The Case for the New START Treaty, by Secretary Gates

The Case for the New START Treaty. By ROBERT M. GATES
The treaty has the unanimous support of America's military leadership.
WSJ, May 13, 2010

I first began working on strategic arms control with the Russians in 1970, an effort that led to the first Strategic Arms Limitation Agreement with Moscow two years later.

The key question then and in the decades since has always been the same: Is the United States better off with an agreement or without it? The answer for each successive president has always been "with an agreement." The U.S. Senate has always agreed, approving each treaty by lopsided, bipartisan margins.

The same answer holds true for the New START agreement: The U.S. is far better off with this treaty than without it. It strengthens the security of the U.S. and our allies and promotes strategic stability between the world's two major nuclear powers. The treaty accomplishes these goals in several ways.

First, it limits significantly U.S. and Russian strategic nuclear arsenals and establishes an extensive verification regime to ensure that Russia is complying with its treaty obligations. These include short-notice inspections of both deployed and nondeployed systems, verification of the numbers of warheads actually carried on Russian strategic missiles, and unique identifiers that will help us track—for the very first time—all accountable strategic nuclear delivery systems.

Since the expiration of the old START Treaty in December 2009, the U.S. has had none of these safeguards. The new treaty will put them back in place, strengthen many of them, and create a verification regime that will provide for greater transparency and predictability between our two countries, to include substantial visibility into the development of Russian nuclear forces.

Second, the treaty preserves the U.S. nuclear arsenal as a vital pillar of our nation's and our allies' security posture. Under this treaty, the U.S. will maintain our powerful nuclear triad—ICBMs, submarine launched ballistic missiles (SLBMs) and bombers—and we will retain the ability to change our force mix as we see fit. Based on recommendations of the Joint Chiefs of Staff, we plan to meet the Treaty's limits by retaining a triad of up to 420 ICBMs, 14 submarines carrying up to 240 SLBMs, and up to 60 nuclear-capable heavy bombers.

Third, and related, the treaty is buttressed by credible modernization plans and long-term funding for the U.S. nuclear weapons stockpile and the infrastructure that supports it. This administration is proposing to spend $80 billion over the next decade to rebuild and sustain America's aging nuclear infrastructure—especially our national weapons labs, and our science, technology and engineering base. This week the president is providing a report to the Congress on investments planned over the next 10 years to sustain and modernize our nuclear weapons, their delivery systems, and supporting infrastructure.

Fourth, the treaty will not constrain the U.S. from developing and deploying defenses against ballistic missiles, as we have made clear to the Russian government. The U.S. will continue to deploy and improve the interceptors that defend our homeland—those based in California and Alaska. We are also moving forward with plans to field missile defense systems to protect our troops and partners in Europe, the Middle East, and Northeast Asia against the dangerous threats posed by rogue nations like North Korea and Iran.

Finally, the treaty will not restrict America's ability to develop and deploy conventional prompt global strike capabilities—that is, the ability to hit targets anywhere in the world in less than an hour using conventional explosive warheads fitted to long-range missiles.

These delivery systems—be they land or sea based—would count against the new treaty limits, but if we deploy them it would be in very limited numbers. We are currently assessing other kinds of long-range strike systems that would not count under the treaty.

The New START Treaty has the unanimous support of America's military leadership—to include the chairman of the Joint Chiefs of Staff, all of the service chiefs, and the commander of the U.S. Strategic Command, the organization responsible for our strategic nuclear deterrent. For nearly 40 years, treaties to limit or reduce nuclear weapons have been approved by the U.S. Senate by strong bipartisan majorities. This treaty deserves a similar reception and result—on account of the dangerous weapons it reduces, the critical defense capabilities it preserves, the strategic stability it maintains, and, above all, the security it provides to the American people.

Mr. Gates is secretary of defense.

Press Briefing

May 13, 2010

Gender-Based Violence Must Be Addressed in Fight Against HIV/AIDS
http://blogs.state.gov/sgwi/index.php/site/entry/gbv_aids

The Struggle for Mastery of the Pacific, by Yuriko Koike
http://www.project-syndicate.org/commentary/koike5/English

Can We Avoid Becoming Europe?
http://blog.heritage.org/2010/05/13/morning-bell-can-we-avoid-becoming-europe

Remarks At the 40th Washington Conference on the Americas. By Hillary Rodham Clinton, State Sec.
Loy Henderson Auditorium, Washington, DC, May 12, 2010
http://www.state.gov/secretary/rm/2010/05/141760.htm

Presidential Memorandum--Oil Supplemental Package
http://www.whitehouse.gov/the-press-office/presidential-memorandum-oil-supplemental-package

Autonomous Car Learns To Powerslide Into Parking Spot
http://spectrum.ieee.org/automaton/green-tech/advanced-cars/autonomous-car-learns-to-powerlslide-into-parking-spot

CPSS and IOSCO consult on policy guidance for central counterparties and trade repositories in the OTC derivatives market. May 12, 2010
http://www.bis.org/press/p100512.htm

Ermakova’s findings defy logic: Feeding Roundup Ready soy doesn’t result in infant mortality
http://academicsreview.org/reviewed-content/genetic-roulette/section-1/1-14-roundup-ready-soy-is-safe-5/

The Case for the New START Treaty - The treaty has the unanimous support of America's military leadership. By Robert M Gates, Defense Secretary
http://www.bipartisanalliance.com/2010/05/case-for-new-start-treaty-by-secretary.html

What's Happening to Faisal Shahzad? - The lack of a court appearance suggests prosecutors are getting information. But they shouldn't have to improvise.
http://online.wsj.com/article/SB10001424052748704250104575238620455479284.html

Notable & Quotable - Jacob Sullum and Michael Barone on Supreme Court nominee Elena Kagan
http://online.wsj.com/article/SB10001424052748703339304575240291154629742.html

Washington's Bungling Auto Engineers - Congress is designing everything from the braking system in your next car to the loan with which you'll finance it. Be very afraid.
http://online.wsj.com/article/SB10001424052748703880304575236373875947794.html

Obama's Kagan Admission - Confirmation and double standards
http://online.wsj.com/article/SB10001424052748703339304575240573955534404.html

Surveillance and Shahzad - Are wiretap limits making it harder to discover and pre-empt jihadists?
http://online.wsj.com/article/SB10001424052748704250104575238444182924962.html

The Treasury-Financial Complex - The Dodd bill is perfectly designed to create the largest and most powerful crony system in history
http://online.wsj.com/article/SB10001424052748704250104575238841836433282.html


The We're-Not-Europe Party - The bill comes due for a life of fairness at the expense of growth
http://online.wsj.com/article/SB10001424052748703339304575240591350076252.html

Remarks by the First Lady at National Military Family Association Summit
http://www.whitehouse.gov/the-press-office/remarks-first-lady-national-military-family-association-summit

Senator Kerry and Lieberman release their new energy tax bill
http://www.instituteforenergyresearch.org/2010/05/12/senator-kerry-and-lieberman-release-their-new-energy-tax-bill/

White House Task Force Hops on Activist Bandwagon - Obesity link to plastics!
http://www.acsh.org/factsfears/newsID.1425/news_detail.asp

Additional Information on the Potential Discretionary Costs of Implementing the Patient Protection and Affordable Care Act (PPACA)
http://www.cbo.gov/ftpdocs/114xx/doc11493/Additional_Information_PPACA_Discretionary.pdf

Statement by President Obama on Financial Reform
http://www.whitehouse.gov/the-press-office/statement-president-obama-financial-reform

No-More-Bailouts Bill Springs a Leak: Fannie and Freddie Ask for More
http://blog.heritage.org/2010/05/10/no-more-bailouts-bill-springs-a-leak-fannie-and-freddie-ask-for-more

How Badly Will the Democrats Do? - Rove on a few trends to watch ahead of November.
http://digs.by/adCGy3

The Price of Wind - The 'clean energy revolution' is expensive

The Price of Wind. WSJ Editorial
The 'clean energy revolution' is expensive
WSJ, May 12, 2010

The ferocious opposition from Massachusetts liberals to the Cape Wind project has provided a useful education in green energy politics. And now that the Nantucket Sound wind farm has won federal approval, this decade-long saga may prove edifying in green energy economics too: Namely, the price of electricity from wind is more than twice what consumers now pay.

On Monday, Cape Wind asked state regulators to approve a 15-year purchasing contract with the utility company National Grid at 20.7 cents per kilowatt hour, starting in 2013 and rising at 3.5% annually thereafter. Consumers pay around nine cents for conventional power today. The companies expect average electric bills to jump by about $1.59 a month, because electricity is electricity no matter how it is generated, and Cape Wind's 130 turbines will generate so little of it in the scheme of the overall New England market.

Still, that works out to roughly $443 million in new energy costs, and that doesn't count the federal subsidies that Cape Wind will receive from national taxpayers. It does, however, include the extra 6.1 cents per kilowatt hour that Massachusetts utilities are mandated to pay for wind, solar and the like under a 2008 state law called the Green Communities Act. Also under that law, at least 15% of power company portfolios must come from renewable sources by 2020.

Two weeks ago, U.S. Interior Secretary Ken Salazar approved Cape Wind, placing it in the vanguard of "a clean energy revolution." A slew of environmental and political outfits have since filed multiple lawsuits for violations of the Endangered Species Act, the National Environmental Policy Act, the Outer Continental Shelf Lands Act, certain tribal-protection laws, the Clean Water Act, the Migratory Bird Treaty Act and the Rivers and Harbors Act.

There's comic irony in this clean energy revolution getting devoured by the archaic regulations of previous clean energy revolutions. But given that taxpayers will be required to pay to build Cape Wind and then required to buy its product at prices twice normal rates, opponents might have more success if they simply pointed out what a lousy deal it is.

