Al From: Democrats Don't Need the Public Option - Transformational reforms have always passed with bipartisan majorities

Democrats Don't Need the Public Option. By AL FROM
Transformational reforms have always passed with bipartisan majorities.
WSJ, Oct 16, 2009

Now that the Senate Finance Committee has voted for a health-care bill that does not include a government-run plan, it would be a mistake for Democrats to insist on adding the public option to reform legislation this year.

By insisting on the public option, liberal Democrats will allow the Republicans, who have no ideas of their own, to cloud the prospects for reform. If this happens, Republicans will be able to divert attention away from reforms most Americans want and instead focus on what Americans disagree on—whether we need a new government-run health plan.

As President Barack Obama has made clear, we need to reform. Right now, health insurance is too costly and the health-insurance market is not competitive enough. Too many people lack insurance or the chance to choose a plan that best suits their needs. Too many people are denied coverage because of pre-existing conditions or lose their coverage when they become sick. And our most successful public program—Medicare—is on the road to going broke. Doing nothing is not acceptable.

With control of the White House and Congress, the American people will rightly hold Democrats accountable for the outcome of the health debate. At the same time, the focus on the public option and level of discord it has generated is already taking a toll on the president's approval ratings and hurting the party more generally. In January, Democrats enjoyed a double digit lead on the "generic ballot"—a measure of support for a party. Last week, a Gallup poll showed that Democrats are now essentially in a dead heat with Republicans on the generic ballot. Particularly significant, the poll showed a nearly 20-point drop in Democratic support since the last election among independents, the key to our victories in 2006 and 2008. Insisting on the public option could cost many Blue Dogs in the House and a number of red-state moderates in the Senate their seats.

Now is the time for Mr. Obama to lead the way to historic health-care reform. He's the only one who can. I'd suggest he do so by taking these three steps:

• First, say unequivocally that he wants a plan that jettisons the public option and contains real reforms to cut health-care costs. As the Senate Finance Committee bill shows, a public option is unnecessary to expand coverage. Dropping it should win support of most centrist Democrats.
• Second, make clear that he does not want Congress to use parliamentary maneuvers, like the budget reconciliation process, to ram through a bill that can't command 60 votes in the Senate. Health-care reform needs broad support; it is too important and too controversial for Congress to pass by resorting to legislative chicanery or short-circuiting the legislative process.
• And finally, make one more effort to bring moderate Republicans along. Transformational reforms, such as civil rights legislation and Medicare in the 1960s, have always been passed with bipartisan majorities. Health-care reform should be no exception. The president promised a post-partisan politics. What better place to forge it than on his most important initiative?

If Mr. Obama takes these steps, I'm convinced Congress would pass a bill that requires every American to buy insurance, offers consumers a choice of plans through a new health exchange like the successful Commonwealth Connector in Massachusetts, provides subsidies that assure everyone can afford a basic plan, and prevents insurance companies from denying coverage to people with pre-existing conditions or dropping coverage for people who become sick. All of these are reforms most American can agree on.

I'd personally like to see health-care reform include fees (as the president proposed) on Cadillac health-care plans, incentives to replace fee-for-service payments with more cost-effective models (the best way to bring down health-care costs over the long haul), and measures to limit abuses in malpractice suits (which Republicans have long called for).

Such a plan would meet the objectives the president has already outlined—expanding coverage, lowering costs, and improving quality—without adding to the federal deficit. With centrist Democrats signed on, such a plan should garner the 60 votes necessary to pass the Senate. Even without a public option, it would achieve most of what liberals have long fought for. Open-minded Republicans might even find it hard to resist.

Mr. From, the principal of The From Company LLC, is the founder of the Democratic Leadership Council.

Trading book quantitative impact study by the Basel Committee: results

Trading book quantitative impact study by the Basel Committee: results
BIS, October 15, 2009

The Basel Committee on Banking Supervision issued today the results of its recent trading book quantitative impact study, which assesses the impact of the revisions to the 1996 rules governing trading book capital. These revisions, which were originally published by the Committee in January 2009, were subsequently adopted in July 2009.

Excluding the so-called correlation trading portfolio, the study concludes that the changes to the market risk framework will increase average trading book capital requirements by two to three times their current levels, although the Committee noted significant dispersion around this average. Based on the results of the study, the Committee decided to maintain the original calibration as proposed in its January consultative package and as adopted in July 2009.

Mr Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank, noted that "increasingly complex trading book exposures were a major driver of losses in the recent crisis". He added: "The reforms will ensure that these exposures are backed by a sufficient capital cushion, help address procyclicality of trading book capital requirements, and limit arbitrage opportunities between the trading book and the banking book."

The Committee will conduct a further impact study, which will evaluate a floor for the comprehensive risk capital charge for correlation trading portfolios. This impact study will be completed in 2010. The trading book requirements will be implemented no later than 31 December 2010.


Technical background

The Committee's new trading book rules set a multiplier of three for both the current and stressed value-at-risk measures as well as a three-month floor on the liquidity horizon used in incremental and comprehensive risk capital requirements. The incremental risk measure includes default risk as well as migration risk for unsecuritised credit products held in the trading book. The comprehensive risk measure can be applied to banks' correlation trading portfolios and captures not just incremental default and migration risks, but all price risks.

Full study: http://www.bis.org/publ/bcbs163.pdf

US Support for the Arms Trade Treaty

Arms Control and International Security: U.S. Support for the Arms Trade Treaty. By Hillary Rodham Clinton, Secretary of State
Washington, DC, October 14, 2009

Conventional arms transfers are a crucial national security concern for the United States, and we have always supported effective action to control the international transfer of arms.

The United States is prepared to work hard for a strong international standard in this area by seizing the opportunity presented by the Conference on the Arms Trade Treaty at the United Nations. As long as that Conference operates under the rule of consensus decision-making needed to ensure that all countries can be held to standards that will actually improve the global situation by denying arms to those who would abuse them, the United States will actively support the negotiations. Consensus is needed to ensure the widest possible support for the Treaty and to avoid loopholes in the Treaty that can be exploited by those wishing to export arms irresponsibly.

On a national basis, the United States has in place an extensive and rigorous system of controls that most agree is the “gold standard” of export controls for arms transfers. On a bilateral basis, the United States regularly engages other states to raise their standards and to prohibit the transfer or transshipment of capabilities to rogue states, terrorist groups, and groups seeking to unsettle regions. Multilaterally, we have consistently supported high international standards, and the Arms Trade Treaty initiative presents us with the opportunity to promote the same high standards for the entire international community that the United States and other responsible arms exporters already have in place to ensure that weaponry is transferred for legitimate purposes.

The United States is committed to actively pursuing a strong and robust treaty that contains the highest possible, legally binding standards for the international transfer of conventional weapons. We look forward to this negotiation as the continuation of the process that began in the UN with the 2008 UN Group of Governmental Experts on the ATT and continued with the 2009 UN Open-Ended Working Group on ATT.

PRN: 2009/1022

Robert Reich, 2007: if you're very old, [i]t's too expensive, so we're going to let you die

Robert Reich, 2007: if you're very old, [i]t's too expensive, so we're going to let you die
WSJ, Oct 15, 2009

Robert Reich, who served as President Clinton's labor secretary, delivered on the subject in 2007:

I will actually give you a speech made up entirely--almost at the spur of the moment, of what a candidate for president would say if that candidate did not care about becoming president. In other words, this is what the truth is, and a candidate will never say, but what candidates should say if we were in a kind of democracy where citizens were honored in terms of their practice of citizenship, and they were educated in terms of what the issues were, and they could separate myth from reality in terms of what candidates would tell them:

"Thank you so much for coming this afternoon. I'm so glad to see you, and I would like to be president. Let me tell you a few things on health care. Look, we have the only health-care system in the world that is designed to avoid sick people. [laughter] That's true, and what I'm going to do is I am going to try to reorganize it to be more amenable to treating sick people. But that means you--particularly you young people, particularly you young, healthy people--you're going to have to pay more. [applause] Thank you.

"And by the way, we are going to have to--if you're very old, we're not going to give you all that technology and all those drugs for the last couple of years of your life to keep you maybe going for another couple of months. It's too expensive, so we're going to let you die. [applause]

"Also, I'm going to use the bargaining leverage of the federal government in terms of Medicare, Medicaid--we already have a lot of bargaining leverage--to force drug companies and insurance companies and medical suppliers to reduce their costs. But that means less innovation, and that means less new products and less new drugs on the market, which means you are probably not going to live that much longer than your parents. [applause] Thank you."

The US dollar shortage in global banking and the international policy response

The US dollar shortage in global banking and the international policy response, by Goetz von Peter and Patrick McGuire
BIS Working Papers No 291, October 2009

Abstract:

Among the policy responses to the global financial crisis, the international provision of US dollars via central bank swap lines stands out. This paper studies the build-up of stresses on banks' balance sheets that led to this coordinated policy response. Using the BIS international banking statistics, we reconstruct the worldwide consolidated balance sheets of the major national banking systems. This allows us to investigate the structure of banks' global operations across their offices in various countries, shedding light on how their international asset positions are funded across currencies and counterparties. The analysis first highlights why a country's "national balance sheet", a residency-based measure, can be a misleading guide to where the vulnerabilities faced by that country's national banking system (or residents) lie. It then focuses on banking systems' consolidated balance sheets, and shows how the growth (since 2000) in European and Japanese banks' US dollar assets produced structural US dollar funding requirements, setting the stage for the dollar shortage when interbank and swap markets became impaired.

JEL Classification Numbers: F34, F55, G01, G21

Keywords: international banking, financial crises, funding risk, US dollar shortage, central bank swap lines

Full text: http://www.bis.org/publ/work291.pdf

Deficits and the Chinese Challenge - Debt can become a real liability for a superpower. Recall what happened to postwar Britain

Deficits and the Chinese Challenge. By ZACHARY KARABELL
Debt can become a real liability for a superpower. Recall what happened to postwar Britain.
WSJ, Oct 13, 2009

The dollar's sharp drop over the past few weeks has led to considerable anxiety about the status of the United States as the dominant force in the global economy. Closely related to this fear is constant worry about the rise of China and the evermore complicated relationship between Beijing and Washington.

