Are You Smarter Than a Fifth Grader? By DANIEL B. KLEIN
Self-identified liberals and Democrats do badly on questions of basic economics.WSJ, Jun 08, 2010
Who is better informed about the policy choices facing the country—liberals, conservatives or libertarians? According to a Zogby International survey that I write about in the May issue of Econ Journal Watch, the answer is unequivocal: The left flunks Econ 101.
Zogby researcher Zeljka Buturovic and I considered the 4,835 respondents' (all American adults) answers to eight survey questions about basic economics. We also asked the respondents about their political leanings: progressive/very liberal; liberal; moderate; conservative; very conservative; and libertarian.
Rather than focusing on whether respondents answered a question correctly, we instead looked at whether they answered incorrectly. A response was counted as incorrect only if it was flatly unenlightened.
Consider one of the economic propositions in the December 2008 poll: "Restrictions on housing development make housing less affordable." People were asked if they: 1) strongly agree; 2) somewhat agree; 3) somewhat disagree; 4) strongly disagree; 5) are not sure.
Basic economics acknowledges that whatever redeeming features a restriction may have, it increases the cost of production and exchange, making goods and services less affordable. There may be exceptions to the general case, but they would be atypical.
Therefore, we counted as incorrect responses of "somewhat disagree" and "strongly disagree." This treatment gives leeway for those who think the question is ambiguous or half right and half wrong. They would likely answer "not sure," which we do not count as incorrect.
In this case, percentage of conservatives answering incorrectly was 22.3%, very conservatives 17.6% and libertarians 15.7%. But the percentage of progressive/very liberals answering incorrectly was 67.6% and liberals 60.1%. The pattern was not an anomaly.
The other questions were: 1) Mandatory licensing of professional services increases the prices of those services (unenlightened answer: disagree). 2) Overall, the standard of living is higher today than it was 30 years ago (unenlightened answer: disagree). 3) Rent control leads to housing shortages (unenlightened answer: disagree). 4) A company with the largest market share is a monopoly (unenlightened answer: agree). 5) Third World workers working for American companies overseas are being exploited (unenlightened answer: agree). 6) Free trade leads to unemployment (unenlightened answer: agree). 7) Minimum wage laws raise unemployment (unenlightened answer: disagree).
How did the six ideological groups do overall? Here they are, best to worst, with an average number of incorrect responses from 0 to 8: Very conservative, 1.30; Libertarian, 1.38; Conservative, 1.67; Moderate, 3.67; Liberal, 4.69; Progressive/very liberal, 5.26.
Americans in the first three categories do reasonably well. But the left has trouble squaring economic thinking with their political psychology, morals and aesthetics.
To be sure, none of the eight questions specifically challenge the political sensibilities of conservatives and libertarians. Still, not all of the eight questions are tied directly to left-wing concerns about inequality and redistribution. In particular, the questions about mandatory licensing, the standard of living, the definition of monopoly, and free trade do not specifically challenge leftist sensibilities.
Yet on every question the left did much worse. On the monopoly question, the portion of progressive/very liberals answering incorrectly (31%) was more than twice that of conservatives (13%) and more than four times that of libertarians (7%). On the question about living standards, the portion of progressive/very liberals answering incorrectly (61%) was more than four times that of conservatives (13%) and almost three times that of libertarians (21%).
The survey also asked about party affiliation. Those responding Democratic averaged 4.59 incorrect answers. Republicans averaged 1.61 incorrect, and Libertarians 1.26 incorrect.
Adam Smith described political economy as "a branch of the science of a statesman or legislator." Governmental power joined with wrongheadedness is something terrible, but all too common. Realizing that many of our leaders and their constituents are economically unenlightened sheds light on the troubles that surround us.
Mr. Klein is a professor of economics at George Mason University. This op-ed is based on an article published in the May 2010 issue of the journal he edits, Econ Journal Watch, a project sponsored by the American Institute for Economic Research.
Showing posts with label irrationalism. Show all posts
Showing posts with label irrationalism. Show all posts
Tuesday, June 8, 2010
Thursday, May 20, 2010
The Madness of Cotton - The feds want U.S. taxpayers to subsidize Brazilian farmers
The Madness of Cotton. WSJ Editorial
The feds want U.S. taxpayers to subsidize Brazilian farmers
WSJ, May 21, 2010
U.S. cotton farmers took in almost $2.3 billion dollars in government subsidies in 2009, and the top 10% of the recipients got 70% of the cash. Now Uncle Sam is getting ready to ask taxpayers to foot the bill for another $147.3 million a year for a new round of cotton payments, this time to Brazilian growers.
