Thursday, June 4, 2009

Iran's Nuclear Threat: The Day After

Iran's Nuclear Threat: The Day After. By The Heritage Foundation Iran Working Group
Heritage, June 4, 2009

The Islamic Republic of Iran, which has pursued policies hostile to the United States since its founding in 1979, is now on the brink of attaining a nuclear weapons capability. U.S. Director of National Intelligence Dennis Blair testified before Congress on March 10 that "We assess Iran has the scientific, technical, and industrial capacity to eventually produce nuclear weapons." Although it is not clear exactly when Iran will realize this goal, Blair also testified that "We judge Iran probably would be technically capable of producing enough highly enriched uranium (HEU) for a weapon sometime during the 2010-2015 timeframe." While estimates vary, it is clear that the world's foremost sponsor of terrorism soon will be able to build one of the world's most terrifying weapons.

What happens next? The answer is that the U.S. should not wait to find out. Rather, it should immediately put in place the foundations of a strategy to dissuade Tehran from attaining a nuclear weapon through adroit diplomacy, disarm it through military force, or establish a robust framework of augmented deterrence to mitigate the threat posed by a nuclear Iran. Washington must take stronger actions now to prevent a future disaster from unfolding. After all, the U.S. will be dealing not just with a nuclear Iran, but with a potential cascade of nuclear powers in the Middle East.

[Check for full report at the link above]

Hurricane Damage and Global Warming

Hurricane Damage and Global Warming. By Daniel Sutter
How Bad Could It Get and What Can We Do about It Today?
CEI, June 3, 2009

Full study available in pdf

Climate experts and policy makers have debated the existence of a potential link between global warming and increased hurricane activity since the record-setting 2005 Atlantic hurricane season. While claims that hurricanes are already stronger due to climate change are highly controversial, research demonstrates that increases in societal vulnerability to hurricanes—the number of persons and amount of property in coastal areas—goes a long way toward explaining the increases in hurricane losses over time.

This paper focuses on hurricane damage projections, reviews them in detail, and critiques the projections. It details how existing public policies have helped increase hurricane losses. In its final section, the paper recommends specific policies to reduce populations’ vulnerability to hurricanes.

Existing public policies—including insurance regulation, government-subsidized flood insurance, improper mitigation, and faulty building code enforcement—contribute to unnecessarily risky and inefficient development along coastal areas by shifting the cost of hurricane damage ultimately onto third parties—mainly taxpayers. Poor policies lead to excessive vulnerability to hurricanes and would exacerbate the cost of any increase in storm activity, whether due to climate change or any other factor. Insurance subsidies and mitigation may not be normally considered part of the climate change debate, but within that debate reform of these policies now will constitute a “no regrets” strategy. In other words, reforms will yield benefits in all circumstances—especially if adverse climate change does occur.

Ten Thousand Commandments 2009

Ten Thousand Commandments 2009, by Clyde Wayne Crews
CEI, May 28, 2009

President Barack Obama’s federal budget for fiscal year (FY) 2010 proposed $3.552 trillion in discretionary, entitlement, and interest spending. The previous fiscal year, President George W. Bush had proposed the first-ever $3-trillion U.S. budget. President Bush was also the first to propose a $2-trillion federal budget—in 2002, a scant seven years ago.

Now the administration projects actual FY 2009 spending of almost $4 trillion ($3.938 trillion) instead of Bush’s $3 trillion, thanks to the late-2008 bailout and “stimulus” frenzy. The result: a projected FY 2009 deficit of a previously unthinkable $1.752 trillion. The Congressional Budget Office (CBO) paints an even more dismal picture.

To be sure, many other countries’ governments consume more of their national output than the U.S. government does; but in absolute terms, the U.S. government is the largest government on Earth, whether one looks at revenues or expenditures.

The “Hidden Tax” of Regulation

Those costs fully convey the federal government’s on-budget scope, and they are sobering enough. Yet the government’s reach extends even beyond the taxes Washington collects and the deficit spending and borrowing now surging. Federal environmental, safety and health, and economic regulations cost hundreds of billions of dollars every year over and above the costs of the official federal outlays that dominate the policy agenda now.

