwise support allowing such investments—will hardly take comfort from a sign that Chinese companies won't play by the rules if it doesn't suit them. If Beijing is actively trying to dissuade foreign investment, it's on the right track.
Beijing might be responding to a political storm over the notion Chinese companies have been exploited by Western banks (one wag has called derivatives "financial opium," a charged phrase in China). Or it could be trying to bail out a few companies that made bad fuel-price bets. Or some other political motivation could be at work. Whatever the cause, though, Beijing's only smart way forward is to state clearly that a contract is a contract and that Chinese companies must abide by theirs.
A contract should be a contract.
WSJ, Sep 09, 2009
Beijing needs to clarify whether a contract is a contract, and fast. Recent suggestions that the government might allow or even encourage companies to challenge derivatives contracts that went against them send a bad signal to foreign companies and countries doing business with China.
The controversy stems from commodities hedges gone wrong. When fuel prices were high, airlines like China Eastern, Air China and Shanghai Airlines and shippers like China Ocean Shipping crafted derivatives contracts with foreign banks to protect the companies from even higher fuel prices. Instead the price of oil has fallen, leaving the companies on the hook for the downside risk of their hedge—a total of about $2 billion for the airlines alone, by some counts.
The companies are crying foul, and several reportedly sent a letter to the banks that sold them the derivatives suggesting they may be "void, invalid or unenforceable." Worse, the government is getting into the act. The state-owned Assets Supervision and Administration Commission, which oversees these companies, on Monday posted a statement on its Web site suggesting that Beijing might countenance efforts to sue to nullify the contracts.
China has been down this road before, pushing foreign counterparties several times over the past decade to back down from derivatives contracts that had turned against a Chinese company. In those cases, the companies or the government variously argued that the firms had been illegally speculating or had not understood the risks they were taking—or even that the people signing the papers on behalf of the Chinese companies hadn't been authorized to do so. It's hard to see how such arguments could apply to the kind of bread-and-butter fuel hedging at issue here.
Policy makers might think the government holds a lot of cards in this case, and in some respects it does. While the derivatives contracts would be tough to wriggle out of legally since they're enforceable through courts in Hong Kong, Singapore or Britain, it would be hard for the banks to collect on any judgment unless they're willing to seize planes at Heathrow or Changi airports.
The banks would have strong incentives not to try, too. Regulators in Beijing decide whether the foreign banks receive various business licenses, for instance, and state-owned enterprises constitute some of the biggest bank clients. Especially since the goal could only be to renegotiate the contracts instead of canceling them, policy makers and executives might think the banks will be willing to pay that price to continue doing business in China.
But this kind of bullying is not free. Most immediately, hedging is a risk-management tool that many Chinese companies can't afford to live without. It works on trust between counterparties that each side will hold up its end of the bargain. Already banks reportedly are demanding higher collateral for derivatives contracts like those at issue here to compensate for the loss of trust. That's an added cost of doing business not faced by other airlines that take their lumps when hedges go wrong. like Hong Kong's Cathay Pacific or America's United.
This incident will leave foreign investors wondering where China stands on its road to commercial rule of law. Following the arrests of Rio Tinto executives in a dispute over ore prices, foreign businesses already have to wonder about their physical safety if they run afoul of Chinese companies in contract negotiations. Now it appears foreign companies can be in financial danger simply for ending up on the "wrong" side of a standard off-the-shelf derivatives transaction.
Beijing officials may not realize the potential effects of this controversy on Chinese companies investing abroad. Chinese mergers and acquisitions in countries like America or Australia have been controversial in large part because politicians in those countries have worried about a lack of transparency within Chinese companies, and whether those companies would play by the rules once they hit foreign shores. Politicians already predisposed to oppose Chinese investment—and perhaps some who'd otherwise support allowing such investments—will hardly take comfort from a sign that Chinese companies won't play by the rules if it doesn't suit them. If Beijing is actively trying to dissuade foreign investment, it's on the right track.
Beijing might be responding to a political storm over the notion Chinese companies have been exploited by Western banks (one wag has called derivatives "financial opium," a charged phrase in China). Or it could be trying to bail out a few companies that made bad fuel-price bets. Or some other political motivation could be at work. Whatever the cause, though, Beijing's only smart way forward is to state clearly that a contract is a contract and that Chinese companies must abide by theirs.
Monday, September 7, 2009
The jobless stimulus: It's still not too late to redirect $400 billion to business tax cuts
The Jobless Stimulus. WSJ Editorial
It's still not too late to redirect $400 billion to business tax cuts.
WSJ, Sep 07, 2009
The recession may be over on Wall Street and Silicon Valley, but on Working Family Avenue it still has a ways to run. That's the lesson of yesterday's August jobs report that showed losses of 216,000, which believe it or not is the slowest monthly decline in a year and caused the White House to praise with the faint damn that the "trajectory is in the right direction." That's the good news.
On the other hand, the jobless rate popped up to 9.7%, the highest rate in 26 years, from 9.4%, reflecting an increase in the size of the labor force. The main concern we see going forward is the slow pace of new job creation to soak up the 7.4 million workers who have lost jobs since 2007.
There are now 26 million Americans who can't find a full-time job. Average weekly hours remained at an abysmally low 33.1—which is putting a strain on family budgets. And the jobless rate including so-called discouraged workers, or those who have stopped looking, leapt to 16.8% from 16.3% in July. Meanwhile, the number of Americans working part-time who want full-time work increased by 278,000 to 9.1 million, which as a share of the workforce is larger than at any time since the recession of 1982. These are the workers that employers will tend to hire first as a recovery unfolds, so it is worrisome that this cohort remains so large.
None of this does much for the credibility of the Obama Administration's stimulus spending plan, which was sold with the promise of a jobless rate this year of "below 8%" if the stimulus were passed. That was off by some three million jobs in a mere seven months. The same economists who fretted in February that $780 billion in stimulus was too small now claim that the $300 billion or so that has been spent has somehow ignited the recovery.
But a tax-cutting stimulus would have provided much more job and economic growth for the buck, and it could even now too. If the Administration really wants to fire up private job creation, how about taking the remaining $400 billion or more and using it to lower business taxes? The unspent stimulus is enough for a two-year down payment on repealing the U.S. corporate income tax, which studies show is a job and wage-increase killer.
Congress could also reconsider its July minimum-wage increase of 70 cents an hour, which almost certainly contributed to the leap in teenage unemployment to 25.5% in August. The rate was 24% in June and 23.8% in July, before the wage hike started to price low-skilled teens looking for jobs out of the workplace. Congress would be wise to suspend the increase until the overall jobless rate falls below 7%.
Of course neither of our proposals is going to happen given the current policy views in Washington, but someone has to speak up for workers who want a job, as opposed to those lucky enough to still have them.
We still believe an economic recovery is under way, and some job growth will certainly follow. But the danger is that the U.S. will recover with only European levels of job creation. The French and Germans have had a hard time bringing down unemployment even during expansions, thanks to the burden of high taxes, regulation and onerous union work rules. The economic agenda now pending on Capitol Hill includes all three of these burdens, so it's no wonder that employers are being supercautious before they add to their payrolls.
The U.S. economy is a remarkably resilient animal, and even deep recessions have always been followed by recoveries, usually strong ones. But businesses aren't going to rehire nearly as many workers amid the current policy uncertainty. The faster Congress defeats cap and trade, union card check and the House health-care bill, the better for job creation
It's still not too late to redirect $400 billion to business tax cuts.
WSJ, Sep 07, 2009
The recession may be over on Wall Street and Silicon Valley, but on Working Family Avenue it still has a ways to run. That's the lesson of yesterday's August jobs report that showed losses of 216,000, which believe it or not is the slowest monthly decline in a year and caused the White House to praise with the faint damn that the "trajectory is in the right direction." That's the good news.
On the other hand, the jobless rate popped up to 9.7%, the highest rate in 26 years, from 9.4%, reflecting an increase in the size of the labor force. The main concern we see going forward is the slow pace of new job creation to soak up the 7.4 million workers who have lost jobs since 2007.
There are now 26 million Americans who can't find a full-time job. Average weekly hours remained at an abysmally low 33.1—which is putting a strain on family budgets. And the jobless rate including so-called discouraged workers, or those who have stopped looking, leapt to 16.8% from 16.3% in July. Meanwhile, the number of Americans working part-time who want full-time work increased by 278,000 to 9.1 million, which as a share of the workforce is larger than at any time since the recession of 1982. These are the workers that employers will tend to hire first as a recovery unfolds, so it is worrisome that this cohort remains so large.
None of this does much for the credibility of the Obama Administration's stimulus spending plan, which was sold with the promise of a jobless rate this year of "below 8%" if the stimulus were passed. That was off by some three million jobs in a mere seven months. The same economists who fretted in February that $780 billion in stimulus was too small now claim that the $300 billion or so that has been spent has somehow ignited the recovery.
But a tax-cutting stimulus would have provided much more job and economic growth for the buck, and it could even now too. If the Administration really wants to fire up private job creation, how about taking the remaining $400 billion or more and using it to lower business taxes? The unspent stimulus is enough for a two-year down payment on repealing the U.S. corporate income tax, which studies show is a job and wage-increase killer.
Congress could also reconsider its July minimum-wage increase of 70 cents an hour, which almost certainly contributed to the leap in teenage unemployment to 25.5% in August. The rate was 24% in June and 23.8% in July, before the wage hike started to price low-skilled teens looking for jobs out of the workplace. Congress would be wise to suspend the increase until the overall jobless rate falls below 7%.
Of course neither of our proposals is going to happen given the current policy views in Washington, but someone has to speak up for workers who want a job, as opposed to those lucky enough to still have them.
We still believe an economic recovery is under way, and some job growth will certainly follow. But the danger is that the U.S. will recover with only European levels of job creation. The French and Germans have had a hard time bringing down unemployment even during expansions, thanks to the burden of high taxes, regulation and onerous union work rules. The economic agenda now pending on Capitol Hill includes all three of these burdens, so it's no wonder that employers are being supercautious before they add to their payrolls.
The U.S. economy is a remarkably resilient animal, and even deep recessions have always been followed by recoveries, usually strong ones. But businesses aren't going to rehire nearly as many workers amid the current policy uncertainty. The faster Congress defeats cap and trade, union card check and the House health-care bill, the better for job creation
Friday, September 4, 2009
Industry views: The NREL’s Flawed White Paper on the Spanish Green Jobs Study
The NREL’s Flawed White Paper on the Spanish Green Jobs Study
Institute for Energy Research, Sep 03, 2009
Institute for Energy Research, Sep 03, 2009
Friday, August 21, 2009
Libertarian: There's no evidence for the theory that state spending has shortened this or any other slowdown
Big Government, Big Recession. By ALAN REYNOLDS
There's no evidence for the theory that state spending has shortened this or any other slowdown.
WSJ, Aug 21, 2009
‘So it seems that we aren’t going to have a second Great Depression after all,” wrote New York Times columnist Paul Krugman last week. “What saved us? The answer, basically, is Big Government. . . . [W]e appear to have averted the worst: utter catastrophe no longer seems likely. And Big Government, run by people who understand its virtues, is the reason why.”
This is certainly a novel theory of the business cycle. To be taken seriously, however, any such explanation of recessions and recoveries must be tested against the facts. It is not enough to assert the U.S. economy would have experienced a "second Great Depression" were it not for the Obama stimulus plan.
Even those who think government borrowing is a free lunch can't possibly believe the government has already done enough "stimulus spending" to explain the difference between depression and recovery.
CNNMoney recently calculated that the stimulus plan has spent just $120 billion—less than 1% of GDP—mostly on temporary tax cuts ($53 billion) and additional Medicaid, food stamps and unemployment benefits. Less than $1 billion has been spent on highway and energy projects. Commitments for the future are much larger, but households and firms can't spend commitments.
