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Geithner's Radical Takeover Proposal

Thu, 02 Apr 2009 00:00:00 -0600

Nevertheless, there are some highly critical lines that should not be crossed if the essential character of our system of democratic capitalism is to be maintained. Treasury Secretary Timothy Geithner has proposed to cross one of them.

Geithner has proposed that the federal government be given the authority to take over financial institutions that, in its judgment, pose a systemic risk.

After taking over the company, the federal government would have unlimited power to do whatever it wants. It could override the rights of shareholders and abrogate obligations to and contracts with employees, creditors and customers. All the normal legal rights of these other parties would be extinguished.

This is basically the confiscation of private property without compensation or due process. Companies which the federal government fingered for takeover could appeal to the courts for review. But since there are no normative standards to restrict such takeovers, it's a subjective judgment of the regulators, there's no real basis for appeal.

Moreover, there's no point. A company so designated by the federal government is toast. There's nothing a court can give it of any value at that point -- except compensation, which isn't a remedy permitted under the Geithner proposal.

Geithner says that his proposal is patterned after the resolution authority of the Federal Deposit Insurance Corporation over banks. But there is a critical difference. The FDIC insures deposits at such banks. Such banks receive a competitive advantage in attracting capital in exchange for subjecting themselves to the FDIC's resolution authority.

Geithner's proposal is at least arguably unconstitutional. It would certainly be found to be so if we had judges who placed as much importance on protecting property rights as did the founders.

Regardless, the proposal puts too much power in the hands of fallible regulators. The handling of all the various bailouts to date hardly inspires much confidence.

Regulators have handed out hundreds of billions of dollars and shredded shareholder equity in several companies to stem a systemic risk they've never been able to coherently or cogently define. Moreover, what has been disclosed, for instance about AIG's counterparties, severely undercuts some of the claims of systemic risk.

The proposal is also fundamentally unfair. Fannie Mae and Freddie Mac didn't want to be taken over by the federal government. They thought they could still make it. Then Treasury Secretary Henry Paulson made the decision to take them over anyway, even though it wasn't legally his decision to make.

Fannie and Freddie may have been wrong. But their shareholders and management should have had the chance to try.

My solution is to let big boys fail. The Lehman Brothers bankruptcy is claimed to be evidence against that approach. But in his recent book, "Getting Off Track," Stanford economist John Taylor makes a convincing case that the Lehman bankruptcy did not, in fact, add significant stress to the credit markets.

If additional regulation is to be the response, then regulating behavior is in keeping with our system of democratic capitalism. If leverage is thought to pose excessive systemic risk, then limit leverage. If opaqueness is a risk, then increase disclosure requirements.

But allowing the federal government to preemptively confiscate private property and abrogate contracts without due process or compensation is a radical departure.

It may not be socialism, per se. But it's a giant and dangerous stride away from being a civil society dedicated, in part, to the protection of private property rights.




It's Time to Regulate Recreational Drugs

Wed, 18 Mar 2009 00:10:00 -0600

The United States should be a country dedicated, in part, to the protection of individual liberty. Such a society should be highly circumspect about the behaviors it deems criminal and thus worthy of depriving those who engage in them of their liberty.

The use of recreational drugs should not be such a behavior. Instead, it should be treated as a matter of personal responsibility and personal and public health.

The United States does not treat it as such. But, increasingly, the country treats drug use less and less as a criminal matter as well.

Few people are actually incarcerated for just drug usage. Diversion into treatment has become the norm.

This has rendered U.S. drug policy incoherent and arbitrary. Drug use remains a crime. Enforcement, however, is spotty and inconsistent.

That has left a large demand for recreational drugs that can only be supplied through criminal enterprises. That hugely inflates prices and profits. Much of this supply comes from Mexico, and the criminal money involved has overwhelmed the ability to maintain the rule of law in parts of the country.

Mexican President Felipe Calderon has mobilized national forces to try to break the grip of the cartels on civil governance in some areas. The result has been an outbreak of frightening violence with uncertain prospects for success.

Criminal drug organizations have long been a source of instability in Latin America. Some fear that Mexico can become a failed state. And that has some people unmoved by the philosophical argument wondering whether the United States needs to legalize at least marijuana to reduce the pressure on Mexico.

The United States has choices.

Contrary to the position taken by most legalization advocates, I believe prohibition could work. Sweden has tough law against recreational drug use and aggressively enforces them. It has a much lower usage rate than in other European countries.

But the short-term cost of aggressive enforcement would be enormous. Over a quarter of young American adults 18-25 report having used marijuana in the last year. And over 6 percent report having used cocaine.

The hypocrisy would be pretty rank. In my generation, former recreational drug users who are now successful because they avoided the enforcement lottery are the rule not the exception. We have a president who has acknowledged using both marijuana and cocaine.

The United States prospered in the 20th Century with a Latin America that, for most of that period, was unstable and economically dysfunctional. A policy of trying to contain the effects of the Latin American drug wars on the United States could probably muddle through.

The question is: What's the point? At this juncture, U.S. drug policy is mostly about maintaining the fiction that the country is doing something about young adults using recreational drugs.

Education has moderated usage. Diversion does work for some.

But the U.S. demand for recreational drugs remains large and short of criminally cracking down on users, it will remain so. Suppression activities in Latin America have not materially reduced supply.