Press Briefing

May 12, 2010

Egypt's Renewal of State of Emergency. By Hillary Rodham Clinton, Secretary of State. Washington, DC, May 11, 2010
http://www.state.gov/secretary/rm/2010/05/141736.htm


Club-K Container Missile System - See video
http://blog.heritage.org/2010/05/11/video-the-very-real-short-range-missile-threat-obama-is-ignoring

How to Prevent Another Trading Panic - The SEC should require price limits for sell orders
http://online.wsj.com/article/SB10001424052748703880304575236303198364676.html

Pennsylvania Kids Deserve School Choice - Bad public schools hurt poor and rural children the most. By Anthony H Williams, state senator from Pennsylvania and a candidate in the May 18 Democratic primary for governor.
http://online.wsj.com/article/SB10001424052748704448304575196191596419272.html

The Minnesota Prelude - Land of 10,000 tax increases
http://online.wsj.com/article/SB10001424052748704250104575238213436787960.html

OTC derivatives market activity in the second half of 2009
http://www.bis.org/press/p100511.htm

Finally, a passing grade in DC
http://www.washingtonpost.com/wp-dyn/content/article/2010/05/11/AR2010051104207.html

Myths of Cap-and-Trade and Clean Energy Policies
http://www.instituteforenergyresearch.org/2010/05/11/myths-of-cap-and-trade-and-clean-energy-policies/

Microsoft gets more aggressive with free software
http://www.japantoday.com/category/technology/view/microsoft-gets-more-aggressive-with-free-software

Deadly Rotavirus Vs. Harmless Pig Virus
http://www.acsh.org/factsfears/newsID.1422/news_detail.asp

The Price of Wind - The 'clean energy revolution' is expensive
http://www.bipartisanalliance.com/2010/05/price-of-wind-clean-energy-revolution.html

Fannie the Unreformable - Democrats leave Chris Dodd alone to defend the indefensible.
http://online.wsj.com/article/SB10001424052748704250104575238641146885632.html

Press Briefing by Press Secretary Robert Gibbs and FEMA Administrator Craig Fugate
http://www.whitehouse.gov/the-press-office/press-briefing-press-secretary-robert-gibbs-and-fema-administrator-craig-fugate

Extend the Bush Tax Cuts—For Now —— Deficits are a real problem but the recovery is still too fragile to choke off growth with higher rates
http://online.wsj.com/article/SB10001424052748704370704575228123196462504.html

Shahzad and the Pre-9/11 Paradigm - In the 1990s we mocked the ineptness of jihadists and were confident civilian courts could handle them. Look where that got us.
http://www.bipartisanalliance.com/2010/05/shahzad-and-pre-911-paradigm-in-1990s.html

On Elena Kagan: "She is certainly a fan of presidential power." By Radley Balko
http://reason.com/blog/2010/05/10/she-is-certainly-a-fan-of-pres

Our Unsustainable Debt, by Veronique de Rugy - America is on the verge of financial disaster
http://reason.com/archives/2010/05/11/our-unsustainable-debt

Side Effects: Higher Premiums from Adult “Children” on Parents’ Health Plans
http://blog.heritage.org/2010/05/11/side-effects-higher-premiums-from-adult-children-on-parents-health-plans/

Side Effects: Get Ready to Lose Your Doctor
http://blog.heritage.org/2010/05/10/side-effects-get-ready-to-lose-your-doctor

Side Effects: Let the Employer Penalties Begin
http://blog.heritage.org/2010/05/04/side-effects-let-the-employer-penalties-begin

Side Effects: Physician-Owned Hospitals Face New Regulations, Limits on Growth
http://blog.heritage.org/2010/05/06/side-effects-physician-owned-hospitals-face-new-regulations-limits-on-growth

Will the Obama administration enable more of Hosni Mubarak's autocracy?
http://www.washingtonpost.com/wp-dyn/content/article/2010/05/11/AR2010051104204.html

Shahzad and the Pre-9/11 Paradigm - In the 1990s we mocked the ineptness of jihadists and were confident civilian courts could handle them

Shahzad and the Pre-9/11 Paradigm. By MICHAEL B. MUKASEY
In the 1990s we mocked the ineptness of jihadists and were confident civilian courts could handle them. Look where that got us.
WSJ, May 12, 2010

Some good news from the attempted car bombing in Times Square on May 1 is that—at the relatively small cost of disappointment to Broadway theater-goers—it teaches valuable lessons to help deal with Islamist terrorism. The bad news is that those lessons should already have been learned.

One such lesson has to do with intelligence gathering. Because our enemies in this struggle do not occupy a particular country or location, intelligence is our only tool for frustrating their plans and locating and targeting their leaders. But as was the case with Umar Faruk Abdulmutallab, who tried to detonate a bomb aboard an airplane over Detroit last Christmas Day, principal emphasis was placed on assuring that any statements Faisal Shahzad made could be used against him rather than simply designating him an unlawful enemy combatant and assuring that we obtained and exploited any information he had.

On Sunday, Attorney General Eric Holder said that in regard to terrorism investigations he supports "modifying" the Miranda law that requires law enforcement officials to inform suspects of their rights to silence and counsel. But his approach—extension of the "public safety exemption" to terror investigations—is both parsimonious and problematic. The public safety exemption allows a delay in Miranda warnings until an imminent threat to public safety—e.g., a loaded gun somewhere in a public place that might be found by a child—has been neutralized. In terror cases it is impossible to determine when all necessary intelligence, which in any event might not relate to an imminent threat, has been learned.

The lesson from our experience with Abdulmutallab, who stopped talking soon after he was advised of his rights and did not resume for weeks until his family could be flown here to persuade him to resume, should have been that intelligence gathering comes first. Yes, Shahzad, as we are told, continued to provide information even after he was advised of his rights, but that cooperation came in spite of and not because of his treatment as a conventional criminal defendant.

Moreover, once Shahzad cooperated, it made no more sense with him than it did with Abdulmutallab to publicize his cooperation and thereby warn those still at large to hide and destroy whatever evidence they could. The profligate disclosures in Shahzad's case, even to the point of describing his confession, could only hinder successful exploitation of whatever information he provided.

The Shahzad case provides a reminder of the permanent harm leaks of any kind can cause. An Associated Press story citing unnamed law enforcement sources reported that investigators were on the trail of a "courier" who had helped provide financing to Shahzad.

A courier would seem oddly out of place in the contemporary world where money can be transferred with the click of a mouse—that is, until one recalls that in 2006 the New York Times disclosed on its front page a highly classified government program for monitoring electronic international money transfers through what is known as the Swift system.

That monitoring violated no law but was leaked and reported as what an intelligence lawyer of my acquaintance referred to as "intelliporn"—intelligence information that is disclosed for no better reason than that it is fun to read about, and without regard for the harm it causes. Of course, terrorists around the world took note, and resorted to "couriers," making it much harder to trace terrorist financing.

In the hours immediately following the discovery and disarming of the car bomb, media outlets and public figures fell all over themselves to lay blame as far as possible from where it would ultimately be found. Secretary of Homeland Security Janet Napolitano suggested the incident was entirely isolated and directed her agency's personnel to stand down. New York Mayor Michael Bloomberg sportingly offered to wager a quarter on the proposition that the bomb was the work of a solitary lunatic, perhaps someone upset over passage of the health-care bill, and much merriment was had over how primitive the bomb had been and how doomed it was to fail.

This sort of reaction goes back much further than this administration. Consider the chain of events leading to the 1993 World Trade Center bombing and eventually 9/11.

In November 1990, Meir Kahane, a right-wing Israeli politician, was assassinated after delivering a speech at a Manhattan hotel by El-Sayid Nosair, quickly pigeonholed as a lone misfit whose failures at work had driven him over the edge. The material seized from his home lay largely unexamined in boxes until a truck bomb was detonated under the World Trade Center in 1993, when the perpetrators of that act announced that freeing Nosair from prison was one of their demands.

Authorities then examined the neglected boxes and found jihadi literature urging the attacks on Western civilization through a terror campaign that would include toppling tall buildings that were centers of finance and tourism. An amateur video of Kahane's speech the night he was assassinated revealed that one of the 1993 bombers, Mohammed Salameh, was present in the hall when Nosair committed his act, and the ensuing investigation disclosed that Nosair was supposed to have made his escape with the help of another, Mahmoud Abouhalima, who was waiting outside at the wheel of a cab.

Nosair jumped into the wrong cab and the terrified driver pulled over and ducked under the dashboard, at which point Nosair tried to flee on foot and was captured. Salameh was captured when the vehicle identification number on the truck that carried the bomb led investigators to a rental agency, where he showed up days later to try to retrieve the deposit on the truck so that he could finance his escape.

Despite the toll from the first World Trade Center blast—six killed, hundreds injured, tens of millions of dollars in damage—and the murder of Kahane, much sport was made of how inept the perpetrators were.

Nosair and the 1993 Trade Center bombers were disciples of cleric Omar Abdel Rahman, known as the "blind sheikh," who was tried and convicted in 1995 along with nine others for conspiring to wage a war of urban terror that included not only that bombing and the Kahane assassination but also a plot to bomb simultaneously the Holland and Lincoln Tunnels, the George Washington Bridge and the United Nations.

One of the unindicted co-conspirators in that case was a then-obscure Osama bin Laden, who would declare in 1996 and again in 1998 that militant Islamists were at war with the United States. In 1998, his organization, al Qaeda, arranged the near-simultaneous bombing of American Embassies in Kenya and Tanzania.

Despite the declaration of war and the act of war, the criminal law paradigm continued to define our response. Along with immediate perpetrators, and some remote perpetrators including Khalid Sheikh Mohammed, bin Laden was indicted, and the oft-repeated vow to "bring them to justice" was repeated. Unmoved, and certainly undeterred, bin Laden in 2000 unleashed the attack in Yemen on the destroyer USS Cole, killing 17.

That was followed by Sept. 11, 2001, and it appeared for a time that Islamist fanaticism would no longer be greeted with condescending mockery. To the phrase "bring them to justice" was added "bring justice to them." The country appeared ready to adopt a stance of war, and to be ready to treat terrorists as it had the German saboteurs who landed off Long Island and Florida in 1942—as unlawful combatants under the laws of war who were not entitled to the guarantees that the Constitution grants to ordinary criminals.