Proponents of Big Government can't say we avoided the next Great Depression due to hypothetical stimulus money that is mostly unspent. So they argue it's more important that the federal government merely continued spending and didn't "slash" spending as in the early 1930s. But the federal government didn't slash spending in the early '30s. Federal spending rose by 6.2% in 1930, 7.7% in 1931 and 30.2% in 1932. Since prices were falling, real increases in federal spending were huge during the Hoover years.
President Obama clearly believes Big Government is the antidote to this and perhaps all recessions. At his first news conference in February, the president said, "The federal government is the only entity left with the resources to jolt our economy back to life." Yet that raises a key question: If the U.S. economy could not recover without a big "jolt" of deficit spending, then how did the economy recover from recessions in the distant past, when the federal government was very small?
A 1999 study in The Journal of Economic Perspectives by Christina Romer (now head of the Council of Economic Advisers) found that "real macroeconomic indicators have not become dramatically more stable between the pre-World War I and post-World War II eras, and recessions have become only slightly less severe." Ms. Romer also noted that "recessions have not become noticeably shorter" in the era of Big Government. In fact, she found the average length of recessions from 1887 to 1929 was 10.3 months. If the current recession ended in August, then the average postwar recession lasted one month longer—11.3 months. The longest recession from 1887 to 1929 lasted 16 months. But there have been three recessions since 1973 that lasted at least that long.
The relative brevity of recessions before the New Deal is particularly surprising since the U.S. economy was then dominated by farming and manufacturing—industries far more prone to nasty cyclical surprises than today's service-based economy.
In the late 19th and early 20th centuries, nobody thought the government could or should do anything except stand aside and let the mistakes of business and banking be fixed by those who made them. There were no Keynesian plans to borrow and spend our way out of recessions. And bankers had no Federal Reserve to bail them out until 1913. Yet recessions after the Fed was created soon turned out to be much deeper than before (1920-21, 1929-33, 1937-38) and often more persistent.
It's clear that U.S. history does not support the theory that Big Government means shorter and milder recessions. In reality, recessions always ended without government prodding, long before anyone heard of Keynes and long before the Fed existed. What's more, recessions ended more quickly before the New Deal's push for Big Government than they have in the past three decades. The economy's natural recuperative powers before the 1930s proved superior to recent tinkering by Big Government economists, politicians and central bankers.
The recent experience of other countries provides another way to test the Big Government theory of economic recovery. If it is true that Big Government prevents or cures recessions, then countries where government accounts for the largest share of GDP should have suffered much smaller losses of GDP over the past year than countries where the private sector is dominant.
The chart nearby [Spending and recession depth - http://s.wsj.net/public/resources/images/OB-EH223_REynol_G_20090820211046.jpg] lists 13 major economies by the size of government spending relative to GDP using OECD figures for 2007 (the U.S. is well above 40% by 2009). Europe's big spenders are at the top, the U.S. and Japan are in the middle, and fiscally frugal countries like China and India are at the bottom.
The last column shows the change in real GDP over the most recent four quarters—ending in the second quarter for the U.S., U.K., Germany, Japan, France, Italy, Sweden and China, but the first for the rest. Four of the five deepest contractions happened in countries with the biggest governments—Sweden, Italy, Germany and the U.K. Japan's government spending in 2007 was about like ours, but Japan's tax rates are far more punitive and the economy has suffered endless "fiscal stimulus" packages. China's central government spent 22% of GDP, but 30%-plus with local government included.
To believe Big Government explains why this extremely long recession was not even longer, we need to find some connection between the size of government and the depth and duration of recessions. There is no such connection in U.S. history, or in recent cyclical experience of other countries.
On the contrary, recessions have become longer as the U.S. government (and the Fed) became larger, more expensive, and more involved in the economy. Foreign countries in which government spending accounts for about half of the economy have also suffered the deepest recessions lately, while economic recovery is well established in countries where government spending is a smaller share of GDP than in the U.S.
In short, bigger government appears to produce only bigger and longer recessions.
Mr. Reynolds is a senior fellow with the Cato Institute and the author of "Income and Wealth" (Greenwood Press, 2006).
There's no evidence for the theory that state spending has shortened this or any other slowdown.
WSJ, Aug 21, 2009
‘So it seems that we aren’t going to have a second Great Depression after all,” wrote New York Times columnist Paul Krugman last week. “What saved us? The answer, basically, is Big Government. . . . [W]e appear to have averted the worst: utter catastrophe no longer seems likely. And Big Government, run by people who understand its virtues, is the reason why.”
This is certainly a novel theory of the business cycle. To be taken seriously, however, any such explanation of recessions and recoveries must be tested against the facts. It is not enough to assert the U.S. economy would have experienced a "second Great Depression" were it not for the Obama stimulus plan.
Even those who think government borrowing is a free lunch can't possibly believe the government has already done enough "stimulus spending" to explain the difference between depression and recovery.
CNNMoney recently calculated that the stimulus plan has spent just $120 billion—less than 1% of GDP—mostly on temporary tax cuts ($53 billion) and additional Medicaid, food stamps and unemployment benefits. Less than $1 billion has been spent on highway and energy projects. Commitments for the future are much larger, but households and firms can't spend commitments.
Proponents of Big Government can't say we avoided the next Great Depression due to hypothetical stimulus money that is mostly unspent. So they argue it's more important that the federal government merely continued spending and didn't "slash" spending as in the early 1930s. But the federal government didn't slash spending in the early '30s. Federal spending rose by 6.2% in 1930, 7.7% in 1931 and 30.2% in 1932. Since prices were falling, real increases in federal spending were huge during the Hoover years.
President Obama clearly believes Big Government is the antidote to this and perhaps all recessions. At his first news conference in February, the president said, "The federal government is the only entity left with the resources to jolt our economy back to life." Yet that raises a key question: If the U.S. economy could not recover without a big "jolt" of deficit spending, then how did the economy recover from recessions in the distant past, when the federal government was very small?
A 1999 study in The Journal of Economic Perspectives by Christina Romer (now head of the Council of Economic Advisers) found that "real macroeconomic indicators have not become dramatically more stable between the pre-World War I and post-World War II eras, and recessions have become only slightly less severe." Ms. Romer also noted that "recessions have not become noticeably shorter" in the era of Big Government. In fact, she found the average length of recessions from 1887 to 1929 was 10.3 months. If the current recession ended in August, then the average postwar recession lasted one month longer—11.3 months. The longest recession from 1887 to 1929 lasted 16 months. But there have been three recessions since 1973 that lasted at least that long.
The relative brevity of recessions before the New Deal is particularly surprising since the U.S. economy was then dominated by farming and manufacturing—industries far more prone to nasty cyclical surprises than today's service-based economy.
In the late 19th and early 20th centuries, nobody thought the government could or should do anything except stand aside and let the mistakes of business and banking be fixed by those who made them. There were no Keynesian plans to borrow and spend our way out of recessions. And bankers had no Federal Reserve to bail them out until 1913. Yet recessions after the Fed was created soon turned out to be much deeper than before (1920-21, 1929-33, 1937-38) and often more persistent.
It's clear that U.S. history does not support the theory that Big Government means shorter and milder recessions. In reality, recessions always ended without government prodding, long before anyone heard of Keynes and long before the Fed existed. What's more, recessions ended more quickly before the New Deal's push for Big Government than they have in the past three decades. The economy's natural recuperative powers before the 1930s proved superior to recent tinkering by Big Government economists, politicians and central bankers.
The recent experience of other countries provides another way to test the Big Government theory of economic recovery. If it is true that Big Government prevents or cures recessions, then countries where government accounts for the largest share of GDP should have suffered much smaller losses of GDP over the past year than countries where the private sector is dominant.
The chart nearby [Spending and recession depth - http://s.wsj.net/public/resources/images/OB-EH223_REynol_G_20090820211046.jpg] lists 13 major economies by the size of government spending relative to GDP using OECD figures for 2007 (the U.S. is well above 40% by 2009). Europe's big spenders are at the top, the U.S. and Japan are in the middle, and fiscally frugal countries like China and India are at the bottom.
The last column shows the change in real GDP over the most recent four quarters—ending in the second quarter for the U.S., U.K., Germany, Japan, France, Italy, Sweden and China, but the first for the rest. Four of the five deepest contractions happened in countries with the biggest governments—Sweden, Italy, Germany and the U.K. Japan's government spending in 2007 was about like ours, but Japan's tax rates are far more punitive and the economy has suffered endless "fiscal stimulus" packages. China's central government spent 22% of GDP, but 30%-plus with local government included.
To believe Big Government explains why this extremely long recession was not even longer, we need to find some connection between the size of government and the depth and duration of recessions. There is no such connection in U.S. history, or in recent cyclical experience of other countries.
On the contrary, recessions have become longer as the U.S. government (and the Fed) became larger, more expensive, and more involved in the economy. Foreign countries in which government spending accounts for about half of the economy have also suffered the deepest recessions lately, while economic recovery is well established in countries where government spending is a smaller share of GDP than in the U.S.
In short, bigger government appears to produce only bigger and longer recessions.
Mr. Reynolds is a senior fellow with the Cato Institute and the author of "Income and Wealth" (Greenwood Press, 2006).
Thursday, August 20, 2009
The Swedish Model
The Swedish Model, by Richard W. Rahn
This article appeared in the Washington Times on August 18, 2009
Do you think America would be better off with a Swedish-type welfare state? This question tends to evoke strong reactions from both the left and right, yet few understand Sweden's economic history and the revisions it has been making to its welfare-state model in recent years. Sweden was a very poor country for most of the 19th century.
The poverty of those years caused many to emigrate from the country, mostly to the U.S. Upper Midwest. Beginning in the 1870s, Sweden created the conditions for developing a high-growth, free-market economy with a slowly growing government sector. As a result, Sweden for many years had the world's fastest-growing economy, ultimately producing the third-highest per capita income, almost equaling that in the United States by the late 1960s. Sweden became a rich country before becoming a welfare state.
Sweden began its movement toward a welfare state in the 1960s, when its government sector was about equal to that in the United States. However, by the late 1980s, government spending grew from 30 percent of gross domestic product to more than 60 percent of GDP.
Most full-time employees faced marginal tax rates of 65 percent to 75 percent, as contrasted with 40 percent in 1960. Labor-market regulations were introduced to make it very difficult to fire workers. Business profits were taxed heavily, and financial markets were regulated heavily. By 1993, the government budget deficit was 13 percent of GDP and total government debt was about 71 percent of GDP, which led to a rapid fall in the value of the currency and a rise in inflation.
These policies and outcomes greatly diminished the incentives to work, save and invest. Economic growth slowed to a crawl. Other countries that avoided the excess spending, taxing and regulation of Sweden grew more rapidly, leaving Sweden in the dust. Sweden is still a prosperous country, but far from the top, and its per capita income has fallen to just about 80 percent of that in the United States.
In the late 1980s and 1990s, Sweden began an economic course correction that continues today. Marginal tax rates were reduced for most of the population, and this trend is expected to continue.
The wealth tax and inheritance tax were abolished. Financial markets, telecommunications, electricity, road transport, taxis and other activities were deregulated. Privatization of industry was begun, and the current government is continuing the process. The generosity of some welfare and other benefits has been reduced, with the goal of making work more economically rewarding relative to government benefits. Also, trade liberalization has been expanded greatly. The result has been a pickup in economic growth, and Sweden is no longer falling further behind other developed countries.
One notable success has been pension reform. Sweden was the first nation to implement a mandatory government retirement system for all its citizens. Sweden, like the United States and most other countries, was faced with an increasing, unfunded social security liability as a result of low birthrates and people living much longer. After studying the problem in the early 1990s, the Swedes approved, in 1998, moving toward a Chilean private pension system, first developed by former Chilean Labor Minister Jose Pinera. (Seventeen countries have adopted variations of the Pinerian system, which has been very successful in Chile.)