The United States should legalize and tightly regulate recreational drugs because that is the policy most compatible with the principle of protecting individual liberty, and dealing with drug use as a matter of personal responsibility and personal and public health.

The breathing space it would give the countries in Latin America, and particularly Mexico, to develop their own civil societies under the rule of law is not a reason to do so. But it would be a substantial additional benefit.




Americans Lose Gift for Practical Living

Fri, 27 Feb 2009 00:30:00 -0600

But it can also become a dangerous delusion. And, with respect to the American people, it may be yesterday's news.

The United States has been historically distinctive. But that's not because our people are wired differently. After all, except for Native Americans, there really isn't an American race. We are a hodgepodge of other people.

What has made us different is that we lived in a framework that tended to maximize human potential. That was in part legal, a government dedicated to the protection of individual rights, including the right to property and to engage in commerce. And it was in part a culture that created and reinforced expectations about self-reliance and right living.

Alexis de Tocqueville, the Frenchman who visited the United States in the 1830s, provided roots to this notion that Americans were different. He thought Americans had an exceptional gift and capacity for practical living.

Writing in "Democracy in America," de Tocqueville observed that the mind of the American was fixed "upon purely practical objects. His passions, his wants, his education, and everything about him seem to unite in drawing the native of the United States earthward."

Americans were hard-working, entrepreneurial, thrifty and religious.

There was a strong ethic of self-responsibility. People were expected to provide for themselves and their family, including helping even extended family members in difficulty.

There were strong communitarian instincts as well, but these were acted upon voluntarily. De Tocqueville remarked on the voluntary associations that sprang up in the United States to improve the community and serve those in need. So, even our communitarian activities reinforced the notion of self-responsibility.

Achieving a reasonable degree of material comfort and economic security is easier today than at any time in our history. The formula is pretty straightforward: Regardless of how bad a school you attend, pay attention and do what your teachers say to do. Get at least a high school education.

Don't abuse alcohol or drugs. Don't have a child out of wedlock.

Get a job and perform your duties diligently. Live below your means and put the power of compounding interest to work for your future.

This formula, however, is not drummed into our young, particularly those from disadvantaged backgrounds who need to understand it the most. The culture doesn't reinforce it.

And the number of Americans who breach some element of the formula is staggering.

The observation that Americans have been living above their means has become commonplace. And it's true for both our people and our corporations.

American consumers are retrenching, and this goes beyond just unemployment and stagnant incomes. Despite those things, the savings rate has increased markedly.

And yet the federal government is enacting new subsidies for buying homes and cars and for consumer debt generally.

The message from Washington seems to be: Live within your means. Just not yet.

Americans are not immune. If we make the same mistakes as other people, we will suffer the same consequences.

And I don't think a modern-day de Tocqueville, visiting our country with fresh eyes and an inquiring mind, would walk away with the conclusion that we have an exceptional gift and capacity for practical living.




A Better Way to Help Homeowners

Fri, 20 Feb 2009 00:00:00 -0600

Assuming government officials can fix housing assumes that they know how many homes should be bought and built and what they should cost. They don't. No one does. That's why there are markets.

Instead, federal policy regarding housing is best seen as a welfare program, using the term descriptively, not pejoratively. The question is what government should do to help people cope with the stress the burst of the housing bubble and the economic contraction have put on mortgages.

There are three categories of people who could use assistance: those who bought more home than they could afford, assuming that rising values would permit a later refinancing; those who are having trouble making payments due to a loss of family income; and those who want to sell their homes but can't because their homes are now worth less than they owe and they cannot afford the loss.

Obama spoke, as did President Bush before him, about separating the deserving from the undeserving in any assistance program. But that's impossible. An assistance program can, and should, be limited to primary residences. But beyond that, aid will fall on the just and the unjust alike.

Obama proposes that Fannie Mae and Freddie Mac refinance loans they own or guarantee up to 105 percent of current value.

He also proposes that other lenders write down the loans of borrowers who cannot afford their mortgages. Lenders would eat whatever reduction would get mortgage payments down to 38 percent of the borrower's income. The federal government would then subsidize a further write down to 31 percent of income.

This is very costly. The program would require another $275 billion federal outlay to provide Fannie and Freddie additional public capital and subsidize loan write downs.

It's also of limited reach and relief. Underwater mortgages not owned or guaranteed by Fannie and Freddie would be ineligible for refinancing under that part of the program. And the write-down relief is only good for five years. After that, payments can pop back up. Unless home values or family incomes have sharply rebounded, the same affordability problem reappears.

There's a better solution that's both broader and less costly. It's grounded in two realities: (1) the default rate on mortgages that are underwritten for income is very small; and (2) the market power of a government guarantee.

Here's the proposal: For a short period of time, say two years, the federal government will guarantee the refinancing of any mortgage on any primary residence so long as the monthly payments don't exceed 31 percent of family income. It doesn't matter what the home is worth or how long the payment term has to be, even if it exceeds 30 years.

This would be at the option of the homeowner. Existing lenders don't have to take a hair cut or consent. They are paid off.

The guarantees would work the same way as the existing Fannie and Freddie guarantees work. They would buy qualifying refinanced mortgages and then resell them with a guarantee, for a fee. This part of the Fannie and Freddie business model was working fine. They were brought down by the subprime mortgage-backed securities generated by others that they bought for investment.