Firms generally pass along the costs of some taxes to consumers. Likewise, some regulatory compliance costs that businesses shoulder find their way into consumer prices. Precise regulatory costs can never be fully known; unlike taxes, they are unbudgeted and often indirect. But scattered government and private data exist on scores of regulations and the agencies that issue them, as well as on regulatory costs and benefits. Some of that information can be compiled to make the regulatory state somewhat more comprehensible. That is one purpose of the annual Ten Thousand Commandments report, highlights of which appear next:

• A very rough extrapolation from an estimate of the federal regulatory enterprise by economist Mark Crain estimates that regulatory compliance costs hit $1.172 trillion in 2008.
• Given 2008’s government spending of $2.98 trillion, the regulatory “hidden tax” stood at 39 percent of the level of federal spending itself. (Because of the months-old spending surge, this proportion will surely be lower next year.)
• Trillion-dollar deficits and regulatory costs in the trillions are both unsettling new developments for America. Although FY 2008 regulatory costs are more than double that year’s $459 billion budget deficit, the more recent deficit spending surge will catapult the deficit above the costs of regulation for the near future.
• CBO now projects 2009 federal spending to hit $4.004 trillion and the deficit to soar to $1.845 trillion. The game has changed; although these spending levels eclipse federal regulatory costs now, unchecked government spending translates, in later years, into greater regulation as well.
• Regulatory costs are equivalent to 65 percent of 2006 corporate pretax profits of $1.8 trillion.
• Regulatory costs rival estimated 2008 individual income taxes of $1.2 trillion.
• Regulatory costs dwarf corporate income taxes of $345 billion.• Regulatory costs of $1.172 trillion absorb 8 percent of the U.S. gross domestic product (GDP), estimated at $14.3 trillion in 2008.
• Combining regulatory costs with federal FY 2008 outlays of $2.978 trillion implies that the federal government’s share of the economy now reaches 29 percent.
• The Weidenbaum Center at Washington University in St. Louis and the Mercatus Center at George Mason University in Virginia jointly estimate that agencies spent $49.1 billion to administer and police the 2008 regulatory enterprise. Adding the $1.172 trillion in off-budget compliance costs brings the total regulatory burden to $1.221 trillion.
• The 2008 Federal Register is close to breaking the 80,000-page barrier. It contained 79,435 pages, up 10 percent from 72,090 pages in 2007—an all-time record high.
• Federal Register pages devoted specifically to final rules jumped nearly 16 percent, from 22,771 to a record 26,320.
• In 2008, agencies issued 3,830 final rules, a 6.5-percent increase from 3,595 rules in 2007.
• The annual outflow of roughly 4,000 final rules has meant that well over 40,000 final rules were issued during the past decade.
• Although regulatory agencies issued 3,830 final rules in 2008, Congress passed and the President signed into law a comparatively low 285 bills. Considerable lawmaking power is delegated to unelected bureaucrats at agencies.
• According to the 2008 Unified Agenda, which lists federal regulatory actions at various stages of implementation, 61 federal departments, agencies, and commissions have 4,004 regulations in play at various stages of implementation.
• Of the 4,004 regulations now in the pipeline, 180 are “economically significant” rules packing at least $100 million in economic impact. Assuming these rulemakings are primarily regulatory rather than deregulatory, that number implies roughly $18 billion yearly in future off-budget regulatory effects.
• “Economically significant” rules increased by 13 percent between 2007 and 2008 (following a 14-percent increase the year before). As noted, high federal budgetary spending now likely implies higher future regulatory costs as well.
• The five most active rule-producing agencies—the departments of the Treasury, Agriculture, Commerce, and the Interior, along with the Environmental Protection Agency—account for 1,837 rules, or 46 percent of all rules in the Unified Agenda pipeline.
• Of the 4,004 regulations now in the works, 753 affect small business.

Full Document Available In PDF

U.S. Contributes $75 Million for Childhood Immunization

U.S. Contributes $75 Million for Childhood Immunization
June 4, 2009

WASHINGTON, DC -- The U.S. Agency for International Development (USAID) yesterday contributed $75 million to improve and expand children's immunization programs in developing countries.

The contribution is part of the overall U.S. commitment to global health and the new global health initiative, a 6-year, $63 billion dollar effort announced by President Obama in May.
The grant was announced by Deputy Secretary of State Jacob Lew at Global Alliance for Vaccines and Immunization (GAVI) Board of Directors Meeting at the World Bank.

“When children escape disease, they have a fighting chance to thrive and attend school,” said Lew. “As they grow into healthy adults, they can then contribute to the development of more vibrant and productive societies. Ensuring better health for the world's children is an investment in the prospects of the next generation. Today’s children will become tomorrow’s doctors, scientists, engineers, and leaders.”