The new Swedish pension system has four key features, including partial privatization, individual accounts, a safety net to protect the poor and a transition to protect retirees and older workers. The benefits have been substantial budgetary savings, higher retirement income and faster economic growth.
Those who wish to chase the Swedish model need first to decide which model they seek: The high-growth, pre-1960 model; the low-growth model of the 1970s and 1980s; or the reformist, welfare-state model of recent years. The irony is that the current Democratic Congress and administration are rapidly emulating the parts of the Swedish model that proved disastrous and rejecting those parts that are proving to be successful.
Most Swedes now understand that they still have a good distance to go to further strengthen the market economy to ensure continued growth. Thus, they continue to move toward reducing the size of government rather than increasing it.
If the Obama Democrats were wise enough to learn from the Swedes, they would be moving toward trade liberalization rather than away from it. They would be moving to at least partially privatize Social Security. They would not seek to prevent the abolition of the death tax. They would be reducing rather than increasing regulations. They would be reducing rather than trying to increase marginal tax rates on work, saving and investment. They would be reducing the corporate income tax as was done in Sweden.
Finally, the Obama Democrats would be reducing government spending rather than increasing it and not running deficits as large as those that almost sank the Swedish economy 16 years ago.
Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.
This article appeared in the Washington Times on August 18, 2009
Do you think America would be better off with a Swedish-type welfare state? This question tends to evoke strong reactions from both the left and right, yet few understand Sweden's economic history and the revisions it has been making to its welfare-state model in recent years. Sweden was a very poor country for most of the 19th century.
The poverty of those years caused many to emigrate from the country, mostly to the U.S. Upper Midwest. Beginning in the 1870s, Sweden created the conditions for developing a high-growth, free-market economy with a slowly growing government sector. As a result, Sweden for many years had the world's fastest-growing economy, ultimately producing the third-highest per capita income, almost equaling that in the United States by the late 1960s. Sweden became a rich country before becoming a welfare state.
Sweden began its movement toward a welfare state in the 1960s, when its government sector was about equal to that in the United States. However, by the late 1980s, government spending grew from 30 percent of gross domestic product to more than 60 percent of GDP.
Most full-time employees faced marginal tax rates of 65 percent to 75 percent, as contrasted with 40 percent in 1960. Labor-market regulations were introduced to make it very difficult to fire workers. Business profits were taxed heavily, and financial markets were regulated heavily. By 1993, the government budget deficit was 13 percent of GDP and total government debt was about 71 percent of GDP, which led to a rapid fall in the value of the currency and a rise in inflation.
These policies and outcomes greatly diminished the incentives to work, save and invest. Economic growth slowed to a crawl. Other countries that avoided the excess spending, taxing and regulation of Sweden grew more rapidly, leaving Sweden in the dust. Sweden is still a prosperous country, but far from the top, and its per capita income has fallen to just about 80 percent of that in the United States.
In the late 1980s and 1990s, Sweden began an economic course correction that continues today. Marginal tax rates were reduced for most of the population, and this trend is expected to continue.
The wealth tax and inheritance tax were abolished. Financial markets, telecommunications, electricity, road transport, taxis and other activities were deregulated. Privatization of industry was begun, and the current government is continuing the process. The generosity of some welfare and other benefits has been reduced, with the goal of making work more economically rewarding relative to government benefits. Also, trade liberalization has been expanded greatly. The result has been a pickup in economic growth, and Sweden is no longer falling further behind other developed countries.
One notable success has been pension reform. Sweden was the first nation to implement a mandatory government retirement system for all its citizens. Sweden, like the United States and most other countries, was faced with an increasing, unfunded social security liability as a result of low birthrates and people living much longer. After studying the problem in the early 1990s, the Swedes approved, in 1998, moving toward a Chilean private pension system, first developed by former Chilean Labor Minister Jose Pinera. (Seventeen countries have adopted variations of the Pinerian system, which has been very successful in Chile.)
The new Swedish pension system has four key features, including partial privatization, individual accounts, a safety net to protect the poor and a transition to protect retirees and older workers. The benefits have been substantial budgetary savings, higher retirement income and faster economic growth.
Those who wish to chase the Swedish model need first to decide which model they seek: The high-growth, pre-1960 model; the low-growth model of the 1970s and 1980s; or the reformist, welfare-state model of recent years. The irony is that the current Democratic Congress and administration are rapidly emulating the parts of the Swedish model that proved disastrous and rejecting those parts that are proving to be successful.
Most Swedes now understand that they still have a good distance to go to further strengthen the market economy to ensure continued growth. Thus, they continue to move toward reducing the size of government rather than increasing it.
If the Obama Democrats were wise enough to learn from the Swedes, they would be moving toward trade liberalization rather than away from it. They would be moving to at least partially privatize Social Security. They would not seek to prevent the abolition of the death tax. They would be reducing rather than increasing regulations. They would be reducing rather than trying to increase marginal tax rates on work, saving and investment. They would be reducing the corporate income tax as was done in Sweden.
Finally, the Obama Democrats would be reducing government spending rather than increasing it and not running deficits as large as those that almost sank the Swedish economy 16 years ago.
Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.
Mount Sinai's Scare Campaign
Mount Sinai's Scare Campaign (and John Stossel's reaction). By Elizabeth M. Whelan, Sc.D., M.P.H. ACSH, August 19, 2009
ACSH's view on this issue was noted by John Stossel on his blog [http://blogs.abcnews.com/johnstossel/2009/08/teach-dont-scare.html] today:
It is nothing new for junk science to make it onto the New York Times op-ed page. But some agendas are so far outside the mainstream they have to buy their way onto the page. That's what the Mount Sinai School of Medicine did in buying a platform for their Dr. Philip Landrigan, an activist who has dedicated his career to raising anxieties about "chemicals" in the environment.
In an August 4 "op-ad" likely costing around $50,000, Dr. Landrigan rails against thousands of new, synthetic chemicals introduced over the last few decades.
He says they are responsible for a full spectrum of diseases in our children -- including cancer, hyperactivity, asthma, reproductive difficulties, and even autism. There is not a shred of evidence to back up such claims. He cites some specific chemicals that have been in the news of late: PCBs (industrial chemicals used until 1977 in fireproofing and insulation ), phthalates (plastic softeners used in a wide variety of consumer products and medical devices), and bisphenol-A (BPA, used to harden plastics and in food and beverage packaging).
He states that these and other chemicals are routinely found in the bodies of both adults and children -- and that this itself is a cause for alarm. In an attempt to gain some legitimacy for his scientifically bereft claims, Dr. Landrigan throws in for good measure the actual documented health risks from exposure to high levels of lead in paint and gasoline (which was the case decades ago but is no longer an issue) and the actual link between asthma and exposure to cigarette smoke. Even a broken clock is right twice a day.
But for all his claims that "chemicals" are not safe and have not been tested, he does not acknowledge these basic facts:
•Everything in our universe consists of chemicals. Our natural foods (yes, even organic ones) are 100% chemical in composition -- and come replete with myriad natural toxins (otherwise known as poisons) and carcinogens (usually defined as chemicals which cause cancer in high doses in animal studies). Such natural carcinogens and toxins are of no health consequences because they occur at such low doses.
•Nearly all the health claim Dr. Landrigan makes -- regarding chemicals causing cancer or "toxic effects," for example -- are based on high-level animal studies. By that criterion, he should be worried about nutmeg (which contains a natural hallucinogen and the carcinogen safrole), potatoes (which contain a toxicologically significant level of arsenic), and apples (with their own natural carcinogen quercetin glycosides)
•That we can detect traces of myriad "chemicals" in the human body should be no surprise. With today's sophisticated analytical techniques, we can basically find anything in anything. The mere ability to detect a substance does not mean that the substance poses a hazard.
•Landrigan mentions something called "endocrine disruption" and reproductive defects -- but these phenomena have absolutely no practical application to human risk. Again, the claim that trace levels of chemicals adversely affect hormone production is based only on high-dose animal studies. The allegation that synthetic chemicals cause abnormalities in reproductive potential -- including allegedly chemically-induced penis shrinking -- is derived from observations of alligators growing up in polluted Florida lakes. The human data provide no evidence of reproductive problems linked to chemicals.
In short, the paid-for Landrigan piece is alarmist propaganda masquerading as science and represents a great disservice to parents, children, and public health. One cannot help wonder why Mount Sinai let its good name be associated with this unscientific diatribe -- even allowing its logo to be included in the op-ad.
Dr. Landrigan says that our children need our protection. I could not agree more. Dr. Landrigan's false alarms contribute nothing to our children's health but do create needless distractions. Instead of scaring parents about phantom risks, we should, among other things, advocate basics such as seatbelts, bike helmets, smoke detectors, childhood vaccinations, nutritious diets, and healthy recreation. Parents who provide their kids with these should not be needlessly terrified by Mount Sinai about imaginary chemical menaces.
Dr. Elizabeth Whelan is president of the American Council on Science and Health (ACSH.org).
ACSH's view on this issue was noted by John Stossel on his blog [http://blogs.abcnews.com/johnstossel/2009/08/teach-dont-scare.html] today:
It is nothing new for junk science to make it onto the New York Times op-ed page. But some agendas are so far outside the mainstream they have to buy their way onto the page. That's what the Mount Sinai School of Medicine did in buying a platform for their Dr. Philip Landrigan, an activist who has dedicated his career to raising anxieties about "chemicals" in the environment.
In an August 4 "op-ad" likely costing around $50,000, Dr. Landrigan rails against thousands of new, synthetic chemicals introduced over the last few decades.
He says they are responsible for a full spectrum of diseases in our children -- including cancer, hyperactivity, asthma, reproductive difficulties, and even autism. There is not a shred of evidence to back up such claims. He cites some specific chemicals that have been in the news of late: PCBs (industrial chemicals used until 1977 in fireproofing and insulation ), phthalates (plastic softeners used in a wide variety of consumer products and medical devices), and bisphenol-A (BPA, used to harden plastics and in food and beverage packaging).
He states that these and other chemicals are routinely found in the bodies of both adults and children -- and that this itself is a cause for alarm. In an attempt to gain some legitimacy for his scientifically bereft claims, Dr. Landrigan throws in for good measure the actual documented health risks from exposure to high levels of lead in paint and gasoline (which was the case decades ago but is no longer an issue) and the actual link between asthma and exposure to cigarette smoke. Even a broken clock is right twice a day.
But for all his claims that "chemicals" are not safe and have not been tested, he does not acknowledge these basic facts:
•Everything in our universe consists of chemicals. Our natural foods (yes, even organic ones) are 100% chemical in composition -- and come replete with myriad natural toxins (otherwise known as poisons) and carcinogens (usually defined as chemicals which cause cancer in high doses in animal studies). Such natural carcinogens and toxins are of no health consequences because they occur at such low doses.
•Nearly all the health claim Dr. Landrigan makes -- regarding chemicals causing cancer or "toxic effects," for example -- are based on high-level animal studies. By that criterion, he should be worried about nutmeg (which contains a natural hallucinogen and the carcinogen safrole), potatoes (which contain a toxicologically significant level of arsenic), and apples (with their own natural carcinogen quercetin glycosides)
•That we can detect traces of myriad "chemicals" in the human body should be no surprise. With today's sophisticated analytical techniques, we can basically find anything in anything. The mere ability to detect a substance does not mean that the substance poses a hazard.
•Landrigan mentions something called "endocrine disruption" and reproductive defects -- but these phenomena have absolutely no practical application to human risk. Again, the claim that trace levels of chemicals adversely affect hormone production is based only on high-dose animal studies. The allegation that synthetic chemicals cause abnormalities in reproductive potential -- including allegedly chemically-induced penis shrinking -- is derived from observations of alligators growing up in polluted Florida lakes. The human data provide no evidence of reproductive problems linked to chemicals.