We realize that in today's Washington this is a rounding error. But the reason for the new payments to foreign farmers deserves attention. If it becomes a habit, it is unlikely to end with cotton.
Here's the problem: The World Trade Organization has ruled that subsidies to American cotton growers under the 2008 farm bill are a violation of U.S. trading commitments. The U.S. lost its final appeal in the case in August 2009 and the WTO gave Brazil the right to retaliate.
Brazil responded by drafting a retaliation list threatening tariffs on more than 100 U.S. exports, including autos, pharmaceuticals, medical equipment, electronics, textiles, wheat, fruits, nuts and cotton. The exports are valued at about $1 billion a year, and the tariffs would go as high as 100%. Brazil is also considering sanctions against U.S. intellectual property, including compulsory licensing in pharmaceuticals, music and software.
The Obama Administration appreciates the damage this retaliation would cause, so in April it sent Deputy U.S. Trade Representative Miriam Sapiro to negotiate. She came back with a promise from Brazil to postpone the sanctions for 60 days while it considers a U.S. offer to—get this—let American taxpayers subsidize Brazilian cotton growers.
That's right. Rather than reduce the U.S. subsidies to American cotton farmers that are the cause of the trade fight, the Administration is proposing that U.S. taxpayers also compensate Brazilian cotton farmers for the harm done by the U.S. subsidies. Thus the absurd U.S. cotton program would dip into the Commodity Credit Corporation to pay what is a bribe to Brazil so it won't retaliate.
Talk about taxpayer double jeopardy. As Senator Richard Lugar (R., Ind.) said recently, the commodity credit program was established to assist U.S. agriculture, "not to pay restitution to foreign farmers who won a trade complaint against a U.S. farm subsidy program."
Mr. Lugar wants the subsidies to U.S. farmers cut by the amount that will have to be sent to Brazil. He adds that a better option would be to take on the trade-distortions of the cotton program. "I am prepared to introduce legislation to achieve these immediate reforms," he wrote in an April 30 letter to President Obama.
This is probably tilting at political windmills, since Mr. Obama has shown no appetite for trade promotion, much less confronting a cotton lobby supported by such Democrats as Arkansas Senator Blanche Lincoln. But we're glad to see that at least Mr. Lugar is willing to call out the absurdity of U.S. taxpayers subsidizing foreign farmers to satisfy the greed of a few American cotton growers.
The feds want U.S. taxpayers to subsidize Brazilian farmers
WSJ, May 21, 2010
U.S. cotton farmers took in almost $2.3 billion dollars in government subsidies in 2009, and the top 10% of the recipients got 70% of the cash. Now Uncle Sam is getting ready to ask taxpayers to foot the bill for another $147.3 million a year for a new round of cotton payments, this time to Brazilian growers.
We realize that in today's Washington this is a rounding error. But the reason for the new payments to foreign farmers deserves attention. If it becomes a habit, it is unlikely to end with cotton.
Here's the problem: The World Trade Organization has ruled that subsidies to American cotton growers under the 2008 farm bill are a violation of U.S. trading commitments. The U.S. lost its final appeal in the case in August 2009 and the WTO gave Brazil the right to retaliate.
Brazil responded by drafting a retaliation list threatening tariffs on more than 100 U.S. exports, including autos, pharmaceuticals, medical equipment, electronics, textiles, wheat, fruits, nuts and cotton. The exports are valued at about $1 billion a year, and the tariffs would go as high as 100%. Brazil is also considering sanctions against U.S. intellectual property, including compulsory licensing in pharmaceuticals, music and software.
The Obama Administration appreciates the damage this retaliation would cause, so in April it sent Deputy U.S. Trade Representative Miriam Sapiro to negotiate. She came back with a promise from Brazil to postpone the sanctions for 60 days while it considers a U.S. offer to—get this—let American taxpayers subsidize Brazilian cotton growers.