A federal guarantee should lubricate the private market to originate such loans and buy them in the secondary market. Federal losses, given the income underwriting, should be minimal and covered by the fees.

Since September, the federal government has been guaranteeing, for a fee, money-market funds. There have been no losses and the government has collected over $800 million in fees.

A housing plan based upon refinancing guarantees, not outlays and hair cuts, would do more and cost less.




Bad Ideas for Stimulus Cash: Construction, Housing

Fri, 06 Feb 2009 00:00:00 -0600

The Democrats propose that the federal government build new stuff for virtually everyone.

The Congressional Budget Office has already noted the constraints that exist on government's ability to get hundreds of billions of dollars of construction money out the door quickly. But even that ignores the constraint from those who would need to do the work.

Residential construction is, of course, in a deep slump. Commercial construction not so much. And residential construction workers are not easily redeployed to do commercial and heavy construction. The skill sets are different.

The deceit is that all this spending requires suspending ordinary budget constraints to jumpstart the economy. Most of the spending is actually in pursuit of long-term Democratic economic growth strategies.

Democrats believe that the economy will perform better long-term with significant additional government investments in alternative energy sources, education, health care and social welfare programs.

Democrats won the election and certainly have a right to try to advance their long-term strategies. But there is nothing about fighting the recession that justifies exempting these long-term strategies from the most basic of budget considerations: How are you going to pay for them?

Even without the stimulus package, the federal government has already reached post-World War II records for spending and the deficit as a percentage of GDP.

The primary economic effect of the Democrat's stimulus proposals will be to inflate private sector commercial construction costs and give the country an even more severe fiscal headache.

The Republicans counter that our financial difficulties are rooted in housing and that's where the fix needs to start.

Certainly the bursting of the housing bubble was a proximate contributor to the economic downturn. But the heart of the problem was an overinvestment in housing, partially induced by government subsidies. That was compounded by imprudent lending to people without skin in the game in the form of a substantial down payment.

So, what do Republicans propose? New, more massive federal subsidies. Under their proposal, the federal government would guarantee new mortgage rates of 4 percent. And don't sweat that down payment. The federal government will give you a tax credit of $15,000.

In the first place, existing mortgage rates are already historically low. Moreover, home sales are trending up, induced by deeply discounted prices.

The federal government could usefully reduce foreclosures by guaranteeing the refinancing of existing mortgages so that payments don't exceed a certain percentage of income.

By massively subsidizing new home purchases, however, Republicans are basically proposing to reinflate the housing bubble.

Republicans also propose to reduce the income tax rates on the two lowest brackets. Rather than truly help low-income Americans, who don't pay much in income taxes, the benefits will primarily flow to the upper middle class, while increasing the marginal tax rate increase faced by the middle class.

Truly providing income support to low-income Americans, who are most vulnerable in an economic downturn, would be something useful the federal government could do, through such things as temporary payroll tax relief and extended unemployment benefits. But there's only a little over $100 billion in such short-term assistance in the stimulus bills.

The country would be fortunate if Congress would just enact those provisions and then call it a day.




The Right Way to Fix Our Financial Institutions

Wed, 28 Jan 2009 00:20:00 -0600

To address that problem, the Bush administration asked Congress for up to $700 billion to buy those assets and take them off the books of the financial institutions. Congress agreed, set up the Troubled Asset Relief Program, and released the first $350 billion. But instead of using the money to buy up the distressed securities, the Bush administration decided to inject public capital into the banks. In fairness to the Bush administration, the consensus among economic experts at the time was that injecting public capital was preferable to buying distressed securities. But it turned out to be a colossal mistake. The TARP investments increased the capital of the financial institutions, but made it no more certain. Moreover, it put the federal government into the banking business, and that scared off private capital. Ideally, the existing capital for financial institutions would become more certain and they would be recapitalized with private investment. But no sensible private investor wants Uncle Sam as a senior partner. When injecting public capital, the federal government gave itself a preferred position, with a 5 percent to 9 percent return off the top. It also assumed the right to tell the financial institutions how to run their business, how much they could pay their executives and what they could distribute to other investors in dividends. Uncle Sam is, of course, ultimately a political beast, with an army of regulators and bureaucrats and 535 would-be CEOs in Congress. Reports are beginning to trickle out about members of Congress trying to influence the allocation of TARP monies and the decisions of the financial institutions that received them. Moreover, Uncle Sam has treated shareholders roughly in previous bailouts, requiring that shareholder equity be severely diminished or extinguished in the forced sale of Bear Stearns and the takeovers of Fannie Mae, Freddie Mac and AIG. Now the market fear is of a more formal nationalization of the banks. Given the situation and the track record, private capital is going to stay on the sidelines so long as Uncle Sam haunts the boardroom. The Obama administration and the Democratic Congress want to make the situation worse. Members of Congress are clamoring for more lending at the same time as the regulators are urging greater cushions due to the continuing uncertainty about capital. The Obama administration says any additional TARP investments will come with more strings. The House passed a bill that contained several, including diversity monitoring in management, employment and business activities. A sensible approach would be designed to increase the likelihood of new private capital flowing into the country's financial institutions. This would require, first of all, a firm commitment to unwind the federal government's current position in these institutions, including selling its preferred stock at a loss if necessary. While being unwound, the stock should be turned over to a trustee with instructions not to interfere with the management decisions of the institutions in the interim. Second, the federal government should guarantee, for a premium, the value of mortgaged-backed securities held by financial institutions. About 90 percent of all mortgages remain current. Even two-thirds of subprime mortgages are still current. A guarantee of somewhere between 65 percent and 75 percent of face value should provide a floor on the value of these securities without taxpayers running great risks. I am loathe to suggest special tax breaks. But in this circumstance, freeing new investments in financial institutions from capital gains taxation for a period of time would be less offensive and far more effective than what the federal government is doing and contemplating. This is a way out, if anyone in Washington is truly interested in one.[...]