The contribution brings the total U.S. commitment to $569 million to the GAVI effort. The U.S., through USAID, also serves on the GAVI Alliance Board, and provides technical guidance at the international and country levels.

Since GAVI’s launch nine years ago, more than three million premature deaths have been prevented, global immunization rates have risen by 10 percent, and approximately $4 billion has been committed to countries and immunization programs for vaccine procurement and delivery and strengthening of health systems.

To date, vaccines that have been funded by GAVI include vaccines against diphtheria, pertussis, tetanus, Hepatitis B, pneumonia, measles, and yellow fever. GAVI and its partners are preparing to finance the introduction of two new vaccines into the poorest countries, against pneumococcal disease and rotavirus. Together, pneumococcal diseases and rotavirus account for more than one million child deaths each year; a majority of these deaths can be prevented with existing vaccines. Support for GAVI-financed vaccines will enable countries to make significant progress toward the Millennium Development Goals between now and 2015.

Since the 1970s, USAID has worked with partners across the globe to confront that challenge and help immunize children in remote and underdeveloped parts of the world. Over the decades tens of millions of infants and children have gained protection from disease.

Cap-and-Trade: All Cost, No Benefit

Cap-and-Trade: All Cost, No Benefit. By Martin Feldstein
WaPo, Monday, June 1, 2009

The Obama administration and congressional Democrats have proposed a major cap-and-trade system aimed at reducing carbon dioxide emissions. Scientists agree that CO2 emissions around the world could lead to rising temperatures with serious long-term environmental consequences. But that is not a reason to enact a U.S. cap-and-trade system until there is a global agreement on CO2 reduction. The proposed legislation would have a trivially small effect on global warming while imposing substantial costs on all American households. And to get political support in key states, the legislation would abandon the auctioning of permits in favor of giving permits to selected corporations.

The leading legislative proposal, the Waxman-Markey bill that was recently passed out of the House Energy and Commerce Committee, would reduce allowable CO2 emissions to 83 percent of the 2005 level by 2020, then gradually decrease the amount further. Under the cap-and-trade system, the federal government would limit the total volume of CO2 that U.S. companies can emit each year and would issue permits that companies would be required to have for each ton of CO2 emitted. Once issued, these permits would be tradable and could be bought and sold, establishing a market price reflecting the targeted CO2 reduction, with a tougher CO2 standard and fewer available permits leading to higher prices.

Companies would buy permits from each other as long as it is cheaper to do that than to make the technological changes needed to eliminate an equivalent amount of CO2 emissions. Companies would also pass along the cost of the permits in their prices, pushing up the relative price of CO2-intensive goods and services such as gasoline, electricity and a range of industrial products. Consumers would respond by cutting back on consumption of CO2-intensive products in favor of other goods and services. This pass-through of the permit cost in higher consumer prices is the primary way the cap-and-trade system would reduce the production of CO2 in the United States.

The Congressional Budget Office recently estimated that the resulting increases in consumer prices needed to achieve a 15 percent CO2 reduction -- slightly less than the Waxman-Markey target -- would raise the cost of living of a typical household by $1,600 a year. Some expert studies estimate that the cost to households could be substantially higher. The future cost to the typical household would rise significantly as the government reduces the total allowable amount of CO2.

Americans should ask themselves whether this annual tax of $1,600-plus per family is justified by the very small resulting decline in global CO2. Since the U.S. share of global CO2 production is now less than 25 percent (and is projected to decline as China and other developing nations grow), a 15 percent fall in U.S. CO2 output would lower global CO2 output by less than 4 percent. Its impact on global warming would be virtually unnoticeable. The U.S. should wait until there is a global agreement on CO2 that includes China and India before committing to costly reductions in the United States.

The CBO estimates that the sale of the permits for a 15 percent CO2 reduction would raise revenue of about $80 billion a year over the next decade. It is remarkable, then, that the Waxman-Markey bill would give away some 85 percent of the permits over the next 20 years to various businesses instead of selling them at auction. The price of the permits and the burden to households would be the same whether the permits are sold or given away. But by giving them away the government would not collect the revenue that could, at least in principle, be used to offset some of the higher cost to households.

The Waxman-Markey bill would give away 30 percent of the permits to local electricity distribution companies with the expectation that their regulators would require those firms to pass the benefit on to their customers. If they do this by not raising prices, there would be less CO2 reduction through lower electricity consumption. The permit price would then have to be higher to achieve more CO2 reduction on all other products. Some electricity consumers would benefit, but the cost to all other American families would be higher.