Most people are now aware that China is the largest creditor to a heavily indebted U.S. government. It holds close to a trillion dollars of U.S. Treasurys and has invested hundreds of billions more in private enterprises in America. Even though these facts are plainly acknowledged, policy makers and experts continue to underestimate the full ramifications of this relationship.

Consider what happened in 1946, when a cash-strapped Great Britain turned to the U.S. for a loan. For 30 years or more, the British had been consumed by the threat of a rising Germany. Two wars had been fought, millions of lives had been lost, and the British treasury was dramatically depleted in the process. Britain survived, but the costs were substantial.

In spite of its global empire, a powerful military, and an enviable position at the center of world-wide commerce, in early 1946 the British government faced a serious risk of defaulting on its financial obligations. So it did what it had done at various points over the previous decade and turned to its closest ally for assistance. It asked the U.S. for a loan of $5 billion at zero-interest repayable over 50 years. As generous as those terms seem today, such financing had been almost routine in years prior. To the surprise and shock of the British, Washington refused.

Unable to take no for answer, Britain explained that unless it received funds the government would be insolvent. The Americans came back with a series of conditions. They would lend Britain $3.7 billion at 2% interest, and the British government would have to abide by the 1944 Bretton Woods plan, which made the dollar rather than the pound sterling the reference point for global exchange rates and required Britain to make the pound freely convertible. Even more significantly, Britain had to end its system of imperial preferences, which meant no more tariffs and duties on goods to and from colonies such as India. These were not mere financial penalties: Taken together, they meant the end of the British Empire.

Within two years, Britain had left India and was on its way to decolonizing throughout Asia and Africa. Unable to compete with the United States economically and no longer able to reap the benefits of colonial trade, Britain's military shrank and its commerce contracted. It quickly receded from its dominant global position and entered several decades of economic malaise. In the 1980s, Britain finally emerged as a prosperous country, but it was a shadow of what it had been in its heyday.

The U.S. replaced Britain as the guardian of the West. As one British official, Evelyn Shuckburgh, remarked in the late 1940s, "it was impossible not to be conscious that we were playing second fiddle." And that was precisely what the U.S. desired. Having supported the British for decades and become its banker and manufacturer during two wars, at the end of World War II the U.S. fully intended to supplant the British Empire. The loan request provided the pretext, but by then the balance had already shifted and Britain could have done little to reverse the tide.
By 2030—if not sooner—China is likely to surpass the U.S. in the size of its economy, though it will remain on a per capita basis a much poorer society for many years after that. Trajectories can change, but the recent implosion of the American financial system has only accelerated China's rise.

Given the lesson of the British Empire's demise, it would be foolish to base current policy on the assumption that China will hit a fatal speed-bump before it is able to supplant the U.S. And while the level of current indebtedness is manageable for the U.S.—and in fact tethers the Chinese closely to the U.S. economy in ways that are arguably beneficial for both countries—the fact that these economies are currently bound together does not mean that their interests will always be in sync.

Here, too, the British analogy is sobering. For decades, the relationship between Britain and the U.S. was mutually beneficial, though the Americans resented being treated as junior partners. As tension festered, the British were consumed with the more immediate threat of Germany. But in the end it was the U.S. that delivered the knockout blow.

The Americans have not had to deal with a true economic rival since the British more than half a century ago. America today is as unaccustomed to global economic competition as the British were at their apex. The U.S. often seems lumbering and ill-suited to the demands of economic rivalry.

The only way to avoid Britain's fate and meet the challenge of China is to reinvigorate economic life. This is a multiyear endeavor that must be done primarily through innovation, not legislation. America needs to retool its domestic economy to build on the global success of many U.S. companies. It must focus on inventing new products and generating new ideas, rather than defending the rusty industries of yesterday. Fights over health care and climate change are the cultural equivalent of fiddling while Rome burns.

China thrives because it is hungry, dynamic, scared of failure and convinced that it should be a leading force in the world. That is why America thrived a century ago. Today, such hunger and dynamism seem less evident in American life than petulance that the world is not cooperating.
The U.S. is in danger of assuming that because it has been a dominant nation on the world stage, it must continue to be so. That is a recipe for becoming Britain.

Mr. Karabell is the author of "Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It," just published by Simon & Schuster.

Mutual guarantee institutions "are better than banks at screening and monitoring opaque borrowers"

Mutual guarantee institutions and small business finance, by Francesco Columba, Leonardo Gambacorta and Paolo Emilio Mistrulli
BIS Working Papers No 290
October 2009

Abstract:

A large body of literature has shown that small firms experience difficulties in accessing the credit market due to informational asymmetries. Banks can overcome these asymmetries through relationship lending, or at least mitigate their effects by asking for collateral. Small firms, especially if they are young, have little collateral and short credit histories, and thus may find it difficult to raise funds from banks. In this paper, we show that even in this case, small firms may improve their borrowing capacity by joining mutual guarantee institutions (MGIs).

Our empirical analysis shows that small firms affiliated with MGIs pay less for credit compared with similar firms which are not MGI members. We obtain this result for interest rates charged on loan contracts which are not backed by mutual guarantees. We then argue that our findings are consistent with the view that MGIs are better than banks at screening and monitoring opaque borrowers. Thus, banks benefit from the willingness of MGIs to post collateral since it implies that firms are better screened and monitored.

JEL Classification Numbers: D82, G21, G30, O16

Keywords: credit guarantee schemes, joint liability, microfinance, peer monitoring, small business finance

Has the economic stimulus program helped or hurt?

Stimulus Scam, by Richard W. Rahn
Cato
The Washington Times on October 8, 2009

Has the economic stimulus program helped or hurt? Administration officials keep saying the stimulus program has been beneficial, but where is the evidence?

There are several ways to see if it is working as advertised. First, what did the proponents say would happen when they were pushing the plan versus what has happened? Second, how has the United States fared compared to other nations that had smaller or no stimulus programs? Third, how have the results to date compared to what pro-stimulus, Keynesian-school economic theorists advocated versus what other theorists (principally Austrian-school) who largely opposed the stimulus plans said?

U.S. unemployment already has reached 9.8 percent, with 15.1 million Americans unemployed, and more than 7.1 million jobs have been eliminated since the beginning of the recession. President Obama's economic advisers said in the beginning of this year that the unemployment rate would rise to 9 percent with no stimulus package and would only rise to a maximum of 7.9 percent with the stimulus bill, peaking during this past summer. Stimulus proponents clearly have failed the first test (despite Vice President Joseph R. Biden Jr.'s revisionist statements) and there is zero evidence for their claims that more jobs would have been lost without the stimulus package.

One might argue that the stimulus had worked if the results in the United States were better than in other countries that had smaller or no stimulus packages. The recession has been global, and every country has been affected negatively. Only Great Britain attempted to put in a stimulus package that was relatively as large as the U.S. package. A crude measure of economic stimulus is the size of the deficit relative to gross domestic product. During recessions, tax revenues decline in all countries, so most will run a deficit whether they intend to or not. A stimulus package normally contains a mix of government spending increases and tax cuts, resulting in a deliberately larger deficit.

The United States and Britain have by far and away run the largest deficits as a percentage of GDP (i.e. the most stimulus), yet the U.S. and Britain, along with Italy and Russia, had not bottomed out in second-quarter 2009, while the rest of the 10 largest economies were showing real growth in the second quarter. Russia's poor performance is largely a function of relying very heavily on the export of raw materials rather than developing a broad-based economy as all the others in the Big 10 have done.

The three countries with the smallest deficits (the least stimulus) — Brazil, China and Germany — have all turned the corner rather quickly and are growing. German Chancellor Angela Merkel has just announced she is going to push tax cuts, which should give the German economy an additional shot in the arm.

While the data set is too small with the top 10 countries (which collectively account for a large majority of the world's GDP) to draw definitive conclusions, the existing evidence indicates that a big stimulus package seems to delay recovery, while little stimulus leads to a quick return to economic growth.

Finally, what do the competing economic theorists say? The Keynesians say that if the government increases spending to stimulate demand and create jobs for those who do not have them, this should lead to a less painful downturn and a quicker recovery. The Austrian (aka Hayekians) free-market sorts say recoveries occur on their own once asset and labor prices fall from inflated levels of the previous boom and excess inventories are worked off. This usually happens within 16 months unless government attempts to mitigate these necessary price adjustments, which will delay the recovery. (Apologies to both my Austrian and Keynesian friends for trying to summarize their views in one short paragraph.)

The Keynesians never really get a fair test of their theory because politicians always take the Keynesian notion that it is OK to increase government spending as a license to spend the extra money on themselves and their friends rather than on those who might actually benefit. (This self-dealing process is well explained by the public-choice school of economics.) A few examples from the current stimulus program should suffice. Congress increased spending on itself last year by 10.9 percent and by another 5.8 percent this year for a grand total of $4.7 billion. (Remember, it was just 15 years ago when the Gingrich Republicans ran against the "billion dollar Congress.") Given that the number of members of Congress remains fixed at 535, why should their budget go up any faster than inflation?

Congress and the administration also have gotten into the venture capital business, which enables them to dump infinite quantities of money into their rich friends' pockets. Bill Frezza, a principled venture capitalist, using Fox News and other venues, has been blowing the whistle on these unsavory and destructive practices. Did you know that Al Gore and friends just received almost $600 million to develop another expensive ($88,000) hybrid electric sports car with your tax money? The chances of taxpayers getting their money back are less than of General Motors Corp. and Chrysler paying off all their loans, which is close to zero. Paradise defined: being politically well-connected when stimulus money is around.