That's right. Rather than reduce the U.S. subsidies to American cotton farmers that are the cause of the trade fight, the Administration is proposing that U.S. taxpayers also compensate Brazilian cotton farmers for the harm done by the U.S. subsidies. Thus the absurd U.S. cotton program would dip into the Commodity Credit Corporation to pay what is a bribe to Brazil so it won't retaliate.
Talk about taxpayer double jeopardy. As Senator Richard Lugar (R., Ind.) said recently, the commodity credit program was established to assist U.S. agriculture, "not to pay restitution to foreign farmers who won a trade complaint against a U.S. farm subsidy program."
Mr. Lugar wants the subsidies to U.S. farmers cut by the amount that will have to be sent to Brazil. He adds that a better option would be to take on the trade-distortions of the cotton program. "I am prepared to introduce legislation to achieve these immediate reforms," he wrote in an April 30 letter to President Obama.
This is probably tilting at political windmills, since Mr. Obama has shown no appetite for trade promotion, much less confronting a cotton lobby supported by such Democrats as Arkansas Senator Blanche Lincoln. But we're glad to see that at least Mr. Lugar is willing to call out the absurdity of U.S. taxpayers subsidizing foreign farmers to satisfy the greed of a few American cotton growers.
Thursday, May 13, 2010
The Case for the New START Treaty, by Secretary Gates
The Case for the New START Treaty. By ROBERT M. GATES
The treaty has the unanimous support of America's military leadership.
WSJ, May 13, 2010
I first began working on strategic arms control with the Russians in 1970, an effort that led to the first Strategic Arms Limitation Agreement with Moscow two years later.
The key question then and in the decades since has always been the same: Is the United States better off with an agreement or without it? The answer for each successive president has always been "with an agreement." The U.S. Senate has always agreed, approving each treaty by lopsided, bipartisan margins.
The same answer holds true for the New START agreement: The U.S. is far better off with this treaty than without it. It strengthens the security of the U.S. and our allies and promotes strategic stability between the world's two major nuclear powers. The treaty accomplishes these goals in several ways.
First, it limits significantly U.S. and Russian strategic nuclear arsenals and establishes an extensive verification regime to ensure that Russia is complying with its treaty obligations. These include short-notice inspections of both deployed and nondeployed systems, verification of the numbers of warheads actually carried on Russian strategic missiles, and unique identifiers that will help us track—for the very first time—all accountable strategic nuclear delivery systems.
Since the expiration of the old START Treaty in December 2009, the U.S. has had none of these safeguards. The new treaty will put them back in place, strengthen many of them, and create a verification regime that will provide for greater transparency and predictability between our two countries, to include substantial visibility into the development of Russian nuclear forces.
Second, the treaty preserves the U.S. nuclear arsenal as a vital pillar of our nation's and our allies' security posture. Under this treaty, the U.S. will maintain our powerful nuclear triad—ICBMs, submarine launched ballistic missiles (SLBMs) and bombers—and we will retain the ability to change our force mix as we see fit. Based on recommendations of the Joint Chiefs of Staff, we plan to meet the Treaty's limits by retaining a triad of up to 420 ICBMs, 14 submarines carrying up to 240 SLBMs, and up to 60 nuclear-capable heavy bombers.
Third, and related, the treaty is buttressed by credible modernization plans and long-term funding for the U.S. nuclear weapons stockpile and the infrastructure that supports it. This administration is proposing to spend $80 billion over the next decade to rebuild and sustain America's aging nuclear infrastructure—especially our national weapons labs, and our science, technology and engineering base. This week the president is providing a report to the Congress on investments planned over the next 10 years to sustain and modernize our nuclear weapons, their delivery systems, and supporting infrastructure.
Fourth, the treaty will not constrain the U.S. from developing and deploying defenses against ballistic missiles, as we have made clear to the Russian government. The U.S. will continue to deploy and improve the interceptors that defend our homeland—those based in California and Alaska. We are also moving forward with plans to field missile defense systems to protect our troops and partners in Europe, the Middle East, and Northeast Asia against the dangerous threats posed by rogue nations like North Korea and Iran.
Finally, the treaty will not restrict America's ability to develop and deploy conventional prompt global strike capabilities—that is, the ability to hit targets anywhere in the world in less than an hour using conventional explosive warheads fitted to long-range missiles.
These delivery systems—be they land or sea based—would count against the new treaty limits, but if we deploy them it would be in very limited numbers. We are currently assessing other kinds of long-range strike systems that would not count under the treaty.