There have been more than 20 Islamist terrorist plots aimed at this country since 9/11, including the deadly shooting by U.S. Army Maj. Nidal Hasan, those of Abdulmutallab and Shahzad, and those of Najibullah Zazi and his cohorts, Bryant Neal Vinas and his, against commuter railroads and subways in New York; of plotters who targeted military personnel at Fort Dix, N.J., Quantico, Va., and Goose Creek, S.C., and who murdered an Army recruiter in Little Rock, Ark.; of those who planned to blow up synagogues in New York, an office building in Dallas, and a courthouse in Illinois, among others.

Yet the pre-9/11 criminal law paradigm is again setting the limit of Attorney General Holder's response, even to the point of considering the inapposite public safety exception to Miranda as a way to help intelligence gathering. He continues to press for a civilian trial for Khalid Sheikh Mohammed and others who had long since been scheduled to be tried before military commissions.

A significant lesson lurking in Shahzad's inadequacy, and the history that preceded it, is that one of the things terrorists do is persist. Ramzi Yousef's shortcomings in the first attempt to blow up the World Trade Center were made up for by Khalid Sheikh Mohammed. We should see to the good order of our institutions and our attitudes before someone tries to make up for Faisal Shahzad's shortcomings.

Mr. Mukasey was attorney general of the United States from 2007 to 2009.

Press Briefing

May 11, 2010

EIA's Annual Energy Outlook 2010
http://www.eia.doe.gov/oiaf/aeo/index.html

US Missile Defense and Regional Security. By Frank A. Rose, Deputy Assistant Secretary, Bureau of Verification, Compliance, and Implementation. Remarks At the First Annual Israel Multinational Ballistic Missile Defense Conference. Tel Aviv, Israel, May 5, 2010
http://www.state.gov/t/vci/rls/141673.htm

What’s Worse Than Energy Taxes? Renewable Electricity Standards
http://blog.heritage.org/2010/05/11/morning-bell-whats-worse-than-energy-taxes-renewable-electricity-standards

$145 Billion and Counting - Fannie and Freddie lose it all for you
http://online.wsj.com/article/SB10001424052748703880304575236270385307174.html

Kagan and the Military: What Really Happened - As dean, she upheld a policy already in place
http://online.wsj.com/article/SB10001424052748703880304575236502953055276.html

The World's Dollar Drug - Expect the greenback to remain the world's reserve currency, but that won't be a sign of U.S. strength
http://online.wsj.com/article/SB10001424052748704342604575222701291563876.html

K[G]L 101: A Glossary of Terms
http://www.instituteforenergyresearch.org/2010/05/10/kgl-101-a-glossary-of-terms/

Rats fed Roundup Ready Soy —no effect on pancreas
http://academicsreview.org/reviewed-content/genetic-roulette/section-1/1-11roundup-ready-soy-is-safe-2/

Purposes and Principles of US Engagement in Burma, by Kurt M. Campbell, Assistant Secretary, Bureau of East Asian and Pacific Affairs. Rangoon, Burma, May 10, 2010
http://www.state.gov/p/eap/rls/rm/2010/05/141669.htm

Defending Freedom Is a Choice, by Kim R. Holmes, Ph.D. Heritage Foundation, May 3, 2010
http://www.heritage.org/Research/Reports/2010/05/Defending-Freedom-Is-a-Choice

A Renewable Electricity Standard: What It Will Really Cost Americans. By David Kreutzer, Ph.D., Karen Campbell, Ph.D., William Beach, Ben Lieberman and Nicolas Loris. Heritage Foundation, May 5, 2010
http://www.heritage.org/Research/Reports/2010/05/A-Renewable-Electricity-Standard-What-It-Will-Really-Cost-Americans

Press Briefing

May 10, 2010

http://digs.by/cgspol Remarks at the East-West Center's 50th Anniversary Celebration, by Judith A. McHale, Undersecretary for Public Diplomacy and Public Affairs. Capital Hilton Hotel, Washington, DC, May 6, 2010

http://digs.by/bdNTtP One of the Nation's Leading Legal Minds: The President Nominates Elena Kagan for the Supreme Court

http://digs.by/ccFPg5 Kagan Nomination Launches Constitutional Debate + http://digs.by/9HoCRb Supreme Court Nominee Elena Kagan

http://digs.by/b4eau0 Five Reasons Not to Support a Bailout of Greece

http://digs.by/cr09j1 The Carbon Recession - CO2 emissions plunge, along with the economy. Washington rejoices

http://www.bipartisanalliance.com/2010/05/euros-tribulations-dont-blame-single.html The Euro's Tribulations - Don't blame the single currency for the failures of Keynesian economics

http://digs.by/alQbF1 The FCC vs. Broadband Investors - The last thing Internet entrepreneurs need is a new period of regulatory uncertainty

http://digs.by/drVDrs Corporate governance: much better job than they get credit for, but here are a few suggestions for improvement

http://digs.by/dfMg6B Weekly Address: President Obama Praises the Benefits and Successes of Health Reform Already in Effect

http://digs.by/dBb9JN ObamaCare's Phony Medicaid 'Deal' - The new health law unconstitutionally coerces the states.

http://digs.by/91RSgh The Euro's Tribulations - Don't blame the single currency for the failures of Keynesian economics

http://digs.by/bFfSuO Arizona's Real Problem: Drug Crime - Violence in the border is not committed by migrant laborers.

http://digs.by/bNbJdi Islam's Nowhere Men-- Millions like Faisal Shahzad are unsettled by a modern world they can neither master nor reject

The Euro's Tribulations - Don't blame the single currency for the failures of Keynesian economics

The Euro's Tribulations. WSJ Editorial
Don't blame the single currency for the failures of Keynesian economics.WSJ, Monday,May 10, 2010

Twelve years ago, economist Robert Mundell wrote a series of articles in these pages under the headline, "The Case for the Euro," touting the benefits of the single European currency due in 1999. The subsequent decade exceeded the rosiest scenarios set out by the "father of the euro." Sixteen countries came to enjoy prosperity and stability in the world's second most successful zone of sound money and free commerce (after the U.S.).

This year, the party has come to a crashing halt with Greece's financial meltdown, and one consequence has been a run on confidence in the euro. Last week, as the European Union and International Monetary Fund approved a €110 billion rescue and the Greeks adopted an austerity package, the euro tumbled to 14-month lows.

The euro will be tested in the coming months and years by policy makers and markets. The challenges ahead include continued economic weakness, particularly across a Mediterranean flirting with insolvency from Greece to Portugal, political tensions and calls to winnow euroland to the strong economies, or to shelve the euro altogether.

Europe's unprecedented monetary union can no doubt be improved, but its benefits in economic efficiency and monetary discipline should not be ignored, much less tossed away at the first serious challenge. It's also important to understand that the single currency is the scapegoat du jour for a crisis whose real causes are inconvenient for the political class.
***

In one anti-euro corner are weak-money neo-Keynesians. Greece was their model pupil, spending its way to supposedly drive growth. But when the time came to pay the piper, the lament now heard from Paul Krugman and elsewhere is that the Greeks are unjustly shackled by the euro. Take back national control over monetary policy and the EU's weak economies can once again devalue their way out of trouble. Blaming the euro for the failures of Keynesianism sets a new standard for chutzpah, and this prescription would debase not only the currencies but the middle class for a generation.

Then there's the idea to save the euro by creating a European super-state to set economic policy, harmonize taxes and ease transfers from rich countries to the poor. George Soros stands in this camp, as does prominent German central banker Otmar Issing, who earlier this year wrote that "starting monetary union without having established a political union was putting the cart before the horse." This is really a call for imposing on all countries the welfare state agenda that got Europe into this jam in the first place.

Before offering cures, let's diagnose the Greek disease properly. Joining the euro gave the poorer southern EU countries a perfect opportunity to "pull up their socks," in Professor Mundell's words. Some, like Italy and Spain, did so for a while. But sitting pretty inside the euro club, many politicians took the foot off the pedal of unpopular reforms, such as liberalizing labor codes or lowering costs to business.

Greek politicians in particular lived beyond their means and put much of this spending, in Wall Street parlance, off their balance sheet. The euro did enable bad habits by letting Greece borrow at German interest rates. This postponed the day of reckoning for the failures of reform, until a new Athens government last year came clean about the lies and the mess. But don't blame a currency for irresponsible leadership.

Europe isn't experiencing a currency crisis. It is a debt crisis driven by overborrowing, large and inefficient government, and insufficient economic growth. Some of the sickest countries use the euro as their legal tender, but others don't. Iceland, Latvia, Romania and Hungary were all forced into the arms of the IMF, though none of them is in the euro zone. Britain is also outside the euro bloc but is facing its own day of debt reckoning.

Iceland is a sobering might-have-been for the Greeks. The small Arctic island's financial crisis was compounded by a currency crisis. It's now fast-tracking an application to join the EU and the euro. The Icelanders understand that small countries with shallow capital markets are most vulnerable to currency volatility in a world of floating exchange rates.

Before Greece or Portugal seriously consider bringing back the drachma and escudo, and devaluing their way out of trouble, recall that Argentina took this advice in late 2001. Dropping its dollar peg, the Argentines beggared their people and avoided policy changes. They ended up defaulting and continue to fall behind Brazil and Chile.

The Greeks can leave the euro if they prefer, and neither Berlin nor Brussels would spill many tears. But the costs of dropping out would be substantial. The bulk of Greek financial contracts are in euros. Were a reconstituted drachma devalued by 50%, the public debt to GDP ratio would essentially double—in Greece's case to well over 200% of GDP. Our guess is that the Greeks restructure their debts or default before they drop out of the single currency.
***

While not the cause of this crisis, the euro has been tarnished by it. Greece's Madoff-like bookkeeping broke the mutual trust that is essential to any monetary compact, and this will take time to restore.

Shortcomings in the rules governing the euro zone were evident long before this crisis, and they now need to be addressed. In one of his 1998 Journal articles, Mr. Mundell wrote that the rules on fiscal deficits and public debts in the Stability and Growth Pact—adopted by euro-zone countries to govern the single currency—needed bite to guard against the obvious free-rider problem: Countries would be tempted to take advantage of a colossal and low-interest bond market believing that "when the chips are down the union will act as lender of last resort." He essentially predicted the problems of Greece and the proposed EU-IMF bailout.