The only things one can say for sure about stimulus money is that it will add to the deficit, ultimately driving up interest rates and taxes; and much of it will be wasted and/or stolen, neither of which benefits the unemployed. By any objective measure, the stimulus program has been and will continue to be a failure — but don't expect the Washington politicos ever to admit it.

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

Would a Stricter Fed Policy and Financial Regulation Have Averted the Financial Crisis?

Would a Stricter Fed Policy and Financial Regulation Have Averted the Financial Crisis?, by Jagadeesh Gokhale and Peter Van Doren
Cato, October 8, 2009

Many commentators have argued that if the Federal Reserve had followed a stricter monetary policy earlier this decade when the housing bubble was forming, and if Congress had not deregulated banking but had imposed tighter financial standards, the housing boom and bust—and the subsequent financial crisis and recession—would have been averted. In this paper, we investigate those claims and dispute them. We are skeptical that economists can detect bubbles in real time through technical means with any degree of unanimity. Even if they could, we doubt the Fed would have altered its policy in the early 21st century, and we suspect that political leaders would have exerted considerable pressure to maintain that policy. Concerning regulation, we find that the banking reform of the late 1990s had little effect on the housing boom and bust, and that the many reform ideas currently proposed would have done little or nothing to avert the crisis.

Commentators have also argued that the popularization of financial products such as teaser-rate hybrid loans for subprime homebuyers and credit default swaps for investors is to blame for the financial crisis. We find little evidence for this. Housing data indicate that the majority of subprime hybrid loans that have entered default had not undergone interest rate resets, and the default rate for subprime hybrid loans is not much higher than for subprime fixed rate loans. Concerning swaps, although their introduction may increase financial inflows into risky sectors, their execution through a clearing-house or regulation via other means would not necessarily have avoided the mispricing of risks in underlying contracts. Capital requirements for the credit default swaps that were used to insure mortgage-backed securities would have been low because housing investments were not considered risky.

Full text: http://www.cato.org/pubs/pas/pa648.pdf

Jagadeesh Gokhale is a senior fellow at the Cato Institute and the author of Social Security: A Fresh Look at Reform Alternatives (forthcoming). Peter Van Doren is a senior fellow at the Cato Institute and the editor of Cato's Regulation magazine.

Grand Mufti on Islam, Israel and the United States

Islam, Israel and the United States. By Sheikh Ali Gomaa
Peace among the Abrahamic faiths will be built on respect and the law.
WSJ, Oct 08, 2009

America and the West have been victims of violent extremists acting in the name of Islam, the tragic events of 9/11 being only the most egregious of their attacks. Western officials and commentators are consumed by the question, "Where are the moderates?" Many, seeing only the extremism perpetuated by a radical few, despair of finding progressive and peaceful partners of standing in the Muslim world.

However, reconciling Islam with modernity has been an imperative for Muslims before it became a preoccupation for the West. In particular, the process dates back to the 19th century, when what became known as the Islamic reform movement was born in Al Azhar University in Cairo, Islam's premiere institution of learning.

At the Dar al Iftaa, Egypt's supreme body for Islamic legal edicts over which I preside, we wrestle constantly with the issue of applying Islam to the modern world. We issue thousands of fatwas or authoritative legal edicts—for example affirming the right of women to dignity, education and employment, and to hold political office, and condemning violence against them. We have upheld the right of freedom of conscience, and of freedom of expression within the bounds of common decency. We have promoted the common ground that exists between Islam, Christianity and Judaism. We have underscored that governance must be based on justice and popular sovereignty. We are committed to human liberty within the bounds of Islamic law. Nonetheless, we must make more tangible progress on these and other issues.

We unequivocally condemned violence against the innocent during Egypt's own struggle with terrorism in the 1980s and 90's, and after the heinous sin of 9/11. We continue to do so in public debates with extremists on their views of Islam, in our outreach to schools and youth organizations, in our training of students from all across the world at Egypt's theological institutions, and in our counseling of captured terrorists. As the head of the one of the foremost Islamic authorities in the world, let me restate: The murder of civilians is a crime against humanity and God punishable in this life and the next.

Yet, just as we recommit to reinforcing the values of moderation in our faith, we look to the United States to assume its responsibility for the sake of a better relationship between the West and Islam.

First, it is essential that the U.S. confront the fear and misunderstanding that has often pervaded the public discourse about Islam, especially in the media.

Second, while we must strive to reinforce the common principles that we share, we must also accept the reality of differences in our values and in our outlook. Islam and the West have distinct value systems. Respect for our differences is a foundation for coexistence, and never for conflict.

Finally, there must a true commitment to the rule of law, and to sovereign equality, as the legitimate basis for international relations. While some of the divide between Islam and the West lies in the realm of ideas, it lies mostly in the realm of politics. The violence and the aggression to which many Muslim countries have been subjected are the main sources of a deep and legitimate sense of grievance, and they must be addressed.

Israel's occupation of Palestine must be brought to an end; its continuation is an affront to the fundamental tenets of justice and freedom that we all seek to uphold. In Iraq and Afghanistan, full sovereignty and independence must be restored to their people with the withdrawal of all foreign forces. President Barack Obama's historic address to the Muslim world from Cairo on June 4 was a landmark event that opened the door to a new relationship between Islam and the West, precisely because it acknowledged these imperatives. Yet much work needs to be done by both sides.

This week in Washington I am participating in the Common Word Initiative, a group of religious leaders hosted by Georgetown University's Center for Muslim-Christian Understanding. While the focus of this initiative has been to foster dialogue between Islam and Christianity, I will call for its expansion to include representatives of all the Abrahamic faiths. The road ahead will be difficult, but we can, God willing, arrive at a more peaceful future together.

Dr. Gomaa is the Grand Mufti of Egypt.

Islamists misrepresent the liberal legacy of the Ottoman Empire

Bring Back the Caliphate. By Soner Cagaptay
Islamists misrepresent the liberal legacy of the Ottoman Empire.
WSJ, Oct 08, 2009

The reaction in Turkey to the recent death of Ertugrul Osman, heir to the Ottoman throne and successor to the last Caliph, could not be more shocking. Islamists in kaftans and long beards gathered in Istanbul two weeks ago to bury the titular head of the world Muslim community, a scotch-drinking, classical music-listening Western Turk who until recently lived on New York City's Upper East Side.

The Islamists' embrace of Osman, a descendant of the westernized Ottoman sultans, provides a periscope into the Islamist mind: Islamism is not about religion or reality. Rather it is a myth and a subversion of reality intended to promote Islamism, a utopian ideology. Osman, raised by a line of West-leaning caliphs and sultans, loved Atatürk's Turkey, yet the Islamists abused his funeral and the memory of the caliphate, changing it into a symbol for their anti-Western, anti-secular and anti-liberal agenda.

Were Ertugrul Osman alive and were the Ottomans around today, he would be Sultan Osman V and no doubt, he would be going after the fundamentalists who abused his funeral in an attempt to distort his legacy.

Despite what the Islamists want the world to believe, the Ottoman caliphate was not anti-Western. The Ottoman Empire always interacted with the West—an interaction that goes all the way back to 16th-century Sultan Suleyman the Magnificent, who envisioned himself as the Holy Roman emperor. In the 18th and 19th centuries, the Ottoman sultans and caliphs embarked on a program of intense reforms to remake the Ottoman Empire in the Western image to match up with European powers. To this end, the caliphs launched institutions of secular education, and paved the way for women's emancipation by enrolling them in those schools. By the beginning of the 19th century, the sultans and caliphs of the Ottoman Empire embodied Western life and Western values. The last caliph, Abdulmecid Efendi, considered the Ottoman state a Western power with a Western destiny. An enlightened man and avid artist, the caliph's sought-after paintings, including nudes, are on exhibition at various museums, such as Istanbul's new museum of Modern Art.

It is therefore wrong to represent the Ottoman Empire as the antithesis to the secular republic Atatürk founded in 1923. True, when Atatürk turned Turkey into a secular republic in 1923 by abolishing the Ottoman state and the caliphate, Atatürk did noteradicate the sultan-caliphs' legacy. Rather, he fulfilled their dream of making Turkey a full-fledged Western society. Atatürk's reforms are a continuation of the late Ottoman Empire—he merely pursued Ottoman reforms to their logical conclusion.

Moreover, Atatürk was the product par excellence of the Ottoman Empire. He was raised in Salonika, the hub of cosmopolitanism and Western culture in the reforming empire. He studied in secular Ottoman schools, and he was trained in the Westernized Ottoman military.

The debate over the Ottoman caliphate's legacy has ramifications not only for Turkey, but also for contemporary Muslims and the Western world's desire to counter radical Islamists. Years before emergence of al Qaeda, the caliphs produced an antidote against radical jihadists, a progressive vision for a Western-oriented Muslim society. The sultan-caliphs built the institutional foundations of this society, including the first Ottoman parliament and constitution of 1876, and planted in it seeds of Western values, such as secular education and women's emancipation. Modern Turkey owes its existence as much to Atatürk as to the sultan-caliphs who were among the first to promote liberal and Western values in a Muslim society.

Now, the Islamists want to usurp the caliphate and its legacy. The fundamentalists first distort the caliphate's politics, reimagining it as an anti-Western institution. Then, they portray the revival of this invented caliphate as the ultimate political dream in an anti-Western ideology.

Eighty years ago, the Ottoman caliph-sultans imagined a Turkey that is more akin to modern Turkey than to the Islamist society envisioned by al Qaeda or others who dismiss Atatürk's dream of a Western Turkey and liberal values as anomalies. Ertugrul Osman himself told Turkish journalist Asli Aydintasbas shortly before his death that "the republic has been devastating for our family, but very good for Turkey."

Caliph Osman was Turkish by birth, Muslim by religion, and a Westerner by upbringing. I want my caliph back, and so should all Muslims who want deliverance from the distorted and illiberal world envisioned by the Islamists.