The New START Treaty has the unanimous support of America's military leadership—to include the chairman of the Joint Chiefs of Staff, all of the service chiefs, and the commander of the U.S. Strategic Command, the organization responsible for our strategic nuclear deterrent. For nearly 40 years, treaties to limit or reduce nuclear weapons have been approved by the U.S. Senate by strong bipartisan majorities. This treaty deserves a similar reception and result—on account of the dangerous weapons it reduces, the critical defense capabilities it preserves, the strategic stability it maintains, and, above all, the security it provides to the American people.
Mr. Gates is secretary of defense.
The treaty has the unanimous support of America's military leadership.
WSJ, May 13, 2010
I first began working on strategic arms control with the Russians in 1970, an effort that led to the first Strategic Arms Limitation Agreement with Moscow two years later.
The key question then and in the decades since has always been the same: Is the United States better off with an agreement or without it? The answer for each successive president has always been "with an agreement." The U.S. Senate has always agreed, approving each treaty by lopsided, bipartisan margins.
The same answer holds true for the New START agreement: The U.S. is far better off with this treaty than without it. It strengthens the security of the U.S. and our allies and promotes strategic stability between the world's two major nuclear powers. The treaty accomplishes these goals in several ways.
First, it limits significantly U.S. and Russian strategic nuclear arsenals and establishes an extensive verification regime to ensure that Russia is complying with its treaty obligations. These include short-notice inspections of both deployed and nondeployed systems, verification of the numbers of warheads actually carried on Russian strategic missiles, and unique identifiers that will help us track—for the very first time—all accountable strategic nuclear delivery systems.
Since the expiration of the old START Treaty in December 2009, the U.S. has had none of these safeguards. The new treaty will put them back in place, strengthen many of them, and create a verification regime that will provide for greater transparency and predictability between our two countries, to include substantial visibility into the development of Russian nuclear forces.
Second, the treaty preserves the U.S. nuclear arsenal as a vital pillar of our nation's and our allies' security posture. Under this treaty, the U.S. will maintain our powerful nuclear triad—ICBMs, submarine launched ballistic missiles (SLBMs) and bombers—and we will retain the ability to change our force mix as we see fit. Based on recommendations of the Joint Chiefs of Staff, we plan to meet the Treaty's limits by retaining a triad of up to 420 ICBMs, 14 submarines carrying up to 240 SLBMs, and up to 60 nuclear-capable heavy bombers.
Third, and related, the treaty is buttressed by credible modernization plans and long-term funding for the U.S. nuclear weapons stockpile and the infrastructure that supports it. This administration is proposing to spend $80 billion over the next decade to rebuild and sustain America's aging nuclear infrastructure—especially our national weapons labs, and our science, technology and engineering base. This week the president is providing a report to the Congress on investments planned over the next 10 years to sustain and modernize our nuclear weapons, their delivery systems, and supporting infrastructure.
Fourth, the treaty will not constrain the U.S. from developing and deploying defenses against ballistic missiles, as we have made clear to the Russian government. The U.S. will continue to deploy and improve the interceptors that defend our homeland—those based in California and Alaska. We are also moving forward with plans to field missile defense systems to protect our troops and partners in Europe, the Middle East, and Northeast Asia against the dangerous threats posed by rogue nations like North Korea and Iran.
Finally, the treaty will not restrict America's ability to develop and deploy conventional prompt global strike capabilities—that is, the ability to hit targets anywhere in the world in less than an hour using conventional explosive warheads fitted to long-range missiles.
These delivery systems—be they land or sea based—would count against the new treaty limits, but if we deploy them it would be in very limited numbers. We are currently assessing other kinds of long-range strike systems that would not count under the treaty.
The New START Treaty has the unanimous support of America's military leadership—to include the chairman of the Joint Chiefs of Staff, all of the service chiefs, and the commander of the U.S. Strategic Command, the organization responsible for our strategic nuclear deterrent. For nearly 40 years, treaties to limit or reduce nuclear weapons have been approved by the U.S. Senate by strong bipartisan majorities. This treaty deserves a similar reception and result—on account of the dangerous weapons it reduces, the critical defense capabilities it preserves, the strategic stability it maintains, and, above all, the security it provides to the American people.
Mr. Gates is secretary of defense.
