Monday, June 29, 2009

Scalia invites assaults on national banks

Spitzerism Revisited. WSJ Editorial
Scalia invites assaults on national banks.
The Wall Street Journal, Jun 30, 2009, p A14

Eliot Spitzer has departed the national stage in ignominy, but the damage he did as an unrestrained state Attorney General lives on, notably in a dubious 5-4 victory yesterday before the Supreme Court.

The case is Cuomo v. Clearing House Association, but it was Mr. Spitzer, New York AG Andrew Cuomo's promiscuous predecessor, who brought the suit in 2005. At issue was whether New York's AG could demand mortgage data from federally chartered banks to fish for evidence of discrimination under the state's fair lending laws. Mr. Spitzer was running for Governor, and he wanted to play the racial lending card even as he now denounces the same banks for lending too much to the same people.

We'll defend federalism as staunchly as anyone, but the National Bank Act dates all the way back to the Lincoln Administration, and over the years the courts, including the High Court, have been clear about its intent: A national bank should be regulated by federal overseers and not subject to harassment by states for the way it conducts banking. As recently as two years ago, in Watters v. Wachovia, the Supreme Court upheld precisely this principle. But now a five-Justice majority, improbably led by Antonin Scalia, who was joined by the Court's entire liberal wing, has opened the gates of state regulation against national banks.

Justice Scalia's opinion distinguishes between "visitorial" and "prosecutorial" power over national banks. By visitorial he means the power to demand whatever information may be necessary to regulate an institution. Mr. Scalia argues that while the federal Office of the Comptroller of the Currency (OCC) has sole visitorial power over federal banks, state AGs may nonetheless "prosecute" those banks for violations of state law.

There's nothing wrong with this argument as it pertains to, say, state employment law, fraud or other laws of general applicability. No one argues that a national bank should be immune from a state sexual harassment investigation simply because its banking activities are regulated by the OCC.

But as Justice Clarence Thomas points out in his dissent, lending, including mortgage lending, is a core banking activity authorized by the 1864 National Bank Act and already regulated by the OCC. It is exactly the kind of banking that national banks are supposed to have the freedom to do under a law designed to create a uniform regulatory environment across the entire country.

Justice Scalia argues that prosecutorial pursuit of a national bank is fundamentally different from a bank regulator's visitorial powers because prosecutors are subject to judicial checks and balances. The Justice must not have been paying attention to Mr. Spitzer, whose career is a living testament to the ways that an unscrupulous AG can twist the power to prosecute into the power to "visit" and regulate and legislate. Justice Scalia's opinion may well expose national banks to the depredations of 50 state AGs, making a mockery of "national" bank regulation.

When the political progeny of Mr. Spitzer crank up their fishing expeditions against national banks, we doubt those banks will take much comfort because they are being "prosecuted," rather than "visited."

The health-care systems Democrats want to emulate don't allow contingency fees or large jury awards

How Other Countries Judge Malpractice. By RICHARD A. EPSTEIN
The health-care systems Democrats want to emulate don't allow contingency fees or large jury awards.
The Wall Street Journal, Jun 30, 2009, p A15

In his recent speech to the American Medical Association, President Barack Obama held out the tantalizing possibility of reforming medical malpractice law as part of a comprehensive overhaul of the U.S. health-care system. As usual, he hedged his bets by declining to endorse the only medical malpractice reform with real bite -- a national cap on damages for pain and suffering, such as the ones enacted in more than 30 states.

These caps are usually set between $250,000 to $500,000, and they can make a substantial difference. Other reforms, such as rules that limit contingency fees, shorten statutes of limitation, or confine each defendant's tort exposure to his proportionate share of the harm, have small and uncertain effects.

Medical malpractice, of course, is not just an American issue. And now that the U.S. is considering universal health-care systems similar to those found elsewhere, it's worth a quick peek at their medical malpractice systems -- which usually attract far less controversy, and are far less expensive, than our own.

Litigation in the U.S. has at least four distinctive procedural features that drive up malpractice costs. The first is jury trials, which can veer out of control and in any case introduce significant uncertainty. The second is the contingency-fee system, which allows well-heeled lawyers to self-finance litigation. The third is the rule that makes each side bear its own costs. This induces riskier lawsuits than are undertaken in most other countries, such as Canada, England and most of Europe, where the loser pays the legal costs of the winner. The fourth is extensive pretrial discovery outside the direct supervision of judges, which occurs far more readily here than elsewhere.

Even these features aren't the whole story. American judges frequently let juries decide whether honest mistakes are negligent. Judges in other nations are less likely to do so. American courts commonly think it proper for juries to infer medical negligence from the mere occurrence of a serious injury. European judges usually will not.

American plaintiffs are sometimes spared the heavy burden of identifying particular acts of negligence, or of showing the precise causal connection between a negligent act and an actual injury. Lastly, damage awards for lost income and medical expenses in the U.S. tend to dwarf awards made elsewhere -- in part because governments elsewhere provide this medical care from their nationalized systems. In sum, the medical malpractice system provides incentives for plaintiffs that really do matter. Americans, for example, file claims about 3.5 times more often than Canadians.

The overall picture is still more complex, since there are major variations in medical malpractice rules in different American states, and differences within states, such as between juries in big cities and those in small towns. Doctrinal reform cannot stop these abuses. What is needed is the replacement of juries with specialized commissions like those in France, which help reduce litigation expenses and promote uniformity in case outcomes across regions.

What then does this quick survey teach us about the ability of our system to deter medical injuries and compensate its victims? Not much that's encouraging.

A study led by David Studdert published in the 2006 New England Journal of Medicine concluded that the administrative expenses of the malpractice system were "exorbitant." And worse, it found errors in jury verdicts in about a quarter of the litigated cases. Juries denied compensation properly due in 16% of the cases, and awarded it about 10% of the time when it was unwarranted. These error rates don't include damage awards set at improper levels.

More disturbingly, a careful 1992 study by Donald Dewees and Michael Trebilcock in the Osgood Hall Law Journal concluded that the frequency of medical malpractice in Canada was about the same as in the U.S. -- for about 10% the total cost. In other words, our costly system doesn't seem to do much to deter malpractice. On medical malpractice at least, Canada does better than we do.

The U.S. cannot ignore serious reform. To be sure, medical malpractice premiums constitute well under 1% of the total U.S. health-care bill. But defensive medicine adds perhaps as much as 10%. High malpractice costs can shut down clinics that serve vulnerable populations, leading to more patient harm than the occasional case of malpractice.

The best reform would be to allow physicians, hospitals and patients to contract out of the liability mess by letting the parties reject state-imposed malpractice rules. They could, for example, choose to arbitrate, to waive jury trials, or to limit damage recovery. Stiff competition and the need to maintain reputation should keep medical providers in line in such a system. Market-based solutions that make the private sector more responsive should in turn undermine the case for moving head-first into a government-run health-care system with vast, unintended inefficiencies of its own.

Mr. Epstein is a professor of law at the University of Chicago, a senior fellow at the Hoover Institution, and a visiting professor at NYU Law School.

WaPo: The House considers a sensible bill to rein in the president's power to exclude court evidence

Fixing Abuses of State Secrets. WaPo Editorial
The House considers a sensible bill to rein in the president's power to exclude court evidence.
Monday, June 29, 2009

NO PRESIDENT should be trusted to be the sole arbiter of what evidence can and cannot be introduced in court. But that's essentially what has been happening for four decades in cases that touch on national security matters.

In the 1950s the Supreme Court gave the executive virtual carte blanche to determine what pieces of evidence or information must be withheld in civil lawsuits against the government; lower courts since then have routinely rubber-stamped the executive's secrecy claims.
The second Bush administration took the state secrets doctrine to new heights by arguing that an entire case should be dismissed -- sometimes at its earliest stages -- if it could touch on any information that could conceivably have national security ramifications. The Justice Department under President George W. Bush used this approach to try to quash litigation involving, among other things, domestic surveillance and extraordinary rendition (the forced transfer of detainees to countries where they may be tortured).

President Obama has said that the state secrets doctrine should be reformed, and he has promised to be more measured. Yet when confronted with actual cases the Obama Justice Department has adopted the same legal arguments as the Bush administration. The Obama administration, for example, recently asked the full U.S. Court of Appeals for the 9th Circuit to reconsider a panel decision that declined to dismiss a lawsuit brought by men who were subject to extraordinary rendition; the administration claimed that allowing the suit to go forward could harm national security. If Mr. Obama shapes a more circumscribed approach, as promised, that would be welcome.

But legislation is necessary to guarantee that all presidents abide by sensible rules that protect both national security and the ability of litigants to make their case in court. Rep. Jerrold Nadler (D-N.Y.) is the primary sponsor of legislation that sets out such rules; similar legislation has also been introduced in the Senate.

Under the State Secret Protection Act of 2009, a federal judge would be the arbiter and would make determinations on specific pieces of evidence. If a particular document or piece of evidence were deemed by the judge to be too sensitive to be shared with the plaintiff's lawyer, the government would be obligated to provide a redacted copy or, if that proved unworkable, an unclassified summary of what the evidence shows. If this approach still presented the risk of a national security breach, the judge could exclude the information but allow the plaintiff to proceed with the litigation unless the excluded information was absolutely necessary to the case. In these instances, the judge would be empowered to dismiss the case.

Independent scrutiny is necessary to ensure that the state secrets doctrine is being used legitimately and not to cover up embarrassing or incriminating evidence or episodes. The proposed legislation strikes the appropriate balance.