In my judgment, the proposed cap-and-trade system would be a costly policy that would penalize Americans with little effect on global warming. The proposal to give away most of the permits only makes a bad idea worse. Taxpayers and legislators should keep these things in mind before enacting any cap-and-trade system.

Martin Feldstein, a professor of economics at Harvard University and president emeritus of the nonprofit National Bureau of Economic Research, was chairman of the Council of Economic Advisers from 1982 to 1984.

The North Korean Syndrome- Talk,Test, Talk Again,Test Again

The North Korean Syndrome- Talk,Test, Talk Again,Test Again. By B.Raman
C3S Paper No.278 dated May 30, 2009

Years before 2006, North Korea had a tested medium-range missile capability and was developing a long-range capability which could hit targets in the US. If its objective was only to have the capability to target South Korea and Japan, it did not need a long-range capability. It wanted the long-range capability to intimidate and threaten the US. But its economy was in such a bad shape that it did not have the money to spend on its missile programme.

2. And that money came from Pakistan and Iran. They funded research and development of the North Korean missile programme as a quid pro quo for North Korea’s sharing its expertise and technology with them and selling to them some of the missiles. The Pakistan-North Korea missile development co-operation started clandestinely in 1993 when Benazir Bhutto was the Prime Minister, but it came to public notice in 1998 when Pakistan tested its so-called Ghauri missile, which was nothing but a re-baptised version of a North Korean missile. Benazir Bhutto, who was then in the opposition, publicly claimed credit for giving Pakistan a deterrent capability against India by persuading North Korea during a clandestine visit from Beijing in 1993 to co-operate with Pakistan in missile development. Around the same time, reports also started coming in of Iran’s missile procurement relationship with North Korea.

3.When Pervez Musharraf was the President of Pakistan, it had carried out a number of firings of medium and long-range missiles capable of hitting the major cities of India. These were not test firings. These were firings meant to demonstrate Pakistan’s possession of such missiles and to psychologically intimidate India. I had pointed out on many occasions that Pakistan’s action in carrying out so many demonstration firings spoke of the large stock of missiles which it has got from North Korea. Even Osama bin Laden, in one of his messages, taunted Musharraf for ordering a demonstration firing of a missile whenever he was facing difficulty at home.

4. Around the same time, Iran started emulating Pakistan by carrying out demonstration firings of missiles in order to psychologically intimidate Israel. Apart from oral warnings and threats to board North Korean ships suspected of carrying prohibited equipment to other countries, the US did nothing.Even if one can understand its inability to act against North Korea due to a fear of an irresponsible state like North Korea provoking a war in the Korean region, one failed to understand its inability to act against Pakistan and to encourage Israel to similarly act against Iran.

5.In 2003, the international community learnt with shock and surprise that Pakistan’s weapons of mass destruction capability relationship with North Korea was not confined to missiles, but also covered military nuclear capability.A.Q.Khan, the Pakistani nuclear scientist, was found to have supplied nuclear-related eqipment and technology not only to Iran and Libya, two Muslim countries, but also to North Korea. It was a nuclear-missile barter relationship. This relationship had continued at least till the Kargil conflict between India and Pakistan in 1999 when, according to Khan’s own admission to some journalists, Musharraf sent him to North Korea to procure urgently some surface-to-air missiles.

6. When all these factors came to notice one after the other since Pakistan’s firing of the Ghauri missile in April,1998, the US had three options:
  • Act against North Korea through a pre-emptive strike against its nuclear and missile production facilities . It did not do so due to a fear of the unpredictable behaviour of North Korea which could have led to a war in the Korean region.
  • Act against Pakistan in order to penalise it for its relations with North Korea and to force it to terminate its relationship. This might not have forced North Korea to stop its programme, but it might have slowed down its programme due to financial difficulties. It would have also given some indication of the US resolve to act. The US did nothing. After 9/11, co-operation ftrom Pakistan against Al Qaeda assumed greater importance for US policy-makers than options of action to stop North Korea from acquiring a military nuclear capability.
  • Similarly, act against Iran or encourage Israel to act. From time to time, statements were made that all options were open—-meaning even a military strike against the nuclear establishments in Iran. In the case of powers such as North Korea and Iran, empty warnings without a demonstration of the resolve to act create only contempt.
7. All eggs were put in the basket of the six-power talks, which were marked by a faith in the ability and readiness of China to make North Korea behave. North Korea skilfully adopted a strategem of “Talk, test, talk again, test again”. It will seemingly co-operate with the talks, agree to some denuclearisation measures, then break the agreement under some pretext, test, then agree to talk again, then break the talks again under some other pretext and then test again. This has been going on for some years now.