Wednesday, May 12, 2010
The Price of Wind - The 'clean energy revolution' is expensive
The Price of Wind. WSJ Editorial
The 'clean energy revolution' is expensive
WSJ, May 12, 2010
The ferocious opposition from Massachusetts liberals to the Cape Wind project has provided a useful education in green energy politics. And now that the Nantucket Sound wind farm has won federal approval, this decade-long saga may prove edifying in green energy economics too: Namely, the price of electricity from wind is more than twice what consumers now pay.
On Monday, Cape Wind asked state regulators to approve a 15-year purchasing contract with the utility company National Grid at 20.7 cents per kilowatt hour, starting in 2013 and rising at 3.5% annually thereafter. Consumers pay around nine cents for conventional power today. The companies expect average electric bills to jump by about $1.59 a month, because electricity is electricity no matter how it is generated, and Cape Wind's 130 turbines will generate so little of it in the scheme of the overall New England market.
Still, that works out to roughly $443 million in new energy costs, and that doesn't count the federal subsidies that Cape Wind will receive from national taxpayers. It does, however, include the extra 6.1 cents per kilowatt hour that Massachusetts utilities are mandated to pay for wind, solar and the like under a 2008 state law called the Green Communities Act. Also under that law, at least 15% of power company portfolios must come from renewable sources by 2020.
Two weeks ago, U.S. Interior Secretary Ken Salazar approved Cape Wind, placing it in the vanguard of "a clean energy revolution." A slew of environmental and political outfits have since filed multiple lawsuits for violations of the Endangered Species Act, the National Environmental Policy Act, the Outer Continental Shelf Lands Act, certain tribal-protection laws, the Clean Water Act, the Migratory Bird Treaty Act and the Rivers and Harbors Act.
There's comic irony in this clean energy revolution getting devoured by the archaic regulations of previous clean energy revolutions. But given that taxpayers will be required to pay to build Cape Wind and then required to buy its product at prices twice normal rates, opponents might have more success if they simply pointed out what a lousy deal it is.
The 'clean energy revolution' is expensive
WSJ, May 12, 2010
The ferocious opposition from Massachusetts liberals to the Cape Wind project has provided a useful education in green energy politics. And now that the Nantucket Sound wind farm has won federal approval, this decade-long saga may prove edifying in green energy economics too: Namely, the price of electricity from wind is more than twice what consumers now pay.
On Monday, Cape Wind asked state regulators to approve a 15-year purchasing contract with the utility company National Grid at 20.7 cents per kilowatt hour, starting in 2013 and rising at 3.5% annually thereafter. Consumers pay around nine cents for conventional power today. The companies expect average electric bills to jump by about $1.59 a month, because electricity is electricity no matter how it is generated, and Cape Wind's 130 turbines will generate so little of it in the scheme of the overall New England market.
Still, that works out to roughly $443 million in new energy costs, and that doesn't count the federal subsidies that Cape Wind will receive from national taxpayers. It does, however, include the extra 6.1 cents per kilowatt hour that Massachusetts utilities are mandated to pay for wind, solar and the like under a 2008 state law called the Green Communities Act. Also under that law, at least 15% of power company portfolios must come from renewable sources by 2020.
Two weeks ago, U.S. Interior Secretary Ken Salazar approved Cape Wind, placing it in the vanguard of "a clean energy revolution." A slew of environmental and political outfits have since filed multiple lawsuits for violations of the Endangered Species Act, the National Environmental Policy Act, the Outer Continental Shelf Lands Act, certain tribal-protection laws, the Clean Water Act, the Migratory Bird Treaty Act and the Rivers and Harbors Act.
There's comic irony in this clean energy revolution getting devoured by the archaic regulations of previous clean energy revolutions. But given that taxpayers will be required to pay to build Cape Wind and then required to buy its product at prices twice normal rates, opponents might have more success if they simply pointed out what a lousy deal it is.
Saturday, May 1, 2010
India's Government By Quota - The affirmative-action plan to eliminate caste discrimination was supposed to last 10 years. Instead it has become a permanent, and divisive, fact of life
India's Government By Quota. By SHIKHA DALMIA
The affirmative-action plan to eliminate caste discrimination was supposed to last 10 years. Instead it has become a permanent, and divisive, fact of life.WSJ, May 01, 2010
For nearly half a century, group or racial preferences have been America's prescribed remedy for racism and other -isms standing in the way of social equality. But anyone wishing to study the unintended side-effects of this medicine on the body politic need only look at India. There reactionary groups are trying to co-opt a women's quota bill, not to create an egalitarian utopia, but its opposite.