A Primer on the Employee Free Choice Act's Arbitration Provision

A Primer on the Employee Free Choice Act's Arbitration Provision. By F. Vincent Vernuccio
CEI, Jun 25, 2009

In the ongoing debate over the Employee Free Choice Act (EFCA, H.R. 1409, S 560), the Act’s card check provision has received a great deal of attention. This provision would effectively eliminate the secret ballot in union certification elections in favor of the card check process, in which union organizers ask workers to sign union cards out in the open. This exposes workers to high-pressure tactics that the secret ballot is designed to avoid. By focusing on its undemocratic nature, EFCA opponents have helped muster popular opposition to card check, and the bill has failed to move forward in Congress. However, EFCA supporters are now looking to craft a “compromise,” which would retain other harmful provisions in EFCA.

The Employee Free Choice Act’s Section 3, “Facilitating Initial Collective Bargaining Agreements,” has not received nearly as much attention as card check, but its implications could be enormous. If enacted as part of an EFCA “compromise,” it could fundamentally change the way businesses deal with their employees. Section 3 of EFCA empowers the federal government to impose mandatory binding compulsory interest arbitration, whereby government representatives are enjoined to create a fresh contract from scratch. It would allow the government to write “first contracts” between employers and unions even if one party objects.

Full Document Available in PDF

Sunday, June 28, 2009

A Letter to Ali Khameini

A Letter to Ali Khameini. By PARVANEH VAHIDMANESH
Your daughter and I are both Neda's age.
The Wall Street Journal, Jun 29, 2009, p A11

Dear Ali Khamenei,

You may not have heard of me, but your daughter knows me well. For eight years, I studied with Boshra at the Refah school in Tehran. The Refah School is where Ayatollah Khomeini resided during the Islamic Revolution. On its roof, leaders from the Shah's regime were executed. Sound familiar?

Boshra and I played volleyball together. I remember how she always arrived at school in a white Toyota with three escorts. And I remember how favorably the teachers treated her.

I will never forget the time when every class was asked to raise money to send to Bosnia during the Serbia-Bosnia crisis. The class with the highest amount of money raised would be awarded with a field trip to Lavasoon, a city near Tehran.

The next day, we all emptied our piggy-banks and brought our money to school. All together, the school raised between 4,000-5,000 tomans, the Iranian unit of currency. The competition boiled down to a 10-20 tomans difference among all the classes. In the midst of this, your daughter suddenly appeared and handed in 30,000 tomans to her class on behalf of you. The game was over and her class won the contest by a huge margin. We all objected to the result, complaining that the contest was between the money gathered from students' own pockets, not from their fathers. But no one really took notice of us, and Boshra's class was declared the winner.

I have many similar stories, but I am not writing here to share my memories. Rather, I am here to confess that we, Boshra's classmates, are now part of those disruptive demonstrators you refer to during your speeches.

Neda Soltan, the young innocent girl who was killed on Karegar Avenue, was the same age as me and your daughter. She came to the demonstrations with no weapons or knives. All she carried with her was her voice, a voice that cried out in protest against your regime.

Who said the response to such cries is a bullet? You, just like the shah, silence the voices of protestors with gunshots. But don't forget that the shah's harsh methods undid him and caused his regime to fall. Neda has died and her voice will no longer call out to disturb your slumber. But I beg you to consider if the prophet lived his life the way you have? Islam permits irreligious or secular rulers. It does not permit tyrants. I pity you. All the blood you've spilled has forever stained your 70 years of worship and piety.

While you may not hear the nation's shouts of Allahu Akbar! (God is great) every night, I am sure your daughter hears them. Since you have violated and abused your countrymen's trust, they are now calling out to the only God they know for refuge. A nation that once was great is now called villainous because of people like Mahmoud Ahmadinejad. So the Iranians vehemently cast their ballots on election day to oppose him, only to have their rights trampled upon.

If you, contrary to what I believe, are not aware of what's going on in the streets of your country -- if tear gas hasn't burned your eyes and the sounds of gunfire haven't pierced your ears -- then Boshra can direct you to some of the information available on the Internet. Ask her to show you the photos of Neda's last moments in the street. Neda, just like Boshra, has a father and a family who deeply loved and cared for her. Like Boshra, Neda cherished a thousand dreams in her heart.

Ali Khamenei, if you pursue the path you have been following, our people's anger will take a different form. It will turn you and your family, as it did the shah's and his, into forlorn and helpless individuals with the word "exile" stamped across your foreheads.

Before it's too late for you and your family, realize that Neda's voice is here to stay.

Ms. Vahidmanesh is an Iranian human-rights activist living in Washington, D.C.

Target: Hawaii - Missile defenses for Oahu, but cuts for the rest of us

Target: Hawaii. WSJ Editorial
Missile defenses for Oahu, but cuts for the rest of us.
The Wall Street Journal, Jun 29, 2009, p A12

The Pentagon recently announced that it is repositioning ground-to-air radar and missile defenses near Hawaii in case North Korea decides to launch another long-range missile, this time toward the Aloha State. So at least 1.3 million Hawaiians will benefit from defenses that many officials in the current Administration didn't even want to build.

But what about the rest of us? It's an odd time to be cutting missile defense, as the Obama Administration is doing in its 2010 budget -- by $1.2 billion to $1.6 billion, depending on how you calculate it. Programs to defend the U.S. homeland are being pared, while those that protect our soldiers or allies are being expanded after the Pentagon decided that the near-term threat is from short-range missiles. But as North Korea and Iran show, rogue regimes aren't far from having missiles that could reach the U.S.

In case you're not convinced about the threat, consider this exchange between Arizona Republican Trent Franks and Lieutenant-General Patrick O'Reilly, head of the Missile Defense Agency, in a hearing last month at the House Subcommittee on Strategic Forces:

Rep. Franks: "Do you believe that the threat from long-range missiles has increased or decreased in the last six months as it relates to the homeland here?"

Gen. O'Reilly: "Sir, I believe it has increased significantly. . . . The demonstration of capability of the Iranian ability to put a sat[ellite] into orbit, albeit small, shows that they are progressing in that technology. Additionally, the Iranians yesterday demonstrated a solid rocket motor test which is . . . disconcerting. Third, the North Koreans demonstrated . . . that they are improving in their capacity and we are very concerned about that."

This 2006 image provided by the U.S. Navy shows the heavy lift vessel MV Blue Marlin entering Pearl Harbor, Hawaii with the Sea Based X-Band Radar (SBX) aboard. Among the losers in the Administration's budget are the additional interceptors planned for the ground-based program in Alaska. The number will be limited to 30 interceptor missiles located at Fort Greely in Alaska and Vandenberg Air Force Base in California. Also on the chopping block is the Airborne Laser, which is designed to shoot down incoming missiles in the boost phase, before they can release decoys and at a point in the missile trajectory when it would fall back down on enemy territory. This highly promising technology will be starved.

The Administration may also kill the plan for a missile defense system in Europe. The proposed system, which would place interceptors in Poland and a radar in the Czech Republic, is intended to protect Europe against Iranian missiles. As is often forgotten, it would also protect the U.S., by providing an additional layer of defense for the Eastern seaboard, which is a long way from the Alaskan defenses.

The Administration is reconsidering the European site due to opposition from Moscow, which says -- though it knows it's false -- that the European system is intended to defeat Russian missiles. In advance of Barack Obama's visit to Russia next week, there's talk of "cooperation" on missile defense, possibly by adding radars in southern Russia and Azerbaijan. From a geographical perspective, neither location would add much as an Iranian missile headed for Western Europe or the U.S. would be on the periphery of the radars' vision, at best.

Meanwhile, Moscow says that unless the Administration backtracks on missile defense, it won't agree to mutual reductions in nuclear arsenals under the START Treaty, which expires this year. Mr. Obama is eager to negotiate arms cuts. But it would be a mistake to tie decisions on missile defense to anything except what is best for the security of the U.S. and its allies.

In Congress, bipartisan efforts are afoot to restore some of the funding for missile defense. But even if more money is forthcoming, the bigger problem is the new U.S. mindset. The Obama Administration is staffed with Cold War-era arms controllers who still believe missile defense is destabilizing -- except, apparently, now that they need it for Hawaii. They also reject the essential next phase, which is to make better use of space-based systems.

Missile defense is no techno-fantasy. The U.S. has made major strides since President Bush exercised the option to withdraw from the ABM Treaty in 2001. If North Korea launches a missile toward Hawaii, the best demonstration of that ability -- and of U.S. resolve -- would be to shoot it down.

The less credible the U.S. deterrent, the more likely other states are to seek weapons

Our Decaying Nuclear Deterrent. By JON KYL and RICHARD PERLE
The less credible the U.S. deterrent, the more likely other states are to seek weapons.
The Wall Street Journal, Jun 29, 2009, p A13

A bipartisan congressional commission, headed by some of our most experienced national security practitioners, recently concluded that a nuclear deterrent is essential to our defense for the foreseeable future. It also recommended that urgent measures be taken to keep that deterrent safe and effective.

Unfortunately, President Barack Obama has adopted an agenda that runs counter to the commission's recommendations.

Consider the president's declaration, in a major speech this spring in Prague, of "America's commitment to seek the peace and security of a world without nuclear weapons." Will such a world be peaceful and secure? It is far from self-evident.

In the nuclear-free world that ended in 1945 there was neither peace nor security. Since then there have indeed been many wars but none has come close to the carnage that occurred regularly before the development of nuclear weapons, and none has pitted nuclear powers against each other.

Consider also that while the administration accepts the urgency of halting the spread of nuclear weapons, the policies it has embraced to reach that goal are likely to make matters worse.
Thus, in his Prague speech, Mr. Obama announced that the U.S. would "immediately and aggressively" pursue ratification of the comprehensive ban on the testing of nuclear weapons. The administration believes, without evidence, that ratification of the test-ban treaty will discourage other countries from developing nuclear weapons.