In short, the paid-for Landrigan piece is alarmist propaganda masquerading as science and represents a great disservice to parents, children, and public health. One cannot help wonder why Mount Sinai let its good name be associated with this unscientific diatribe -- even allowing its logo to be included in the op-ad.
Dr. Landrigan says that our children need our protection. I could not agree more. Dr. Landrigan's false alarms contribute nothing to our children's health but do create needless distractions. Instead of scaring parents about phantom risks, we should, among other things, advocate basics such as seatbelts, bike helmets, smoke detectors, childhood vaccinations, nutritious diets, and healthy recreation. Parents who provide their kids with these should not be needlessly terrified by Mount Sinai about imaginary chemical menaces.
Dr. Elizabeth Whelan is president of the American Council on Science and Health (ACSH.org).
Tuesday, August 18, 2009
Don't Set Speed Limits on Trading - Why penalize efficiency? It creates deep and liquid markets
Don't Set Speed Limits on Trading. By ARTHUR LEVITT JR.
Why penalize efficiency? It creates deep and liquid markets.
WSJ, Aug 18, 2009
The debate over high-frequency trading may seem remote and irrelevant to small investors. After all, they may think, if you're only buying and selling stocks and mutual funds occasionally, what difference does it make whether some traders are able to move quickly in and out of those same stocks, squeezing an extra penny or two of profit here and there?
But this debate is not just about the rarified world of high-frequency traders, dominated by superfast computing and trading by advanced algorithms. It's fundamentally about the competitiveness and health of U.S. markets, and the ease with which all investors are able to find willing buyers and sellers. Small investors may never directly use a high-frequency trading strategy in their lives, but they have a very large stake in whether such strategies are regulated out of existence, as is now urged by some in Congress, the media and Wall Street.
High-frequency trading is, in many respects, just the next stage in the ongoing technological innovation of financial markets. Just as paper tickets for trades were replaced by computer orders, and the trading floor seen on television was made largely irrelevant by electronic exchanges, so has high-frequency trading revolutionized the way most U.S. stocks and related investment products are priced and sold.
High-frequency trading occurs when traders position very fast computers as close as possible to the stock market's computer servers to minimize the distance and time it takes for an order to pass through telecom lines. The traders then program those computers to analyze and react to incoming market data in mere fractions of a second.
Those fractions of a second translate into only slightly better margins in executing trades, but if done in large enough volume they add up to significant value. Because of that, roughly two-thirds of all U.S. daily stock volume is generated by high-frequency traders.
Due to the rise of high-frequency trading, investors both large and small enjoy a deeper pool of potential buyers and sellers, and a wider variety of ways to execute trades. There are today more than 30 execution venues—ranging from established global exchanges to a plethora of specialized markets—catering to the particular trading needs of institutions and individuals. Choice abounds, and investors now enjoy faster, more reliable execution technology and lower execution fees than ever before. All of that contributes significantly to market liquidity, a critical measure of market health and something all investors value.
Normally, this revolution in trading would be welcomed, but the practice of "flash trading," which has recently garnered negative headlines and regulatory action, has led some market observers to condemn high-frequency trading as a whole. This is a mistake. While I support the move to ban flash orders because they have the potential to undermine the goals of market competition, that does not mean we should demonize or regulate out of existence all high-frequency trading.
Some in Congress have suggested a tax on all trades of up to 25 basis points per trade, which would raise the per-transaction price on the purchase of a $20 stock to five cents from less than a penny now. Such a tax has been tried before—from 1914 to 1966, there was a transfer tax set at 0.2% on stock trades. But that expense was simply passed on to investors. Today, a tax on each stock transaction would probably drive high-frequency traders, and the liquidity they bring, to foreign markets.
Others simply assert that all high-frequency trading has no moral or underlying economic value, and that high-frequency trading is simply a game for those who want to profit from getting access to data a split-second ahead of someone else. The Securities and Exchange Commission should ignore these complaints and the caricature that has developed of high-frequency traders.
These traders have developed systems to allow them to beat the competition to displayed quotes. They have taken available space near the markets' data servers to squeeze time out of every transaction. These traders continuously look for inefficiencies, and by exploiting them, correct them. I see nothing sinister or unfair about the advantages that come out of their investments and efforts.
We should not set a speed limit to slow everyone down to the pace set by those unwilling or unable to compete at the highest levels of market activity. Investors large and small have always been served well by those looking to build the deepest possible pool of potential buyers and sellers, make trades at a better price, and all as quickly as possible.
More liquidity, better pricing and faster speeds are the building blocks of healthy and transparent markets, and we must always affirm those goals.
Mr. Levitt was chairman of the Securities and Exchange Commission from 1993 to 2001.
Why penalize efficiency? It creates deep and liquid markets.
WSJ, Aug 18, 2009
The debate over high-frequency trading may seem remote and irrelevant to small investors. After all, they may think, if you're only buying and selling stocks and mutual funds occasionally, what difference does it make whether some traders are able to move quickly in and out of those same stocks, squeezing an extra penny or two of profit here and there?
But this debate is not just about the rarified world of high-frequency traders, dominated by superfast computing and trading by advanced algorithms. It's fundamentally about the competitiveness and health of U.S. markets, and the ease with which all investors are able to find willing buyers and sellers. Small investors may never directly use a high-frequency trading strategy in their lives, but they have a very large stake in whether such strategies are regulated out of existence, as is now urged by some in Congress, the media and Wall Street.
High-frequency trading is, in many respects, just the next stage in the ongoing technological innovation of financial markets. Just as paper tickets for trades were replaced by computer orders, and the trading floor seen on television was made largely irrelevant by electronic exchanges, so has high-frequency trading revolutionized the way most U.S. stocks and related investment products are priced and sold.
High-frequency trading occurs when traders position very fast computers as close as possible to the stock market's computer servers to minimize the distance and time it takes for an order to pass through telecom lines. The traders then program those computers to analyze and react to incoming market data in mere fractions of a second.
Those fractions of a second translate into only slightly better margins in executing trades, but if done in large enough volume they add up to significant value. Because of that, roughly two-thirds of all U.S. daily stock volume is generated by high-frequency traders.
Due to the rise of high-frequency trading, investors both large and small enjoy a deeper pool of potential buyers and sellers, and a wider variety of ways to execute trades. There are today more than 30 execution venues—ranging from established global exchanges to a plethora of specialized markets—catering to the particular trading needs of institutions and individuals. Choice abounds, and investors now enjoy faster, more reliable execution technology and lower execution fees than ever before. All of that contributes significantly to market liquidity, a critical measure of market health and something all investors value.
Normally, this revolution in trading would be welcomed, but the practice of "flash trading," which has recently garnered negative headlines and regulatory action, has led some market observers to condemn high-frequency trading as a whole. This is a mistake. While I support the move to ban flash orders because they have the potential to undermine the goals of market competition, that does not mean we should demonize or regulate out of existence all high-frequency trading.
Some in Congress have suggested a tax on all trades of up to 25 basis points per trade, which would raise the per-transaction price on the purchase of a $20 stock to five cents from less than a penny now. Such a tax has been tried before—from 1914 to 1966, there was a transfer tax set at 0.2% on stock trades. But that expense was simply passed on to investors. Today, a tax on each stock transaction would probably drive high-frequency traders, and the liquidity they bring, to foreign markets.
Others simply assert that all high-frequency trading has no moral or underlying economic value, and that high-frequency trading is simply a game for those who want to profit from getting access to data a split-second ahead of someone else. The Securities and Exchange Commission should ignore these complaints and the caricature that has developed of high-frequency traders.
These traders have developed systems to allow them to beat the competition to displayed quotes. They have taken available space near the markets' data servers to squeeze time out of every transaction. These traders continuously look for inefficiencies, and by exploiting them, correct them. I see nothing sinister or unfair about the advantages that come out of their investments and efforts.
We should not set a speed limit to slow everyone down to the pace set by those unwilling or unable to compete at the highest levels of market activity. Investors large and small have always been served well by those looking to build the deepest possible pool of potential buyers and sellers, make trades at a better price, and all as quickly as possible.
More liquidity, better pricing and faster speeds are the building blocks of healthy and transparent markets, and we must always affirm those goals.
Mr. Levitt was chairman of the Securities and Exchange Commission from 1993 to 2001.
Monday, August 17, 2009
We Don't Spend Enough on Health Care
We Don't Spend Enough on Health Care. By CRAIG S. KARPEL
It's crazy to adopt a bean-counting mentality amid revolutionary, albeit expensive, advances in medicine.
WSJ, Aug 16, 2009
Americans are being urged to worry about the nation spending 17% of its gross domestic product each year on health care—a higher percentage than any other country. Addressing the American Medical Association in June, Barack Obama said, "Make no mistake: The cost of our health care is a threat to our economy." But the president is mistaken. Japan spends 8% of its GDP on health care—the same as Zimbabwe. South Korea and Haiti both spend 6%. Monaco spends 5%, which is what Afghanistan spends. Do all of these countries have economies that are less "threatened" than that of the U.S.?
No. So there must be other factors that affect the health of a nation's economy.
Mr. Obama has said that "the cost of health care has weighed down our economy." No one thinks the 20% of our GDP that's attributable to manufacturing is weighing down the economy, because it's intuitively clear that one person's expenditure on widgets is another person's income. But the same is true of the health-care industry. The $2.4 trillion Americans spend each year for health care doesn't go up in smoke. It's paid to other Americans.
The basic material needs of human beings are food, clothing and shelter. The desire for food and clothing drove hunter-gatherer economies and, subsequently, agricultural economies, for millennia. The Industrial Revolution was driven by the desire for clothing. Thus Richard Arkwright's water frame, James Hargreaves's spinning jenny, Samuel Crompton's spinning mule, Eli Whitney's cotton gin and Elias Howe's sewing machine.
Though it hasn't been widely realized, the desire for shelter was a major driver of the U.S. economy during the second half of the 20th century and the first several years of the 21st. About one-third of the new jobs created during the latter period were directly or indirectly related to housing, as the stupendous ripple effect of the bursting housing bubble should make painfully obvious.
Once these material needs are substantially met, desire for health care—without which there can be no enjoyment of food, clothing or shelter—becomes a significant, perhaps a principal, driver of the economy.
A little-noticed feature of the current recession is the role of the health-care industry as a resilient driver of the general economy. Health-care now accounts for 10.4% of nonfarm employment. Health-care employment grew by 19,600 jobs in July 2009, on a par with the average monthly gain for the first half of 2009, which was down from an average monthly increase of 30,000 in 2008. Remarkably, these gains occurred in a period during which total employment shrank by 6.7 million.
The U.S. health-care economy should be viewed not as a burden but as an engine of growth. Medical and orthopedic equipment exports increased by 65.1% from 2004 through 2008. Pharmaceutical exports were up 74.6%. The unprecedented advances expected to come out of American stem cell, nanotechnology and human genome research—which other countries' constricted health sectors cannot support—will send these already impressive figures skyward.
A study by Deloitte LLP has found that more than 400,000 non-U.S. residents obtained medical care in the U.S. in 2008, and it forecasts an annual increase of 3%. Some 3.5% of inpatient procedures at U.S. hospitals were performed on international patients, many of them escaping from Canada's supposedly superior health system.
"Inbound medical tourism," Deloitte stated, "is primarily driven by the search for high-quality care without extensive waiting periods. Foreign patients are willing to pay more for care within the United States if these two factors play a large role." The deficiencies of the foreign health-care systems the Obama administration wishes to emulate can be counted on to generate ever-increasing revenues for U.S. providers and employment for Americans.
In a 2007 study, Stanford University economists Robert E. Hall (who will take office next year as president of the American Economic Association) and Charles I. Jones reported that modeling they've conducted has found that mid-21st century U.S. health-care expenditures would optimally amount to 30% of GDP or more. They wrote:
"We examine the allocation of resources that maximizes social welfare in our model. We abstract from the complicated institutions that shape spending in the United States and ask a more basic question: from a social welfare standpoint, how much should the nation spend on health care, and what is the time path of optimal health spending? . . .