Can Obama Eradicate Cynicism?

Tue, 20 Jan 2009 00:40:12 -0600

George Washington was indispensible to the founding of the Republic. Abraham Lincoln was indispensible to preserving it. And King was indispensible to beginning the process of healing it.

Electing a Black president doesn't mean that the wounds of slavery and Jim Crow are healed. But it is a testimony to the opportunity an America true to its principles proffers, and to the man whose character, ability and good will persuaded his fellow Americans to entrust him with the leadership of our country.

Now, however, Obama has to govern.

Obama's inaugural address indicates a moderate with big ambitions and plans.

Obama's chief challenge, of course, is to repair the American economy.

When Franklin D. Roosevelt took over in much tougher economic times, he told the American people that their plight was not of their own making. Instead, he blamed it on "unscrupulous money changers" whom he vowed to bring to heel.

These are different economic troubles, and Obama didn't let us off the hook. He did say that our difficulties were partly a "consequence of greed and irresponsibility on the part of some," but also of "our collective failure to make hard choices." He called for a "new era of responsibility."

While promising a more watchful eye on the market, he nevertheless credited it with an unmatched "power to generate wealth and expand freedom."

And, as an emblem of the promise of the American creed, he staunchly embraced its founding pieties.

So, Obama doesn't claim to be "writing a new chapter in our book of self-government," as FDR did, but to continuing the story he has inherited.

Nevertheless, the reach of Obama's ambition is considerable.

He is proposing that the federal government occupy a bigger space in our economy than anytime since the end of World War II, and considerably bigger than FDR instituted during the Great Depression.

He reiterated his call for a new politics that goes beyond "stale political arguments," such as over whether government is too big or too small.

He called for a new start with the Muslim world, based upon "mutual interest and mutual respect." He foresaw a world in which old hatreds pass, the lines of tribe dissolve and a shrinking world reveals a common humanity.

He offered a hand to authoritarian regimes that unclench their fists.

Obama dismissed the cynics "who question the scale of our ambitions." They "fail to understand that the ground has shifted beneath them."

Perhaps. It would be nice to believe in Obama's vision of a more harmonious and less dangerous world. Still, it is important to see the world as it is, not as one wishes it were. It is uncertain whether Obama truly sees the world as it really is. If not, like Jimmy Carter, he's probably in for a rude awakening.

And on domestic policy, those old arguments aren't stale, and aren't replaced by an appeal to what works. What works is part of what those arguments are all about.

But, on this occasion, even a certified cynic can put his reservations momentarily aside.

Obama has trod a remarkable path, and with him, so has the country.




Washington's Economic Folly

Sun, 18 Jan 2009 00:30:54 -0600

These are unprecedented levels in the post-World War II era. They exceed previous records by large margins. The previous highs were reached in 1983, 6 percent of GDP for the deficit and 23.5 percent for spending.

In historically-challenged Washington, the current economic difficulties are routinely described as the worst since the Great Depression. Everyone in town must have sleepwalked through the 1970s and early 1980s.

In any event, even Washingtonians are willing to admit that the Great Depression was worse. So, what was the federal government's response to those economic troubles? Federal spending never exceeded 11 percent of GDP and the deficit never exceeded 6 percent.

And what should the federal government now do, given the news that spending and the deficit have already reached unimaginably high levels? The conclusion in Washington is nearly unanimous: spend even more.

The incoming Obama administration wants Congress to release the second $350 billion of the Troubled Asset Relief Program and enact an additional stimulus of around $800 billion over the next two years.

This would probably raise the federal deficit to nearly 12 percent of GDP and spending to over 27 percent.

Even without this additional stimulus, the federal government will have run up $3.3 trillion in deficits since 2001. Yet Washington is rushing into additional spending without anyone bothering to ask, much less answer, what would seem to be an obvious question: If $3.3 trillion in deficit-spending stimulus didn't keep us from falling into the recession, why the assumption that an additional trillion will get us out?

The TARP funds were supposed to be used to buy distressed assets, mostly mortgage-backed securities, from financial institutions. Instead, the Bush administration used them to put public capital into the banks.

Now, Fed Chairman Ben Bernanke is saying that financial institutions will not be stabilized until the distressed assets are, indeed, removed from their books. Gee, Ben, it would have been nice if you'd made that point before the first $350 billion got out the door.

Now that the federal government owns part of the banks, members of Congress want to tell them what to do, specifically make more loans.

The banks make money by lending. So, they are already making whatever loans they think prudent given their capital, the economy, and the creditworthiness of applicants. Any lending they made in response to this political pressure would, by definition, be imprudent in their eyes.