Which countries does it have in mind? Iran? North Korea? Syria? Countries alarmed by the nuclear ambitions of their enemies? Allies who may one day lose confidence in our nuclear umbrella?

There are good reasons why the test-ban treaty has not been ratified. The attempt to do so in 1999 failed in the Senate, mostly out of concerns about verification -- it simply is not verifiable. It also failed because of an understandable reluctance on the part of the U.S. Senate to forgo forever a test program that could in the future be of critical importance for our defense and the defense of our allies.

Robert Gates, who is now Mr. Obama's own secretary of defense, warned in a speech last October that in the absence of a nuclear modernization program, even the most modest of which Congress has repeatedly declined to fund, "[a]t a certain point, it will become impossible to keep extending the life of our arsenal, especially in light of our testing moratorium." Suppose future problems in our nuclear arsenal emerge that cannot be solved without testing? Would our predicament discourage nuclear proliferation -- or stimulate it?

For the foreseeable future, the U.S. and many of our allies rely on our nuclear deterrent. And as long as the U.S. possesses nuclear weapons, they must be -- as Mr. Obama recognized in Prague -- "safe, secure and effective." Yet his proposed 2010 budget fails to take the necessary steps to do that.

Those steps have been studied extensively by the Perry-Schlesinger Commission (named for co-chairmen William Perry, secretary of defense under President Bill Clinton, and James R. Schlesinger, secretary of defense under Presidents Richard Nixon and Gerald Ford). Its consensus report, released in May, makes numerous recommendations to increase the funding for, and improve the effectiveness of, the deteriorating nuclear weapons laboratory complex (e.g., the Los Alamos facility in New Mexico, the Pantex plant in Texas, and the dangerously neglected Y-12 plant in Tennessee) that has become the soft underbelly of our deterrent force.

The commission also assessed the nuclear weapons infrastructure that is essential to a safe, secure and effective deterrent and declared it "in serious need of transformation." It looked at our laboratory-based scientific and technical expertise and concluded that "the intellectual infrastructure" is in "serious trouble." A major cause is woefully inadequate funding. The commission rightly argued that we must "exercise the full range of laboratory skills, including nuclear weapon design skills . . . Skills that are not exercised will atrophy." The president and the Congress must heed these recommendations.

There are some who believe that failing to invest adequately in our nuclear deterrent will move us closer to a nuclear free world. In fact, blocking crucial modernization means unilateral disarmament by unilateral obsolescence. This unilateral disarmament will only encourage nuclear proliferation, since our allies will see the danger and our adversaries the opportunity.

By neglecting -- and in some cases even opposing -- essential modernization programs, arms-control proponents are actually undermining the prospect for further reductions of the U.S. nuclear arsenal. As our nuclear weapons stockpile ages and concern about its reliability increases, we will have to compensate by retaining more nuclear weapons than would otherwise be the case. This reality will necessarily influence future arms-control negotiations, beginning with the upcoming Strategic Arms Reduction Treaty follow-on.

For these negotiations, the Russians are insisting on a false linkage between nuclear weapons and missile defenses. They are demanding that we abandon defenses against North Korean or Iranian missiles as a condition for mutual reductions in American and Russian strategic forces. As the president cuts the budget for missile defense and cedes ground to the Russians on our planned defense sites in Poland and the Czech Republic, we may end up abandoning a needed defense of the U.S. and our European allies from the looming Iranian threat.

There is a fashionable notion that if only we and the Russians reduced our nuclear forces, other nations would reduce their existing arsenals or abandon plans to acquire nuclear weapons altogether. This idea, an article of faith of the "soft power" approach to halting nuclear proliferation, assumes that the nuclear ambitions of Kim Jong Il or Mahmoud Ahmadinejad would be curtailed or abandoned in response to reductions in the American and Russian deterrent forces -- or that India, Pakistan or China would respond with reductions of their own.

This is dangerous, wishful thinking. If we were to approach zero nuclear weapons today, others would almost certainly try even harder to catapult to superpower status by acquiring a bomb or two. A robust American nuclear force is an essential discouragement to nuclear proliferators; a weak or uncertain force just the opposite.

George Shultz, William Perry, Henry Kissinger and Sam Nunn have, on this page, endorsed the distant goal -- about which we remain skeptical -- of a nuclear-free world. But none of them argues for getting there by neglecting our present nuclear deterrent. The Perry-Schlesinger Commission has provided a path for protecting that deterrent. Congress and the president should follow it, without delay.

Mr. Kyl is a Republican senator from Arizona. Mr. Perle, a fellow at the American Enterprise Institute, was assistant secretary of defense in the Reagan administration.

Honduras Defends Its Democracy - Fidel Castro and Hillary Clinton object

Honduras Defends Its Democracy. By MARY ANASTASIA O'GRADY
Fidel Castro and Hillary Clinton object.
The Wall Street Journal, Jun 29, 2009, p A11

Hugo Chávez's coalition-building efforts suffered a setback yesterday when the Honduran military sent its president packing for abusing the nation's constitution.

It seems that President Mel Zelaya miscalculated when he tried to emulate the success of his good friend Hugo in reshaping the Honduran Constitution to his liking.

But Honduras is not out of the Venezuelan woods yet. Yesterday the Central American country was being pressured to restore the authoritarian Mr. Zelaya by the likes of Fidel Castro, Daniel Ortega, Hillary Clinton and, of course, Hugo himself. The Organization of American States, having ignored Mr. Zelaya's abuses, also wants him back in power. It will be a miracle if Honduran patriots can hold their ground.

That Mr. Zelaya acted as if he were above the law, there is no doubt. While Honduran law allows for a constitutional rewrite, the power to open that door does not lie with the president. A constituent assembly can only be called through a national referendum approved by its Congress.

But Mr. Zelaya declared the vote on his own and had Mr. Chávez ship him the necessary ballots from Venezuela. The Supreme Court ruled his referendum unconstitutional, and it instructed the military not to carry out the logistics of the vote as it normally would do.

The top military commander, Gen. Romeo Vásquez Velásquez, told the president that he would have to comply. Mr. Zelaya promptly fired him. The Supreme Court ordered him reinstated. Mr. Zelaya refused.

Calculating that some critical mass of Hondurans would take his side, the president decided he would run the referendum himself. So on Thursday he led a mob that broke into the military installation where the ballots from Venezuela were being stored and then had his supporters distribute them in defiance of the Supreme Court's order.

The attorney general had already made clear that the referendum was illegal, and he further announced that he would prosecute anyone involved in carrying it out. Yesterday, Mr. Zelaya was arrested by the military and is now in exile in Costa Rica.

It remains to be seen what Mr. Zelaya's next move will be. It's not surprising that chavistas throughout the region are claiming that he was victim of a military coup. They want to hide the fact that the military was acting on a court order to defend the rule of law and the constitution, and that the Congress asserted itself for that purpose, too.

Mrs. Clinton has piled on as well. Yesterday she accused Honduras of violating "the precepts of the Interamerican Democratic Charter" and said it "should be condemned by all." Fidel Castro did just that. Mr. Chávez pledged to overthrow the new government.

Honduras is fighting back by strictly following the constitution. The Honduran Congress met in emergency session yesterday and designated its president as the interim executive as stipulated in Honduran law. It also said that presidential elections set for November will go forward. The Supreme Court later said that the military acted on its orders. It also said that when Mr. Zelaya realized that he was going to be prosecuted for his illegal behavior, he agreed to an offer to resign in exchange for safe passage out of the country. Mr. Zelaya denies it.

Many Hondurans are going to be celebrating Mr. Zelaya's foreign excursion. Street protests against his heavy-handed tactics had already begun last week. On Friday a large number of military reservists took their turn. "We won't go backwards," one sign said. "We want to live in peace, freedom and development."

Besides opposition from the Congress, the Supreme Court, the electoral tribunal and the attorney general, the president had also become persona non grata with the Catholic Church and numerous evangelical church leaders. On Thursday evening his own party in Congress sponsored a resolution to investigate whether he is mentally unfit to remain in office.
For Hondurans who still remember military dictatorship, Mr. Zelaya also has another strike against him: He keeps rotten company. Earlier this month he hosted an OAS general assembly and led the effort, along side OAS Secretary General José Miguel Insulza, to bring Cuba back into the supposedly democratic organization.

The OAS response is no surprise. Former Argentine Ambassador to the U.N. Emilio Cárdenas told me on Saturday that he was concerned that "the OAS under Insulza has not taken seriously the so-called 'democratic charter.' It seems to believe that only military 'coups' can challenge democracy. The truth is that democracy can be challenged from within, as the experiences of Venezuela, Bolivia, Ecuador, Nicaragua, and now Honduras, prove." A less-kind interpretation of Mr. Insulza's judgment is that he doesn't mind the Chávez-style coup.

The struggle against chavismo has never been about left-right politics. It is about defending the independence of institutions that keep presidents from becoming dictators. This crisis clearly delineates the problem. In failing to come to the aid of checks and balances, Mrs. Clinton and Mr. Insulza expose their true colors.

Saturday, June 27, 2009

U.S. Department of State Releases Fourth Annual Report to Congress on Water and Sanitation Strategy in Developing Countries

U.S. Department of State Releases Fourth Annual Report to Congress on Water and Sanitation Strategy in Developing Countries
US State Dept, Washington, DC, June 27, 2009

On June 26, 2009, the U.S. Department of State released the 2009 Senator Paul Simon Water for the Poor Act of 2005 Report to Congress (PDF) describing U.S. Government efforts to expand access to safe drinking water and sanitation, improve water resources management and increase water productivity in developing countries.