8. The result:North Korea is a demonstrated nuclear power with a delivery capability at least against South Korea and Japan, if not yet against the US. It has carried out two tests, with the second one earlier in May,2009, reportedly being more powerful and more sophisticated than the first one in 2006. It has reportedly re-started the re-processing of spent fuel rods which would add to its stockpile of fissile material.

9. Pre-emption is no longer an option. Can North Korea be pressured or cajoled through China to come back to the negotiating table and to renew its commitment to the denuclearisation path? Even if one succeeds, it is very likely that after some talks, it will break the agreement reached under some other pretext. It broke the last agreement under the pretext that the UN imposed sanctions against it for allegedly testing a communication satellite. The next time, it will find some other pretext.

10. All US administrations have fought shy of a confrontation with North Korea. The Barack Obama administration even more so than its predecessors. The North Korean leadership has concluded that not only the US, but even Japan and South Korea do not have the stomach for a policy of confrontation. It, therefore, feels it does not have to fear either pre-emption or confrontation.

11. There is one option still left—- threaten China with the danger of the international community closing its eyes to Japan acquiring a military nuclear capability if China does not force North Korea to de-nuclearise. Will it work? It may or may not, but in the absence of any other options, it is well worth giving a try.

12. Even while struggling and juggling with various options available against North Korea, it is important for the Obama Administration to remember that Teheran is closely watching how Obama handles North Korea. Any sign of further weakness and accommodation with North Korea could encourage Iran in its nuclear obstinacy. This is definitely not the time for the Obama Administration to convey a wrong message to Iran that ties between the US and Israel are weakening. The US will end up by undermining a steadfast ally for the sake of better relations with an unpredictable country. The US may have valid reasons for improving its relations with Iran, but this should not be at the expense of its relations with Israel.

(The writer, Mr B.Raman, is Additional Secretary (retd), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai. He is also associated with the Chennai Centre For China Studies.)

The evidence from Europe shows that consumption taxes go hand-in-hand with rising income taxes

VATs Mean Big Government. By DANIEL J. MITCHELL
The evidence from Europe shows that consumption taxes go hand-in-hand with rising income taxes.
The Wall Street Journal, page A15, Jun 04, 2009

There is growing interest in Washington in a new national consumption tax, otherwise known as a value-added tax or VAT. Senate Budget Committee Chairman Kent Conrad (D., N.D.), for example, recently told the Washington Post that "a VAT" has "got to be on the table" as part of "fundamental tax reform."

President Barack Obama is already looking at a wide range of other potential tax increases, including higher income tax rates, restrictions on itemized deductions, an energy tax, and higher payroll tax rates. Even if they all became law, the revenues would not come close to satisfying his and Congress's appetite for bigger government, particularly a government-run health-care scheme.

At the same time, our aging population and unconstrained entitlement programs mean that a dramatic expansion in the size of government will occur automatically in coming decades unless Medicare, Medicaid and Social Security are reformed. Simply stated, there's no way to finance all this new spending without an additional, broad-based tax. That's exactly why a VAT -- which is like a national sales tax collected at each stage of the production process, rather than at the final point of sale -- should be resisted.

The classical argument in favor of a VAT says that it's desirable because it has a single rate and is based on consumption. It is true that single-rate systems (assuming a reasonable rate) are less harmful than discriminatory regimes with "progressive" rates. It's also true that a consumption-based tax would not inflict as much damage as our internal revenue code, with its multiple layers of tax on income that is saved and invested. But these arguments only apply if a VAT replaces the current tax system -- which is not the case here. And the evidence from Europe suggests it's not a good idea to add a somewhat-bad tax like the VAT on top of a really bad tax system.

VATs are associated with both higher overall tax burdens and more government spending. In 1965, before the VAT swept across Europe, the average tax burden for advanced European economies (the EU-15) was 27.7% of economic output, roughly comparable to the U.S., where taxes were 24.7% of GDP, according to data from the Organization for Economic Cooperation and Development OECD). European nations began to impose VATs in the late 1960s, and now the European Union requires all members to have a VAT of at least 15%.