Fines were decreased and the stability pact was never seriously enforced. Germany and France, which pushed hardest for strict penalties, were the first to break the rules without suffering any consequences. Five years ago, Berlin and Paris shot down the European Commission's proposal to oversee national statistical agencies to safeguard against Greek-like cheating.

On Tuesday, the Commission plans to unveil proposals on closer surveillance of euro-zone budgets. Next it should restore some teeth to the stability pact. These modest steps won't excite euro federalists as much as a grand and unrealistic political union, but they might do some actual good.
***

The future of the euro in the next decade depends on the will of European politicians. First the beggar-thy-currency crowd must be ignored. The European Central Bank has, at least so far, been a bulwark against such talk. On the other hand, the EU's decision to create a "bailout fund" tells creditors and borrower governments alike that they will always be rescued, increasing moral hazard and the odds of another crisis. If asked to foot the bill again, unhappy German or Dutch taxpayers may decide the euro isn't worth the price and themselves push for its dissolution.

Above all, the euro will thrive only if Europe thrives. Austerity plans intended to stem the fiscal hemorrhaging are no substitute for policies to promote growth. Should Europe use this crisis to make itself more competitive and rein in the welfare state, the Continent would be even better placed to take advantage of a huge single market underpinned by a stable currency and low inflation. And if that were to happen, the second decade of the euro could turn out to be better than the first.

Press Briefing

May 07, 2010

http://bit.ly/a816l3 Yuriko Koike: How to Undermine an Alliance

http://digs.by/bz8N5M Future Nuclear Arms Control and Nonproliferation: New START and Beyond, by Rose Gottemoeller, Assistant Secretary, Bureau of Verification, Compliance, and Implementation. Remarks at National Defense University, Center for the Study of Weapons of Mass Destruction 10th Annual Symposium. Washington, DC, May 5, 2010

http://digs.by/9uXyU7 Sergei Karaganov: The Dangers of Nuclear Disarmament

http://digs.by/cLRm3d The Next Capital Insurgency- In 1978 Jimmy Carter signed a cap gains cut to lift a sagging economy.

http://digs.by/dkxApG History is littered with tales of men who turned to violence because of bad real-estate investments

http://digs.by/aSKNOB Julius Caesar of the Internet - The FCC puts another industry under political control

http://digs.by/9rhbN8 At Last, More Jobs - The latest jobs report

http://digs.by/bcdSoY Moms to the Barricades - 'The tea parties are an extension of our need to protect the future for our children.'

http://digs.by/c0swOd The Markets Have Good Reasons To Be Nervous - Nobody will trust the euro like they used to.

http://digs.by/dvaCvj Cancer and the Environment

http://digs.by/a68PnA Deepwater Horizon - Focus on Cleanup, Not Politics

Derivatives Clearinghouses Are No Magic Bullet - Another kind of institution that's too big to fail?

Derivatives Clearinghouses Are No Magic Bullet. By MARK J. ROE
Will the Dodd bill create another kind of institution that's too big to fail?WSJ, May 06, 2010

As the Senate finalizes its financial reform legislation, a consensus is developing that if we could just get derivatives traded through a centralized clearinghouse we could avoid a financial crisis like the one we just went through. This is false. Clearinghouses provide efficiencies in transparency and trading, but they are no cure-all. They can even exacerbate problems in a financial crisis.

If I agree to sell you a product next month through a clearinghouse, I'll deliver the product to the clearinghouse and you'll deliver the cash to the clearinghouse on the due date. Let's say we both have many trades going through the clearinghouse and we've posted collateral to cover any single trade that fails. This is more efficient than each of us posting collateral privately for each trade. Moreover, we're not worried that I won't deliver or you won't pay because we both count on the clearinghouse to deliver and pay up if one of us doesn't.

This clearing system makes trading more efficient. If you default, the cost is spread through the clearinghouse so I don't get hurt severely. And if the clearinghouse has enough collateral from you, there's no loss to spread. But there's also a potential downside: The clearinghouse reduces our incentives to worry about counterparty risk. Your business might collapse before you need to pay up, but that's not my problem because the clearinghouse pays me anyway. The clearinghouse weakens private market discipline.

Still, if the clearinghouse is as good or better at checking up on your creditworthiness as I am, all will be well. But one has to wonder how good a clearinghouse will be, or can be.

Consider two of our biggest derivatives-related failures—Long-Term Capital Management in 1998 and the subprime market in 2008. When Russia's ruble dropped unexpectedly, LTCM was exposed on its more than $1 trillion in interest-rate and foreign-exchange derivatives. It could not pay up and collapsed. Ten years later the market rapidly revalued subprime mortgage securities, rendering several institutions insolvent. AIG was over-exposed in credit default swaps tied to the value of subprime mortgages.

Could a clearinghouse really have been ahead of the curve in getting sufficient capital posted before these problems became serious and well-known? I'm not so sure. Worse yet, major types of derivatives have built-in discontinuities—"jump-to-default" in derivatives-speak.

For a credit default swap, one counterparty guarantees the debt of another company to you, in return for you paying a fee for that guarantee. If no one goes bankrupt, the counterparty just collects the fees from you. But if the guarantee is called because the company you were worried about goes bankrupt, the counterparty must all of a sudden pay out a huge amount immediately.

Yet the guarantor is often called upon to pay in a weak economy, just when it can itself be too weak to pay. You get credit default protection on your real-estate investments from me, just in case the economy turns sour. But just when you need me the most, in a sour economy, I turn out to be so overextended I can't pay up. Collateralizing and monitoring such discontinuous obligations will not be so easy for the clearinghouse.

Moreover, if trillions of dollars of derivatives trading goes through a clearinghouse, we will have created another institution that's too big to fail. Regulators worried that an interconnected Bear or AIG could drag down the economy. Imagine what an interconnected clearinghouse's failure could do.

AIG needed $85 billion in government cash to avoid defaulting on its debts, including its derivatives obligations. Could one clearinghouse meet even a fraction of that call without backup from the U.S.? True, we could have many clearinghouses, each not too big to fail—but then maybe each would be too small to do enough good.

The Senate bill would allow a clearinghouse to grab new collateral out from failing derivatives-trading banks to cover old, but suddenly toxic, debts the banks owe to the clearinghouse. This could harm other creditors and cause the firm to suffer a run. Nevertheless, to protect itself in a declining market, a clearinghouse would have to make those big collateral calls. That's good if it protects the clearinghouse. But it's bad if it starts a run on a weakened but important bank.

One key but missing element in the search for reform has yet to gain traction in Washington. Derivatives players obtained exceptions from typical bankruptcy and bank resolution rules in the past few decades for their contracts with a bankrupt counterparty. This allowed them to grab and keep collateral other creditors cannot. That gives derivatives traders reason to pay less attention to their counterparties' riskiness and weakens market discipline. These rules should be changed before the Senate is done.

To say that a clearinghouse solution is very incomplete is not to say there is an easy solution out there. We may be unable to do more than to make incomplete improvements and muddle through.

Derivatives trades first of all should not just be centrally cleared, but should also be taken out from the government-guaranteed entities, such as commercial banks (or at least we need to impose tight capital requirements on those banks that deal in derivatives). Derivatives traders like doing business with Citibank because they know the government won't let Citibank go down. But this puts taxpayers at risk. It would be better to run those trades through an affiliate, not through the bank, so counterparties realize they might not be bailed out if the affiliate failed. If a banking affiliate's counterparty is the clearinghouse, then the clearinghouse will have incentives to make sure that the affiliate is well-capitalized. This is particularly so if the clearinghouse won't get any special priority treatment in a bankruptcy.

Critics of proposals to establish separate bank affiliates for derivatives trading complain about the large amount of capital that would be needed for such affiliates. But the capital that might be needed to buttress a bank affiliate indicates some level of the value (i.e., the taxpayer subsidy) to derivatives players of trading with a too-big-to-fail entity that they know the government will step in to save. They are implicitly getting insurance and should pay for it.

And, since a clearinghouse is itself at risk of being too big to fail, regulators need to police its capital and collateral requirements. If the derivatives market sees the clearinghouse as too big to fail, the potential for derivatives players making overly risky derivatives trades becomes real. Clearinghouses can help manage some systemic risk if they're run right. If not, they can become the Fannie and Freddie of the next financial meltdown.

Mr. Roe is a professor at Harvard Law School, where he teaches bankruptcy and corporate law.

Time to Junk the Corporate Tax

Time to Junk the Corporate Tax. By MICHAEL J. BOSKIN
Nobel Laureate Robert Lucas says reform would deliver great benefits at little cost, making it "the largest genuinely true free lunch I have seen.'WSJ, May 06, 2010

President Obama has put tax reform on the agenda, but surprisingly little attention is being paid to fixing the most growth-inhibiting, anticompetitive tax of all: the corporate income tax. Reducing or eliminating the corporate tax would curtail numerous wasteful tax distortions, boost growth in both the short and long run, increase America's global competitiveness, and raise future wages.

The U.S. has the second-highest corporate income tax rate of any advanced economy (39% including state taxes, 50% higher than the OECD average). Many major competitors, Germany and Canada among them, have reduced their corporate tax rate, rendering American companies less competitive globally.

Of course, various credits and deductions—such as for depreciation and interest—reduce the effective corporate tax rate. But netting everything, our corporate tax severely retards and misaligns investment, problems that will only get worse as more and more capital becomes internationally mobile. Corporate income is taxed a second time at the personal level as dividends or those capital gains attributable to reinvestment of the retained earnings of the corporation. Between the new taxes in the health reform law and the expiration of the Bush tax cuts, these rates are soon set to explode.

This complex array of taxes on corporate income produces a series of biases and distortions. The most important is the bias against capital formation, decreasing the overall level of investment and therefore future labor productivity and wages. Also important are the biases among types of investments, depending on the speed of tax vs. true economic depreciation, against corporate (vs. noncorporate) investment, and in favor of highly leveraged assets and industries. These biases assure that overall capital formation runs steeply uphill, while some investments run more, some less uphill. It would be comical if the deleterious consequences weren't so severe.