Mr. Cagaptay is a senior fellow at the Washington Institute for Near East Policy and author of "Islam Secularism and Nationalism in Modern Turkey: Who is a Turk?" (Routledge, 2006).

Down with capitalists, nations, bosses, families, etc. - Commonwealth

Brothers in Marx. By Brian C Anderson
Down with capitalists, nations, bosses, families, etc.
WSJ, Oct 08, 2009

Review of: Commonwealth
By Michael Hardt and Antonio Negri
Harvard University Press, 434 pages, $35

Astonishingly, given the ruin associated with his name, Karl Marx is back in fashion. The global economic downturn has spurred sales of "Das Kapital" to an all-time high; Michael Moore with his latest movie rivals the Original Communist in denouncing the evils of capitalism; and for the past year the news media seem to have delighted in running obituaries for the owners of the means of production. Michael Hardt and Antonio Negri, then, are nicely positioned to take advantage of Marx's revival with the publication of "Commonwealth," which re-imagines Marxism for the 21st century.

Mr. Hardt teaches literature at Duke University and is a postmodernism-steeped radical—that is to say, he is an American college professor. Mr. Negri, a political theorist, has a more unusual background. Three decades ago, the Italian government believed that he was the secret intellectual leader of the leftist terrorists called the Red Brigades and that he was the architect of the group's 1978 kidnapping and murder of Christian Democratic Party leader Aldo Moro. Unable to build a sufficient case to try Mr. Negri for murder—he has always denied the allegation—Italian authorities convicted him of "armed insurrection against the state." Facing 30 years in the slammer, Mr. Negri scooted to France, where he remained, a philosopher in exile, until 1997, when he returned to Italy to serve the remainder of a reduced sentence. He is a left-wing guru whose field work has occurred far from the faculty lounge.

"Commonwealth" completes a trilogy that began in 2000 with "Empire" and continued with "Multitude" in 2004. The book is a witch's brew of contemporary radicalism. Capitalism deserves to die, Messrs. Hardt and Negri believe, for it has abused and corrupted "the common." The common isn't just "the fruits of the soil, and all nature's bounty," they tell us; it is the universe of things necessary for social life—"knowledges, languages, codes, information, affects." Under capitalism, nature is ravaged, society brutalized.

Yet the conditions for people's emancipation are budding within capitalism, the authors believe (just as Marx believed in the mid-19th century). Unlike the factory laborer of yesterday, today's knowledge worker has less and less need for a boss. Companies extract the most value from the worker, we're told, when he is left alone to create, connect and collaborate as he sees fit. This is also true of "affective labor" that offers services to the public, "even in the most constrained and exploited circumstances, such as call centers."

Messrs. Hardt and Negri propose getting rid of bosses, of course, but they also target another bugaboo of the hard left, private property. The possession of property supports unjust power structures—why not agree that the "common wealth" of the human and natural worlds should be everyone's responsibility, everyone's resource? Welcome to The Communist Manifesto 2.0.

"Commonwealth" updates Marx's championing of the proletariat as the agent of revolution. The authors prefer "the multitude," which includes workers of all kinds, naturally, but also gathers the mighty forces of identity politics: black and Hispanic activists, radical feminists, "queer" transgressives and others purportedly harmed by global capitalism. They don't all get along, Messrs. Hardt and Negri admit, so the left must persuade this army-in-waiting to value the importance of "revolutionary parallelism." No Black Power movement that treats woman or homosexuals badly, for instance, will win the day. After the revolution, we're told, identity politics, like class warfare, will dissolve.

For the revolution to succeed, three supposedly corrupt forms of the common must be destroyed. Some of the harshest language in "Commonwealth" targets the family: Mom, dad and the kids might not know it, but they are part of a "pathetic" institution, a "machine" that "grinds down and crushes the common" with "the blindest egoism." Messrs. Hardt and Negri cry: "Down with the family!" The two other killers of the world's spirit: the corporation and the nation. When the multitude seizes "control of the means of production and reproduction," we're promised, the evil trio will wind up on Marx's ash heap of history.

The authors warn the rulers of the capitalist world that if they want to survive a little longer, they need to enact reforms, including global citizenship, a right to income for everyone and participatory democracy. But Messrs. Hardt and Negri don't think that their warning will be heeded. Revolution will erupt—and soon. It could be violent, a prospect that does not seem to trouble them: "What is the best weapon against the ruling powers—guns, peaceful street demonstrations, exodus, media campaigns, labor strikes, transgressing gender norms, silence, irony, or many others—depends on the situation." Pirates, the rioting Muslim banlieusards of Paris and the Black Panthers all are praised in "Commonwealth" as heroes of disruption.

Messrs. Hardt and Negri make little effort to build arguments in support of their wild assertions and predictions. They write as if ignorant of the 20th century and of much else, including economics and social science. (They still quote Lenin and Mao as if they were sources of wise political and economic analysis.) How would abolishing private property not lead to a threadbare totalitarian state, as it has in the past? The authors promise it will be different this time, without explaining why. If you abolish the family, how will children grow into flourishing adults? We must take it on faith that the post-family world will be just fine. (The word "children" almost never appears in the book.) How do the authors explain away capitalist globalization's record of elevating millions of people out of poverty? Answer: They don't.

"Commonwealth" is a dark, evil book, and it is troubling that it appears under the prestigious imprimaturof Harvard University Press. Countless millions were slaughtered by adherents of Karl Marx in the 20th century. God help us if the scourge returns in the 21st.

Mr. Anderson, the editor of City Journal, is the author of "Democratic Capitalism and Its Discontents" and, with Adam Thierer, "A Manifesto for Media Freedom."

Why Sustainability Standards for Biofuel Production Make Little Economic Sense

Why Sustainability Standards for Biofuel Production Make Little Economic Sense. By Harry de Gorter and David R. Just
Cato, October 7, 2009

The federal "sustainability standard" requires ethanol to emit at least 20 percent less carbon dioxide (CO2) than gasoline. Recent rulings by California and the Environmental Protection Agency, however, have cast doubt on the methodology of the sustainability calculus and whether those standards are being met. We show that the methodological debate is misplaced because sustainability standards for ethanol are, by definition, illogical and ineffective. Moreover, those standards divert attention from the contradictions and inefficiencies of ethanol import tariffs, tax credits, mandates, and subsidies, all of which exist whether ethanol is sustainable or not.

Ethanol is sustainable by definition. The CO2 sequestered by growing corn is exactly offset by the CO2 emissions that follow from burning the fuel in a car. The same observation applies to, say, consuming bourbon made from corn, but ethanol can replace energy — bourbon cannot. Hence, any sustainability standard should be applied to all corn and other crop products, and not just ethanol.

Sustainability standards are based on "lifecycle accounting," in which ethanol is assumed to replace gasoline; but in fact, it may be replacing coal or other energy sources. Life-cycle accounting also fails to recognize that if incentives are given for ethanol producers to use relatively "clean" inputs (e.g., natural gas), the "dirtier" inputs (e.g., coal) that might otherwise have been used for the ethanol production will simply be used by other producers to make products that are not covered by the sustainability standard. Sustainability standards reshuffle who is using what inputs — with no net reduction in national emissions.

Finally, sustainability standards are discriminatory under World Trade Organization law and are unlikely to survive a legal challenge from ethanol producers abroad. The United States will not be able to rely on the World Trade Organization's exception for trade laws protecting the environment because of lax U.S. policies dealing with greenhouse gas emissions relative to its trading partners. Moreover, the imposition of U.S. tariffs on more climate-friendly ethanol produced abroad weakens any U.S. defense of ethanol sustainability standards under the WTO.

Full text: http://www.cato.org/pubs/pas/pa647.pdf

Harry de Gorter and David R. Just are economists in the Department of Applied Economics and Management at Cornell University.

Readout of the Presidents call and meeting with Iraqi President Talabani

Readout of the Presidents call and meeting with Iraqi President Talabani

WHITE HOUSE
Office of the Press Secretary
-------------------------------------------------------
For Immediate Release October 6, 2009

Readout of the President’s call and meeting with Iraqi President Talabani

President Obama called President Talabani on October 5, and spoke with him at the White House on October 6 when he dropped in on President Talabani’s meeting with National Security Advisor General Jim Jones. The President conveyed appreciation for the leadership that President Talabani has shown in promoting national unity in Iraq and encouraged him to continue his efforts in this regard. The President conveyed to President Talabani support for Iraqi efforts to adopt an election law soon. He also reaffirmed that the United States remains committed to working with Iraq to promote security, political progress, and economic development as Iraqis take responsibility for their future. The two leaders expressed support for further economic cooperation, and highlighted the upcoming October 20-21 U.S.-Iraq Business and Investment Conference in Washington.

Cato: The Government Robbed Chrysler Creditors

The Government Robbed Chrysler Creditors. By Ilya Shapirohttp://www.cato-at-liberty.org/2009/10/

In January 2009, Chrysler stood on the brink of insolvency. Purporting to act under the Emergency Economic Stabilization Act, the Treasury extended Chrysler a $4 billion loan using funds from the Troubled Asset Relief Program (TARP). Still in a bad financial situation, Chrysler initially proposed an out-of-court reorganization plan that would fully repay all of Chrysler’s secured debt. The Treasury rejected this proposal and instead insisted on a plan that would completely eradicate Chrysler’s secured debt, hinging billions of dollars in additional TARP funding on Chrysler’s acquiescence.

When Chrysler’s first lien lenders refused to waive their secured rights without full payment, the Treasury devised a scheme by which Chrysler, instead of reorganizing under a chapter 11 plan, would sell its assets free of all secured interests to a shell company, the New Chrysler. Chrysler was thus able to avoid the “absolute priority rule,” which provides that a court should not approve a bankruptcy plan unless it is “fair and equitable” to all classes of creditors.