This report is required by Section 6 of the Senator Paul Simon Water for the Poor Act of 2005. The Act makes the provision of safe water and sanitation services in developing countries a component of U.S. foreign assistance. It requires the Secretary of State, in consultation with USAID, to develop and implement a strategy to support this goal within the context of sound water resource management. This is the Fourth Report to Congress.

In FY 2008, the United States obligated more than $1 billion for water- and sanitation-related activities in developing countries (excluding Iraq). Of that amount, over $820 million was obligated in 95 countries worldwide to improve access to safe drinking water and sanitation and promote hygiene. Investments in Sub-Saharan Africa rose to $646 million in FY 2008.

The United States remains one of the largest bilateral donors to water and sanitation activities in developing countries, accounting for 10 percent of all official assistance to the water and sanitation sector in 2006–2007. The United States also remains one of the largest donors to several multilateral development banks and intergovernmental organizations, which are significant contributors to water and sanitation projects. More important are the results we are achieving. As a result of USAID investments, more than 7.7 million people received improved access to safe drinking water and more than 6.2 million received improved access to sanitation. Of these, more than 4.6 million received first-time access to an improved drinking water source and more than 2.1 million to improved sanitation.

This year’s report includes – for the first time – country specific plans for achieving U.S. goals and objectives along with measurable indicators to track progress and report results. The report also highlights the work of U.S. agencies and departments to build partnerships, improve science and technology capacity, and increase the political will among developing and donor countries to address water and sanitation challenges.

We believe these are significant steps that represent a growing commitment by the United States to make water a core element of our foreign assistance. This and previous reports in response to the Act can be found at

PRN: 2009/650

The Washington Post Discovers the Problems with Energy Subsidies

The Washington Post Discovers the Problems with Energy Subsidies.
Institute for Energy Research, Jun 24, 2009

From the Washington Post editors:

"Uncertainties abound: What if the costs of clean coal don’t come down enough to make it economical relative to other measures? If clean coal turns out to be less than its advocates envision, can Congress ever work up the political will to kill the subsidy program? Subsidies are set to phase out after 10 years of paying for operating costs, but won’t powerful coal-state lawmakers fight to keep them going? And even if it does work, won’t members of Congress insist that big carbon repositories not be located in their districts?"

Friday, June 26, 2009

Obama, the Neocons and Iran

Obama, the Neocons and Iran. By Robert McFarlane
The president's new foreign policy will be judged on this crisis.
WSJ, Jun 26, 2009

Thursday, June 25, 2009

The Dangers of Fannie Mae Health Care - A public plan would have certain advantages. That's precisely the problem

The Dangers of Fannie Mae Health Care. By JOHN E. CALFEE
A public plan would have certain advantages. That's precisely the problem.
The Wall Street Journal, Jun 26, 2009, p A15

President Obama and most congressional Democrats say they want to preserve private health insurance. They also want to add a "public plan" to compete with private insurance plans. Their basic argument is that a public plan would offer needed competition, save money through low administrative costs and zero profits, realize greater economies of scale, and be a superior negotiator of the prices of medical services and technology.

The first three arguments are bogus. The fourth argument is only half-bogus -- but the half that isn't reveals a great danger: If a public plan is inserted into private insurance markets, the American health-care system could rapidly evolve into a single-payer system, which would have devastating effects on R&D for new medical technology.

The first argument, that we need a public plan to spur competition, just isn't plausible. Hundreds of health insurance plans already exist, and employer benefit managers can choose among numerous alternatives. There is no lack of firms willing to compete to provide health insurance.

As to the second argument, what is to be saved by avoiding profits? Nonprofit health insurance firms are common, including many of the Blue Cross-Blue Shield plans. Nonprofit status has not proved to be a reliable source of efficiency and cost-saving. The addition of new nonprofit cooperatives and the like -- as a bipartisan group of senators has proposed -- would make little difference, unless the new plans are given the power to set prices and take on extra risk supported by government subsidies.

Would a public plan have lower administrative costs? Well, how often are public enterprises run more efficiently than private ones? Why did practically all economically advanced nations dismantle their public airlines, phone companies, and so on, invariably obtaining lower administrative costs and consumer prices?

As Stanford University health economist Victor Fuchs has pointed out, what "insurance" firms actually sell to large employers -- which account for the single largest segment of the entire health-care market -- is usually administrative services, not actual insurance. (Large companies are not insured; they pay benefits directly.) There is no reason to expect a Medicare-like public plan to match the administrative efficiency of Aetna, Blue Cross-Blue Shield, Cigna, UnitedHealth Group, and WellPoint. Medicare doesn't even try. It outsources most administrative services to the private sector.

Turning to public plans like Medicare and Medicaid for more efficient administration is a fool's errand.

What about economies of scale? Aetna currently serves about 18 million subscribers, UnitedHealth Care serves between 25 million and 30 million, and WellPoint more than 35 million. That is more than is served by the health-care monopoly of Canada (population 33.6 million), and more than the entire health-care systems of most European nations. Once a plan reaches a few million subscribers, there may not be a lot of economies of scale left that can enable public plans to provide lower prices.

Finally, there is the crucial task of negotiating prices for doctors, hospitals, clinics, drugs, devices and thousands of other items essential to modern health care. Here, there are really two arguments for a public plan. The first is about bargaining skill and the firm size, basic ingredients in any negotiating environment.

There is no reason to think the administrators of a public plan will possess skills superior to those honed by private plan personnel during years of negotiations under the pressure of competition. Nor is there any reason to think that mere size would help.

True enough, relatively small European nations routinely obtain better drug prices than are achieved by mammoth American pharmacy benefit managers such as Express Scripts (50 million patients) and Medco (60 million patients), each of whose numbers exceed the entire citizenry of all but the largest European nations. Even sparsely populated New Zealand (population four million) gets better prices than the giant drug-price negotiators in the American private market.

Their success is due to what economists call "monopsony power." Monopsony occurs when a single buyer negotiates prices with several competing sellers (as opposed to monopoly, where there are many buyers but one seller).

Thus, if you want to sell your branded drug in New Zealand, your prices are negotiated with PharMac, a branch of the government. Much the same is true when selling to Canada, Germany, the Netherlands, and essentially the entire developed world save the United States. The negotiating power of these government entities results from monopsony, not superior skill.

For example, the various sellers of cholesterol drugs (Lipitor, Crestor, and so on) have to compete with one another while they all face a single government negotiator. If one seller balks at government prices, it leaves competitors to pick up more sales. The same is true for most other drug classes and most medical devices. This uneven battle ensures that negotiated prices will be well below those in a competitive market.

But here is where the huge risks of creating a "public plan" to compete with private insurance firms come into focus. Foremost among these risks are the effects of monopsony power in the purchase of medical technology.

The U.S. is unique because it alone is the source of half of world-wide profits that provide the payoff for the complex, lengthy, and expensive process of developing new treatments. When other nations construct their health-care systems, they ignore the impact of their pricing policies on R&D incentives. As the dominant R&D funding wellhead, we do not have that option.

Competitive markets have generated the prices and the profits necessary to induce a steady flow of medical innovation in this country. A public plan option would tend to dismantle that system. The people in charge will not know how to set reimbursement levels to motivate reasonable R&D efforts, and there is no reason to expect them to try. In public plans, the tried-and-true method is to push the prices of suppliers down until something gives -- too few doctors willing to take on Medicare patients, for example -- and then to ease up. That is a destructive approach to medical technology R&D.

Who knows what drugs will not be developed if reimbursement levels for a new multiple-sclerosis treatment are too measly? In virtually every advanced economy but our own, pricing authorities simply make sure prices are high enough so that existing drugs continue to be made available. We can expect a public plan here to do the same. The inevitable result is to drastically under-incentivize R&D.

This problem would not matter if a public plan remained small -- but it would likely grow into a monster. Monopsony negotiating power will generate lower prices, so many consumers will switch to a public plan. Employers eager to offload health-care costs will also dump unwilling employees into the public plan. That is the basis for the Lewin Group's much-cited prediction that a public plan would come to dominate any market in which it is allowed to compete.

Bargaining power, however, is far from the only potential source of below-market prices for public plans. In the home mortgage market, the public plans -- known as Fannie Mae and Freddie Mac -- were for years viewed by investors as less risky because they would be bailed out by the federal government if they took on too much risk. That translated into lower prices (the interest rates paid by borrowers), which eventually translated into extraordinary and unseemly growth, culminating in bankruptcy and a federal bailout.

The lesson for health insurance is clear. All insurance plans -- especially in health-care markets -- have to take on risk. Prudent planning, including the maintenance of reasonable financial reserves, is necessary. That increases costs. It would be all too easy for a public plan to gain a competitive advantage by taking on extra risk while keeping prices low because everyone would expect the federal government to take care of financial surprises down the road.

In sum, a public plan would possess formidable and perhaps overwhelming competitive advantages -- generated not by efficiency but by the artificial advantages of "public" status. This would have two disastrous consequences. The first will be to cause most Americans now covered by private insurance to move to public insurance -- one step away from single-payer health care. The second will be to undermine incentives to develop more of the immensely valuable medical technology that is central to all of health care.

Mr. Calfee is a resident scholar at the American Enterprise Institute.

The Albany-Trenton-Sacramento Disease

The Albany-Trenton-Sacramento Disease. WSJ Editorial
How three liberal states got into deep trouble with 'progressive' ideas.
The Wall Street Journal, Jun 2009, p A14

President Obama has bet the economy on his program to grow the government and finance it with a more progressive tax system. It's hard to miss the irony that he's pitching this change in Washington even as the same governance model is imploding in three of the largest American states where it has been dominant for years -- California, New Jersey and New York.