"Viewed from every angle, our results support the proposition that both historical and future increases in the health spending share are desirable. . . . [W]e believe it likely that maximizing social welfare in the United States will require the development of institutions that are consistent with spending 30 percent or more of GDP on health by the middle of the century."
The administration's health-care plan is biased toward bean-counting rather than designed to maximize American physical and mental well-being. We need to ask ourselves whether there is truly anything more valuable to us than our loved ones and our own health and longevity.
In the signature radio sketch of Jack Benny, whose performing persona was laughably frugal, actor Eddie Marr snarled at him, "Don't make a move—this is a stickup. Now, come on: Your money or your life." Benny didn't respond. The "robber" said, "Look, bud—I said your money or your life!" Whereupon Benny shot back, "I'm thinking it over!"
Confronted for the first time in history with a constant stream of medical innovations that are marvelously effective but tend to be very expensive, our legislative representatives—in particular, the Blue Dog Democrats—would do well to stop "thinking it over" and to commit themselves to action that will preserve the ability of Americans to choose life over money.
Mr. Karpel is the author of "The Retirement Myth" (HarperCollins, 1995).
It's crazy to adopt a bean-counting mentality amid revolutionary, albeit expensive, advances in medicine.
WSJ, Aug 16, 2009
Americans are being urged to worry about the nation spending 17% of its gross domestic product each year on health care—a higher percentage than any other country. Addressing the American Medical Association in June, Barack Obama said, "Make no mistake: The cost of our health care is a threat to our economy." But the president is mistaken. Japan spends 8% of its GDP on health care—the same as Zimbabwe. South Korea and Haiti both spend 6%. Monaco spends 5%, which is what Afghanistan spends. Do all of these countries have economies that are less "threatened" than that of the U.S.?
No. So there must be other factors that affect the health of a nation's economy.
Mr. Obama has said that "the cost of health care has weighed down our economy." No one thinks the 20% of our GDP that's attributable to manufacturing is weighing down the economy, because it's intuitively clear that one person's expenditure on widgets is another person's income. But the same is true of the health-care industry. The $2.4 trillion Americans spend each year for health care doesn't go up in smoke. It's paid to other Americans.
The basic material needs of human beings are food, clothing and shelter. The desire for food and clothing drove hunter-gatherer economies and, subsequently, agricultural economies, for millennia. The Industrial Revolution was driven by the desire for clothing. Thus Richard Arkwright's water frame, James Hargreaves's spinning jenny, Samuel Crompton's spinning mule, Eli Whitney's cotton gin and Elias Howe's sewing machine.
Though it hasn't been widely realized, the desire for shelter was a major driver of the U.S. economy during the second half of the 20th century and the first several years of the 21st. About one-third of the new jobs created during the latter period were directly or indirectly related to housing, as the stupendous ripple effect of the bursting housing bubble should make painfully obvious.
Once these material needs are substantially met, desire for health care—without which there can be no enjoyment of food, clothing or shelter—becomes a significant, perhaps a principal, driver of the economy.
A little-noticed feature of the current recession is the role of the health-care industry as a resilient driver of the general economy. Health-care now accounts for 10.4% of nonfarm employment. Health-care employment grew by 19,600 jobs in July 2009, on a par with the average monthly gain for the first half of 2009, which was down from an average monthly increase of 30,000 in 2008. Remarkably, these gains occurred in a period during which total employment shrank by 6.7 million.
The U.S. health-care economy should be viewed not as a burden but as an engine of growth. Medical and orthopedic equipment exports increased by 65.1% from 2004 through 2008. Pharmaceutical exports were up 74.6%. The unprecedented advances expected to come out of American stem cell, nanotechnology and human genome research—which other countries' constricted health sectors cannot support—will send these already impressive figures skyward.
A study by Deloitte LLP has found that more than 400,000 non-U.S. residents obtained medical care in the U.S. in 2008, and it forecasts an annual increase of 3%. Some 3.5% of inpatient procedures at U.S. hospitals were performed on international patients, many of them escaping from Canada's supposedly superior health system.
"Inbound medical tourism," Deloitte stated, "is primarily driven by the search for high-quality care without extensive waiting periods. Foreign patients are willing to pay more for care within the United States if these two factors play a large role." The deficiencies of the foreign health-care systems the Obama administration wishes to emulate can be counted on to generate ever-increasing revenues for U.S. providers and employment for Americans.
In a 2007 study, Stanford University economists Robert E. Hall (who will take office next year as president of the American Economic Association) and Charles I. Jones reported that modeling they've conducted has found that mid-21st century U.S. health-care expenditures would optimally amount to 30% of GDP or more. They wrote:
"We examine the allocation of resources that maximizes social welfare in our model. We abstract from the complicated institutions that shape spending in the United States and ask a more basic question: from a social welfare standpoint, how much should the nation spend on health care, and what is the time path of optimal health spending? . . .
"Viewed from every angle, our results support the proposition that both historical and future increases in the health spending share are desirable. . . . [W]e believe it likely that maximizing social welfare in the United States will require the development of institutions that are consistent with spending 30 percent or more of GDP on health by the middle of the century."
The administration's health-care plan is biased toward bean-counting rather than designed to maximize American physical and mental well-being. We need to ask ourselves whether there is truly anything more valuable to us than our loved ones and our own health and longevity.
In the signature radio sketch of Jack Benny, whose performing persona was laughably frugal, actor Eddie Marr snarled at him, "Don't make a move—this is a stickup. Now, come on: Your money or your life." Benny didn't respond. The "robber" said, "Look, bud—I said your money or your life!" Whereupon Benny shot back, "I'm thinking it over!"
Confronted for the first time in history with a constant stream of medical innovations that are marvelously effective but tend to be very expensive, our legislative representatives—in particular, the Blue Dog Democrats—would do well to stop "thinking it over" and to commit themselves to action that will preserve the ability of Americans to choose life over money.
Mr. Karpel is the author of "The Retirement Myth" (HarperCollins, 1995).
Tuesday, August 11, 2009
Arizona’s Budget Breakthrough - An alternative to California’s tax and spend model
Arizona’s Budget Breakthrough. WSJ Editorial
An alternative to California’s tax and spend model.
WSJ, Aug 11, 2009
Perhaps states are starting to learn the right fiscal lessons from the red-ink blowouts in high-tax California and New York. Today, the legislature in Arizona will vote on a tax reform designed to entice more employers and high-income taxpayers to the state. Sponsored by Republican Governor Jan Brewer, the plan would cut state property taxes, the corporate tax and personal income taxes, in exchange for a temporary rise in the sales tax.
Most economic studies agree that states have more jobs and higher income growth when they tax consumption rather than savings, investment and business profits. This explains why most of the nine states with no income tax at all—such as Texas, Florida and Tennessee—have been economic high-flyers in recent decades.
Ms. Brewer’s proposal reflects this economic logic. Effective January 1, 2011, her plan would reduce the state’s corporate income tax rate to 4.86% from 6.97%, which would be one of the largest business tax cuts in the nation in recent years. The proposal also cuts all personal income tax rates by 6.6%, thus lowering the top marginal rate to 4.24% from 4.54%. A hated statewide tax on commercial and residential property would also be abolished.
Arizona has been hit especially hard by the housing slump, and its budget woes were compounded thanks to former Governor Janet Napolitano’s spending spree before she joined the Obama cabinet. On her watch the budget grew by more than 50% in five years—to $10.2 billion from $6.5 billion in 2004. The state now has a $1 billion budget gap, and to close it the legislature will also vote on a one percentage point increase in the sales tax to 6.6% in 2010 and 2011; in the third year the sales tax would fall to 6.1%, and in the fourth year would revert to its current 5.6% rate.
We’d rather see the legislature cut more spending than raise the sales tax, but on the other hand the sales tax would only take effect if it is approved on the November ballot. The political class is giving voters a say in the matter. The sales tax increase also has the advantage of a built-in expiration date, while the tax cuts are permanent.
Democratic opponents are calling this a tax giveaway to big business. But lawmakers needn’t apologize for trying to retain Arizona’s status as a business-friendly state—particularly when jobs are so scarce. Small employers also benefit from the lower property tax rates and the personal income tax reductions. Lower tax payments will enable them to reinvest more in their enterprises.
The opponents should consult a new study of state business taxes by former U.S. Treasury economist Robert Carroll for the Tax Foundation. He examined 50 states and found that states with lower corporate tax rates have higher wage gains and more productivity over time. This tax cut sounds like a high-return investment.
Republicans control both houses of the Arizona legislature, and as we went to press the main obstacle to passing the reform was the Arizona Senate’s antitax conservatives. They oppose the higher sales tax. These Republicans should look to one of the triumphs of the Reagan Presidency, the 1986 tax reform, which broadened the tax base but substantially lowered tax rates and thus sustained the 1980s expansion.
Arizona has the chance to be the anti-California, closing the budget deficit by growing the economy, not by raising taxes. We hope legislators don’t blow it, because the U.S. desperately needs an alternative to the tax, spend and tax again philosophy of Sacramento and Albany.
An alternative to California’s tax and spend model.
WSJ, Aug 11, 2009
Perhaps states are starting to learn the right fiscal lessons from the red-ink blowouts in high-tax California and New York. Today, the legislature in Arizona will vote on a tax reform designed to entice more employers and high-income taxpayers to the state. Sponsored by Republican Governor Jan Brewer, the plan would cut state property taxes, the corporate tax and personal income taxes, in exchange for a temporary rise in the sales tax.
Most economic studies agree that states have more jobs and higher income growth when they tax consumption rather than savings, investment and business profits. This explains why most of the nine states with no income tax at all—such as Texas, Florida and Tennessee—have been economic high-flyers in recent decades.
Ms. Brewer’s proposal reflects this economic logic. Effective January 1, 2011, her plan would reduce the state’s corporate income tax rate to 4.86% from 6.97%, which would be one of the largest business tax cuts in the nation in recent years. The proposal also cuts all personal income tax rates by 6.6%, thus lowering the top marginal rate to 4.24% from 4.54%. A hated statewide tax on commercial and residential property would also be abolished.
Arizona has been hit especially hard by the housing slump, and its budget woes were compounded thanks to former Governor Janet Napolitano’s spending spree before she joined the Obama cabinet. On her watch the budget grew by more than 50% in five years—to $10.2 billion from $6.5 billion in 2004. The state now has a $1 billion budget gap, and to close it the legislature will also vote on a one percentage point increase in the sales tax to 6.6% in 2010 and 2011; in the third year the sales tax would fall to 6.1%, and in the fourth year would revert to its current 5.6% rate.
We’d rather see the legislature cut more spending than raise the sales tax, but on the other hand the sales tax would only take effect if it is approved on the November ballot. The political class is giving voters a say in the matter. The sales tax increase also has the advantage of a built-in expiration date, while the tax cuts are permanent.
Democratic opponents are calling this a tax giveaway to big business. But lawmakers needn’t apologize for trying to retain Arizona’s status as a business-friendly state—particularly when jobs are so scarce. Small employers also benefit from the lower property tax rates and the personal income tax reductions. Lower tax payments will enable them to reinvest more in their enterprises.
The opponents should consult a new study of state business taxes by former U.S. Treasury economist Robert Carroll for the Tax Foundation. He examined 50 states and found that states with lower corporate tax rates have higher wage gains and more productivity over time. This tax cut sounds like a high-return investment.
Republicans control both houses of the Arizona legislature, and as we went to press the main obstacle to passing the reform was the Arizona Senate’s antitax conservatives. They oppose the higher sales tax. These Republicans should look to one of the triumphs of the Reagan Presidency, the 1986 tax reform, which broadened the tax base but substantially lowered tax rates and thus sustained the 1980s expansion.