Meanwhile, to get the credit markets flowing, Bernanke and the Fed have been madly expanding the money supply and trying to drive down interest rates. Apparently they are working on the theory that the way to get more lending is to reduce the returns from lending.

Let's take a broad perspective. The country is experiencing economic difficulties due to the housing bubble bursting, a bubble caused in part by excessively lax monetary policy, and imprudent lending and borrowing in general.

So, the Washington consensus is that the way to fix the problems caused by excessively lax monetary policy and imprudent lending and borrowing is even looser money and more imprudent lending and borrowing.

If you're expecting these guys to rescue the economy, you're nuts too.




Huntington's Cultural Premise Worthy of Consideration

Sat, 10 Jan 2009 00:20:00 -0600

According to Huntington, the Cold War had held in abeyance a reshaping of the world order based upon culture, primarily from ethnicity and religion.

Nation-states would increasingly align themselves with competing and conflicting civilizations: the West, Russian Orthodox, Chinese, Islamic, Hindu, Latin American, African and Japanese - although Huntington predicted that Japan would accommodate itself to the rise of China and work within its civilizational orbit.

Globalization would actually result in more conflict not less, since it reduces the elbow room each civilization has with respect to the others.

This was quite a splash of cold water. Huntington was saying not only would the world not be like we expected, but that we were not as we saw ourselves.

The tendency in the West, particularly in those heady days, was to see people and values as universal. Huntington was saying that isn't true. People are different. They believe different things and have different values.

Moreover, Huntington contended that people not only define themselves as what they are, but what they aren't - that there is an innate human need for an "other" to be against.

Huntington also fingered the Islamic civilization as a particularly likely source of conflict, referring to its "bloody borders."

After 9/11, Huntington's views from the 1990s seemed to be prescient and his construct came into greater vogue. Nevertheless, Bush's "war on terror" was anchored in the universalism Huntington discounted and warned against.

In this decade, Huntington provoked great controversy and bitter attacks with his book, Who Are We? The subtitle of the book was, "The Challenges to America's National Identity."

Huntington believed the essence of the United States was its Anglo-Protestant culture. There was a secular American creed that held the country together as it became more ethnically and religiously diverse. But the creed, in Huntington's view, derived from the Anglo-Protestant culture and needed it for continuing sustenance.

He saw two contemporary threats to maintaining America's national identity: intellectual multiculturalism and Mexican immigration. Multiculturalism diluted what immigrants were expected to assimilate into, while Mexicans had a unique ability to maintain their own culture while living in the United States.

There is much to quarrel about in Huntington's analyses. Despite differences in cultures, desire for democratic governance does seem universal. Electoral participation is high wherever it is introduced, including in Islamic countries.

Japan hasn't been brought into China's orbit. Instead, the rise of China seems to be stimulating it to affiliate even more closely with the West - consistent with Robert Kagan's construct that the main post-Cold War geopolitical fault line will be between autocratic and democratic states.

Mexican assimilation may be on a slower pace than past waves, but it is on the same trajectory. And a public consensus in favor of the American creed seems to be holding even as the dominance of the Anglo-Protestant culture wanes, although a more supportive intellectual class would help.

Nevertheless, Huntington's main point, that culture matters, is important. We pretend otherwise to our disadvantage, and possibly peril.




A Conservative Hope for Obama

Mon, 10 Nov 2008 05:02:39 -0600

Nevertheless, I have some hope that some good will come from the Obama presidency. He may usefully define the limits of responsible liberal governance, as Ronald Reagan usefully defined the limits of responsible conservative governance. That conservatives and Republicans will be undergoing a soul-searching discussion to decide who they are and what they now stand for is commonly observed. However, less noticed, but more consequential (at least in the short-term), is that liberals and Democrats will now be defining how they govern. In reality, liberals haven't governed since LBJ. To govern, control of the presidency is required. Jimmy Carter didn't so much govern as cope - with the economic aftermath of Nixon's wage and price controls and erratic Fed monetary policy, Soviet aggression in Afghanistan and the Iranian hostage crisis. Bill Clinton began to govern by overreaching with HillaryCare. The country decided he needed a Republican Congress to watch over him. Paradoxically, his political life was revived by Newt Gingrich's overreach with the shutdown of the federal government. Voters decided they needed him to check the Republican Congress they had given him. From that point on, Clinton temporized rather than governed. He famously adopted the triangulation strategy - staking out political ground between the left of his own party and Republican conservatives. Triangulation by definition, however, leaves to others the dimensions of the political playing field, and your position on it. It was thus fundamentally different from Tony Blair's Third Way, to which it was often inaccurately compared. Blair led by defining the political playing field in new ways. Clinton plotted his way through a playing field defined by others. Now, Democrats have no choice. With control of the presidency and Congress they will govern, by design or default. Obama seems quite capable of governing by design. Clinton was a policy wonk, but an impulsive, inconstant and indecisive one. Obama is cool and deliberative. He also seems to want policies that are not just politically popular, or satisfy a political constituency, but also work. And therein lies the hope. Obama is undoubtedly deeply liberal, particularly on domestic policy. He favors redistributionist tax policies and a substantial broadening of social programs to help those on the lower rungs of the economic ladder. He wants to strengthen labor unions. He favors a much more aggressive regulatory state and a government-directed energy and environmental policy. However, Obama seems to understand that it is a healthy private economy that makes these things possible. And that markets have proven themselves more effective at increasing economic output than government-controlled economies. That's why the claim that Obama is a socialist was so silly and ineffective. Now, Obama doesn't understand what makes markets work. In particular, he lacks an understanding of the vital importance of investment capital. His tax policies would shrink the pool of investment capital and discourage its deployment. Nevertheless, he seems to intuit that there is a limit to what government can do without serious consequences on the private economy. His sense of where the limit lies isn't mine. But he seems to think it exists and has surrounded himself with serious economic advisors who know that it exists. This will work as a practical constraint on how the Obama administration governs. And that will, in turn, set the outer limits on responsible liberal governance, as Reagan did for responsible conservative governance. Even today, the argument within conservative and Republican circles is whether to move beyond Reagan or return to him. No one is arguing that success lies in being more conservative than Reagan. LBJ, however, isn't a relevant standard for liberal [...]