A decade ago all three states were among America's most prosperous. California was the unrivaled technology center of the globe. New York was its financial capital. New Jersey is the third wealthiest state in the nation after Connecticut and Massachusetts. All three are now suffering from devastating budget deficits as the bills for years of tax-and-spend governance come due.

These states have been models of "progressive" policies that are supposed to create wealth: high tax rates on the rich, lots of government "investments," heavy unionization and a large government role in health care.

Here's a rundown on the results:

Government spending as economic stimulus. State-local spending per capita is $12,505 in New York (second highest after Alaska), $10,136 per person in California (fourth) and $9,574 in New Jersey (seventh).

Has all this public sector "investment" translated into jobs? Not quite. California had the nation's third highest jobless rate in May (11.5%). New Jersey and New York had below average unemployment rates in May compared to the national average of 9.4%, but one reason is that so many discouraged workers have left those states. From 1998-2007, which included two booms on Wall Street, New York and New Jersey ranked 36th and 31st in job creation. From 2000 to 2007, the New Jersey Business & Industry Association calculates that nine out of 10 new Garden State jobs were in the government.

Soak the rich. Mr. Obama plans to pay for his government investments through higher tax rates on the top 1% and 2% of taxpayers. Our troika of liberal states are champions at soaking the rich. The state-local income tax burden, according to the Tax Foundation, is the highest in the nation in New York, second highest in California and sixth in New Jersey. New York City boasts the highest business tax rate, 17.6%, according to a study by the American Legislative Exchange Council. Seven of the 10 highest property tax counties in America are located in New Jersey.
Instead of balanced budgets, these high taxes have produced record red ink. California's deficit for 2010 is projected at $33.9 billion, New Jersey's $7 billion and New York's $17.9 billion, despite multiple tax increases this decade. The Manhattan Institute finds that three-quarters of the loss in revenues this year in Albany is a result of reduced income tax payments by rich people even though the state keeps raising taxes on high earners.

California's debt burden has multiplied so fast that it now has the worst bond rating of any state, and Governor Arnold Schwarzenegger and state legislators are pleading with Washington to command the other 49 states to pay off its IOUs. The interest rates on Golden State bonds have nearly tripled in the last two years.

Powerful unions. Mr. Obama believes union power is a ticket to the middle class. The middle class is getting creamed in all three of these "progressive" states, where organized labor is king. The unionized share of the workforce is 20% in California, 19% in New Jersey and 27% in New York compared to 13% across the country. All three are non-right-to-work states, have super-minimum wage requirements and provide among the nation's most generous public-employee pensions.

Workers in these paradises are indeed uniting -- by leaving. New York ranks first, California second and New Jersey third in moving vans leaving the state. A study by the National Institute for Labor Relations Research found that over the past decade these and other high-union states (mostly in the Northeast) had one-third the job growth of states with low union penetration.

Government health care. New York, New Jersey and California are among the leading states in government spending on and intervention into the medical market. A 2008 study by the Pacific Research Institute ranked the states on the basis of government regulation of health care and found that New York is most regulated, while New Jersey ranks sixth and California seventh. "New York," the report declares, "suffers from government health programs that are out of control, a grossly overregulated private insurance market and almost completely uncompetitive provider markets."

Have government controls and Medicaid expansions ("the public option") lowered costs? Here is what the American Health Insurance Plans found. For family coverage annual premiums in 2006-07, the national median cost was roughly $5,300; in California it was $5,884, in New Jersey $10,398, and in New York $12,254. New York's coverage mandates cause families to pay more than twice what they do in other states for insurance.

As a result, California and New York have more than one-third of their residents uninsured or in Medicaid -- much higher than the national average of 25%. More government involvement in health care in California, New Jersey and New York has raised costs and often reduced private coverage. That's hardly a model for the nation.

* * *
So goes the real-life experience of progressive governance, with heavy tax burdens financing huge welfare states, and state capitals dominated by public-employee unions. Formerly rich states, they are now known for job losses, booming deficits and debt, wage stagnation, out-migration and laughing-stock legislatures. At least Americans have the ability to flee these ill-governed states for places that still welcome wealth creators. The debate in Washington now is whether to spread this antigrowth model across the entire country.

Tax Credits, Not Vouchers, Are Keeping School Choice a Viable Option

Tax Credits, Not Vouchers, Are Keeping School Choice a Viable Option. By Adam B. Schaeffer Culpeper Star-Exponent on June 25, 2009.

Many school choice supporters are discouraged after having suffered a series of setbacks on the voucher front, ranging from the loss of Utah's nascent voucher program last year to the recent death sentence handed to the D.C. Opportunity Scholarship program. A rambling and inaccurate article in the normally supportive City Journal got the chorus of naysayers rolling more than a year ago with the cry "school choice isn't enough."

The bright spot for vouchers in recent years has been the success of special-needs programs. Yet the Arizona Supreme Court ruled recently that school vouchers for disabled and foster children violate the state constitution, which forbids public money from aiding private schools.

Naturally, the pessimists and opponents of choice are forecasting the death of the voucher movement. They're wrong, because there never was a voucher movement to begin with. It has always been movement for educational freedom, and it is still going strong.

Over the past several years, there has been a gradual shift in focus from vouchers to an alternative mechanism: education tax credits. Illinois, Minnesota and Iowa already provide families with tax credits to offset the cost of independent schooling for their own kids. Florida, Pennsylvania, Arizona and three other states provide tax credits for donations to nonprofit scholarship organizations that subsidize tuition for lower-income families.

The fundamental difference between these programs and vouchers is that while vouchers use public money, credits do not. Credits are targeted tax cuts, and no public dollars are spent with them. That single distinction is the reason Arizona's Supreme Court struck down two voucher programs in March, but upheld the state's scholarship donation tax credit program in 1999.

In fact, tax credit programs have withstood every lawsuit raised against them. Since 1995, seven tax credit programs have been passed and all are still in operation. Four voucher programs (in Florida, Colorado and now two in Arizona) have been struck down by the courts in that same time.

This does not mean that credits are invulnerable. Arizona credits just received a temporary setback from the 9th Circuit Court of Appeals that is sure to be reversed by the U.S. Supreme Court, as is the case with so many other 9th Circuit Court decisions. Vouchers have certainly enjoyed some important legal victories, but vouchers' use of government funds opens them up for attacks to which credits are far less susceptible.

Credit programs have not simply survived, they have thrived. Scholarship donation programs now support more than three times as many low-income children as do voucher programs, though they are generally of more recent vintage. Direct K-12 education tax credits are benefiting hundreds of thousands of families, albeit in more modest dollar amounts.

However, these are not the only reasons that supporters of educational freedom have increasingly begun to favor credits over vouchers. Credits better preserve the autonomy of independent schools, and they extend choice and accountability to taxpayers as well as parents. Taxpayers get to choose to participate in credit programs as well as pick the recipient organization for their funds if they do. In addition, credits command increasingly bipartisan political support.

So while advocates of educational freedom regret that vouchers have been under heavy fire in many states, tax credit programs can be created or expanded to accommodate the children formerly served by vouchers.

Adam B. Schaeffer is a policy analyst at the Cato Institute's Center for Educational Freedom and an adjunct senior fellow with the Education Reform Initiative at the Virginia Institute for Public Policy.

WSJ Editorial Page: Democrats off-loading economics to pass climate change bill

The Cap and Tax Fiction. WSJ Editorial
Democrats off-loading economics to pass climate change bill.
The Wall Street Journal, page A14

House Speaker Nancy Pelosi has put cap-and-trade legislation on a forced march through the House, and the bill may get a full vote as early as Friday. It looks as if the Democrats will have to destroy the discipline of economics to get it done.

Despite House Energy and Commerce Chairman Henry Waxman's many payoffs to Members, rural and Blue Dog Democrats remain wary of voting for a bill that will impose crushing costs on their home-district businesses and consumers. The leadership's solution to this problem is to simply claim the bill defies the laws of economics.

Their gambit got a boost this week, when the Congressional Budget Office did an analysis of what has come to be known as the Waxman-Markey bill. According to the CBO, the climate legislation would cost the average household only $175 a year by 2020. Edward Markey, Mr. Waxman's co-author, instantly set to crowing that the cost of upending the entire energy economy would be no more than a postage stamp a day for the average household. Amazing. A closer look at the CBO analysis finds that it contains so many caveats as to render it useless.

For starters, the CBO estimate is a one-year snapshot of taxes that will extend to infinity. Under a cap-and-trade system, government sets a cap on the total amount of carbon that can be emitted nationally; companies then buy or sell permits to emit CO2. The cap gets cranked down over time to reduce total carbon emissions.

To get support for his bill, Mr. Waxman was forced to water down the cap in early years to please rural Democrats, and then severely ratchet it up in later years to please liberal Democrats. The CBO's analysis looks solely at the year 2020, before most of the tough restrictions kick in. As the cap is tightened and companies are stripped of initial opportunities to "offset" their emissions, the price of permits will skyrocket beyond the CBO estimate of $28 per ton of carbon. The corporate costs of buying these expensive permits will be passed to consumers.

The biggest doozy in the CBO analysis was its extraordinary decision to look only at the day-to-day costs of operating a trading program, rather than the wider consequences energy restriction would have on the economy. The CBO acknowledges this in a footnote: "The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap."

The hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.

When the Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the economy with and without the carbon tax. Under this more comprehensive scenario, it found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035.

Note also that the CBO analysis is an average for the country as a whole. It doesn't take into account the fact that certain regions and populations will be more severely hit than others -- manufacturing states more than service states; coal producing states more than states that rely on hydro or natural gas. Low-income Americans, who devote more of their disposable income to energy, have more to lose than high-income families.

