Sunday, May 2, 2010

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).