India's ruling secular Congress party has joined hands with Hindu nationalist parties on a bill to guarantee 33% seats in the parliament and state legislatures to women. This is on top of a similar quota that women enjoy at the local or panchayat level. The bill sailed through the upper house but has met stiff resistance by India's lower-caste parties. Why? Because it threatens their monopoly on the country's quota regime.
Just as racism is the bane of America, caste is the bane of India; its rigid strictures for centuries sustained a stratified society where birth is destiny. Although caste has declined in India's large, cosmopolitan cities, elsewhere this system still restricts social mobility for the country's 100 million dalits (untouchables). They are not only consigned to demeaning jobs but they're not even allowed to pray in the same temples as upper castes.
But the scheme that India's founders devised to eradicate the caste system has actually deepened the country's caste divide, and created several more. The women's quota bill is only the latest development in the competition for victimhood status that has pitted every group with any grievance, real or imagined, against every other.
India's founders began on the right track, constitutionally banning untouchability in 1950 and, just as in America, guaranteeing equal treatment under the law for everyone regardless of caste, sex, religion or race. But then came the fatal leap. They created a list or "schedule" of all the dalit sub-castes deserving preferential treatment and handed them 17.5% of the seats in the parliament and state legislatures. They also gave them 22.5% of all public-sector jobs and guaranteed spots in public or publicly funded universities.
The scheme was supposed to last 10 years. Instead it assumed a life of its own, making scheduled-caste status a bigger driver of success than individual merit (at least before liberalization opened opportunities in the private sector).
The tipping point came in the late 1980s when the government's Mandal Commission. This body, charged with examining the plight of the poor and disenfranchised, concluded in its final report that the original list of scheduled castes was too short. It recommended a new, catch-all category called Other Backward Classes covering over half the population and called for reserving 49.5% government jobs and university seats for these groups
The report caused an uproar. Hindu students from nonscheduled castes, particularly from modest backgrounds, exploded into riots. Already rubbed raw from the existing quota regime which allowed academically inferior, scheduled-caste candidates to breeze into the best universities and land secure government jobs while they struggled, they took to the streets. A few immolated themselves, one big reason why the government collapsed in November 1990. But the quota system survived, and post-riot governments have slowly expanded it.
Quotas have become a fact of life in India because they are the major currency with which Indian politicians buy votes. In a few states with their own quotas, almost 70% of government jobs and university seats go to the reserved castes.
The major political resistance to the quota regime during the Mandal riots came from Hindu nationalist parties—but that was before they found a way to make it work for them. In some states like Rajasthan they have actually instituted quotas for the poor "forward castes"—code for upper-caste Hindus.
And these parties wholeheartedly back the latest women's quota bill because it will simultaneously allow them to: establish their progressive bona fides; once again stick it to Muslims, arguably the only genuinely disenfranchised minority without its own legislative quota; and consolidate their power base in parliament since the women elected are likely to be relatively well-off Hindus.
A tragi-comic note in this drama is Raj Thackeray, an ultra-nativist, Hindu politician from Mumbai who wants to chase all out-of-state residents out of his city. He is warning the lower-caste leaders to show respect for women by supporting this bill or else "they will be given a lesson on it."
Protests have broken out in the country, with Muslim and lower-caste women opposing it as currently written and urbane, city feminists demanding its immediate passage. But the lower-caste parties' only objection is that the quota bill doesn't contain a sub-quota for lower-caste women. In other words, the debate in India is no longer about using quotas to redistribute opportunity—it is about redistributing the quotas themselves. No politician or party is opposing this bill on principle.
It would be tempting to blame the abuse of quotas on the degraded state of Indian politics. But, in reality, India is demonstrating the reductio ad absurdum logic of quotas.
Progressives in India—as in America—believe that equal protection of individual rights is insufficient to create equality because it does nothing to address private discrimination. Protecting the property rights of persecuted castes is hardly enough if they can't get jobs in the first place. Hence, in their view, government has to give persecuted groups a leg up to equalize opportunity.