Even as Democrats have promised that this cap-and-trade legislation won't pinch wallets, behind the scenes they've acknowledged the energy price tsunami that is coming. During the brief few days in which the bill was debated in the House Energy Committee, Republicans offered three amendments: one to suspend the program if gas hit $5 a gallon; one to suspend the program if electricity prices rose 10% over 2009; and one to suspend the program if unemployment rates hit 15%. Democrats defeated all of them.

The reality is that cost estimates for climate legislation are as unreliable as the models predicting climate change. What comes out of the computer is a function of what politicians type in. A better indicator might be what other countries are already experiencing. Britain's Taxpayer Alliance estimates the average family there is paying nearly $1,300 a year in green taxes for carbon-cutting programs in effect only a few years.

Americans should know that those Members who vote for this climate bill are voting for what is likely to be the biggest tax in American history. Even Democrats can't repeal that reality.

About the Settlements: The U.S. and Israel reached a clear understanding about natural growth

Hillary Is Wrong About the Settlements. By ELLIOTT ABRAMS
The U.S. and Israel reached a clear understanding about natural growth.
The Wall Street Journal, June 25, 2009, p A15

Despite fervent denials by Obama administration officials, there were indeed agreements between Israel and the United States regarding the growth of Israeli settlements on the West Bank. As the Obama administration has made the settlements issue a major bone of contention between Israel and the U.S., it is necessary that we review the recent history.

In the spring of 2003, U.S. officials (including me) held wide-ranging discussions with then Prime Minister Ariel Sharon in Jerusalem. The "Roadmap for Peace" between Israel and the Palestinians had been written. President George W. Bush had endorsed Palestinian statehood, but only if the Palestinians eliminated terror. He had broken with Yasser Arafat, but Arafat still ruled in the Palestinian territories. Israel had defeated the intifada, so what was next?

We asked Mr. Sharon about freezing the West Bank settlements. I recall him asking, by way of reply, what did that mean for the settlers? They live there, he said, they serve in elite army units, and they marry. Should he tell them to have no more children, or move?

We discussed some approaches: Could he agree there would be no additional settlements? New construction only inside settlements, without expanding them physically? Could he agree there would be no additional land taken for settlements?

As we talked several principles emerged. The father of the settlements now agreed that limits must be placed on the settlements; more fundamentally, the old foe of the Palestinians could -- under certain conditions -- now agree to Palestinian statehood.

In June 2003, Mr. Sharon stood alongside Mr. Bush, King Abdullah II of Jordan, and Palestinian Prime Minister Mahmoud Abbas at Aqaba, Jordan, and endorsed Palestinian statehood publicly: "It is in Israel's interest not to govern the Palestinians but for the Palestinians to govern themselves in their own state. A democratic Palestinian state fully at peace with Israel will promote the long-term security and well-being of Israel as a Jewish state." At the end of that year he announced his intention to pull out of the Gaza Strip.

The U.S. government supported all this, but asked Mr. Sharon for two more things. First, that he remove some West Bank settlements; we wanted Israel to show that removing them was not impossible. Second, we wanted him to pull out of Gaza totally -- including every single settlement and the "Philadelphi Strip" separating Gaza from Egypt, even though holding on to this strip would have prevented the smuggling of weapons to Hamas that was feared and has now come to pass. Mr. Sharon agreed on both counts.

These decisions were political dynamite, as Mr. Sharon had long predicted to us. In May 2004, his Likud Party rejected his plan in a referendum, handing him a resounding political defeat. In June, the Cabinet approved the withdrawal from Gaza, but only after Mr. Sharon fired two ministers and allowed two others to resign. His majority in the Knesset was now shaky.

After completing the Gaza withdrawal in August 2005, he called in November for a dissolution of the Knesset and for early elections. He also said he would leave Likud to form a new centrist party. The political and personal strain was very great. Four weeks later he suffered the first of two strokes that have left him in a coma.

Throughout, the Bush administration gave Mr. Sharon full support for his actions against terror and on final status issues. On April 14, 2004, Mr. Bush handed Mr. Sharon a letter saying that there would be no "right of return" for Palestinian refugees. Instead, the president said, "a solution to the Palestinian refugee issue as part of any final status agreement will need to be found through the establishment of a Palestinian state, and the settling of Palestinian refugees there, rather than in Israel."

On the major settlement blocs, Mr. Bush said, "In light of new realities on the ground, including already existing major Israeli populations centers, it is unrealistic to expect that the outcome of final status negotiations will be a full and complete return to the armistice lines of 1949." Several previous administrations had declared all Israeli settlements beyond the "1967 borders" to be illegal. Here Mr. Bush dropped such language, referring to the 1967 borders -- correctly -- as merely the lines where the fighting stopped in 1949, and saying that in any realistic peace agreement Israel would be able to negotiate keeping those major settlements.

On settlements we also agreed on principles that would permit some continuing growth. Mr. Sharon stated these clearly in a major policy speech in December 2003: "Israel will meet all its obligations with regard to construction in the settlements. There will be no construction beyond the existing construction line, no expropriation of land for construction, no special economic incentives and no construction of new settlements."

Ariel Sharon did not invent those four principles. They emerged from discussions with American officials and were discussed by Messrs. Sharon and Bush at their Aqaba meeting in June 2003.

They were not secret, either. Four days after the president's letter, Mr. Sharon's Chief of Staff Dov Weissglas wrote to Secretary of State Condoleezza Rice that "I wish to reconfirm the following understanding, which had been reached between us: 1. Restrictions on settlement growth: within the agreed principles of settlement activities, an effort will be made in the next few days to have a better definition of the construction line of settlements in Judea & Samaria."

Stories in the press also made it clear that there were indeed "agreed principles." On Aug. 21, 2004 the New York Times reported that "the Bush administration . . . now supports construction of new apartments in areas already built up in some settlements, as long as the expansion does not extend outward."

In recent weeks, American officials have denied that any agreement on settlements existed. Secretary of State Hillary Clinton stated on June 17 that "in looking at the history of the Bush administration, there were no informal or oral enforceable agreements. That has been verified by the official record of the administration and by the personnel in the positions of responsibility."

These statements are incorrect. Not only were there agreements, but the prime minister of Israel relied on them in undertaking a wrenching political reorientation -- the dissolution of his government, the removal of every single Israeli citizen, settlement and military position in Gaza, and the removal of four small settlements in the West Bank. This was the first time Israel had ever removed settlements outside the context of a peace treaty, and it was a major step.

It is true that there was no U.S.-Israel "memorandum of understanding," which is presumably what Mrs. Clinton means when she suggests that the "official record of the administration" contains none. But she would do well to consult documents like the Weissglas letter, or the notes of the Aqaba meeting, before suggesting that there was no meeting of the minds.

Mrs. Clinton also said there were no "enforceable" agreements. This is a strange phrase. How exactly would Israel enforce any agreement against an American decision to renege on it? Take it to the International Court in The Hague?

Regardless of what Mrs. Clinton has said, there was a bargained-for exchange. Mr. Sharon was determined to break the deadlock, withdraw from Gaza, remove settlements -- and confront his former allies on Israel's right by abandoning the "Greater Israel" position to endorse Palestinian statehood and limits on settlement growth. He asked for our support and got it, including the agreement that we would not demand a total settlement freeze.

For reasons that remain unclear, the Obama administration has decided to abandon the understandings about settlements reached by the previous administration with the Israeli government. We may be abandoning the deal now, but we cannot rewrite history and make believe it did not exist.

Mr. Abrams, a senior fellow for Middle Eastern Studies at the Council on Foreign Relations, handled Middle East affairs at the National Security Council from 2001 to 2009.

Wednesday, June 24, 2009

Enron Accounting: CBO and EPA Cooked the Books on Cost Estimates for Waxman-Markey Energy Tax

Enron Accounting: CBO and EPA Cooked the Books on Cost Estimates for Waxman-Markey Energy Tax
IER, June 24, 2009

Later this week, the U.S. House will take up the Waxman-Markey global warming bill, the centerpiece of which is a cap and trade program that advocates argue will reduce U.S. greenhouse gas emissions. The bill features a remarkably aggressive timetable, one that would force businesses to cut emissions by 17% (relative to the 2005 baseline) by the year 2020, and by a cumulative 83% by 2050. On cue, “independent” agencies of the government such as CBO and EPA have announced cost estimates that grossly understate the burden Waxman-Markey will place on most U.S. households.

On June 19, the CBO announced that the cap-and trade program contained in Waxman-Markey would cost households an average of $175 in the year 2020 (measured in today’s dollars). On June 23, in an effort to reassert its green bona fides, the EPA came out with an even lower estimate of $80-$111 per household. But even a cursory examination of the methodologies involved in manufacturing those numbers reveals that even the higher CBO figure is far too optimistic, since it leads citizens to believe that energy prices will only go up modestly because of the new cap and trade program.

In fact, very little related to the consequences of Waxman-Markey can be characterized as “modest.” Households will pay far more than $175 per year due to cap and trade, notwithstanding CBO’s attempts to hide it. The EPA study is misleading in the same fashion, but here we focus on the CBO report which can be read by the layperson and states quite clearly how it comes up with its low cost estimate.

Rags to Riches: How the CBO Transforms a Stealth Tax Into a Phantom Tax Cut

There are several major flaws with the CBO approach, but perhaps the most outrageous example of sleight of hand is the CBO’s focus on after-tax income. Because Waxman-Markey will raise prices more than incomes, households will necessarily become poorer. This will push households into lower tax brackets—and thus have lower tax liabilities to the tune of roughly $8.7 billion. Normal people would consider this to be a downside of Waxman-Markey. CBO is not normal. It considers this $8.7 billion as an addition to total household income—money from heaven!—and goes about celebrating the effect of this policy without saying a thing about the cause.