Both Parties Should Lose in this Election

Thu, 23 Oct 2008 00:00:00 -0600

If Democrats gain unchecked power, the one thing it is most clear they would do is to abolish the secret ballot for union elections. Even the so-called "conservative" Democrats running in swing districts are toeing the line on this one. The House Democratic leadership forced a vote on the proposal last year, even though the issue could be used against its vulnerable members. Only two Democrats voted against it. All the Arizona Democrats running in swing districts - Harry Mitchell, Gabrielle Giffords, Ann Kirkpatrick and Bob Lord - support abolishing the secret ballot for union elections. The second most likely thing Democrats would do is to make the tax system sharply more redistributionist. Obama famously vows to increase taxes on those making more than $250,000 a year. But that is only the beginning. He says that he will cut taxes for 95 percent of American families, but only about 60 percent of such families pay income taxes now. What Obama is proposing is a series of refundable tax credits for virtually everything people do: work, raise kids, save, buy a house, send children to college. The way a "refundable" tax credit works is that if the credit exceeds your income-tax liability, the government sends you a check for the difference. Obama justifies this as a "tax cut" by saying that, for those who don't pay incomes taxes, it offsets their payroll tax. That, however, merely means that the redistribution is occurring in the way the country finances Social Security and Medicare and undermines their status as social insurance programs. Regardless, these refundable tax credits are more properly seen as large increases in spending rather than as true tax cuts. Unchecked Democrats are likely to enact fundamental reform in health care. Obama proposes allowing all Americans to buy into a system similar to the one federal employees currently have, in which private insurance companies compete. That is the heart of many reform proposals by both the right and the left. However, Obama also proposes a Medicare-style fee-for-service alternative that might squeeze out the private insurance options. It may be intended to. Democrats are clearly prepared to open the spending floodgates, using the economic downturn as an excuse. Congress has already enacted a $168 billion stimulus package, a $300 billion housing-refinancing plan and a $700 billion bailout for the banking system. Now, Democrats want an additional $300 billion stimulus. This from a government that has to borrow money to pay the light bill. And brace yourself if Democrats reform financial regulation. They like to use corporations to implement their social policies off budget. Remember Fannie and Freddie? In reciting this litany, however, it becomes clear how little grounds the Republicans have to criticize it, except for taxes. Big government spending programs? Bush proposed the largest expansion of the federal role in education since Jimmy Carter with No Child Left Behind and the largest expansion of the entitlement state since Lyndon Johnson with his Medicare prescription-drug benefit. Most congressional Republicans supported them. Racking up deficits? Bush is the champ. Interfering in the private economy? The Bush administration just partially nationalized the banks, forcing healthy banks to accept public capital they didn't want. John McCain once could have legitimately claimed to serve as a check on Democratic excesses, particularly on spending. And Americans seem to like divided government. However, McCain supported the $700 billion bailout and proposes that the federal government spend an additional $300 billion buying up mortgages at face value. Vetoing earmarks isn't going to make up for that. So, there you have it: An election Republicans deserve to lose but Democrats don't d[...]