But this turns the system into a zero-sum game, triggering a race for the spoils in which powerful groups can seize the advantage. Because quotas or preferences don't originally apply to them, they become the new aggrieved—victims of "reverse discrimination." And it is easy for them to mobilize this sentiment into a political movement precisely because they are powerful.
India's lesson is that abrogating individual rights through group preferences or quotas institutionalizes the very divisions that these policies are supposed to erase. Human prejudice can't be legislated away. That requires social activism to coax, cajole and shame people out of their intolerance. There are no short cuts.
Ms. Dalmia is a senior analyst at the Reason Foundation and a Forbes columnist.
The affirmative-action plan to eliminate caste discrimination was supposed to last 10 years. Instead it has become a permanent, and divisive, fact of life.WSJ, May 01, 2010
For nearly half a century, group or racial preferences have been America's prescribed remedy for racism and other -isms standing in the way of social equality. But anyone wishing to study the unintended side-effects of this medicine on the body politic need only look at India. There reactionary groups are trying to co-opt a women's quota bill, not to create an egalitarian utopia, but its opposite.
India's ruling secular Congress party has joined hands with Hindu nationalist parties on a bill to guarantee 33% seats in the parliament and state legislatures to women. This is on top of a similar quota that women enjoy at the local or panchayat level. The bill sailed through the upper house but has met stiff resistance by India's lower-caste parties. Why? Because it threatens their monopoly on the country's quota regime.
Just as racism is the bane of America, caste is the bane of India; its rigid strictures for centuries sustained a stratified society where birth is destiny. Although caste has declined in India's large, cosmopolitan cities, elsewhere this system still restricts social mobility for the country's 100 million dalits (untouchables). They are not only consigned to demeaning jobs but they're not even allowed to pray in the same temples as upper castes.
But the scheme that India's founders devised to eradicate the caste system has actually deepened the country's caste divide, and created several more. The women's quota bill is only the latest development in the competition for victimhood status that has pitted every group with any grievance, real or imagined, against every other.
India's founders began on the right track, constitutionally banning untouchability in 1950 and, just as in America, guaranteeing equal treatment under the law for everyone regardless of caste, sex, religion or race. But then came the fatal leap. They created a list or "schedule" of all the dalit sub-castes deserving preferential treatment and handed them 17.5% of the seats in the parliament and state legislatures. They also gave them 22.5% of all public-sector jobs and guaranteed spots in public or publicly funded universities.
The scheme was supposed to last 10 years. Instead it assumed a life of its own, making scheduled-caste status a bigger driver of success than individual merit (at least before liberalization opened opportunities in the private sector).
The tipping point came in the late 1980s when the government's Mandal Commission. This body, charged with examining the plight of the poor and disenfranchised, concluded in its final report that the original list of scheduled castes was too short. It recommended a new, catch-all category called Other Backward Classes covering over half the population and called for reserving 49.5% government jobs and university seats for these groups
The report caused an uproar. Hindu students from nonscheduled castes, particularly from modest backgrounds, exploded into riots. Already rubbed raw from the existing quota regime which allowed academically inferior, scheduled-caste candidates to breeze into the best universities and land secure government jobs while they struggled, they took to the streets. A few immolated themselves, one big reason why the government collapsed in November 1990. But the quota system survived, and post-riot governments have slowly expanded it.
Quotas have become a fact of life in India because they are the major currency with which Indian politicians buy votes. In a few states with their own quotas, almost 70% of government jobs and university seats go to the reserved castes.
The major political resistance to the quota regime during the Mandal riots came from Hindu nationalist parties—but that was before they found a way to make it work for them. In some states like Rajasthan they have actually instituted quotas for the poor "forward castes"—code for upper-caste Hindus.
And these parties wholeheartedly back the latest women's quota bill because it will simultaneously allow them to: establish their progressive bona fides; once again stick it to Muslims, arguably the only genuinely disenfranchised minority without its own legislative quota; and consolidate their power base in parliament since the women elected are likely to be relatively well-off Hindus.
A tragi-comic note in this drama is Raj Thackeray, an ultra-nativist, Hindu politician from Mumbai who wants to chase all out-of-state residents out of his city. He is warning the lower-caste leaders to show respect for women by supporting this bill or else "they will be given a lesson on it."