After explaining that some government benefits are indexed to the Consumer Price Index, which means that federal spending will have to increase owing to Waxman-Markey’s energy price hikes, the CBO study points out the silver lining:

Because the federal income tax system is largely indexed to the consumer price index, an increase in consumer prices with no increase in nominal incomes would also reduce federal income taxes. That effect would increase households’ after-tax income but would also add to the federal deficit. In combination, the effect of price changes on the government’s indexed benefit payments and income tax receipts would convey an estimated $8.7 billion to households. (p. 7)

Beyond the absurdity of translating rising prices into a benefit for households—on the basis that poorer people pay less in taxes—the CBO’s treatment of income tax revenues is inconsistent with its treatment of carbon allowance auction receipts. The CBO study acknowledges that households will pay higher energy prices partly because businesses will “pass on” the cost of buying emission allowances. But CBO didn’t include this component as a net cost to households, because the government could spend the auction receipts and thus recycle some of the money back into households.

But if that’s how the CBO wants to do its accounting, then it can’t credit households with a fictitious $8.7 billion “tax cut.” As the quotation above points out, the falling income tax revenues will simply mean a larger budget deficit if the government doesn’t cut other spending. This extra borrowing by the federal government will push up interest rates and transfer $8.7 billion out of the private capital markets. Households will ultimately lose wealth (in the form of greater public debt) that exactly offsets their alleged gain from falling into lower tax brackets.

Impacts on the “Average” Household

The CBO study admits on page 1 that the greenhouse gas (GHG) emission schedule would raise prices for Americans:

This analysis examines the average cost per household that would result from implementing the GHG cap-and-trade program under H.R. 2454….Reducing emissions to the level required by the cap would be accomplished mainly by stemming demand for carbon-based energy by increasing its price…. Those higher prices, in turn, would reduce households’ purchasing power. (p.1)

However, the CBO’s reported annual cost estimate of $175 per household in the year 2020, does not refer to the tallying up of the price hikes acknowledged in the quotation above. The CBO reduces the “gross cost” by mixing in all of the financial benefits that will accrue to “households” from the cap and trade program:

At the same time, the distribution of emission allowances would improve households’ financial situation. The net financial impact of the program on households…would depend in large part on how many allowances were sold (versus given away), how the free allowances were allocated, and how any proceeds from selling allowances were used. That net impact would reflect both the added costs that households experienced because of higher prices and the share of the allowance value that they received in the form of benefit payments, rebates, tax decreases or credits, wages, and returns on their investments. (pp. 1-2)

The problem should be obvious: If the government spends auction revenues, or hands out “free” allowances that possess high market value, to fund alternative energy boondoggles, the CBO study will carefully chalk that money up as flowing back into the pockets of U.S. “households.”

The CBO’s logic makes sense from a certain point of view: A firm that makes solar panels is owned by shareholders who live in houses, right? So when that solar panel firm sees huge profits in the new scheme, the wealth showered on its owners will accrue to households. Even though all electricity consumers will be paying higher prices, the “average” hit will be mitigated to the extent that some of those consumers happen to be on the receiving end of the cap and trade gravy train.

The CBO’s reasoning may be appropriate in some applications, but it is grossly misleading in the current political context. Citizens may come away from the report believing that their annual expenses will rise only $175 because of Waxman-Markey. The real figure is much higher.

The CBO’s Gross Cost

In contrast to the net cost of “$22 billion—or about $175 per household” (p.2), what does the CBO say about the gross cost, meaning the actual reduction in household purchasing power? In other words, how much of a hit will households take in the form of higher prices and lower wages, before the CBO adds back in all the pork spending and other goodies? They tell us on page 4:

According to CBO’s estimates, the gross cost of complying with the GHG cap-and-trade program delineated in H.R. 2454 would be about $110 billion in 2020…or about $890 per household…(p. 4)

We see that the number reported in the press—“$175 per household by 2020”—represents only 20 percent of the CBO’s projected increase in household costs. The other 80 percent of the gross price hikes is transferred away from unlucky consumers and into the pockets of politically-connected beneficiaries. Since this wealth is redistributed, it’s still in “households” (somewhere) and so the CBO doesn’t report the gross figure, which is five times higher than the number bouncing around the press. But that’s not the end of it. CBO didn’t score anything but the “cap and trade” part of the bill…not the renewable energy mandate, not the additional costs of complying with the bureaucratic nirvana of new standards for energy efficiency of lighting for home art and “personal spas,” etc. In some parts of the country, the “You Must Obey” renewable energy mandate could force significantly higher costs on consumers and businesses.

Winners and Losers

The CBO study acknowledges that its estimates are average figures, and that the impacts on particular sectors will be uneven:

The measure of costs described above reflects the costs that would occur once the economy had adjusted to the change in the relative prices of goods and services. It does not include the costs that some current investors and workers in sectors of the economy that produce energy and energy-intensive goods and services would incur as the economy moved away from the use of fossil fuels….Stock losses would tend to be widely dispersed among investors because shareholders typically diversify their portfolios. In contrast, the costs of unemployment would probably be concentrated among relatively few households and, by extension, their communities. (p.8)

In addition to the negative impact on workers in energy-intensive sectors, the Waxman-Markey bill would also hurt energy consumers to different degrees, depending on which region of the country they lived in. The Southern and Midwestern states are much more reliant on coal and other fossil fuels for their electricity production. Consumers in these regions will see their electricity rates jump higher than in other areas of the country.


Make no mistake: Waxman-Markey is a tax that, to work properly, must find a way to drive up energy prices. CBO bends over backwards to try to disguise this fact, but even they admit Waxman-Markey will increase energy prices.

The CBO’s gross cost estimate of $890 per household is also optimistic. Other studies put the figure at $1,500 per family in higher energy costs. That makes the much lower figure of $175 per household extremely misleading.

Bent on disguising the true costs of Waxman-Markey, CBO performed a deeply flawed analysis. They treat lower household income as a good thing because households will be subject to lower tax rates, even though this will increase the budget deficit and help drive up interest rates making economic growth more difficult.

The CBO is also disingenuous in its treatment of free allowances. The financial benefit of the free allowances will go a small subset of the population (and to overseas investors), but CBO merely averages the benefits across the U.S. population. This is deeply disingenuous and misleading. Households are in for much bigger price hikes than the CBO would lead them to believe.
Despite CBO’s heroic attempts to put a nice gloss on Waxman-Markey, cap and trade is what Rep. Dingell said it was—a tax, and a great big one.

On the Perils of Negotiating with Terrorists

Negotiating with Terrorists. By Andrew C. McCarthy
The Obama administration ignores a longstanding — and life-saving — policy.
National Review Online, June 24, 2009 4:00 AM

Bank nationalization will soon be back on the agenda unless the economy picks up

Who Owns the Banks, Round Two? By HOLMAN W. JENKINS, JR.
Bank nationalization will soon be back on the agenda unless the economy picks up.
The Wall Street Journal, page A13

The stress tests came and went, but haven't settled the argument over whether anything short of seizing the biggest banks amounts to recapitulating Japan's experience with zombie banks.
That argument remains relevant -- because bank nationalization will soon be back on the agenda unless the economy picks up.

It would be good to get the parallel straight. Japan's problem wasn't so much zombie banks as zombie borrowers, kept alive with new infusions of money because the political class, speaking for Japanese society, wanted to delay and minimize foreclosures, layoffs and asset fire sales to preserve "harmony." An even more important, but unsung, factor in Japan's so-called lost decade was a relentless series of tax hikes.

Letting U.S. banks slide on their capital ratios is not the same as making "zombie banks." Somebody somewhere has to hold bad loans until they're resolved, either because borrowers make repayment or are forced into liquidation. There's no question that the Obama administration has opted for an unspoken policy of regulatory forbearance with respect to various too-big-to-fail banks. But those banks have no natural reason (aside from political pressure) to keep zombie borrowers alive if it would be financially advantageous to foreclose.

For all that, the Obama stress tests have served a confidence-building purpose -- confidence in Washington, not the banks.

It dispensed with the idea that the problem of how to unwind Washington's massive commitment to the financial sector could somehow be solved at the expense of bank shareholders. That idea was always a distraction -- there was not enough market capitalization in the entire banking sector to make a fig's difference, especially while the prospect of nationalization hung over it.

In climbing down, the Fed and the Obama administration did indeed credit future earnings of the banks with solving a big part of their capital problem. Call it fudge: This is a bet on growth, the only decent solution out there, because neither nationalization nor capital raising by banks can get the Federal Reserve off the hook of inflating away the banking system's massive additional losses on consumer, business and housing loans if growth doesn't come back.

As usual, however, there is no coherence in the administration's approach. Even while it counts on surging bank profits, it attacks the banking system's credit card profits, its mortgage profits, its senior-secured lending profits, etc. This is no way to avoid the rightly frightful prospect of having to add Citigroup and Bank of America to the portfolio of companies Washington is running badly.

Meanwhile, Team Obama is periodically tempted by the pro-nationalizers' claim that giving the big banks time to heal can only stifle recovery by retarding their return to lending. The critics underestimate two things: The dynamism of our financial sector, with plenty of healthy banks, start-ups and foreign investors likely to step into any lending gap if real opportunities for profitable loans present themselves (a difference vs. Japan, whose financial system was relatively closed).

They also underestimate the degree to which the problem is demand for loans rather than supply.

It's good to recall the puzzlement of the early Clinton administration over the "jobless recovery" that prevailed after it took office in 1993. The mystery wasn't the mystery the administration liked to pretend: Business refused to hire or expand out of fear of Bill Clinton's then-pending health-care reforms.