Results? By 2006, the OECD reports that the average tax burden for EU-15 nations had climbed to 39.8% of GDP. The tax burden also has increased in the U.S., but at a much slower rate, rising to 28% for that year.

The spending side of the fiscal equation is equally dismal. In 1965, according to European Commission figures, government spending in EU-15 nations averaged 30.1% of GDP, not much higher than the 28.3% of economic output consumed by U.S. government spending. According to 2007 data, government spending now consumes 47.1% of GDP in the EU-15, significantly higher than the 35.3% burden of government in the U.S.

Another argument for the VAT concedes it will increase the overall tax burden but preclude higher taxes on personal income and corporate income. The evidence from Europe says otherwise. Taxes on income and profits consumed 8.8% of GDP in Europe in 1965, giving Europe a competitive advantage over the U.S., where they consumed 11.9%. By 2006, OECD data show that the tax burden on income and profits climbed to 13.8% of GDP in Europe, slightly higher than the 13.5% figure for the U.S.

Last but not least, some protectionists in the business community and on Capitol Hill are attracted by the VAT because it is "border adjusted." This means that there is no VAT on exports, but the VAT is imposed on imports. For people who obsess about trade deficits this is seen as a positive feature. But they do not understand how a VAT works.

Under current law, American goods sold in America do not pay a VAT -- but neither do German-produced goods that are sold in the U.S. Likewise, any American-produced goods sold in Germany today are hit by a VAT, as are, of course, German-made goods. In short, there already is a level playing field.

The income tax system we have today is a nightmarish combination of class warfare and corrupt loopholes. Adding a VAT does not undo any of the damage it imposes. All that happens is that politicians get more money to spend and a chance to auction off a new set of tax breaks to interest groups. That's good for Washington, but bad for America.

Mr. Mitchell is a senior fellow at the Cato Institute.

Merkel for the Fed: The German leader's welcome rebuke to central bankers

Merkel for the Fed. WSJ Editorial
The German leader's welcome rebuke to central bankers.
The Wall Street Journal, page A14, Jun 04, 2009

To the Red Sox winning the World Series, we can now add another miracle for the ages: A politician demanding tighter money. We refer to German Chancellor Angela Merkel, who in a Berlin speech Tuesday rebuked the world's central bankers, notably including the U.S. Federal Reserve, for being too politically accommodating. Hallelujah, sister.

"The independence of the European Central Bank must be preserved and the things that other central banks are now doing must be retracted," Mrs. Merkel told a meeting sponsored by Germany's association of metal- and electrical-industry employers. "We must return together to an independent central-bank policy and to a policy of reason, otherwise we will be in exactly the same situation in 10 years' time." Referring to the U.S. central bank specifically, she said "I view with a great deal of skepticism the extent of the Fed's powers."

Usually when a politician lobbies a central bank, it's to demand easier money. We can't recall a similar tight-money intervention from a national leader, save perhaps Ronald Reagan's quiet support for Paul Volcker in the 1980s. Mrs. Merkel may have been channeling Ludwig Erhard, the great Chancellor whose hard-money policies helped to catapult the German economy from the ruins of World War II. Looking further back, she no doubt knows that the Weimer inflation of the 1920s paved the way for Hitler.

Whatever her inspiration, this is the second time Mrs. Merkel has volunteered to be the designated driver amid the G-20's fiscal and monetary binge. Three months ago, she led a revolt against President Obama's demand that Europe follow his Keynesian spending spree. Her spending restraint is already looking wise as the U.S. asks the world to finance a debt burden rising to World War II levels.

Now she's taking aim at monetary excess, even as the European Central Bank is being lobbied to pursue the same kind of "quantitative easing" that the U.S. Fed has carried out. The ECB is preparing to announce the details of its purchase of $85 billion in low-risk (mostly corporate) debt, and Ms. Merkel may have wanted to send a signal that it ought to stop there. She also rightly fingered "monetary policy in the United States" that was "politically supported" as a main cause of the current mess.

As it happens, Fed Chairman Ben Bernanke was asked about Mrs. Merkel's remarks yesterday during testimony on Capitol Hill. He said he "respectfully" disagreed, adding that, "The U.S. and global economies, including Germany, have faced an extraordinary combination of a financial crisis . . . plus a very serious downturn. I am comfortable with the policy actions that the Federal Reserve has taken."