Of course, the corporation is a legal entity; only people pay taxes. In a static economy with no international trade, the tax is likely borne by shareholders. The U.S. economy is neither static nor closed to trade, and taxes tend to be borne by the least mobile factor of production. Capital is much more mobile globally than labor, and the part of the corporate tax that is well above that of our lowest tax competitors will eventually be borne by workers. In a growing economy, the lower investment slows productivity growth and future wages.

There is considerable evidence that high corporate taxes are economically dangerous. In a 2008 working paper entitled "Taxation and Economic Growth," the Organization for Economic Cooperation and Development concluded that "Corporate taxes are found to be most harmful for growth, followed by personal income taxes and then consumption taxes." Virtually every major tax reform proposal in recent decades has centered on lowering taxes on capital income and moving toward a broad-based, low-rate tax on consumption. This could be accomplished by junking the separate corporate income tax, integrating it with the personal income tax (e.g., attributing corporate income and taxes to shareholders or eliminating personal taxes on corporate distributions), and/or allowing an immediate tax deduction (expensing) for investment (which cancels the tax at the margin on new investment and hence is the priority of most economists). The Hall-Rabushka Flat Tax, the Bradford progressive consumption tax, a value-added Tax (VAT), the FairTax retail sales tax, four decades of Treasury proposals and the 2005 President's Tax Commission proposals would all move in this direction.

Reducing or eliminating the negative effects of the corporate tax on investment would increase real GDP and future wages significantly. Junking both the corporate and personal income taxes and replacing them with a broad revenue-neutral consumption tax would produce even larger gains. Nobel Laureate Robert Lucas concluded that implementing such reforms would deliver great benefits at little cost, making it "the largest genuinely true free lunch I have seen."

Reducing taxes on new investment could help strengthen what is a historically slow recovery from such a deep recession. It would also strengthen the economy long-term. American workers would benefit from more jobs in the short run and higher wages in the long run.

However, if a new tax device is used to grow government substantially, it will seriously erode our long-run standard of living. The VAT has served that purpose in Europe and, while better than still-higher income taxes, the larger-size governments it has enabled there are the prime reason European living standards are 30% lower than ours. Trading a good tax reform for a much larger government is beyond foolish. No tax reform can offset losses that large. Hence, a VAT should only be on the table if it is not only revenue-neutral but accompanied by serious spending control.

Further, the fraction of Americans paying no income taxes is approaching 50%. That sets up a dangerous political dynamic of voting ever-rising taxes to pay for ever-rising spending. We need more people with a stake in controlling spending. Replacing corporate and personal income taxes with a broad-based consumption tax could increase the number of those with "skin in the game." But some reforms, for example a VAT, might be much less transparent and may not serve this purpose.

Congresses (and presidents) seem unable to avoid continually tinkering with the tax code. A tax reform that is quickly riddled with special features would lose much of its economic benefit. We need a stable tax system that changes much less frequently, so families and firms can more reliably plan their future. Current fiscal policy, loaded with immense deficits, ever-growing debt, and the prospect of higher future taxes, is the biggest threat to such stability. To balance proposed spending in Mr. Obama's budget in 2015, his Deficit Commission's target year, will require at least a 43% increase in everyone's income tax. Thus, spending control is vital to tax stability.

American companies and their workers compete in the global marketplace saddled with a costly, anachronistic corporate tax system. To compete successfully in the 21st century, we will need to reform corporate taxation. There are several paths to doing so, each with its advantages. Unfortunately, tax policy is headed in exactly the wrong direction, raising taxes on corporate source income. Business investment is growing again after the collapse in the recession, which is usual in a cyclical recovery with very low interest rates. But eventually structural drags, from our antiquated tax code to massive public debt, will impede investment and economic growth.

Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.

Drilling in Deep Water - A ban on offshore production won't mean fewer oil spills

Drilling in Deep Water. WSJ Editorial
A ban on offshore production won't mean fewer oil spills.WSJ, May 04, 2010

It could be months before we know what caused the explosion and oil spill below the drilling rig Deepwater Horizon. But as we add up the economic costs and environmental damage (and mourn the 11 oil workers who died), we should also put the disaster in some perspective.

Washington is, as usual, showing no such restraint. As the oil in the Gulf of Mexico moves toward the Louisiana and Florida coasts, the left is already demanding that President Obama reverse his baby steps toward more offshore drilling. The Administration has partly obliged, declaring a moratorium pending an investigation. The President has raised the political temperature himself, declaring yesterday that the spill is a "massive and potentially unprecedented environmental disaster."

The harm will be considerable, which is why it is fortunate that such spills are so rare. The most recent spill of this magnitude was the Exxon Valdez tanker accident in 1989. The largest before that was the Santa Barbara offshore oil well leak in 1969.

The infrequency of big spills is extraordinary considering the size of the offshore oil industry that provides Americans with affordable energy. According to the Interior Department's most recent data, in 2002 the Outer Continental Shelf had 4,000 oil and gas facilities, 80,000 workers in offshore and support activities, and 33,000 miles of pipeline. Between 1985 and 2001, these offshore facilities produced seven billion barrels of oil. The spill rate was a minuscule 0.001%.

According to the National Academy of Sciences—which in 2002 completed the third version of its "Oil in the Sea" report—only 1% of oil discharges in North Americas are related to petroleum extraction. Some 62% of oil in U.S. waters is due to natural seepage from the ocean floor, putting 47 million gallons of crude oil into North American water every year. The Gulf leak is estimated to have leaked between two million and three million gallons in two weeks.

Such an accident is still unacceptable, which is why the drilling industry has invested heavily to prevent them. The BP well had a blowout preventer, which contains several mechanisms designed to seal pipes in the event of a problem. These protections have worked in the past, and the reason for the failure this time is unknown. This was no routine safety failure but a surprising first.

One reason the industry has a good track record is precisely because of the financial consequences of accidents. The Exxon Valdez dumped 260,000 barrels of oil, and Exxon spent $3.14 billion on cleanup. Do the math, and Exxon spent nearly 600 times more on cleanup and litigation than what the oil was worth at that time.

As for the environmental damage in the Gulf, much will depend on the weather that has made it more difficult to plug the leak and contain the spill before it reaches shore. The winds could push oil over the emergency containment barriers, or they could keep the oil swirling offshore, where it may sink and thus do less damage.

It is worth noting that this could have been worse. The Exxon Valdez caused so much damage in part because the state of Alaska dithered over an emergency spill response. Congress then passed the 1990 Oil Pollution Act that mandated more safety measures, and it gave the Coast Guard new powers during spill emergencies. We have seen the benefits in the last two weeks as the Coast Guard has deployed several containment techniques—from burning and chemical dispersants to physical barriers. America sometimes learns from its mistakes.

On the other hand, Washington's aversion to drilling closer to shore has pushed the industry into deeper, more difficult, waters farther out to sea. BP's well is 5,000 feet down, at a depth and pressure that test the most advanced engineering and technology. The depth complicates containment efforts when there is a disaster.

As for a drilling moratorium, it is no guarantee against oil spills. It may even lead to more of them. Political fantasies about ending our oil addiction notwithstanding, the U.S. economy will need oil and other fossil fuels for decades to come. If we don't drill for it at home, the oil will have to arrive by tanker and barges. Tankers are responsible for more spills than offshore wells, and those spills tend to be bigger and closer to shore—which usually means more environmental harm.

The larger reality is that energy production is never going to be accident free. No difficult human endeavor is, whether space travel or using giant cranes to build skyscrapers. The rest of the world is working to exploit its offshore oil and gas reserves despite the risk of spills. We need to be mindful of such risks, and to include prevention and clean up in the cost of doing business, but a modern economy can't run without oil.

The State Department is sitting on funds to free the flow of information in closed societies

Mrs. Clinton, Tear Down this Cyberwall. By L. GORDON CROVITZ
The State Department is sitting on funds to free the flow of information in closed societies.WSJ, May 03, 2010

When a government department refuses to spend money that Congress has allocated, there's usually a telling backstory. This is doubly so when the funds are for a purpose as uncontroversial as making the Internet freer.

So why has the State Department refused to spend $45 million in appropriations since 2008 to "expand access and information in closed societies"? The technology to circumvent national restrictions is being provided by volunteers who believe that with funding they can bring Web access to many more people, from Iran to China.

A bipartisan group in Congress intended to pay for tests aimed at expanding the use of software that brings Internet access to "large numbers of users living in closed societies that have acutely hostile Internet environments." The most successful of these services is provided by a group called the Global Internet Freedom Consortium, whose programs include Freegate and Ultrasurf.

When Iranian demonstrators last year organized themselves through Twitter posts and brought news of the crackdown to the outside world, they got past the censors chiefly by using Freegate to get access to outside sites.

The team behind these circumvention programs understands how subversive their efforts can be. As Shiyu Zhou, deputy director of the Global Internet Freedom Consortium, told Congress last year, "The Internet censorship firewalls have become 21st-century versions of Berlin Walls that isolate and dispirit the citizens of closed-society dictatorships."

Repressive governments rightly regard the Internet as an existential threat, giving people powerful ways to communicate and organize. These governments also use the Web as a tool of repression, monitoring emails and other traffic. Recall that Google left China in part because of hacking of human-rights activists' Gmail accounts.

To counter government monitors and censors, these programs give online users encrypted connections to secure proxy servers around the world. A group of volunteers constantly switches the Internet Protocol addresses of the servers—up to 10,000 times an hour. The group has been active since 2000, and repressive governments haven't figured out how to catch up. More than one million Iranians used the system last June to post videos and photos showing the government crackdown.

Mr. Zhou tells me his group would use any additional money to add equipment and to hire full-time technical staff to support the volunteers. For $50 million, he estimates the service could accommodate 5% of Chinese Internet users and 10% in other closed societies—triple the current capacity.

So why won't the State Department fund this group to expand its reach, or at least test how scalable the solution could be? There are a couple of explanations.

The first is that the Global Internet Freedom Consortium was founded by Chinese-American engineers who practice Falun Gong, the spiritual movement suppressed by Beijing. Perhaps not the favorites of U.S. diplomats, but what other group has volunteers engaged enough to keep such a service going? As with the Jewish refuseniks who battled the Soviet Union, sometimes it takes a persecuted minority to stand up to a totalitarian regime.