Cato joined the Washington Legal Foundation, Allied Educational Foundation, and George Mason law professor Todd Zywicki on a brief supporting the creditors’ petition asking the Supreme Court to review the transaction’s validity. We argue that the forced reorganization amounted to the Treasury redistributing value from senior, secured creditors to debtors and junior, unsecured creditors.

The government should not be allowed, through its own self-dealing, to hand-pick certain creditors for favorable treatment at the expense of others who would otherwise enjoy first lien priority. Further, a lack of predictability and consistency with regard to creditors’ expectations in bankruptcy will result in a destabilization of existing and future credit markets.

The Court will be deciding whether to hear the case later this fall. Thanks very much to Cato legal associate Travis Cushman for his help with the brief.

Libertarian: The major provisions of ObamaCare already have been tried. They've led to increased costs and reduced access to care

The Lesson of State Health-Care Reforms. By PETER SUDERMAN
The major provisions of ObamaCare already have been tried. They've led to increased costs and reduced access to care.
WSJ, Oct 07, 2009

Supreme Court Justice Louis Brandeis famously envisioned the states serving as laboratories, trying "novel social and economic experiments without risk to the rest of the country." And on health care, that's just what they've done.

Like participants in a national science fair, state governments have tested variants on most of the major components of the health-care reform plans currently being considered in Congress. The results have been dramatically increased premiums in the individual market, spiraling public health-care costs, and reduced access to care. In other words: The reforms have failed.

New York is exhibit A. In 1993, the state prohibited insurers from declining to cover individuals with pre-existing health conditions ("guaranteed issue"). New York also required insurers to charge those enrolled in their plans the same premium, regardless of health status, age or sex ("community rating"). The goal was to reduce the number of uninsured by making health insurance more accessible, particularly to those who don't have employer-provided insurance.

It hasn't worked out very well, according to a Manhattan Institute study released last month by Stephen T. Parente, a professor of finance at the University of Minnesota and Tarren Bragdon, CEO of the Maine Heritage Policy Center. In 1994, there were just under 752,000 individuals enrolled in individual insurance plans, or about 4.7% of the nonelderly population. This put New York roughly in line with the rest of the U.S. Today, that percentage has dropped to just 0.2% of the state's nonelderly. In contrast, between 1994 and 2007, the total number of people insured in the individual market across the U.S. rose to 5.5% from 4.5%.

The decline in the number of people enrolled in individual insurance plans, the authors say, is "attributable largely to a steep increase in premiums" because of the state's regulations. Messrs. Parente and Bragdon estimate that repeal of community rating and guaranteed issue could reduce the price of individual coverage by 42%.

New York's experience with guaranteed issue and community rating is not unique. In 1996, similar reforms in Washington state preceded massive premium spikes in the individual market. Some premiums increased as much as 78% in the first three years of the reforms—or 10 times medical inflation—according to a study presented at the annual meeting of the Association for Health Services Research in 1999. Other results included a 25% drop in enrollment in the individual market, and a reduction in services offered. Within four years, for example, none of the state's major carriers offered individual insurance plans that included maternity coverage.

A 2008 analysis by Kaiser Permanente's Patricia Lynch published by Health Affairs noted that in addition to Washington and New York, the individual insurance markets in Kentucky, Maine, Massachusetts, New Hampshire, New Jersey and Vermont "deteriorated" after the enactment of guaranteed issue. Individual insurance became significantly more expensive and there was no significant decrease in the number of uninsured.

Supporters of federal health-care reform argue that the problems associated with these regulations can be addressed with the addition of an individual mandate, which is part of every ObamaCare bill in Congress. This would require every individual to purchase health insurance.
Guaranteed issue alone, the argument goes, results in slightly more expensive premiums, which drives healthier individuals out of the risk pool, which in turn further drives up premiums. The end result is that many healthy people opt out, leaving a small pool of sick individuals with very high premiums. An individual mandate, however, would spread those premium costs across a larger, healthier population, thus keeping premium costs down.

The experience of Massachusetts, which implemented an individual mandate in 2007, suggests otherwise. Health-insurance premiums in the Bay State have risen significantly faster than the national average, according to the Commonwealth Fund, a nonprofit health foundation. At an average of $13,788, the state's family plans are now the nation's most expensive. Meanwhile, insurance companies are planning additional double-digit hikes, "prompting many employers to reduce benefits and shift additional costs to workers" according to the Boston Globe.

And health-care costs have continued to grow rapidly. According to a Rand Corporation study this year, the growth now exceeds state GDP by 8%. The Boston Globe recently reported that state health-insurance commissioners are now worried that medical spending could push both employers and patients into bankruptcy, and may even threaten the system's continued existence.

Meanwhile, survey data from the Massachusetts Medical Society indicate that the state's primary-care providers are being squeezed. Family doctors report taking fewer new patients and increases in wait time.

Reform measures in other states have proven to be expensive duds. Maine's 2003 reform plan, Dirigo Health, included a government insurance option resembling the public option included in the House health-care bill. This public plan, "DirigoChoice," was supposed to expand care to all 128,000 of Maine's uninsured by 2009. But according to the U.S. Census Bureau, the 2007 uninsured rate remained roughly 10%—essentially unchanged. DirigoChoice's individual insurance premiums increased by 74% over its first four years—to $499 a month from $287 a month—according to an analysis of Dirigo data by the Maine Heritage Policy Center. The cost of DirigoHealth to taxpayers so far has been $155 million.

Tennessee's plan for universal coverage, dubbed TennCare, fared even worse in the 1990s. The goal of the state-run public insurance plan was to expand coverage to the uninsured by reducing waste. But the costs of expanding coverage quickly ballooned. In 2005, facing bankruptcy, the state was forced to cut 170,000 individuals from its insurance rolls.

Despite these state-level failures, President Barack Obama and congressional Democrats are pushing forward a slate of similar reforms. Unlike most high-school science fair participants, they seem unaware that the point of doing experiments is to identify what actually works. Instead, they've identified what doesn't—and decided to do it again.

Mr. Suderman is an associate editor at Reason magazine.

Iran's Big Victory in Geneva - We are now even further from eliminating Tehran's threat

Iran's Big Victory in Geneva. By JOHN BOLTON
We are now even further from eliminating Tehran's threat.
WSJ, Oct 05, 2009

The most widely touted outcome of last week's Geneva talks with Iran was the "agreement in principle" to send approximately one nuclear-weapon's worth of Iran's low enriched uranium (LEU) to Russia for enrichment to 19.75% and fabrication into fuel rods for Tehran's research reactor. President Barack Obama says the deal represents progress, a significant confidence-building measure.

In fact, the agreement constitutes another in the long string of Iranian negotiating victories over the West. Any momentum toward stricter sanctions has been dissipated, and Iran's fraudulent, repressive regime again hobnobs with the U.N. Security Council's permanent members. Consider the following problems:

• Is there a deal or isn't there? Diplomacy's three slipperiest words are "agreement in principle." Iran's Ambassador to Britain exclaimed after the talks in Geneva, "No, no!" when asked if his country had agreed to ship LEU to Russia; it had "not been discussed yet." An unnamed Iranian official said that the Geneva deal "is just based on principles. We have not agreed on any amount or any numbers." Bargaining over the deal's specifics could stretch out indefinitely.
Other issues include whether Iran will have "observers" at Russian enrichment facilities. If so, what new technologies might those observers glean? And, since Tehran's reactor is purportedly for medical purposes, will Mr. Obama deny what Iran pretends to need to refuel it in 2010?

• The "agreement" undercuts Security Council resolutions forbidding Iranian uranium enrichment. No U.S. president has been more enamored of international law and the Security Council than Mr. Obama. Yet here he is undermining the foundation of the multilateral campaign against Tehran's nuclear weapons program. In Resolution 1696, adopted July 31, 2006, the Security Council required Iran to "suspend all enrichment-related and reprocessing activities, including research and development." Uranium enriched thereafter—the overwhelming bulk of Iran's admitted LEU—thus violates 1696 and later sanctions resolutions. Moreover, considering Iran's utter lack of credibility, we have no idea whether its declared LEU constitutes anything near its entire stockpile.

By endorsing Iran's use of its illegitimately enriched uranium, Mr. Obama weakens his argument that Iran must comply with its "international obligations." Indeed, the Geneva deal undercuts Mr. Obama's proposal to withhold more sanctions if Iran does not enhance its nuclear program by allowing Iran to argue that continued enrichment for all peaceful purposes should be permissible. Now Iran will oppose new sanctions and argue for repealing existing restrictions. Every other aspiring proliferator is watching how violating Security Council resolutions not only carries no penalty but provides a shortcut to international redemption.

• Raising Iran's LEU to higher enrichment levels is a step backwards. Two-thirds of the work to get 90% enriched uranium, the most efficient weapons grade, is accomplished when U235 isotope levels in natural uranium are enriched to Iran's current level of approximately 3%-5%. Further enrichment of Iran's LEU to 19.75% is a significant step in the wrong direction. This is barely under the 20% definition of weapons-grade, highly enriched uranium (HEU). Ironically, Resolution 1887, adopted while Mr. Obama presided over the Security Council last week, calls for converting HEU-based reactors like Iran's to LEU fuel precisely to lower such proliferation risks. We should be converting the Tehran reactor, not refueling it at 19.75% enrichment.

After Geneva, the administration misleadingly stated that once fashioned into fuel rods, the uranium involved could not be enriched further. This is flatly untrue. The 19.75% enriched uranium could be reconverted into uranium hexafluoride gas and quickly enriched to 90%. Iran could also "burn" its uranium fuel (including the Russian LEU available for the Bushehr reactor) and then chemically extract plutonium from the spent fuel to produce nuclear weapons.