Mr. Obama's own initiatives on climate, labor, taxes and health care are the biggest threat to growth -- thus to the success or disaster of the Fed's giant liquidity bet, failure of which could still send us Argentina's way (as the Fed itself no doubt is discussing in its closed meetings today and yesterday).

Here, a happy happenstance for the nation is that our president is an object of craving utterly independent of the policies he pursues. Mr. Obama, therefore, has an unlikely degree of freedom to throw overboard his agenda and go for growth without fear of his public abandoning him.

From the start, he has seemed uniquely detached and noncommittal about his own policy positions, as if he was entertaining them only to see if they might be useful to him. Let's not underestimate this advantage over lesser politicians, who get trapped by their rhetoric. Let's also hope Mr. Obama takes advantage, becoming the "growth" president and saving the big initiatives for his second term. Otherwise, with the AIG disaster before him, he may be remembered as the president who nonetheless blundered into similar disasters trying to manage Citibank et al.

Tuesday, June 23, 2009

Barney Frank telling Fannie Mae to take more credit risk

Barney the Underwriter. WSJ Editorial
Telling Fannie Mae to take more credit risk.
The Wall Street Journal, page A14

Back when the housing mania was taking off, Massachusetts Congressman Barney Frank famously said he wanted Fannie Mae and Freddie Mac to "roll the dice" in the name of affordable housing. That didn't turn out so well, but Mr. Frank has since only accumulated more power. And now he is returning to the scene of the calamity -- with your money. He and New York Representative Anthony Weiner have sent a letter to the heads of Fannie and Freddie exhorting them to lower lending standards for condo buyers.

You read that right. After two years of telling us how lax lending standards drove up the market and led to loans that should never have been made, Mr. Frank wants Fannie and Freddie to take more risk in condo developments with high percentages of unsold units, high delinquency rates or high concentrations of ownership within the development.

Fannie and Freddie have restricted loans to condo buyers in these situations because they represent a red flag that the developments -- many of which were planned and built at the height of the housing bubble -- may face financial trouble down the road. But never mind all that. Messrs. Frank and Weiner think, in all their wisdom and years of experience underwriting mortgages, that the new rules "may be too onerous."

And in a display of the wit for which Mr. Frank is famous, the letter writers slyly point out that higher lending standards won't reduce taxpayer exposure to bad loans because the Federal Housing Administration has even lower standards for condos. "While the underlying goal may be to reduce taxpayer exposure relating to the current conservatorship of the GSEs [government sponsored entities], such a goal would not have such an effect if it merely results in a shifting of loans from the GSEs to the FHA." Tougher lending standards will merely shift market share from one government program to another, so what's the point in being cautious?

Fannie and Freddie have already lost tens of billions of dollars betting on the mortgage market -- with that bill being handed to taxpayers. They face still more losses going forward, because in the wake of their nationalization last year their new "mission" has become to do whatever it takes to prop up the housing market. The last thing they need is lawmakers like Mr. Frank, who did so much to lay the groundwork for their collapse, telling them to play faster and looser with their lending standards.

Fannie and Freddie have always been political creatures under the best circumstances. But we don't remember anyone electing Mr. Frank underwriter-in-chief of the United States.

The Pursuit of John Yoo

The Pursuit of John Yoo. WSJ Editorial
Next time the lawsuit may target Obama's advisers.
The Wall Street Journal, page A14

Here's a political thought experiment: Imagine that terrorists stage an attack on U.S. soil in the next four years. In the recriminations afterward, Administration officials are sued by families of the victims for having advised in legal memos that Guantanamo be closed and that interrogations of al Qaeda detainees be limited.

Should those officials be personally liable for the advice they gave President Obama?

We'd say no, but that's exactly the kind of lawsuit that the political left, including State Department nominee Harold Koh, has encouraged against Bush Administration officials. This month a federal judge in San Francisco ruled that a civil suit filed by convicted terrorist Jose Padilla can proceed against former Justice Department lawyer John Yoo for violating the terrorist's rights. Mr. Yoo is one of those who wrote memos laying out the legal parameters for aggressive interrogation of al Qaeda captives. If Mr. Yoo can be sued, why couldn't Obama officials also be held liable for their advice if there's an attack on their watch?

The mention of Mr. Koh is pertinent because the legal outfit suing Mr. Yoo, and other Bush officials in a separate case in South Carolina, is affiliated with Yale Law School. Mr. Koh is the outgoing dean of Yale and has been perhaps the most prominent legal critic of Bush interrogation policies. He once referred to President Bush as the "torturer in chief." Yet now President Obama has nominated Mr. Koh to be State Department legal adviser, who is charged with defending U.S. officials from legal assaults. It's as if Mr. Obama had nominated the AFL-CIO's John Sweeney as U.S. Trade Representative.

At least the Justice Department is still defending Mr. Yoo, as it should since his advice was offered while working for the U.S. government. But that could change if a second part of this exercise in political revenge goes forward. For five years the Justice Department's Office of Professional Responsibility (OPR) has been investigating Mr. Yoo and former Justice lawyers Jay Bybee and Steven Bradbury for alleged misconduct in writing those legal interrogation memos.

Last month, in a leak full of malice aforethought, the press reported that OPR's draft report recommends disciplinary action against the Bush lawyers. If the final report reaches the same conclusion, the left-wing bar will try to have those lawyers disbarred, while liberals in Congress could pursue impeachment against Mr. Bybee, a federal judge on the Ninth Circuit Court of Appeals. In that event, Justice might also stop defending Mr. Yoo in court. A professor at Berkeley Law, Mr. Yoo would have to pay hundreds of thousands of dollars to defend himself.

This is exactly what the anti-antiterror left hopes to accomplish. Having failed to enact their agenda in Congress, or now even via Mr. Obama, their aim is to ruin and bankrupt individuals in the Bush Administration who played key roles in the war on terror. Their goal is to make sure that no one in public life ever again offers advice that disagrees with their view that terrorists should be handled in nonmilitary courts like common burglars.

The May news leak was especially pernicious because it came before the Bush officials or their lawyers had been allowed to respond to OPR's accusations. They are still bound by a pledge of confidentiality. Our guess is that the leak was intended to box in Attorney General Eric Holder, who will ultimately have to sign off on the report.

Mr. Holder knows that former Attorney General Michael Mukasey had rejected the OPR draft in a scathing, 15-page, single-spaced memo. His deputy, Mark Filip, also refused to endorse the OPR draft. Yet OPR lawyers ran out the clock on Mr. Mukasey, hoping that an Obama AG will validate their work.

The leak of a draft report is itself an act of professional irresponsibility worthy of punishment. And the entire exercise is bizarre, since Messrs. Yoo, Bybee and Bradbury were only doing what their superiors and the CIA asked of them. If OPR's lawyers want to claim misconduct, they should target former Attorney General John Ashcroft or President Bush, who personally named Padilla an enemy combatant. But it's so much easier to pick on mid-level officials who lack a platform to fight back. In any case, OPR is supposed to investigate genuine misconduct such as withholding evidence (the Ted Stevens case), not opine on the legal analysis of other, in this case far superior, lawyers.

As for the lawsuit, Padilla's rights were never violated. Mr. Bush's decision to name the so-called "dirty bomber" an enemy combatant was defended in court by executive branch lawyers, who won in the Fourth Circuit. The Bush Administration later transferred Padilla to be tried in a Miami court, and the Supreme Court declined to hear an appeal. Padilla was convicted after receiving every due process protection and is now serving a 17-year prison sentence.

Politics can be vicious, but we have come to a very strange pass when government lawyers acting in good faith can be sued by convicted terrorists and investigated for giving advice solicited by their superiors. Mr. Holder will do the country, and his own colleagues in the Obama Administration, a service if he speaks out against the Padilla lawsuit and puts an end to Justice's part in this nasty exercise.

Maine: Finally, a state that cuts tax rates on the rich

Maine Miracle. WSJ Editorial
Finally, a state that cuts tax rates on the rich.
The Wall Street Journal, Jun 23, 2009, p A14

At last, there's a place in America where tax cutting to promote growth and attract jobs is back in fashion. Who would have thought it would be Maine?

This month the Democratic legislature and Governor John Baldacci broke with Obamanomics and enacted a sweeping tax reform that is almost, but not quite, a flat tax. The new law junks the state's graduated income tax structure with a top rate of 8.5% and replaces it with a simple 6.5% flat rate tax on almost everyone. Those with earnings above $250,000 will pay a surtax rate of 0.35%, for a 6.85% rate. Maine's tax rate will fall to 20th from seventh highest among the states. To offset the lower rates and a larger family deduction, the plan cuts the state budget by some $300 million to $5.8 billion, closes tax loopholes and expands the 5% state sales tax to services that have been exempt, such as ski lift tickets.

This is a big income tax cut, especially given that so many other states in the Northeast and East -- Maryland, Massachusetts, New Jersey and New York -- have been increasing rates. "We're definitely going against the grain here," Mr. Baldacci tells us. "We hope these lower tax rates will encourage and reward work, and that the lower capital gains tax [of 6.85%] brings more investment into the state."

These changes alone are hardly going to earn the Pine Tree State the reputation of "pro-business." Neighboring New Hampshire still has no income or sales tax. And last year Maine was ranked as having the third worst business climate for states by the Small Business Survival Committee. Still, no state has improved its economic attractiveness more than Maine has this year.

One question is how Democrats in Augusta were able to withstand the cries by interest groups of "tax cuts for the rich?" Mr. Baldacci's snappy reply: "Without employers, you don't have employees." He adds: "The best social services program is a job." Wise and timely advice for both Democrats and Republicans as the recession rolls on and budgets get squeezed.