Arizona has the chance to be the anti-California, closing the budget deficit by growing the economy, not by raising taxes. We hope legislators don’t blow it, because the U.S. desperately needs an alternative to the tax, spend and tax again philosophy of Sacramento and Albany.
The Next Fannie Mae: Ginnie Mae and FHA are becoming $1 trillion subprime guarantors
The Next Fannie Mae. WSJ Editorial
Ginnie Mae and FHA are becoming $1 trillion subprime guarantors.
The Wall Street Journal, p A16, Aug 11, 2009
Much to their dismay, Americans learned last year that they “owned” Fannie Mae and Freddie Mac. Well, meet their cousin, Ginnie Mae or the Government National Mortgage Association, which will soon join them as a trillion-dollar packager of subprime mortgages. Taxpayers own Ginnie too.
Only last week, Ginnie announced that it issued a monthly record of $43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph Murin sounded almost giddy as he cheered this “phenomenal growth.” Ginnie Mae’s mortgage exposure is expected to top $1 trillion by the end of next year—or far more than double the dollar amount of 2007. (See the nearby table.) Earlier this summer, Reuters quoted Anthony Medici of the Housing Department’s Inspector General’s office as saying, “Who would have predicted that Ginnie Mae and Fannie Mae would have swapped positions” in loan volume?
Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee.
Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.
On June 18, HUD’s Inspector General issued a scathing report on the FHA’s lax insurance practices. It found that the FHA’s default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days. The FHA’s reserve fund was found to have fallen in half, to 3% from 6.4% in 2007—meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory. The IG says the FHA may need a “Congressional appropriation intervention to make up the shortfall.”
The IG also fears that the recent “surge in FHA loans is likely to overtax the oversight resources of the FHA, making careful and comprehensive lender monitoring difficult.” And it warned that the growth in FHA mortgage volume could make the program “vulnerable to exploitation by fraud schemes . . . that undercut the integrity of the program.” The 19-page IG report includes a horror show of recent fraud cases.
If housing values continue to slide and 10% of FHA loans end up in default, taxpayers will be on the hook for another $50 to $60 billion of mortgage losses. Only last week, Taylor Bean, the FHA’s third largest mortgage originator in June with $17 billion in loans this year, announced it is terminating operations after the FHA barred the mortgage lender from participating in its insurance program. The feds alleged that Taylor Bean had “misrepresented” its relationship with an auditor and had “irregular transactions that raised concerns of fraud.”
Is anyone on Capitol Hill or the White House paying attention? Evidently not, because on both sides of Pennsylvania Avenue policy makers are busy giving the FHA even more business while easing its already loosy-goosy underwriting standards. A few weeks ago a House committee approved legislation to keep the FHA’s loan limit in high-income states like California at $729,750. We wonder how many first-time home buyers purchase a $725,000 home. The Members must have missed the IG’s warning that higher loan limits may mean “much greater losses by FHA” and will make fraudsters “much more attracted to the product.”
In the wake of the mortgage meltdown, most private lenders have reverted to the traditional down payment rule of 10% or 20%. Housing experts agree that a high down payment is the best protection against default and foreclosure because it means the owner has something to lose by walking away. Meanwhile, at the FHA, the down payment requirement remains a mere 3.5%. Other policies—such as allowing the buyer to finance closing costs and use the homebuyer tax credit to cover costs—can drive the down payment to below 2%.
Then there is the booming refinancing program that Congress has approved to move into the FHA hundreds of thousands of borrowers who can’t pay their mortgage, including many with subprime and other exotic loans. HUD just announced that starting this week the FHA will refinance troubled mortgages by reducing up to 30% of the principal under the Home Affordable Modification Program. This program is intended to reduce foreclosures, but someone has to pick up the multibillion-dollar cost of the 30% loan forgiveness. That will be taxpayers.
In some cases, these owners are so overdue in their payments, and housing prices have fallen so dramatically, that the borrowers have a negative 25% equity in the home and they are still eligible for an FHA refi. We also know from other government and private loan modification programs that a borrower who has defaulted on the mortgage once is at very high risk (25%-50%) of defaulting again.
All of which means that the FHA and Ginnie Mae could well be the next Fannie and Freddie. While Fan and Fred carried “implicit” federal guarantees, the FHA and Ginnie carry the explicit full faith and credit of the U.S. government.
We’ve long argued that Congress has a fiduciary duty to secure the safety and soundness of FHA through common sense reforms. Eliminate the 100% guarantee on FHA loans, so lenders have a greater financial incentive to insure the soundness of the loan; adopt the private sector convention of a 10% down payment, which would reduce foreclosures; and stop putting subprime loans that should have never been made in the first place on the federal balance sheet.
The housing lobby, which gets rich off FHA insurance, has long blocked these due-diligence reforms, saying there’s no threat to taxpayers. That’s what they also said about Fan and Fred—$400 billion ago.
Ginnie Mae and FHA are becoming $1 trillion subprime guarantors.
The Wall Street Journal, p A16, Aug 11, 2009
Much to their dismay, Americans learned last year that they “owned” Fannie Mae and Freddie Mac. Well, meet their cousin, Ginnie Mae or the Government National Mortgage Association, which will soon join them as a trillion-dollar packager of subprime mortgages. Taxpayers own Ginnie too.
Only last week, Ginnie announced that it issued a monthly record of $43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph Murin sounded almost giddy as he cheered this “phenomenal growth.” Ginnie Mae’s mortgage exposure is expected to top $1 trillion by the end of next year—or far more than double the dollar amount of 2007. (See the nearby table.) Earlier this summer, Reuters quoted Anthony Medici of the Housing Department’s Inspector General’s office as saying, “Who would have predicted that Ginnie Mae and Fannie Mae would have swapped positions” in loan volume?
Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee.
Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.
On June 18, HUD’s Inspector General issued a scathing report on the FHA’s lax insurance practices. It found that the FHA’s default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days. The FHA’s reserve fund was found to have fallen in half, to 3% from 6.4% in 2007—meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory. The IG says the FHA may need a “Congressional appropriation intervention to make up the shortfall.”
The IG also fears that the recent “surge in FHA loans is likely to overtax the oversight resources of the FHA, making careful and comprehensive lender monitoring difficult.” And it warned that the growth in FHA mortgage volume could make the program “vulnerable to exploitation by fraud schemes . . . that undercut the integrity of the program.” The 19-page IG report includes a horror show of recent fraud cases.
If housing values continue to slide and 10% of FHA loans end up in default, taxpayers will be on the hook for another $50 to $60 billion of mortgage losses. Only last week, Taylor Bean, the FHA’s third largest mortgage originator in June with $17 billion in loans this year, announced it is terminating operations after the FHA barred the mortgage lender from participating in its insurance program. The feds alleged that Taylor Bean had “misrepresented” its relationship with an auditor and had “irregular transactions that raised concerns of fraud.”
Is anyone on Capitol Hill or the White House paying attention? Evidently not, because on both sides of Pennsylvania Avenue policy makers are busy giving the FHA even more business while easing its already loosy-goosy underwriting standards. A few weeks ago a House committee approved legislation to keep the FHA’s loan limit in high-income states like California at $729,750. We wonder how many first-time home buyers purchase a $725,000 home. The Members must have missed the IG’s warning that higher loan limits may mean “much greater losses by FHA” and will make fraudsters “much more attracted to the product.”
In the wake of the mortgage meltdown, most private lenders have reverted to the traditional down payment rule of 10% or 20%. Housing experts agree that a high down payment is the best protection against default and foreclosure because it means the owner has something to lose by walking away. Meanwhile, at the FHA, the down payment requirement remains a mere 3.5%. Other policies—such as allowing the buyer to finance closing costs and use the homebuyer tax credit to cover costs—can drive the down payment to below 2%.
Then there is the booming refinancing program that Congress has approved to move into the FHA hundreds of thousands of borrowers who can’t pay their mortgage, including many with subprime and other exotic loans. HUD just announced that starting this week the FHA will refinance troubled mortgages by reducing up to 30% of the principal under the Home Affordable Modification Program. This program is intended to reduce foreclosures, but someone has to pick up the multibillion-dollar cost of the 30% loan forgiveness. That will be taxpayers.
In some cases, these owners are so overdue in their payments, and housing prices have fallen so dramatically, that the borrowers have a negative 25% equity in the home and they are still eligible for an FHA refi. We also know from other government and private loan modification programs that a borrower who has defaulted on the mortgage once is at very high risk (25%-50%) of defaulting again.
All of which means that the FHA and Ginnie Mae could well be the next Fannie and Freddie. While Fan and Fred carried “implicit” federal guarantees, the FHA and Ginnie carry the explicit full faith and credit of the U.S. government.
We’ve long argued that Congress has a fiduciary duty to secure the safety and soundness of FHA through common sense reforms. Eliminate the 100% guarantee on FHA loans, so lenders have a greater financial incentive to insure the soundness of the loan; adopt the private sector convention of a 10% down payment, which would reduce foreclosures; and stop putting subprime loans that should have never been made in the first place on the federal balance sheet.
The housing lobby, which gets rich off FHA insurance, has long blocked these due-diligence reforms, saying there’s no threat to taxpayers. That’s what they also said about Fan and Fred—$400 billion ago.
Corporate Earnings Are No Sign of Recovery
Corporate Earnings Are No Sign of Recovery. By ZACHARY KARABELL
WSJ, Aug 09, 2009
Despite grim predictions, most major U.S. companies have reported positive earnings for the second quarter of 2009. Given how wrong past predictions have been, the fact that earnings have blown away expectations shouldn’t be so surprising. Still, the numbers are genuinely impressive: More than 73% of the companies that have reported so far have beaten earnings estimates—and stocks have rightly rallied.
Yes, profits are down sharply from a year ago, but this is in the context of an overall global economy that is shrinking. If a company made $30 million on $100 million in revenue a year ago, and made “only” $20 million this quarter, it’s accurate to have a headline that says its profits fell 33%. But making $20 million, or a 20% margin, in an economy that contracted is nonetheless startling, or should be.
The same Wall Street culture that failed to anticipate the tipping point in the financial system is just as prone to a herd mentality of negativity. Having overlooked the gaping fissures in the system last year, most analysts went to the other extreme in their analysis of what would happen this year. A similar process occurred in 2002 and 2003, as views whipsawed from unrealistic optimism to irrational pessimism.
This time, the slew of better earnings has also led to the conviction that the worst of the economic travails are behind us. As the stock market has soared, many have declared the recession either over or ending. These voices range from public officials at the Federal Reserve to notable pessimists such as New York University economist Nouriel Roubini. This rosy view assumes a connection between how listed companies are fairing and how the national economy will fair. That assumption is wrong.
The delinkage of the fate of corporate profits from that of the overall economy is not new. Beginning earlier in this decade, profits began to accelerate far in excess of either global or U.S. economic growth.
In 2004, for instance, earnings for the S&P 500 grew 22%; in 2005 and 2006 they grew just under 20%. Those same years global growth barely exceeded 3%. As we now know, some of those elevated earnings were due to the leverage-fueled profits of the financial-service industry. And there’s little doubt that mortgage-laced derivatives artificially elevated growth. But even discounting those factors, the growth of corporate profits would have substantially exceeded the expansion of national economies.
Then, in the second half of last year and the first months of this year, profits plunged along with U.S. and global economic activity. That gave succor to the belief that companies can only grow as much as the economies in which they function grow. For years, most analysts argued that if there was too wide a variance between the two, something had to give. Either profits had to descend or national economic growth had to accelerate. As profits shrank over the past nine months, those who argued that a reversion to the mean was inevitable seemed to be vindicated. But that belief is wrong. Companies are increasingly less constrained by any national economy, and their success is no harbinger of national economic growth or sustained economic health for the United States.