The more sophisticated Iran's nuclear skills become, the more paths it has to manufacture nuclear weapons. The research-reactor bait-and-switch demonstrates convincingly why it cannot be trusted with fissile material under any peaceful guise. Proceeding otherwise would be winking at two decades of Iranian deception, which, unfortunately, Mr. Obama seems perfectly prepared to do.

The president also said last week that international access to the Qom nuclear site must occur within two weeks, but an administration spokesman retreated the next day, saying there was no "hard and fast deadline," and "we don't have like a drop-dead date." Of course, neither does Iran. Once again, Washington has entered the morass of negotiations with Tehran, giving Iran precious time to refine and expand its nuclear program. We are now even further from eliminating Iran's threat than before Geneva.

Barro & Redlick: Our new research shows no evidence of a Keynesian 'multiplier' effect. There is evidence that tax cuts boost growth

Stimulus Spending Doesn't Work. By ROBERT J. BARRO AND CHARLES J. REDLICK
Our new research shows no evidence of a Keynesian 'multiplier' effect. There is evidence that tax cuts boost growth.
The Wall Street Journal, Oct 01, 2009

The global recession and financial crisis have refocused attention on government stimulus packages. These packages typically emphasize spending, predicated on the view that the expenditure "multipliers" are greater than one—so that gross domestic product expands by more than government spending itself. Stimulus packages typically also feature tax reductions, designed partly to boost consumer demand (by raising disposable income) and partly to stimulate work effort, production and investment (by lowering rates).

The existing empirical evidence on the response of real gross domestic product to added government spending and tax changes is thin. In ongoing research, we use long-term U.S. macroeconomic data to contribute to the evidence. The results mostly favor tax rate reductions over increases in government spending as a means to increase GDP.

For defense spending, the principal long-run variations reflect the buildups and aftermaths of major wars—World War I, World War II, the Korean War and, to a much lesser extent, the Vietnam War. World War II tends to dominate, with the ratio of added defense spending to GDP reaching 26% in 1942 and 17% in 1943, and then falling to -26% in 1946.

Wartime spending is helpful for estimating spending multipliers for three key reasons. First, the variations in spending are large and include positive and negative values. Second, since the main changes in military spending are independent of economic developments, it is straightforward to isolate the direction of causation between government spending and GDP. Third, unlike many other countries during the world wars, the U.S. suffered only moderate loss of life and did not experience massive destruction of physical capital. In addition, because the unemployment rate in 1940 exceeded 9% but then fell to 1% in 1944, there is some information on how the multiplier depends on the strength of the economy.

For annual data that start in 1939 or earlier (and, thereby, include World War II), the defense-spending multiplier that applies at the average unemployment rate of 5.6% is in a range of 0.6-0.7. A multiplier less than one means that, overall, other components of GDP fell when defense spending rose. Empirically, our research shows that most of the fall was in private investment, with personal consumer expenditure changing little.

Our research also shows that greater weakness in the economy raises the estimated multiplier: It increases by around 0.1 for each two percentage points by which the unemployment rate exceeds its long-run median of 5.6%. Thus the estimated multiplier reaches 1.0 when the unemployment rate gets to about 12%.

To evaluate typical fiscal-stimulus packages, however, nondefense government spending multipliers are more important. Estimating these multipliers convincingly from U.S. time series is problematical, however, because the movements in nondefense government purchases (dominated since the 1960s by state and local outlays) are closely intertwined with the business cycle. Thus the explanation for much of the positive association between nondefense spending and GDP is that government spending increased in response to growing GDP, rather than the reverse.

The effects of tax rates on GDP growth can be analyzed from a time series we've constructed on average marginal income-tax rates from federal and state income taxes and the Social Security payroll tax. Since 1950, the largest declines in the average marginal rate from the federal individual income tax occurred under Ronald Reagan (to 21.8% in 1988 from 25.9% in 1986 and to 25.6% in 1983 from 29.4% in 1981), George W. Bush (to 21.1% in 2003 from 24.7% in 2000), and Kennedy-Johnson (to 21.2% in 1965 from 24.7% in 1963). Tax rates rose particularly during the Korean War, the 1970s and the 1990s. The average marginal tax rate from Social Security (including payments from employees, employers and the self-employed) expanded to 10.8% in 1991 from 2.2% in 1971 and then remained reasonably stable.

For data that start in 1950, we estimate that a one-percentage-point cut in the average marginal tax rate raises the following year's GDP growth rate by around 0.6% per year. However, this effect is harder to pin down over longer periods that include the world wars and the Great Depression.

It would be useful to apply our U.S. analysis to long-term macroeconomic time series for other countries, but many of them experienced massive contractions of real GDP during the world wars, driven by the destruction of capital stocks and institutions and large losses of life. It is also unclear whether other countries have the necessary underlying information to construct measures of average marginal income-tax rates—the key variable for our analysis of tax effects in the U.S. data.

The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP.

Mr. Barro is a professor of economics at Harvard. Mr. Redlick is a recent Harvard graduate. This op-ed is based on a working paper issued by the National Bureau of Economic Research in September.

Protecting the Credit Raters - Washington moves to maintain the AAA cartel

Protecting the Credit Raters. WSJ Editorial
Washington moves to maintain the AAA cartel.
The Wall Street Journal, page A22, Oct 01, 2009

This morning we had hoped to be able to praise House Financial Services Chairman Barney Frank, who seemed ready to break up the credit ratings racket that did so much to inflame the financial panic. But just when you think Barney will free up competition, he reinforces the cartel.

The news came at yesterday's hearings into why the government-anointed credit-ratings agencies—Moody's, Standard and Poor's and Fitch—slapped their seals of approval on billions of dollars in dodgy assets during the credit mania. A former Moody's employee, Eric Kolchinsky, described a "reckless disregard for the truth" in an August memo to a Moody's official. Yesterday he testified that those responsible for ensuring sound ratings methodology are "routinely bullied" by management. Another former Moody's man, Scott McCreskey, testified about the company's failure to monitor the growing risks of municipal bonds. Moody's has generally denied the allegations but says it is investigating.

Yet despite the path of financial destruction paved by the Big Three raters, Washington still won't yank their privileged status as Nationally Recognized Statistical Ratings Organizations (NRSROs). Based on the draft reform written by Mr. Frank's colleague, Paul Kanjorski (D., Pa.), the raters can expect more compliance and legal costs, but no threat to their official role as America's judges of credit risk.

This bill arrives after Mr. Frank sent signals that the racket would be repealed. Appearing on CNBC in September, Mr. Frank said, "We have exalted rating agencies too much." He added, "We need to repeal laws that mandate the use of rating agencies."

While it's true that the Kanjorski draft calls for removing references to the favored agencies in federal law, most of the raters' power comes from rules, not laws. The the bill would end references in law within six months, but the rules stand. The bureaucrats at the Federal Reserve, SEC and elsewhere merely need to study the issue and report back to Congress. These are the same people who wrote the flawed rules, so why would they eliminate them?

It also says something about the mindset of Congressional Democrats that while whiffing on true reform for investors, they're planning to smack a home run for the trial lawyers. The draft contains all kinds of new potential liability for the credit raters, including a bizarre section on "joint liability" that makes one ratings agency liable for another's mistakes. You read that correctly. If S&P blows a call, investors could sue Moody's and Fitch too.

This suggests that the favored agencies may simply be consumed by piranhas in the trial bar. But by bleeding the NRSROs while leaving intact rules that require their services, Mr. Kanjorski could be creating a scenario in which regulators are soon calling S&P and Moody's too big to fail. This is essentially what Sarbanes-Oxley did for the accounting firms after Enron: In the name of punishing them, make them even more important.

Meanwhile, instead of breaking up the ratings club, the SEC has simply chosen to add new members. A new rule allows a few new additional favored firms, which are paid by investors, to get the same inside information that the Big Three, which are paid by bond issuers, have always enjoyed. So rich investors may now be able to pay extra for data never disclosed to average investors.

The best—and only genuine—ratings reform is also the simplest. Remove all references to NRSROs from rules as well as laws. Let markets decide which investments carry the most risk.

U.S. Credibility and Pakistan - What Islamabad thinks of a U.S. withdrawal from Afghanistan

U.S. Credibility and Pakistan. WSJ Editorial
What Islamabad thinks of a U.S. withdrawal from Afghanistan.
The Wall Street Journal, page A22, Oct 01, 2009

Critics of the war in Afghanistan—inside and out of the Obama Administration—argue that we would be better off ensuring that nuclear-armed Pakistan will help us fight al Qaeda. As President Obama rethinks his Afghan strategy with his advisers in the coming days, he ought to listen to what the Pakistanis themselves think about that argument.

In an interview at the Journal's offices this week in New York, Pakistan Foreign Minister Makhdoom Shah Mahmood Qureshi minced no words about the impact of a U.S. withdrawal before the Taliban is defeated. "This will be disastrous," he said. "You will lose credibility. . . . Who is going to trust you again?" As for Washington's latest public bout of ambivalence about the war, he added that "the fact that this is being debated—whether to stay or not stay—what sort of signal is that sending?"

Mr. Qureshi also sounded incredulous that the U.S. might walk away from a struggle in which it has already invested so much: "If you go in, why are you going out without getting the job done? Why did you send so many billion of dollars and lose so many lives? And why did we ally with you?" All fair questions, and all so far unanswered by the Obama Administration.

As for the consequences to Pakistan of an American withdrawal, the foreign minister noted that "we will be the immediate effectees of your policy." Among the effects he predicts are "more misery," "more suicide bombings," and a dramatic loss of confidence in the economy, presumably as investors fear that an emboldened Taliban, no longer pressed by coalition forces in Afghanistan, would soon turn its sights again on Islamabad.

Mr. Qureshi's arguments carry all the more weight now that Pakistan's army is waging an often bloody struggle to clear areas previously held by the Taliban and their allies. Pakistan has also furnished much of the crucial intelligence needed to kill top Taliban and al Qaeda leaders in U.S. drone strikes. But that kind of cooperation will be harder to come by if the U.S. withdraws from Afghanistan and Islamabad feels obliged to protect itself in the near term by striking deals with various jihadist groups, as it has in the past.