Thank The House For Rejecting an Ill Conceived Plan

Wed, 01 Oct 2008 00:30:49 -0600

The legislation purported to instruct the treasury secretary to buy distressed securities at the lowest possible price for taxpayers, using market mechanisms such as a reverse auction. However, the bill also required that the secretary obtain warrants for stock in the companies whose distressed securities were being bought. The warrants were to be for whatever percentage of the company the secretary decided, at whatever price the secretary set. This pretty much obviated the reverse auction idea. How would a company know how much of a discount on its securities to bid if it didn't know how much of the company the government would demand in exchange and what the company would get for that dilution of shareholder equity? As a practical matter, the bill would have returned Paulson to his make-a-deal mode with individual companies, as the bill also permitted, playing with a very big pot of taxpayer money. There's nothing in Paulson's record to date to suggest that he - or any other treasury secretary for that matter - should be entrusted with that kind of power. There are tough economic times ahead. The country has overinvested in housing and overborrowed in general. Some of what is triggering panic is actually a necessary or beneficial part of the correction. Weaker and more leveraged financial institutions are being taken over by stronger institutions that behaved more prudently. If the country has overborrowed, the volume of credit needs to shrink. That requires tighter lending standards and higher interest rates. At this point in the correction, the corporate prime rate is at 5 percent and corporate bonds at an average of 7.2 percent. The country isn't really staring into the abyss of the 1970s, when interest rates reached double-digits, much less the Great Depression, during which the economy contracted by 40 percent, stocks lost more than two-thirds of their value and unemployment reached 25 percent. Still, there is an overwhelming consensus that Congress needs to pass something. If that consensus is to be acted on, here's a program that matches the moment, both economically and politically. First, Congress should suspend the mark-to-market accounting rule for mortgage-backed securities. This requires MBSs to be booked for the highly discounted price at which they can currently be sold, not the much higher price they are likely to be worth if held to maturity. The bill rejected by the House would have empowered the SEC to suspend the rule. Instead, Congress should mandate it. This would provide virtually as much balance sheet relief as Paulson's proposal that taxpayers buy the MBSs. Second, enact the House Republicans' idea for the federal government to insure MBSs. Paulson says it won't work. But he would have a hard time explaining why companies pay trillions for such private insurance but won't purchase more secure insurance from the federal government. Third, have the federal government guarantee the refinancing of homes based upon extending the life of the mortgage for as long as it takes, even if well beyond the conventional 30-year period, to reduce monthly payments to a certain percentage of income. With such a program, no one would have to lose their home, lenders wouldn't have to take a hair cut, and, given the income requirement, federal outlays would be minimal. This program relieves the credit crunch caused by artificially depressed MBSs as much as the federal government is capable of doing. It doesn't fundamentally change the role of the federal government in the private economy, as House Republicans fear. It helps homeowners, as Democrats want. And it doesn't put taxpayers at considerable risk to bail out imprudent big-boy investors, as a remarkable coalition of independent-minded Democrats and c[...]



Dem Platform is for Whiners

Fri, 29 Aug 2008 00:30:00 -0600

Note the disdain for the ethos of self-responsibility. Democrats do not merely regard it as insufficient. Instead they regard the idea that people should provide for themselves as divisive. Even more significantly, Democrats regard self-responsibility as a "recipe for failure." In other words, Democrats don't think the American people are capable of making it on their own. And so, Democrats have a government program for, well, everything. Democrats want government to help you raise your kids, send them to college, train and retrain for a job, buy a home and save for retirement. They must be saving the burial assistance program for 2012. If you want an abortion or want to keep the child, it doesn't matter. Democrats want taxpayers to help pay for it either way. Democrats are also big on "investment" in "infrastructure." Of course, in the Democratic view, everything is infrastructure. It is paradoxical that the Democrats are stressing the need for public investment at the same time that their tax policies will shrink private investment. Simply put, Democrats say they will give you more than Republicans, and that's why you should vote for them. According to Democrats, the lot of the average American is lousy. And according to the polls, the electorate is inclined to agree. Income and wage statistics are tricky. There are problems with inflation measures and averages are affected by the large influx of low-skilled immigration the country has experienced. However, perspective can be gathered by stepping away and looking at the broader picture. More Americans own their homes than at any time in history and their homes are larger than at any time in history. Americans spend less of their income on the basics - food, shelter and clothing - than at any time in history. We own more stuff that does more stuff than ever before. Yes, there is a housing slump. But the end result of that will be, if politicians will get out of the way, more people being able to buy more home at lower prices. There is currently a pinch on wages. But it is caused by inflation. In a 57-page platform that includes such things as supporting refundable tax credits to families on the Northern Mariana Islands, there is not a single word about the importance of a stable currency to protect the buying power and the savings of average Americans. During the depression, GDP declined by 40 percent and a quarter of the American workforce was out of work. In the 1970s, the economy was contracting about half the time, unemployment reached 9 percent and interest rates and inflation hit double digits. Those were tough economic times. These aren't, at least not yet. What is different, and can be tough, is the pace of economic change. Technology and globalization have sped up the creative destruction that is part of the essence of a market economy. That has created economic anxiety and the Democrats are playing on that anxiety. However, Democrats are misleading the American people by claiming that they can make the anxiety go away. Green manufacturing jobs aren't going to be any less susceptible to foreign competition than current manufacturing jobs. Detroit isn't going to face any less global competition in hybrids or plug-ins than in SUVs and sedans. And triggering a protectionist trade war is how you get things like the Great Depression. So, the economic path for most Americans is going to stay more turbulent than in the past. But, according to the Democrats, the American people can't be told to just buck up and learn to live with it. That would be divisive and a recipe for failure. Phil Gramm got tossed off the John McCain Straight-Talk Express for saying that the country had become a nation of whiners. So, pandering during [...]