The second explanation is a split among technologists—between those who support circumvention programs built on proprietary systems and others whose faith is on more open sources of code. A study last year by the Berkman Center at Harvard gave more points to open-source efforts, citing "a well-established contentious debate among software developers about whether secrecy about implementation details is a robust strategy for security." But whatever the theoretical objections, the proprietary systems work.

Another likely factor is realpolitik. Despite the tough speech Hillary Clinton gave in January supporting Internet freedom, it's easy to imagine bureaucrats arguing that the U.S. shouldn't undermine the censorship efforts of Tehran and Beijing. An earlier generation of bureaucrats tried to edit, as overly aggressive, Ronald Reagan's 1987 speech in Berlin urging Mikhail Gorbachev: "Tear down this wall."

It's true that circumvention doesn't solve every problem. Internet freedom researcher and advocate Rebecca MacKinnon has made the point that "circumvention is never going to be the silver bullet" in the sense that it can only give people access to the open Web. It can't help with domestic censorship.

During the Cold War, the West expended huge effort to get books, tapes, fax machines, radio reports and other information, as well as the means to convey it, into closed societies. Circumvention is the digital-age equivalent.

If the State Department refuses to support a free Web, perhaps there's a private solution. An anonymous poster, "chinese.zhang," suggested on a Google message board earlier this year that the company should fund the Global Internet Freedom Consortium as part of its defense against Chinese censorship. "I think Google can easily offer more servers to help to break down the Great Firewall," he wrote.

A Centrist Agenda for Economic Growth

A Centrist Agenda for Economic Growth. By JIM OWENS
Freer trade plus lower corporate and investment taxes would go a long way.WSJ, May 03, 2010

The long-term health of the U.S. economy is at risk. There are signs of recovery from the worst recession since the Great Depression. But not enough.

We need a renewed, centrist political agenda to support economic policies that will enhance our global competitiveness. America cannot sustain itself as a great country without a strong economy. Yet significant economic decisions are made in Washington with little consideration as to how they will affect the global competitiveness of the small and large companies that employ our citizens.

Here are a few policy suggestions:

• Restore fiscal discipline. Simply stated, we must balance the books. This means deciding how much government we want and the best way to generate the tax revenues to pay for it.

To get there, federal and state governments must be required to use the same transparent accounting standards required of corporations for employee retirement benefits. With baby boomers retiring, we have a ticking time bomb on our hands. Transparency would make it clear to everyone just where the unfunded obligations are and get us on road to begin funding them. Further, we should mandate that federal budget deficits be balanced over a business cycle.

• Simplify the federal tax code with flat personal income taxes. This means incentivizing savings and investment with significantly lower rates for dividends and long-term capital gains. Use consumption taxes to raise additional funds to achieve social goals, such as lowering emissions or tobacco consumption.

• Tax business only on profits earned in the United States. This means adopting a territorial tax system for U.S.-based global companies, which will encourage them to repatriate global profits (billions await) to the United States and increase the likelihood of investment here. We should also recruit foreign direct investment to serve U.S. customers and to pay taxes to our government.

Recognizing that the U.S. has one of the highest corporate tax rates in the world, the government should not eliminate the current provision that allows companies to "defer" paying a U.S. tax on foreign income until it is brought back into this country. Over time this would destroy U.S.-based global companies.

• Increase infrastructure investment. Since the 1970s U.S. investment in infrastructure has grown at only half the rate of GDP growth. Today, our roads are crumbling, bridges are in need of repair, and our power grid is inefficient. Meanwhile, emerging economies (notably China, India and Brazil) are making huge investments in modern infrastructure.

Infrastructure is the foundation for an economy's global competitiveness. We don't want to wake up in 10 years and find ourselves hopelessly behind.

• Free up international trade. The U.S. needs to provide leadership for completion of the World Trade Organizations' Doha Development Round of Trade Negotiations. Moreover, Americans need to pressure Washington to ratify the three Free Trade Agreements (FTAs)—for Panama, Colombia and South Korea—that have already been negotiated. Passage of these agreements will show the world we're open for business, create immediate exports and related jobs, and it would also strengthen the economies of three important allies.

• Improve the health-care system's cost effectiveness. To get there, the country needs to further reform its tort system and to continue to adopt better information technology. It's also critical that consumers have access to better information on health-care prices and outcomes and to be able to purchase competitively priced insurance offered in other states. Finally, citizens must have a personal stake in the costs of their care, which will enable them to make prudent decisions.

• Reform immigration laws to make existing "guest" workers legal, tax-paying employees. We should provide legal avenues for guest workers to apply for U.S. citizenship. It is to our advantage to grant more visas to the best and brightest students from around the world who come to our best universities. Students receiving qualifying advanced degrees (such as in math and science) should get an automatic green card to work in our country.

• Maintain the independence of the Federal Reserve. The task of the central bank is to manage money supply to keep inflation low (0%-2%), employment high and the financial system healthy. Excessive political influence could prevent the Fed from taking decisive actions when needed.

These recommendations are not particularly novel. In fact, the majority of economists and business leaders I've talked to agree with virtually all of them. Real GDP growth of 3.5% over the next decade is an aggressive target—but achievable. We need to think like winners.

Mr. Owens is chairman and CEO of Caterpillar Inc.

The US EPA opens a re-re-evaulation of atrazine

The War on a Weed Killer. WSJ Editorial
The EPA opens a re-re-evaulation of a safe chemical.WSJ, May 03, 2010

With the headlines full of oil spills and immigration, the Obama Administration's regulatory agenda is getting little attention. That's a mistake. Consider the Environmental Protection Agency's effort to revive an assault on atrazine, one of the oldest, most well-established agricultural chemicals on the market. Just this past week, the EPA held its third "re-evaluation" hearing on atrazine.

Atrazine is the nation's second-most common herbicide. For 50 years it has been the farm industry's primary crop protector. In the U.S., the weed killer is used in the production of 60% of corn, 75% of sorghum and 90% of sugarcane.

Since atrazine's debut in 1959, 10 Administrations have endorsed its use. The EPA in 2006 completed a 12-year review involving 6,000 studies and 80,000 public comments. In re-registering the product, the agency concluded the cumulative risks posed "no harm that would result to the general U.S. population, infant, children or other . . . consumers." The World Health Organization has found no health concerns.

None of this has stopped the most politicized environmental groups, which oppose both chemicals and the idea of industrial farming itself. Organizations such as the Natural Resources Defense Council have spent years ginning up claims that atrazine in groundwater causes cancer, birth defects and other maladies. Manufacturers such as Syngenta have been required to conduct millions of dollars worth of studies investigating these alarmist claims. EPA staff routinely review the studies in atrazine's favor.

But now the Obama Administration has begun to fill such agencies with hires who are either sympathetic to, or even hail from, these activist groups. Consider the EPA's new head for toxic substances, Stephen Owens. As director of Arizona's Department of Environmental Quality, he so aggressively imposed an activist's climate agenda that the state legislature voted to strip his department of authority to enact greenhouse gas rules.

In August, the NRDC and the Pesticide Action Network began a new campaign against atrazine. In October, the EPA announced it would begin a re-re-evaluation of atrazine with a series of scientific panel meeting, and those are underway. The goal seems to be to lay the groundwork to ban atrazine.

Among the environmental lobby's new lines of attack is that some U.S. water systems occasionally show "spikes" in the chemical. This ignores that the EPA's drinking water standard for atrazine—three parts per billion—has a built-in, 1,000-fold safety factor. It ignores EPA findings that atrazine isn't likely to be carcinogenic to humans.

Also re-energized by the EPA's sudden interest in atrazine is, you guessed it, the plaintiffs bar. Tort kingpin Stephen Tillery, joined by Baron & Budd, filed a class action in 2004 against atrazine makers in tort-friendly Madison County, Illinois, but they've struggled even there. The EPA's re-re-evaluation is already helping the lawyers sign up more water-district plaintiffs—Mr. Tillery has filed a new federal class action—and it surely will provide ammunition in court.

There is an agenda here far more ambitious than getting one chemical. The environmental lobby wants more farmland retired to "nature," and one way to do that is to make farming more expensive. The EPA notes that eliminating atrazine would cost $2 billion annually in lost crop yields and substituting more expensive herbicides. Some farmers would go out of business or ask the federal government for more subsidies.

The environmental lobby also figures that if it can take down atrazine with its long record of clean health, it can get the EPA to prohibit anything. Sounds plausible. Between this and its determination to regulate greenhouse gases, the Obama EPA is proving itself a regulatory fundamentalist, with scant regard for good science or economics.

Free Speech for Some - Unions get a pass from new campaign finance disclosure rules

Free Speech for Some. WSJ Editorial
Unions get a pass from new campaign finance disclosure rules.WSJ, May 03, 2010

Democrats in Congress last week introduced White House-backed legislation that would indirectly reinstate free-speech restrictions that the Supreme Court declared unconstitutional in January. Backers say the measure will force disclosure of corporate money in politics, but the real goal is to muzzle criticism—at least from some people.

The legislation, sponsored by Democrats Charles Schumer in the Senate and Chris Van Hollen in the House, would prevent government contractors and corporate beneficiaries of the Troubled Asset Relief Program from spending money on U.S. elections. It would also ban U.S. subsidiaries of foreign companies from making political contributions if a foreign national owns 20% or more of the voting shares in the company, or if foreign nationals comprise a majority of the board of directors.

The provisions are designed to undermine this year's landmark Supreme Court Citizens United decision, which held that limits on independent campaign expenditures by corporations or unions violate First Amendment free speech guarantees. But, under the bill, unions with government contracts would not be subject to the same restrictions as corporations.

If, as proponents claim, their worry is that a company will use campaign contributions to win government contracts (pay-to-play), why does their bill not show equal concern that labor unions will support candidates with the goal of getting government contracts driven to union companies? The legislation also fails to impose limits on the foreign involvement of unions with global reach, such as the Service Employees International Union or the International Brotherhood of Electrical Workers.