First, companies have been profiting because they can cut costs aggressively. It’s not as if demand in the U.S. or Europe has picked up. Take Starbucks, which reported a surprising surge in profits. Little of that was due to American consumers suddenly becoming comfortable with $5 grande mocha lattes. Instead, it was because Starbucks—faced with weak demand and sluggish sales—closed stores and laid off workers. That has been a trend across industries.
Second, many larger companies have been profiting because they can focus on where the growth is around the globe. Companies such as Intel, Caterpillar, Microsoft and IBM now derive a majority of their revenues from outside the U.S., with the dynamic economies of the Asian rim and above all China assuming an ever-larger role. Companies are thriving in spite of economic activity in the U.S., not because of it.
That suggests the connection between corporate profits and robust economic recovery in the U.S. is tenuous at best. In fact, the financial crisis hastened the trend toward efficiencies, toward leaner inventories, and towards integrating both technology and global supply chains that has been taking place over the past decade.
That has led to severe pressure on the American working class and eroding employment. As these companies profit from global expansion and greater efficiency, they have little or no reason to rehire fired workers, or to expand their work force in a U.S. that is barely growing. If you are a global company, you want to hire and expand where the most dynamic growth is. Unfortunately for Americans, that’s not the U.S.
So we are facing a conundrum: Companies can grow by leaps and bounds—by double-digits—and yet unemployment can skyrocket and remain high. There is nothing on the horizon that would lead one to expect a turnaround in the employment picture.
Job losses slowed slightly last month as the unemployment rate fell to 9.4% in July from 9.5% in June, but that’s a far cry from any sign of job creation. The weight of more than 20 million marginally employed or unemployed, combined with the increasing pace of economic activity outside the U.S., presents the prospect of permanent change in the American economic landscape: high unemployment, moderate to weak growth, and soaring corporate profits.
The ability of companies—large ones especially, but even more modest ventures that assemble and source globally—to become more efficient and go where the growth is has never been greater. This is undoubtedly good for stocks and positive for investors, but it is also a challenge for American society that we have not even begun to confront.
Mr. Karabell is president of River Twice Research. His new book, “Superfusion: How China and America Became One Economy and Why the World’s Prosperity Depends on It,” will be published by Simon & Schuster in October.
WSJ, Aug 09, 2009
Despite grim predictions, most major U.S. companies have reported positive earnings for the second quarter of 2009. Given how wrong past predictions have been, the fact that earnings have blown away expectations shouldn’t be so surprising. Still, the numbers are genuinely impressive: More than 73% of the companies that have reported so far have beaten earnings estimates—and stocks have rightly rallied.
Yes, profits are down sharply from a year ago, but this is in the context of an overall global economy that is shrinking. If a company made $30 million on $100 million in revenue a year ago, and made “only” $20 million this quarter, it’s accurate to have a headline that says its profits fell 33%. But making $20 million, or a 20% margin, in an economy that contracted is nonetheless startling, or should be.
The same Wall Street culture that failed to anticipate the tipping point in the financial system is just as prone to a herd mentality of negativity. Having overlooked the gaping fissures in the system last year, most analysts went to the other extreme in their analysis of what would happen this year. A similar process occurred in 2002 and 2003, as views whipsawed from unrealistic optimism to irrational pessimism.
This time, the slew of better earnings has also led to the conviction that the worst of the economic travails are behind us. As the stock market has soared, many have declared the recession either over or ending. These voices range from public officials at the Federal Reserve to notable pessimists such as New York University economist Nouriel Roubini. This rosy view assumes a connection between how listed companies are fairing and how the national economy will fair. That assumption is wrong.
The delinkage of the fate of corporate profits from that of the overall economy is not new. Beginning earlier in this decade, profits began to accelerate far in excess of either global or U.S. economic growth.
In 2004, for instance, earnings for the S&P 500 grew 22%; in 2005 and 2006 they grew just under 20%. Those same years global growth barely exceeded 3%. As we now know, some of those elevated earnings were due to the leverage-fueled profits of the financial-service industry. And there’s little doubt that mortgage-laced derivatives artificially elevated growth. But even discounting those factors, the growth of corporate profits would have substantially exceeded the expansion of national economies.
Then, in the second half of last year and the first months of this year, profits plunged along with U.S. and global economic activity. That gave succor to the belief that companies can only grow as much as the economies in which they function grow. For years, most analysts argued that if there was too wide a variance between the two, something had to give. Either profits had to descend or national economic growth had to accelerate. As profits shrank over the past nine months, those who argued that a reversion to the mean was inevitable seemed to be vindicated. But that belief is wrong. Companies are increasingly less constrained by any national economy, and their success is no harbinger of national economic growth or sustained economic health for the United States.
First, companies have been profiting because they can cut costs aggressively. It’s not as if demand in the U.S. or Europe has picked up. Take Starbucks, which reported a surprising surge in profits. Little of that was due to American consumers suddenly becoming comfortable with $5 grande mocha lattes. Instead, it was because Starbucks—faced with weak demand and sluggish sales—closed stores and laid off workers. That has been a trend across industries.
Second, many larger companies have been profiting because they can focus on where the growth is around the globe. Companies such as Intel, Caterpillar, Microsoft and IBM now derive a majority of their revenues from outside the U.S., with the dynamic economies of the Asian rim and above all China assuming an ever-larger role. Companies are thriving in spite of economic activity in the U.S., not because of it.
That suggests the connection between corporate profits and robust economic recovery in the U.S. is tenuous at best. In fact, the financial crisis hastened the trend toward efficiencies, toward leaner inventories, and towards integrating both technology and global supply chains that has been taking place over the past decade.
That has led to severe pressure on the American working class and eroding employment. As these companies profit from global expansion and greater efficiency, they have little or no reason to rehire fired workers, or to expand their work force in a U.S. that is barely growing. If you are a global company, you want to hire and expand where the most dynamic growth is. Unfortunately for Americans, that’s not the U.S.
So we are facing a conundrum: Companies can grow by leaps and bounds—by double-digits—and yet unemployment can skyrocket and remain high. There is nothing on the horizon that would lead one to expect a turnaround in the employment picture.
Job losses slowed slightly last month as the unemployment rate fell to 9.4% in July from 9.5% in June, but that’s a far cry from any sign of job creation. The weight of more than 20 million marginally employed or unemployed, combined with the increasing pace of economic activity outside the U.S., presents the prospect of permanent change in the American economic landscape: high unemployment, moderate to weak growth, and soaring corporate profits.
The ability of companies—large ones especially, but even more modest ventures that assemble and source globally—to become more efficient and go where the growth is has never been greater. This is undoubtedly good for stocks and positive for investors, but it is also a challenge for American society that we have not even begun to confront.
Mr. Karabell is president of River Twice Research. His new book, “Superfusion: How China and America Became One Economy and Why the World’s Prosperity Depends on It,” will be published by Simon & Schuster in October.
Monday, August 10, 2009
USAID Partners With Chevron To Promote Agricultural Development in Angola
USAID Partners With Chevron Corporation and the CLUSA To Promote Agricultural Development in Angola.
USAID
The U.S. Agency for International Development (USAID) has signed a memorandum of understanding with the Chevron Corporation and the Cooperative League of the United States of America (CLUSA) to assist Angola in diversifying its economy by revitalizing small and medium scale commercial farming, and promoting agricultural development that is environmentally friendly, socially just and economically sustainable.
Benefits of Implementation
The partnership between USAID, Chevron and the CLUSA will enable farmers to develop and improve the commercial viability of their products and services. The mechanisms the partnership will use to assist Angola in reaching its agricultural sector development include:
To build on the successes of this partnership, USAID, Chevron and CLUSA will coordinate technical assistance and research to promote environmentally friendly resource management agricultural and agribusiness practices and will serve as the facilitators of "best practices" to country-level partners. They will work together to monitor the impact, effectiveness, and sustainability of their support to agricultural activities.
USAID
The U.S. Agency for International Development (USAID) has signed a memorandum of understanding with the Chevron Corporation and the Cooperative League of the United States of America (CLUSA) to assist Angola in diversifying its economy by revitalizing small and medium scale commercial farming, and promoting agricultural development that is environmentally friendly, socially just and economically sustainable.
Benefits of Implementation
The partnership between USAID, Chevron and the CLUSA will enable farmers to develop and improve the commercial viability of their products and services. The mechanisms the partnership will use to assist Angola in reaching its agricultural sector development include:
- Providing finance, business and training support to small and medium scale farmers and related agricultural enterprises;
- Strengthening the capacity of agrarian schools;
- Providing assistance to non-governmental organizations that deliver savings and credit products to small and medium scale farmers and related agricultural enterprises;
- Technical assistance to commercial banks providing wholesale lending to rural finance institutions; and
- Financing and support to private sector-based agricultural initiatives that promote sustainable, integrated value chains that link producers, input suppliers, financiers, buyers and other agribusinesses.
To build on the successes of this partnership, USAID, Chevron and CLUSA will coordinate technical assistance and research to promote environmentally friendly resource management agricultural and agribusiness practices and will serve as the facilitators of "best practices" to country-level partners. They will work together to monitor the impact, effectiveness, and sustainability of their support to agricultural activities.
Friday, August 7, 2009
US Air Force and Naval forces could do serious damage to Tehran’s nuclear facilities if diplomacy fails
There Is a Military Option on Iran. By CHUCK WALD
U.S. Air Force and Naval forces could do serious damage to Tehran’s nuclear facilities if diplomacy fails.
WSJ, Aug 07, 2009
In a policy address at the Council on Foreign Relations last month, Secretary of State Hillary Clinton said of Iran, “We cannot be afraid or unwilling to engage.” But the Iranian government has yet to accept President Obama’s outstretched hand. Even if Tehran suddenly acceded to talks, U.S. policy makers must prepare for the eventuality that diplomacy fails. While there has been much discussion of economic sanctions, we cannot neglect the military’s role in a Plan B.
There has been a lack of serious public discussion of the military tools available to us. Any mention of them is either met with accusations of warmongering or hushed with concerns over sharing sensitive information. It is important to discuss, within legal limits, such a serious issue as openly as possible. Discussion strengthens our democracy and dispels misinformation.
The military can play an important role in solving this complex problem without firing a single shot. Publicly signaling serious preparation for a military strike might obviate the need for one if deployments force Tehran to recognize the costs of its nuclear defiance. Mr. Obama might consider, for example, the deployment of additional carrier battle groups and minesweepers to the waters off Iran, and the conduct of military exercises with allies.
If such pressure fails to impress Iranian leadership, the U.S. Navy could move to blockade Iranian ports. A blockade—which is an act of war—would effectively cut off Iran’s gasoline imports, which constitute about one-third of its consumption. Especially in the aftermath of post-election protests, the Iranian leadership must worry about the economic dislocations and political impact of such action.
Should these measures not compel Tehran to reverse course on its nuclear program, and only after all other diplomatic avenues and economic pressures have been exhausted, the U.S. military is capable of launching a devastating attack on Iranian nuclear and military facilities.
Many policy makers and journalists dismiss the military option on the basis of a false sense of futility. They assume that the U.S. military is already overstretched, that we lack adequate intelligence about the location of covert nuclear sites, and that known sites are too heavily fortified.
Such assumptions are false.
An attack on Iranian nuclear facilities would mostly involve air assets, primarily Air Force and Navy, that are not strained by operations in Iraq and Afghanistan. Moreover, the presence of U.S. forces in countries that border Iran offers distinct advantages. Special Forces and intelligence personnel already in the region can easily move to protect key assets or perform clandestine operations. It would be prudent to emplace additional missile-defense capabilities in the region, upgrade both regional facilities and allied militaries, and expand strategic partnerships with countries such as Azerbaijan and Georgia to pressure Iran from all directions.
Conflict may reveal previously undetected Iranian facilities as Iranian forces move to protect them. Moreover, nuclear sites buried underground may survive sustained bombing, but their entrances and exits will not.