Confrontation Won't Work With Russia

Wed, 20 Aug 2008 00:32:00 -0600

The ambitions of the communist Soviet Union were universal. It wanted to remake the world in its image. It promoted the spread of communism throughout the globe. It actively sought to undermine Western democracies, particularly in Western Europe. It posed a military threat to the independence of Western Europe. Vladimir Putin has emasculated nascent democratic institutions in post-Soviet Russia. He has successfully turned Russia's oil and natural gas resources into an instrument of state power. Putin's Russia seeks power and influence. But there is no evidence that Putin's Russia aims to remake the world in its image. Instead, it is seeking safe space for its authoritarianism. It perceives itself threatened by Western powers who believe that legitimacy comes only from the sort of democratic expressions Putin has suppressed. That is why it reacts so adversely to NATO nestling up to its borders. Putin's Russia has sought economic leverage to constrain Western Europe, and pretty successfully so. Europe gets 25 percent of its natural gas from Russia. The figures are even higher for countries such as Germany and Italy. However, Russia, unlike the Soviet Union, poses no military threat to Western Europe. It probably poses no military threat to most of Eastern Europe either, although the one good thing that came out of the Georgian conflict was the willingness of the United States to provide Patriot missile defenses to Poland. Russia's true military and economic threat, unlike that of the Soviet Union, is geographically constrained largely to the countries that immediately border it. Many of those countries do not want to be in the Russian orbit. They want to align and integrate themselves with the West. That's important, and it matters. But what the West can do to give these countries some living space independent of Russia is difficult to fathom. Neither the United States nor particularly Western Europe is going to get into a shooting war with Russia over these border countries. That means that bringing them into NATO simply renders the already confused mission of that military alliance even more confused. John McCain was right that Russia should have never been invited to join the G-7, turning it into the G-8. But what would booting it out really accomplish? The G-8 is a useless enterprise, in which heads of government, or their foreign or finance ministers, get together and tell each other lies about what they are going to do to address common problems. Russia would lose nothing of concrete value by not getting together periodically for these preening sessions with the United States, Britain, Germany, France, Italy, Japan and Canada. These are the self-appointed leading industrial democracies, a conceit the rest of the world increasingly ignores. The other punishment most commonly advocated is blocking Russia's membership in the World Trade Organization. To join the WTO, Russia would have to submit to rules-based trade, reduce its domestic tariffs and open up its domestic financial services industry. And exactly how is all that to the disadvantage of the West? Russia is hardly a manufacturing powerhouse. It imports twice as much in manufactured goods as it exports. So, the first effect of its WTO membership would likely be greater diversity of consumer goods available to the Russian people. But let's assume that there is a benefit to domestic producers in Russia from WTO membership and its manufacturing exports begin to rise. Is the West better or worse off if Russia develops a more diversified economy less dependent on oil and natural gas? Russia is an authoritarian power. It seeks to intimidate its neighbors, who aspire to associate themselves with other de[...]



West Won't Support Change in Status Quo

Wed, 13 Aug 2008 00:00:00 -0600

To which, the most brutally relevant question is: So what? Russia clearly has a strategic objective of Finlandizing the Caucasus. During the Cold War, the West was unwilling to commit to the defense of Finland. So Finland, to achieve a degree of domestic independence, had to make its foreign policy subservient to Soviet interests. Georgia and Ukraine want to avoid this fate. But the harsh reality is that the West is unwilling to commit to their defense as well. Bush has pushed for Georgia and Ukraine to be included in NATO, a call echoed by both McCain and Obama. This merely reflects continued confused thinking about NATO. NATO began as a military alliance to deter Soviet aggression against Western Europe. The Soviet Union no longer exists and Germans do not fear Russian tanks rumbling across their border. Today, NATO is a military alliance with a mission to be determined later on an ad hoc basis. However, that mission will not include meaningful military assistance to Georgia or Ukraine to resist Russian intimidation. Take the positions of Germany and Italy, both headed by pro-American conservative leaders. German Chancellor Angela Merkel has led the opposition to Georgian membership in NATO. Italy's foreign minister, in the context of the current conflict, said: "It doesn't behoove us to pit ourselves against Russia. Russia is a strategic partner." Germany gets 39 percent of its natural gas from Russia. Italy gets 31 percent. Vladimir Putin has succeeded with his plan to turn Russian oil and natural gas into an instrument of state power, as chronicled by Marshall Goldman in his new book Petrostate. Bush, McCain and Obama all said that Russia had damaged its international standing and relations with the rest of the world. But that's just not true. Regardless of the outcome in Georgia, the rest of the world will continue doing business with Russia much as it has in the past. The same is probably true of the United States as well. The people of Georgia and Ukraine desire to be associated with other democratic countries with market economies and have some brave leaders working to make that their future. It would be indescribably sad if this desire is thwarted by Russian military and economic intimidation. The harsh reality, however, is that Western Europe has more to lose than gain by confronting Russia over the Caucasus. And what happens in the Caucasus only marginally affects U.S. security or prospects. It is disturbing that McCain claims to see it otherwise. The Georgian conflict exposes how misplaced is the hope that there are international norms of behavior that can be enforced. The case of the United States against Russia is that it violated the sovereignty of Georgia and is undermining a democratically elected government. According to Bush, this just isn't done in the 21st Century. Yet, in the 21st Century, the United States has supported independence for Kosovo, previously recognized as part of the sovereign state of Serbia. And it worked actively to undermine the Hamas government democratically elected by the Palestinian people. There are, of course, gross differences between Kosovo and South Ossetia, contrary to Russian assertions of an analogy. Yet it demonstrates the difficulty in an appeal to international norms of behavior that lack universal agreement, much less an enforcement mechanism. Is there a problem with tough talk not backed up by tough action? There is. It can lead to a miscalculation by those whose fate is at risk. That might have happened in Georgia. Georgian President Mikheil Saakashvilli might have provoked a confrontation in hopes that the West would rally and save his country from the fate of R[...]