It's no coincidence that the lead authors of these bills are the current head of the Democratic Congressional Campaign Committee (Mr. Van Hollen) and the immediate past head of the Democratic Senatorial Campaign Committee (Mr. Schumer). And it's no surprise that Republicans have been reluctant to sign on. The House bill has two GOP sponsors and the Senate bill has none.

When President Obama berated the High Court earlier this year for its free speech ruling, he was very specific about whose free speech he opposed. "This is a major victory for Big Oil, Wall Street banks, health insurance companies and other powerful interests," said Mr. Obama of the decision, suggesting that despite the good governance rhetoric, this legislation is not about muzzling spenders generally so much as specific spenders who don't always salute the Democratic agenda.

How to Avoid a 'Bailout Bill' - A new bankruptcy process is the right way to deal with failing financial institutions

How to Avoid a 'Bailout Bill'. By JOHN B. TAYLOR
A new bankruptcy process is the right way to deal with failing financial institutions.WSJ, May 03, 2010

It's good news there's now bipartisan agreement that the financial reform bill should not be a "bailout bill," and that amendments to Connecticut Sen. Chris Dodd's draft legislation are being proposed and debated with this agreement in mind. The biggest challenge in this bailout reform debate is to avoid giving the federal government more discretionary power, whether by creating a special bailout fund or by providing more ways to bypass proven bankruptcy rules. Experience shows that such power would increase, not decrease, the likelihood of another crisis.

Some say that the government did not have enough power to intervene with certain firms during the financial crisis. But it had plenty of power and it used it, beginning with Bear Stearns. This highly discretionary power—to bail out some creditors and not others, to take over some businesses and not others, to let some firms go through bankruptcy and not others—was a major cause of the financial panic in the fall of 2008. The broad justification used for the bailout of Bear Stearns creditors led many to believe the government would again intervene if another similar institution, such as Lehman Brothers, failed.

But when the Federal Reserve and the Treasury Department could not persuade private firms to provide funds to Lehman to pay its creditors in September 2008, the Fed surprisingly cut off access to its funds. The examiner's report on Lehman makes it very clear there was no preparation for bankruptcy proceedings before the day the government suddenly cut off the funds. No wonder there was a disruption.

Then, the next day, the Fed reopened its balance sheet to make loans to rescue the creditors of AIG, including billions for Goldman Sachs. The funding spigot was then turned off again, and a new program, the Troubled Asset Relief Program (TARP), was proposed. This on-again off-again policy was part of a series of unpredictable and confusing government interventions which led to panic.

This experience demonstrates why it is dangerous for the "orderly liquidation" section of the Dodd bill to institutionalize such a process by giving the government even more discretion and power to take over businesses; the interventions are likely again to cause more harm than good, even with the best of intentions. Many experts doubt the ability of the Federal Deposit Insurance Corp. (FDIC) to take over large, complex financial institutions, as the current bill calls for, without causing disruption.

The moral hazard associated with protecting creditors will continue even if the FDIC has the discretionary authority to claw back later some of the funds it provides in the bailout. The proposed liquidation process would have the unintended consequence of increasing the incentive for creditors and other counterparties to run whenever there is a rumor that a government official is thinking about intervening. Who is going to be helped? Who is going to be hurt? It is up to government officials to decide, not the rule of law.

Fortunately, it is not necessary to provide this additional discretionary authority. During the past year since the administration proposed its financial reforms, bankruptcy experts have been working on a reform to the bankruptcy law designed especially for nonbank financial institutions. Sometimes called Chapter 11F, the goal is to let a failing financial firm go into bankruptcy in a predictable, rules-based way without causing spillovers to the economy and permitting, if possible, people to continue to use its financial services—just as people flew on United Airlines planes, bought Kmart sundries and tried on Hartmax suits when those firms were in bankruptcy.

What would a Chapter 11F amendment look like? It would create a special financial bankruptcy court, or at least a group of "special masters" consisting of judges knowledgeable about financial markets and institutions, which would be responsible for handling the case of a financial firm.

In addition to the normal commencement of bankruptcy petitions by creditors or debtors, an involuntary proceeding could be initiated by a government regulatory agency as prescribed by the new bankruptcy law, and the government would be able to propose a reorganization plan—not simply a liquidation. Defining and defending the circumstances for such an initiation—including demonstrating systemic risk using quantitative measures such as interbank credit exposures—is essential.

Third, Chapter 11F would handle the complexities of repurchase agreements and derivatives by enabling close-out netting of contracts in which offsetting credit exposures are combined into a single net amount, which would reduce likelihood of runs.

Fourth, a wind-down plan, filed in advance by each financial firm with its regulator, would serve as a blueprint for the bankruptcy proceedings.

The advantage of this bankruptcy approach is that debtors and creditors negotiate with clear rules and judicial review throughout the process. In contrast, the proposed "orderly liquidation" authority in the current bill is secretive and potentially capricious. Rather than a government official declaring "we will wipe out the shareholders" or "it's unfair for us to claw back so much from creditors," under Chapter 11F the rule of law applies.

A discretionary punishment can be just as harmful as a discretionary bailout. As George Shultz puts it in the book "Ending Government Bailouts As We Know Them," recently published by the Hoover Press, "Let's write Chapter 11F into the law so that we have a credible alternative to bailouts in practice."

What are the obstacles to following this sensible advice? One is that the proposals are new; much of the creative work was done in the past year since the administration first made its reform proposals. A common perception is that bankruptcy is too slow to deal with systemic risk situations in a large complex institution, but the new proposals would have a team of experts ready to go.

Another obstacle is that the Judiciary Committee rather than the Banking Committee has jurisdiction over bankruptcy law, and it is too hard to coordinate. But bureaucratic silos should not get in the way when the stakes are so high.

Yet another hurdle to reform is that the current bill was put together by many of the same people who were in government at the time of the bailouts. A typical government excuse for the crisis is that government did not have enough power, but a more likely explanation is that it had too much discretionary power and, as is so often the case, did not use it effectively.

You do not prevent bailouts by giving the government more power to intervene in a discretionary manner. You prevent bailouts by requiring adequate capital based on simple, enforceable rules and by making it possible for failing firms to go through bankruptcy without causing disruption to the financial system and the economy.

Mr. Taylor, a professor of economics at Stanford and a senior fellow at the Hoover Institution, is co-editor with Kenneth Scott and George Shultz of "Ending Government Bailouts As We Know Them" (Hoover Press, 2010).

India's Government By Quota - The affirmative-action plan to eliminate caste discrimination was supposed to last 10 years. Instead it has become a permanent, and divisive, fact of life

India's Government By Quota. By SHIKHA DALMIA
The affirmative-action plan to eliminate caste discrimination was supposed to last 10 years. Instead it has become a permanent, and divisive, fact of life.WSJ, May 01, 2010

For nearly half a century, group or racial preferences have been America's prescribed remedy for racism and other -isms standing in the way of social equality. But anyone wishing to study the unintended side-effects of this medicine on the body politic need only look at India. There reactionary groups are trying to co-opt a women's quota bill, not to create an egalitarian utopia, but its opposite.

India's ruling secular Congress party has joined hands with Hindu nationalist parties on a bill to guarantee 33% seats in the parliament and state legislatures to women. This is on top of a similar quota that women enjoy at the local or panchayat level. The bill sailed through the upper house but has met stiff resistance by India's lower-caste parties. Why? Because it threatens their monopoly on the country's quota regime.

Just as racism is the bane of America, caste is the bane of India; its rigid strictures for centuries sustained a stratified society where birth is destiny. Although caste has declined in India's large, cosmopolitan cities, elsewhere this system still restricts social mobility for the country's 100 million dalits (untouchables). They are not only consigned to demeaning jobs but they're not even allowed to pray in the same temples as upper castes.

But the scheme that India's founders devised to eradicate the caste system has actually deepened the country's caste divide, and created several more. The women's quota bill is only the latest development in the competition for victimhood status that has pitted every group with any grievance, real or imagined, against every other.

India's founders began on the right track, constitutionally banning untouchability in 1950 and, just as in America, guaranteeing equal treatment under the law for everyone regardless of caste, sex, religion or race. But then came the fatal leap. They created a list or "schedule" of all the dalit sub-castes deserving preferential treatment and handed them 17.5% of the seats in the parliament and state legislatures. They also gave them 22.5% of all public-sector jobs and guaranteed spots in public or publicly funded universities.

The scheme was supposed to last 10 years. Instead it assumed a life of its own, making scheduled-caste status a bigger driver of success than individual merit (at least before liberalization opened opportunities in the private sector).

The tipping point came in the late 1980s when the government's Mandal Commission. This body, charged with examining the plight of the poor and disenfranchised, concluded in its final report that the original list of scheduled castes was too short. It recommended a new, catch-all category called Other Backward Classes covering over half the population and called for reserving 49.5% government jobs and university seats for these groups

The report caused an uproar. Hindu students from nonscheduled castes, particularly from modest backgrounds, exploded into riots. Already rubbed raw from the existing quota regime which allowed academically inferior, scheduled-caste candidates to breeze into the best universities and land secure government jobs while they struggled, they took to the streets. A few immolated themselves, one big reason why the government collapsed in November 1990. But the quota system survived, and post-riot governments have slowly expanded it.

Quotas have become a fact of life in India because they are the major currency with which Indian politicians buy votes. In a few states with their own quotas, almost 70% of government jobs and university seats go to the reserved castes.

The major political resistance to the quota regime during the Mandal riots came from Hindu nationalist parties—but that was before they found a way to make it work for them. In some states like Rajasthan they have actually instituted quotas for the poor "forward castes"—code for upper-caste Hindus.

And these parties wholeheartedly back the latest women's quota bill because it will simultaneously allow them to: establish their progressive bona fides; once again stick it to Muslims, arguably the only genuinely disenfranchised minority without its own legislative quota; and consolidate their power base in parliament since the women elected are likely to be relatively well-off Hindus.

A tragi-comic note in this drama is Raj Thackeray, an ultra-nativist, Hindu politician from Mumbai who wants to chase all out-of-state residents out of his city. He is warning the lower-caste leaders to show respect for women by supporting this bill or else "they will be given a lesson on it."