Pakistanis have long viewed the U.S. through the lens of a relationship that has oscillated between periods of close cooperation—as during the war against the Soviets in Afghanistan in the 1980s—and periods of tension and even sanctions—as after Pakistan's test of a nuclear device in 1998. Pakistan's democratic government has taken major risks to increase its assistance to the U.S. against al Qaeda and the Taliban. Mr. Qureshi is warning, in so many words, that a U.S. retreat from Afghanistan would make it far more difficult for Pakistan to help against al Qaeda.

Wall Street Needs More Skin in the Game - Partnerships were one way of aligning the interests of money managers and investors

Wall Street Needs More Skin in the Game. By PETER WEINBERG
Partnerships were one way of aligning the interests of money managers and investors.
WSJ, Oct 01, 2009

The debate about bonuses and Wall Street pay rages on, and for good reason. Compensation is a complex issue that is essential to managing systemic risk. The asymmetrical structure of pay packages—a "heads I win, tails I win less" approach—was wrong. But overly prescriptive government intervention to solve the problem poses its own challenges and might not help us get the incentives right, either. So what can we do?

Prior to 1970, the New York Stock Exchange had a rule prohibiting brokerage firms from being publicly traded companies. There was a genius to this rule. It aligned the interest of the partners of old Wall Street with that of the securities markets themselves. Today, all the large firms are publicly traded. This has given these firms needed permanent capital, but has also served to distort incentives.

We can't snap our fingers and turn public financial institutions back into private partnerships, but we can realign interests by restructuring executive pay.

The only private partnership I can talk about authoritatively is the one in which I was a partner from 1992 to 1999, when the firm went public: Goldman Sachs. Partners there owned the equity of the firm. When elected a partner, you were required to make a cash investment into the firm that was large enough to be material to your net worth. Each partner had a percentage ownership of the earnings every year, but the earnings would remain in the firm. A partner's annual cash compensation amounted only to a small salary and a modest cash return on his or her capital account. A partner was not allowed to withdraw any capital from the firm until retirement, at which time typically 75%-80% of one's net worth was still in the firm. Even then, a retired ("limited") partner could only withdraw his or her capital over a three-year period. Finally, and perhaps most importantly, all partners had personal liability for the exposure of the firm, right down to their homes and cars.

The focus on risk was intense, and wealth creation was more like a career bonus rather than a series of annual bonuses. Other private Wall Street firms had similar pay structures.

Here are two ideas that could help us replicate the discipline instilled by the old pay packages of private partnerships:

First, institute what is called a "10/20/30/40" plan. Under such a plan, junior employees would receive regular competitive pay, but senior employees would be paid as follows: 10% of annual compensation in cash now; 20% of annual compensation in cash later; 30% of annual compensation in stock now (with a required holding period); and 40% of annual compensation in stock later.

"Now" means paid immediately at the end of a compensation period. "Later" means after a period during which a cycle can be evaluated. During that evaluation, the firm's compensation committee would perform a "look back" in which it can adjust the award or leave it at a predetermined level. This function should not be used to micromanage past bonuses but simply to make sure success in a specific year was still viewed to be success in hindsight.

Second, create a "Skin in the Game" plan. When an executive or a senior employee manages a trading or asset-management business which can be measured by its own profit and loss statement, those executives or employees should invest a significant amount of their own capital in that business or fund. The compensation committee of the company's board would determine who qualifies for this plan and the definition of a material commitment.

What would these two plans achieve? The first would back-end wealth creation to ensure that through-the-cycle compensation was linked to through-the-cycle value creation. The second would increase stock ownership and personal financial commitment to better align the pocketbooks of Wall Street with the pocketbooks of financial markets and our economy.

Beyond more prudent capital requirements, regulators and politicians likely won't gain much if they are too prescriptive. Writing new rules could spark a cat-and-mouse game that would not benefit anyone. If the private sector can align its incentives and risk management with the interests of the global marketplace, we will all be pulling in the same direction. That has worked before.

Mr. Weinberg is a founding partner of Perella Weinberg Partners, an advisory and asset-management firm based in New York and London.

How the U.S. Government Rations Health Care

How the U.S. Government Rations Health Care. By SCOTT GOTTLIEB
The agency that would likely run the 'public option' was slow to pay for implantable cardiac defibrillators.
WSJ, Oct 01, 2009

President Barack Obama deflects criticism that his health-care plan will bring on government rationing of medical care by arguing that insurance companies ration care. Everyone knows private payers limit access to some health care. But government does it in far more byzantine and arbitrary ways.

Consider the $450 billion Medicare program. It provides a model for—indeed its bureaucracy could well end up running—the "public option" health plan that Mr. Obama wants to offer all Americans under the age of 65. In recent years, Medicare's staff has been aggressively restricting coverage for costly treatments. Looking for ways to control spending on medical products—and preserve the illusory "trust fund" that pays Medicare claims—is what shapes the culture of the organization and motivates the agency's staff.

This often means limiting access to the costliest technologies. To do this Medicare relies on its rationing and pricing systems. National coverage decisions (NCDs) are assessments issued by Medicare's medical staff that define who is eligible for new but often expensive treatments. Medicare then assigns medical products and procedures with "codes" that determine which regulated category they fall into. Finally, price "schedules" are developed by Medicare's staff each year to assign each unique code with its own updated payment rate. The process for getting a favorable code on a new product is a source of intense lobbying. It can make or break a technology.

For a remote agency like Medicare, far removed from clinical practice, it's easier to try and manage the use of a high-cost but specialty treatment than a much lower-cost but very widely used product. Yet cheaper, more commonly used products can still be mispriced and account for more total cost to the agency. For example, low-tech orthotic devices and other "durable medical equipment" are a known source of wasteful spending. These medical products often evade Medicare's attention in favor of less used but more expensive items such as a biological cancer drug.

Take the agency's tortured decisions concerning the use of implantable defibrillators that jump-start stopped hearts during cardiac arrest. Medicare sharply restricted their use in the 1990s. Mounting research proved that the $30,000 devices could be saving many more lives. So in 2003 Medicare adopted a novel theory to expand coverage to some, but not everyone, who needed one. The agency said only patients with certain measures on their electrocardiograms (called "wide QRS") seemed to benefit.

It was an easily measurable but ultimately imprecise way to allocate the devices. After another major study firmly refuted the QRS theory, Medicare expanded coverage again in 2005, potentially saving 2,500 additional lives according to a press release issued with that decision.
That experience wasn't unique. From 1999 to 2007, Medicare denied access in a third of the treatments it evaluated through its coverage process, taking an average of eight months to complete its reviews. When coverage was granted, in 85% of cases the treatments were restricted, usually to patients with more advanced illnesses.

Medicare is lately increasing its use of the national coverage process and is becoming more tightfisted. Since 2008, according to my review of Medicare data, it conditioned access in 29% of its reviews and denied new or expanded coverage in fully 53% of cases.

Medicare's methods can also be arbitrary. Take the travails of the pharmaceutical company Sepracor and its drug Xopenex, an innovative respiratory medicine that competes with the chemically distinct and much cheaper generic albuterol. Both are inhaled aerosols used to treat asthma and chronic obstructive pulmonary disease. Xopenex has the same benefits as albuterol, but some believe fewer of its cardiac side effects. Medicare didn't agree.

The agency tried to make a "national coverage decision" on Xopenex but couldn't come up with a clinical justification to limit the drug's usage. So Medicare manipulated its payment process, saying it would pay Xopenex a price equivalent to the "least costly alternative" form of generic albuterol, 10 cents a treatment compared to about $2.50 for Xopenex. Then Medicare was sued by a patient, and a Federal court recently ruled the agency exceeded its authority.

Medicare finally succeeded in reigning in the use of Xopenex with its coding system. By issuing Xopenex the same classification as generic albuterol, it was able to pay both products the same "blended" price—an average of the cost of each individual drug. That lowered the price on Xopenex, but ironically increased what Medicare paid for the generics.

It's not a stretch to say that Medicare spent hundreds of cumulative man-hours focusing on Xopenex while other priorities languished. The question is why? There weren't safety concerns. Xopenex may have been used in lieu of a cheaper alternative, but at peak Medicare sales of about $300 million it represented far less than one one-thousandth of the agency's budget. Simply put, a few staffers inside Medicare were consumed with the drug and its higher price—revealing a process that is capricious and often disconnected from science.

Worse still is how impenetrable these programs have become. Drug and device companies spend millions of dollars trying to influence Medicare decisions. The hundreds of consultants they hire to advise them typically command $20,000-a-month retainers.

Formal patient and provider appeals to Medicare took an average of 21 months, according to a report issued in 2003 by the Government Accountability Office (using 2001 data), with delays in "administrative processing" due to "inefficiencies and incompatibility" of data systems eating up 70% of the time spent processing appeals.

There's nothing inherently wrong with a program like Medicare seeking value for taxpayers. But it shouldn't make up the rules as it goes. When private plans ration care, patients can appeal directly to an insurer's medical staff. Only a small fraction of Medicare's denied claims—about 5%—are ever formally appealed because its process is so impenetrable. People can also switch insurers, and in many cases patients chose a policy because it matched their preferences in the first place. These options don't exist in a government health program.

Dr. Gottlieb is a resident fellow at the American Enterprise Institute and a former senior official at the Centers for Medicare and Medicaid Services. He is partner to a firm that invests in health-care companies, and he advises health plans.