Of course, there are huge risks to military action: U.S. and allied casualties; rallying Iranians around an unstable and oppressive regime; Iranian reprisals be they direct or by proxy against us and our allies; and Iranian-instigated unrest in the Persian Gulf states, first and foremost in Iraq.
Furthermore, while a successful bombing campaign would set back Iranian nuclear development, Iran would undoubtedly retain its nuclear knowhow. An attack would also necessitate years of continued vigilance, both to retain the ability to strike previously undiscovered sites and to ensure that Iran does not revive its nuclear program.
But the risks of military action must be weighed against those of doing nothing. If the Iranian regime continues to advance its nuclear program despite the best efforts of Mr. Obama and other world leaders, we risk Iranian domination of the oil-rich Persian Gulf, threats to U.S.-allied Arab regimes, the emboldening of radicals in the region, the creation of an existential threat to Israel, the destabilization of Iraq, the shutdown of the Israel-Palestinian peace process, and a regional nuclear-arms race.
A peaceful resolution of the threat posed by Iran’s nuclear ambitions would certainly be the best possible outcome. But should diplomacy and economic pressure fail, a U.S. military strike against Iran is a technically feasible and credible option.
Gen. Wald (U.S. Air Force four-star, retired) was the air commander for the initial stages of Operation Enduring Freedom in Afghanistan and deputy commander of the U.S. European Command. He was also a participant in the Bipartisan Policy Center’s project on U.S. policy toward Iran, “Meeting the Challenge.”
U.S. Air Force and Naval forces could do serious damage to Tehran’s nuclear facilities if diplomacy fails.
WSJ, Aug 07, 2009
In a policy address at the Council on Foreign Relations last month, Secretary of State Hillary Clinton said of Iran, “We cannot be afraid or unwilling to engage.” But the Iranian government has yet to accept President Obama’s outstretched hand. Even if Tehran suddenly acceded to talks, U.S. policy makers must prepare for the eventuality that diplomacy fails. While there has been much discussion of economic sanctions, we cannot neglect the military’s role in a Plan B.
There has been a lack of serious public discussion of the military tools available to us. Any mention of them is either met with accusations of warmongering or hushed with concerns over sharing sensitive information. It is important to discuss, within legal limits, such a serious issue as openly as possible. Discussion strengthens our democracy and dispels misinformation.
The military can play an important role in solving this complex problem without firing a single shot. Publicly signaling serious preparation for a military strike might obviate the need for one if deployments force Tehran to recognize the costs of its nuclear defiance. Mr. Obama might consider, for example, the deployment of additional carrier battle groups and minesweepers to the waters off Iran, and the conduct of military exercises with allies.
If such pressure fails to impress Iranian leadership, the U.S. Navy could move to blockade Iranian ports. A blockade—which is an act of war—would effectively cut off Iran’s gasoline imports, which constitute about one-third of its consumption. Especially in the aftermath of post-election protests, the Iranian leadership must worry about the economic dislocations and political impact of such action.
Should these measures not compel Tehran to reverse course on its nuclear program, and only after all other diplomatic avenues and economic pressures have been exhausted, the U.S. military is capable of launching a devastating attack on Iranian nuclear and military facilities.
Many policy makers and journalists dismiss the military option on the basis of a false sense of futility. They assume that the U.S. military is already overstretched, that we lack adequate intelligence about the location of covert nuclear sites, and that known sites are too heavily fortified.
Such assumptions are false.
An attack on Iranian nuclear facilities would mostly involve air assets, primarily Air Force and Navy, that are not strained by operations in Iraq and Afghanistan. Moreover, the presence of U.S. forces in countries that border Iran offers distinct advantages. Special Forces and intelligence personnel already in the region can easily move to protect key assets or perform clandestine operations. It would be prudent to emplace additional missile-defense capabilities in the region, upgrade both regional facilities and allied militaries, and expand strategic partnerships with countries such as Azerbaijan and Georgia to pressure Iran from all directions.
Conflict may reveal previously undetected Iranian facilities as Iranian forces move to protect them. Moreover, nuclear sites buried underground may survive sustained bombing, but their entrances and exits will not.
Of course, there are huge risks to military action: U.S. and allied casualties; rallying Iranians around an unstable and oppressive regime; Iranian reprisals be they direct or by proxy against us and our allies; and Iranian-instigated unrest in the Persian Gulf states, first and foremost in Iraq.
Furthermore, while a successful bombing campaign would set back Iranian nuclear development, Iran would undoubtedly retain its nuclear knowhow. An attack would also necessitate years of continued vigilance, both to retain the ability to strike previously undiscovered sites and to ensure that Iran does not revive its nuclear program.
But the risks of military action must be weighed against those of doing nothing. If the Iranian regime continues to advance its nuclear program despite the best efforts of Mr. Obama and other world leaders, we risk Iranian domination of the oil-rich Persian Gulf, threats to U.S.-allied Arab regimes, the emboldening of radicals in the region, the creation of an existential threat to Israel, the destabilization of Iraq, the shutdown of the Israel-Palestinian peace process, and a regional nuclear-arms race.
A peaceful resolution of the threat posed by Iran’s nuclear ambitions would certainly be the best possible outcome. But should diplomacy and economic pressure fail, a U.S. military strike against Iran is a technically feasible and credible option.
Gen. Wald (U.S. Air Force four-star, retired) was the air commander for the initial stages of Operation Enduring Freedom in Afghanistan and deputy commander of the U.S. European Command. He was also a participant in the Bipartisan Policy Center’s project on U.S. policy toward Iran, “Meeting the Challenge.”
Thursday, August 6, 2009
How Japan Restored Its Financial System - The focus was on better risk controls, not higher capital reserves
How Japan Restored Its Financial System. By KATSUNORI NAGAYASU
The focus was on better risk controls, not higher capital reserves.
WSJ, Aug 06, 2009
Regulatory authorities around the world are currently discussing ways to prevent another financial crisis. One idea is to mandate higher levels of capital reserves. Japan’s banking reform shows that a comprehensive solution would work better.
After our bubble economy collapsed in the 1990s, it took policy makers many years to address the real issue: the health of our financial system. When they did, they injected public funds into large Japanese banks across the board, enhanced deposit insurance safety nets, and accelerated the disposal of nonperforming assets based on strict risk assessments. The market selected which banks could survive under a system of multiple regulatory requirements, not just a capital requirement. Many banks were absorbed into larger entities.
Japan also avoided moral hazard by studiously avoiding the classification of any bank as “too big to fail.” Regulators instead put more emphasis on improving banks’ risk controls and did not require them to have excess capital. The financial system soon regained its health and the economy enjoyed seven consecutive years of uninterrupted growth, starting in 2001.
Today’s regulatory dialogue in the United States and Europe has implicitly assumed that large financial institutions are “too big to fail.” This assumption may encourage banks to take excessive risks, resulting in potentially more bank bailouts. It has also skewed the regulatory debate toward a focus on requiring banks to hold higher levels of “going concern capital,” such as common equity.
This is a dangerous path to follow. If regulators mandate higher capital requirements for banks, there is no guarantee that banks will be able to raise that capital in equity markets. They may have to shrink their balance sheets to meet the requirements, potentially curtailing their capacity to lend and support economic growth. A narrowly defined approach to capital regulation would also reduce banks’ options for raising other types of capital when they need it. This could result in systemic risk when another financial crisis hits.
A better regulatory framework must combine capital regulations with other tools, including a resolution mechanism for financial institutions that fail, a retail deposit insurance system, and a prompt corrective action system that allows regulators to force a bank to take action before it fails. As long as the regulators can effectively control systemic risk by taking such a multifaceted approach, banks should also be allowed to absorb losses, raising capital other than common equity. It should be acceptable to allow banks to fail, and there should be no need for excessive capital requirements.
A new regulatory framework must also distinguish between banks whose main business is deposit taking and lending—the vast majority of banks world-wide—and banks that trade for their own account. The recent financial crisis demonstrated that balance sheet structure matters. Trusted banks with a large retail deposit base continued to provide funds to customers even in the depths of the crisis, whereas many banks that relied heavily on market funding or largely trading for their own account effectively failed. Investment banks with higher risk businesses by nature should be charged a higher level of capital requirement—otherwise, sound banking will not be rewarded.
Higher capital requirements attempt to rectify market or systemic failure by denying the market mechanism, where banks that take too much risk fail, and those that don’t, survive. Excessive regulation will stifle healthy competition in banking.
Policy makers instead should learn from Japan’s experience by improving the range of regulatory rules available and setting reasonable capital rules for banks based on their actual business models. That’s the best way to ensure banks perform their essential role at the lowest long-term cost to taxpayers, customers and shareholders.
Mr. Nagayasu is president of Bank of Tokyo-Mitsubishi UFJ and chairman of the Japanese Bankers Association.
The focus was on better risk controls, not higher capital reserves.
WSJ, Aug 06, 2009
Regulatory authorities around the world are currently discussing ways to prevent another financial crisis. One idea is to mandate higher levels of capital reserves. Japan’s banking reform shows that a comprehensive solution would work better.
After our bubble economy collapsed in the 1990s, it took policy makers many years to address the real issue: the health of our financial system. When they did, they injected public funds into large Japanese banks across the board, enhanced deposit insurance safety nets, and accelerated the disposal of nonperforming assets based on strict risk assessments. The market selected which banks could survive under a system of multiple regulatory requirements, not just a capital requirement. Many banks were absorbed into larger entities.
Japan also avoided moral hazard by studiously avoiding the classification of any bank as “too big to fail.” Regulators instead put more emphasis on improving banks’ risk controls and did not require them to have excess capital. The financial system soon regained its health and the economy enjoyed seven consecutive years of uninterrupted growth, starting in 2001.
Today’s regulatory dialogue in the United States and Europe has implicitly assumed that large financial institutions are “too big to fail.” This assumption may encourage banks to take excessive risks, resulting in potentially more bank bailouts. It has also skewed the regulatory debate toward a focus on requiring banks to hold higher levels of “going concern capital,” such as common equity.
This is a dangerous path to follow. If regulators mandate higher capital requirements for banks, there is no guarantee that banks will be able to raise that capital in equity markets. They may have to shrink their balance sheets to meet the requirements, potentially curtailing their capacity to lend and support economic growth. A narrowly defined approach to capital regulation would also reduce banks’ options for raising other types of capital when they need it. This could result in systemic risk when another financial crisis hits.
A better regulatory framework must combine capital regulations with other tools, including a resolution mechanism for financial institutions that fail, a retail deposit insurance system, and a prompt corrective action system that allows regulators to force a bank to take action before it fails. As long as the regulators can effectively control systemic risk by taking such a multifaceted approach, banks should also be allowed to absorb losses, raising capital other than common equity. It should be acceptable to allow banks to fail, and there should be no need for excessive capital requirements.
A new regulatory framework must also distinguish between banks whose main business is deposit taking and lending—the vast majority of banks world-wide—and banks that trade for their own account. The recent financial crisis demonstrated that balance sheet structure matters. Trusted banks with a large retail deposit base continued to provide funds to customers even in the depths of the crisis, whereas many banks that relied heavily on market funding or largely trading for their own account effectively failed. Investment banks with higher risk businesses by nature should be charged a higher level of capital requirement—otherwise, sound banking will not be rewarded.
Higher capital requirements attempt to rectify market or systemic failure by denying the market mechanism, where banks that take too much risk fail, and those that don’t, survive. Excessive regulation will stifle healthy competition in banking.
Policy makers instead should learn from Japan’s experience by improving the range of regulatory rules available and setting reasonable capital rules for banks based on their actual business models. That’s the best way to ensure banks perform their essential role at the lowest long-term cost to taxpayers, customers and shareholders.
Mr. Nagayasu is president of Bank of Tokyo-Mitsubishi UFJ and chairman of the Japanese Bankers Association.
A new database tracks emerging threats to trade
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).
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).
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