Protests have broken out in the country, with Muslim and lower-caste women opposing it as currently written and urbane, city feminists demanding its immediate passage. But the lower-caste parties' only objection is that the quota bill doesn't contain a sub-quota for lower-caste women. In other words, the debate in India is no longer about using quotas to redistribute opportunity—it is about redistributing the quotas themselves. No politician or party is opposing this bill on principle.

It would be tempting to blame the abuse of quotas on the degraded state of Indian politics. But, in reality, India is demonstrating the reductio ad absurdum logic of quotas.

Progressives in India—as in America—believe that equal protection of individual rights is insufficient to create equality because it does nothing to address private discrimination. Protecting the property rights of persecuted castes is hardly enough if they can't get jobs in the first place. Hence, in their view, government has to give persecuted groups a leg up to equalize opportunity.

But this turns the system into a zero-sum game, triggering a race for the spoils in which powerful groups can seize the advantage. Because quotas or preferences don't originally apply to them, they become the new aggrieved—victims of "reverse discrimination." And it is easy for them to mobilize this sentiment into a political movement precisely because they are powerful.

India's lesson is that abrogating individual rights through group preferences or quotas institutionalizes the very divisions that these policies are supposed to erase. Human prejudice can't be legislated away. That requires social activism to coax, cajole and shame people out of their intolerance. There are no short cuts.

Ms. Dalmia is a senior analyst at the Reason Foundation and a Forbes columnist.

The North Korea Endgame - However difficult, unification must be the ultimate objective

The North Korea Endgame. By Nicholas Eberstadt
However difficult, unification must be the ultimate objective.WSJ, Apr 30, 2010

Ironing Out the Kinks in the Dodd Bill - Killing the $50 billion bailout fund would be a good start

Ironing Out the Kinks in the Dodd Bill. By PHILLIP SWAGEL
Killing the $50 billion bailout fund would be a good startWSJ, Apr 30, 2010

Imagine a future in which Sen. Chris Dodd's financial reform bill was law and a firm like AIG or Lehman Brothers failed. Without a vote of Congress, the government could guarantee the firm's debts or put money into the failing firm to keep it afloat and reduce the hit taken by creditors such as banks and pension funds that lent the firm money.

The temptation will be huge; after all, no government official will want to be blamed for allowing another post-Lehman meltdown. But so is the danger that risky behavior and bailouts will become more common.

This scenario is a key defect in the Dodd bill that the Senate has begun to debate. True, the shareholders of a failed financial firm would be wiped out, but creditors—the people who lent it the money that got it in trouble in the first place—will be bailed out. And this has real consequences, because if market participants know they can be rescued for imprudent behavior, they will likely behave more imprudently.

In coming days and weeks, as amendments to the Dodd bill are publicly offered and private negotiations proceed, removing the $50 billion bailout fund would be a good start. A more important way to address the problem of "too big to fail" is to have a resolution process centered on bankruptcy—and in which bailouts would require a vote of Congress. Bankruptcy would make it more likely that the division of resources would be in the hands of judges, not political officials using public money to support favored creditors. When GM and Chrysler were failing, the two firms were used as conduits for a transfer of TARP money to the auto unions.

Other aspects of the Dodd proposal are worrisome. One need not think too creatively to imagine a media-obsessed head of a new consumer financial protection agency looking to impose her will across all aspects of commerce, with attendant hits to lending for consumers and businesses, small and large. The idea of a systemic risk council empowered to gather data and ensure that no firm slips between regulatory cracks is useful—and on this there is bipartisan agreement. Yet regulators and bank supervisors have considerable power already and were not able to head off the recent crisis. Giving more power to a new regulatory agency is not a sure-fire solution and could have unintended negative consequences for jobs and growth.

The bill's approach to taking derivatives trading out of banks is similarly problematic. This trading takes place in large financial institutions for a reason: These are the firms with the expertise and large balance sheets needed to carry it out. And while derivatives can be misused, the bottom line is that they have socially useful purposes, including for financial firms. A community bank, for example, might legitimately want to use derivatives to offset some of the risk it faces from its lending for housing and commercial real estate in a local community. By hobbling this activity, the approach espoused by Sen. Dodd and Sen. Blanche Lincoln threatens to increase rather than limit risk.

Administration officials dissolve into mumbles when asked about the derivatives piece of the bill, suggesting that they recognize the problem. Hopefully they will have the courage to fix this even if it gives the appearance of seeming to "weaken" the bill.

Finally, financial regulatory reform will not be complete without addressing the awkward status of Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) whose loan guarantees contributed to the housing bubble behind the crisis. It was appropriate to take over Fannie and Freddie to avoid further risk to the financial sector, but the continued conservatorship of the two firms means that taxpayers remain on the hook for their losses, including losses suffered intentionally to support the administration's public policy goals such as reducing foreclosures.


An appropriate future for Fannie and Freddie would focus them on the socially useful function of securitizing mortgages and thereby fostering housing liquidity. There might still be a role for a government backstop against another catastrophic decline in housing prices, but this public support should be made explicit and the GSEs should pay for it.

With the government standing behind Fannie and Freddie, their huge portfolios of mortgage-backed securities are no longer needed as a buyer of last resort for bundled mortgages to ensure that funding is available for housing. The portfolios were the channel through which Fannie and Freddie enjoyed private gains while imposing risks on taxpayers, and they were the source of systemic risk posed by the firms. The financial regulatory reform bill should ensure a new and sustainable model for Fannie and Freddie that makes explicit any public support for the firms and limits taxpayer exposure to future losses.

There is bipartisan agreement that financial reform is needed. But the details matter. On nonbank resolution, derivatives and consumer protection, the approach in the Dodd bill could well increase financial risks to the economy rather than heading them off. Fixing these issues, along with addressing the risks posed by Fannie and Freddie, will yield a reform that truly learns the lessons from the financial crisis.

Mr. Swagel is a visiting professor at the McDonough School of Business, Georgetown University, and nonresident scholar at the American Enterprise Institute. He was assistant secretary for economic policy at the Treasury Department from December 2006 to January 2009.

Attacking the motives of critics is not presidential

It's Only Called the Bully Pulpit. By Karl Rove
Attacking the motives of critics is not presidential.
WSJ, Apr 29, 2010

President Barack Obama's speech last week at New York Cooper's Union showcased two unattractive verbal leitmotifs. The first was the president's reliance on straw-man arguments. America, he said, need not "choose between two extremes . . . markets that are unfettered by even modest protections against crisis, or markets that are stymied by onerous rules."

Mr. Obama was right in calling this "a false choice." Who is suggesting that Wall Street should not be regulated?

The other, more troubling rhetorical device was Mr. Obama's labeling his opponents as "special interests," and demanding that they stop disagreeing with him and get on board his legislative express. Speaking to bank executives, he decried the "furious effort of industry lobbyists to shape" financial regulation legislation—a barb aimed at the investment bankers in the audience who have hired lobbyists. The president urged "the titans of industry" to whom he was speaking "to join us, instead of fighting us."

While criticizing political opponents is standard operating White House procedure, the practice of summoning critics to bully them in public is unpresidential and worrisome.

Before his health-care bill passed, Mr. Obama sent a tough letter to health-insurance CEOs and then castigated them 22 times in a follow-up prime-time televised speech. This is behavior worthy of a Third World dictator—not the head of a vibrant democracy.

Mr. Obama has also excoriated drug and health-insurance companies, while remaining content to have them spend tens of millions of dollars on ads supporting his health-care bill. This smacked of Chicago-style shake-down politics.

Too often, Mr. Obama disparages those who disagree with him as having venal, illegitimate motivations. In his Cooper Union speech he berated the "battalions of financial industry lobbyists" for their "misleading arguments and attacks." He blamed their "withering forces" for buckling "a bipartisan process" that had "produced . . . a common-sense, reasonable, non-ideological approach."

Maybe the renowned lecturer of constitutional law at the University of Chicago should reacquaint himself with Federalist No. 10. James Madison, a father of the Constitution, suggested that there are "two methods of curing the mischiefs of faction."

One was to destroy "the liberty which is essential to its existence"—something that is anathema to our democratic system. The other was to give "to every citizen the same opinions, the same passions, and the same interests," which is impossible.

"The latent causes of faction are thus sown in the nature of man," Madison wrote. Recognizing this led the Founders to create a system in which competition between interests restrains government, cools passions, and forces political compromise. This has kept our politics floating around the center.

Mr. Obama's attacks on his critics are not only unbecoming; they undermine a political process that would otherwise trend toward occasional bipartisan compromise. They are also hypocritical. Mr. Obama said in New York last week that "a lack of consumer protections and . . . accountability" created the credit crisis. As a senator in 2005, he joined Sen. Chris Dodd (D., Conn.) to threaten to filibuster a GOP effort to rein in Fannie Mae and Freddie Mac when it was still possible to diminish the role those companies would play in the financial crisis. He later voted for the Fannie and Freddie reforms after the two went belly up in 2008.

But it is the president's intimidation that is most troubling. Mr. Obama has the disturbing tendency to question the motives of those who disagree with him, often making them the objects of ad hominem attacks. His motives, on the other hand, are pure.

Mr. Obama often makes it seem illegitimate to challenge his views, and he isn't content to argue issues on the merits. Instead, he wants to make opponents into pariahs. And it's not just business executives who are on the receiving end. We've also seen this pattern with the administration's attacks on the tea party movement and those who attended town-hall meetings last summer on health care.

This is a bad habit—and a dangerous one. The presidency is a very powerful office, and presidents need to be careful not to use it to silence dissenting voices.

Mr. Obama will learn these efforts don't work. In a big, free nation like ours, people want to debate the issues. They don't take kindly to arrogant leaders who believe it is their right to silence the opposition—by either driving them out of the legislative process or pushing them out of the public debate with fiery rhetoric. Through the anonymity of a ballot box and beyond the power of presidential intimidation, voters can express their discontent and they will.

Mr. Rove, the former senior adviser and deputy chief of staff to President George W. Bush, is the author of "Courage and Consequence" (Threshold Editions, 2010).