We'd agree -- and maybe Ms. Merkel would too -- that the Fed clearly needed to counter the declining velocity of money amid the autumn and winter panic. We've also given Mr. Bernanke the benefit of the doubt on some of his liquidity interventions. But the Fed has since elbowed its way into fiscal policy by buying housing and other dodgy assets, and it is also directly monetizing federal debt by buying Treasurys. The latter move appears to have had the opposite of its intended effect, scaring the world's investors to bid up long-term rates for fear the Fed has sold its independence to Congress and the White House. The Fed should call a halt to such purchases at its monetary policy meeting later this month.

Notwithstanding Mr. Bernanke's "comfort" with his actions so far, the world is wondering when the Fed will start to remove the flood of money it has injected into the economy during the crisis. Mr. Bernanke says not to worry, as his mentor Alan Greenspan also did yesterday. But this is cold comfort given their earlier track record. The Fed's habit is to look at backward indicators, such as the cost-of-living index and the jobless rate, rather than at currency and commodity prices that can warn of asset bubbles and inflation ahead. This is precisely the mistake both men made in 2003, as the recently released Fed transcripts from that year illustrate. The warning that Mrs. Merkel -- and China and the financial markets -- is sounding is whether the Fed will have the political courage to start removing that liquidity even if the unemployment rate is high, and before it creates another mess.

Meanwhile, on Capitol Hill yesterday Mr. Bernanke preferred to do some fiscal policy moonlighting. "Unless we demonstrate a strong commitment to fiscal sustainability in the longer run," he said, "we will have neither financial stability nor healthy economic growth." We can see why Mr. Bernanke would want to change the subject from his own monetary responsibilities, but he'd be wiser to heed Mrs. Merkel.

What I Saw at Tiananmen

What I Saw at Tiananmen. By Claudia Rossett
WSJ, Jun 04, 2009

WaPo: Once again Russia amasses troops and stages provocations

Another Summer in Georgia. WaPo Editorial
Once again Russia amasses troops and stages provocations.
Thursday, June 4, 2009

A YEAR AGO, Russian military maneuvers and provocations of the former Soviet republic of Georgia caused a couple of astute observers to predict that Moscow was laying the groundwork for a military invasion of its democratic and pro-Western neighbor. The warnings were laughed off -- until Russian forces poured across Georgia's borders on the night of Aug. 7, routing the Georgian army and driving thousands of ethnic Georgians from two breakaway provinces. Ten months later, with another summer approaching, Russia is once again mounting provocations on the ground and in diplomatic forums; once again it has scheduled a large military training exercise for July in the region bordering Georgia.

Could Vladimir Putin be contemplating another military operation to finish off the Georgian government of Mikheil Saakashvili -- whom Mr. Putin once vowed to "hang by his balls"? Once again, the scenario is easy to dismiss: The Russian leadership, after all, is engaged in an effort to "reset" relations with the United States; it is seeking support in Europe for discussions on a new "security architecture." Another fight with Georgia could blow up both efforts.

Still, the facts are these: Russia, in open violation of the cease-fire deal Mr. Putin made with French President Nicolas Sarkozy, has never withdrawn its troops to pre-war positions. Instead it has reinforced its units in Georgia and has between 5,000 and 7,500 soldiers in the provinces of South Ossetia and Abkhazia, which Moscow now treats as independent states. There are frequent incidents in the border areas, and Russia recently refused to renew the mandate of an international observer mission that had been deployed in and around South Ossetia.

If hostilities were renewed, Georgia wouldn't have much chance to defend itself. Its defense minister says that the country has not been able to replace much of the equipment lost in the last war. The Obama administration, which is hoping to complete the outlines of a new strategic arms agreement with Russia by the time of a July summit meeting, hasn't supplied the Georgian government with the air defenses or anti-tank weapons it would need to resist another Russian assault.

Mr. Saakashvili's best defense, of course, remains political support from the United States, the European Union and NATO. So far, at least, White House rhetoric in support of Georgian independence has remained firm. The sometimes-impulsive Georgian leader has helped himself with his patient and tolerant management of opposition demonstrations that have disrupted Tbilisi for nearly two months; he needs to be as skillful in sidestepping provocations along the frontier, so as to avoid providing the Kremlin with an excuse for intervention. But a peaceful summer in Georgia will also require firmness from Mr. Obama: He must leave no doubt that another Russian advance in Georgia would be devastating for U.S.-Russian relations.