Biologics: Diverse and Dramatic Advances

Biologics: Diverse and Dramatic Advances
Innovation.org, September 3, 2009

Research in biologics offers huge promise to patients. As scientists learn more of the molecular underpinnings of disease, our ability to treat diseases with biologics in new and innovative ways rapidly grows. A recent article in the Journal of the American Medical Association stated that biologics “represent an important and growing part of the therapeutic arsenal.”[i]

Biologics are medicines made from living material (plant, animal or microorganism) and may be derived from natural sources or engineered in a laboratory. Because they are structurally so different from most existing treatments and allow for very precise targeting, they have revolutionized treatment for many diseases. In many cases biologics are the first treatment available for a disease or they offer a significantly better way to treat a given disease. And many believe that, with more research, the near future holds many more breakthrough biologics.

Here are just a few examples of biologics that are making an enormous difference for patients:

Bevacizumab (Avastin) represents a completely new approach to attacking cancer tumors by cutting off the blood supply that feeds them. Following three decades of research in this promising area, bevacizumab was approved in 2004 to treat metastatic colorectal cancer. Since then bevacizumab has proved effective against several other forms of cancer.

Approved in 2008 to treat metastatic breast cancer, bevacizumab, in combination with paclitaxel, was shown to double progression-free survival time for women with metastatic breast cancer. The American Society for Clinical Oncology (ASCO) highlighted this a major advance of 2008.[ii]

Another recent study presented at the 2009 American Society for Clinical Oncology annual meeting found that for non-small cell lung cancer patients, bevacizumab combined with chemotherapies can slow cancer growth by up to 25%. According to the study author, "This cancer is very hard to treat. There have been some advances, but we have reached a treatment plateau and we need more agents which may help us to offer better treatment to patients…We were able to confirm that bevacizumab adds efficacy to standard chemotherapy and provides hope for patients suffering from a deadly disease."[iii]

Etanercept (Enbrel), originally approved for treatment of moderate to severe rheumatoid arthritis in 1998,[iv] has since been approved for several other autoimmune diseases, including: plaque psoriasis, psoriatic arthritis, ankylosing spondylitis, and juvenile idiopathic arthritis.[v]

Etanercept has contributed to great strides in treating rheumatoid arthritis. A recent study found that patients treated with combination therapy including etanercept had a 50% chance of complete clinical remission after 52 weeks of treatment, compared with 28% taking an older medicine.[vi] According to an editorial in The Lancet, these results would have been “unthinkable in the 20th century” prior to new disease-modifying biological medicines.[vii]

Trastuzumab (Herceptin) is one of the earliest and most common examples of personalized medicine. About 30% of women have a form of breast cancer that over-expresses a protein called HER2, which is not responsive to standard therapy. Trastuzumab was approved for patients with HER2 positive tumors in 1998 and further research showed in 2005, that it reduced recurrence by 52% in combination with chemotherapy.[viii] A commentary in the New England Journal of Medicine concluded that findings suggested “a dramatic and perhaps permanent perturbation of the natural history of the disease, maybe even a cure.”[ix]

These are just three examples of advances that are already benefiting patients. Based on progress like this, many experts believe that biologics are a key source for potential future advances. According to the Association of American Universities, “Biologics have enormous potential to provide breakthrough medical treatments.”[x] Researchers continue to explore the possibilities of new biologics and the promise for patients is enormous. By fostering such research we can deliver on the potential of biologics for more patients in the coming years.


References

[i]T.J. Giezen, “Safety-Related Regulatory Actions for Biologicals Approved in the United States and the European Union,” Journal of the American Medical Association, 300 (October 2008): 16, 1887-1896.
[ii]American Society of Clinical Oncology, “Clinical Cancer Advances 2008: Major Research Advances in Cancer Treatment, Prevention and Screening,” Journal of Clinical Oncology, 22 December 2008.
[iii]A. Gardner, “New Treatments for Tough Cancers Show Promise,” 23 March 2007, HealthDay, http://abcnews.go.com/Health/Healthday/story?id=4507406&page=1 (Accessed 21 July 2009).
[iv]Food and Drug Administration, Approval Letter, 2 November 1998, http://www.accessdata.fda.gov/drugsatfda_docs/appletter/1998/etanimm110298L.htm, (Accessed 21 July 2009).
[v]Food and Drug Administration, Drugs @ FDA, (Accessed 21 July 2009).
[vi]P. Emery, et. al., “Comparison of Methotrexate Monotherapy with a Combination of Methotrexate and Etanercept in Active, Early, Moderate to Severe Rheumatoid Arthritis (COMET): A Randomized, Double-Blind, Parallel Treatment Trial,” The Lancet, 372 (August 2008): 9636, 375-382.
[vii]J.M. Kremer, “COMET’s Path, and the New Biologicals in Rheumatoid Arthritis,” The Lancet, 372 (August 2008): 9636, 347-348.
[viii]Personalized Medicine Coalition, “The Case for Personalized Medicine,” May 2009, http://www.personalizedmedicinecoalition.org/communications/TheCaseforPersonalizedMedicine_5_5_09.pdf (Accessed 21 July 2009); Piccart-Gebhart MJ, Procter M, Leyland-Jones B, et al. Trastuzumab after Adjuvant Chemotherapy in HER2-positive Breast Cancer. New England Journal of Medicine, 353 (20 October 2005):1659-72; Romond EH, Perez EA, Bryant J, et al. Trastuzumab plus Adjuvant Chemotherapy for Operable HER2-positive Breast Cancer. New England Journal of Medicine 2005; 353 (20 October 2005):1673-84.
[ix]G. Hortobagyi, “Trastuzumab in the Treatment of Breast Cancer,” New England Journal of Medicine, 353 (20 October 2005): 16, 1734-1736.
[x]R. M. Berdahl, Association of American Universities, Letter to Representative Anna Eshoo, 20 July 2009.

Libertarian: protectionist policies hurting low-income Americans

Obama's protectionist policies hurting low-income Americans. By Daniel Griswold
Washington Times, Sep 30, 2009

President Obama and the other Group of 20 leaders delivered their obligatory warning against protectionism at last week's summit in Pittsburgh. But at home the U.S. president continues to conduct his own trade war, not only against imports from China and other developing countries, but against the most vulnerable of American consumers.

America's highest remaining trade barriers are aimed at products mostly grown and made by poor people abroad and disproportionately consumed by poor people at home. While industrial goods and luxury products typically enter under low or zero tariffs, the U.S. government imposes duties of 30 percent or more on food and lower-end clothing and shoes - staple goods that loom large in the budgets of poor families.

To win favor with organized labor and other opponents of trade liberalization, Mr. Obama has either defended or actually raised barriers on precisely those products of most interest to poor households.

The tariff the president imposed on Chinese tires earlier this month was heavily biased against low-income American families. The affected tires typically cost $50 to $60 each, as compared with the unaffected tires that sell for $200 each. The result of the tariff will be an increase in lower-end tire prices of 20 percent to 30 percent. Low-income families struggling to keep their cars on the road will be forced to postpone replacing old and worn tires, putting their families at greater risk.

The "cash for clunkers" program the president championed, while not a trade measure, betrays the same indifference to markets that serve the poor. The program forced the disposal of the 700,000 cars and light trucks that were traded in, reducing supply and raising prices of used vehicles for families that cannot afford to buy new. Because of this president's policies, low-income drivers will find it more difficult to buy a car and to keep it running safely. The president's policy appears to be to let the rich drive their new, subsidized hybrid cars while the poor walk or take a bus.

Mr. Obama also displays no concern for the anti-poor nature of tariffs on food and clothing. As a senator and presidential candidate, he embraced the 2008 farm bill, which subsidizes farmers whose average incomes and wealth are higher than the typical non-farm family. The farm bill imposes anti-competitive tariffs and quotas on imported sugar, milk and cheese - a food tax that falls disproportionately hard on the poor, who spend a larger share of their budgets on food.

This summer, a group of sugar-using industries asked the Obama administration to relax quotas on imported sugar to avoid potential domestic shortages in the face of globally high prices. The administration refused, not only placing jobs at risk in the confectionery and food-processing sectors, but also forcing working families to continue paying higher prices than they should for candy, breakfast cereals, bakery goods and other sugar-containing products.

When he was running for president, Mr. Obama explicitly endorsed higher prices for T-shirts for every American family to save jobs in the small and declining apparel sector. At a debate before union members in Chicago in August 2007, he said, "People don't want a cheaper T-shirt if they're losing a job in the process. They would rather have the job and pay a little bit more for a T-shirt."

The future president ignored the fact that every poor family must buy those shirts to keep themselves clothed, yet only one-third of 1 percent of American workers make clothing or textiles of any kind. A wealthy politician or TV commentator need not care about the price of a T-shirt or other everyday consumer items, but millions of poor and middle-class American families do care.

A few liberal Democrats still care, too. Edward Gresser of the Democratic Leadership Council has done more than anyone to expose the unfair, anti-poor bias of the U.S. tariff code.
In his 2007 book "Freedom From Want: American Liberalism and the Global Economy," he calculated that a single mother earning $15,000 a year as a maid in a hotel will forfeit about a week's worth of her annual pay to the U.S. tariff system, while the hotel's $100,000-a-year manager will give up only two or three hours of pay.

The $25 billion in revenue raised each year from import duties represent by far the most regressive tax the federal government imposes. Yet the Obama administration and the Democratic Congress have refused to move forward with trade agreements that would lower trade taxes that fall most heavily on the poor. By supporting the farm bill, but not new trade agreements, the president has embraced the status quo rather than change.

This is the status quo that so many "progressives" in America, from Public Citizen to the AFL-CIO, are expending millions of dollars to defend. They reflexively oppose any trade agreements that would reduce those regressive tariffs. In contrast to what he says on the public stage, Mr. Obama so far has taken their side in the trade debate at the expense of poor American families struggling to keep their cars on the road, shirts in the closet and food on the table.

Daniel Griswold is director of the Center for Trade Policy Studies at the Cato Institute and author of a new book, "Mad About Trade: Why Main Street America Should Embrace Globalization" (Washington: Cato Institute, 2009).