Protests have broken out in the country, with Muslim and lower-caste women opposing it as currently written and urbane, city feminists demanding its immediate passage. But the lower-caste parties' only objection is that the quota bill doesn't contain a sub-quota for lower-caste women. In other words, the debate in India is no longer about using quotas to redistribute opportunity—it is about redistributing the quotas themselves. No politician or party is opposing this bill on principle.
It would be tempting to blame the abuse of quotas on the degraded state of Indian politics. But, in reality, India is demonstrating the reductio ad absurdum logic of quotas.
Progressives in India—as in America—believe that equal protection of individual rights is insufficient to create equality because it does nothing to address private discrimination. Protecting the property rights of persecuted castes is hardly enough if they can't get jobs in the first place. Hence, in their view, government has to give persecuted groups a leg up to equalize opportunity.
But this turns the system into a zero-sum game, triggering a race for the spoils in which powerful groups can seize the advantage. Because quotas or preferences don't originally apply to them, they become the new aggrieved—victims of "reverse discrimination." And it is easy for them to mobilize this sentiment into a political movement precisely because they are powerful.
India's lesson is that abrogating individual rights through group preferences or quotas institutionalizes the very divisions that these policies are supposed to erase. Human prejudice can't be legislated away. That requires social activism to coax, cajole and shame people out of their intolerance. There are no short cuts.
Ms. Dalmia is a senior analyst at the Reason Foundation and a Forbes columnist.
Friday, April 30, 2010
Ironing Out the Kinks in the Dodd Bill - Killing the $50 billion bailout fund would be a good start
Ironing Out the Kinks in the Dodd Bill. By PHILLIP SWAGEL
Killing the $50 billion bailout fund would be a good startWSJ, Apr 30, 2010
Imagine a future in which Sen. Chris Dodd's financial reform bill was law and a firm like AIG or Lehman Brothers failed. Without a vote of Congress, the government could guarantee the firm's debts or put money into the failing firm to keep it afloat and reduce the hit taken by creditors such as banks and pension funds that lent the firm money.
The temptation will be huge; after all, no government official will want to be blamed for allowing another post-Lehman meltdown. But so is the danger that risky behavior and bailouts will become more common.
This scenario is a key defect in the Dodd bill that the Senate has begun to debate. True, the shareholders of a failed financial firm would be wiped out, but creditors—the people who lent it the money that got it in trouble in the first place—will be bailed out. And this has real consequences, because if market participants know they can be rescued for imprudent behavior, they will likely behave more imprudently.
In coming days and weeks, as amendments to the Dodd bill are publicly offered and private negotiations proceed, removing the $50 billion bailout fund would be a good start. A more important way to address the problem of "too big to fail" is to have a resolution process centered on bankruptcy—and in which bailouts would require a vote of Congress. Bankruptcy would make it more likely that the division of resources would be in the hands of judges, not political officials using public money to support favored creditors. When GM and Chrysler were failing, the two firms were used as conduits for a transfer of TARP money to the auto unions.
Other aspects of the Dodd proposal are worrisome. One need not think too creatively to imagine a media-obsessed head of a new consumer financial protection agency looking to impose her will across all aspects of commerce, with attendant hits to lending for consumers and businesses, small and large. The idea of a systemic risk council empowered to gather data and ensure that no firm slips between regulatory cracks is useful—and on this there is bipartisan agreement. Yet regulators and bank supervisors have considerable power already and were not able to head off the recent crisis. Giving more power to a new regulatory agency is not a sure-fire solution and could have unintended negative consequences for jobs and growth.
The bill's approach to taking derivatives trading out of banks is similarly problematic. This trading takes place in large financial institutions for a reason: These are the firms with the expertise and large balance sheets needed to carry it out. And while derivatives can be misused, the bottom line is that they have socially useful purposes, including for financial firms. A community bank, for example, might legitimately want to use derivatives to offset some of the risk it faces from its lending for housing and commercial real estate in a local community. By hobbling this activity, the approach espoused by Sen. Dodd and Sen. Blanche Lincoln threatens to increase rather than limit risk.
Administration officials dissolve into mumbles when asked about the derivatives piece of the bill, suggesting that they recognize the problem. Hopefully they will have the courage to fix this even if it gives the appearance of seeming to "weaken" the bill.
Finally, financial regulatory reform will not be complete without addressing the awkward status of Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) whose loan guarantees contributed to the housing bubble behind the crisis. It was appropriate to take over Fannie and Freddie to avoid further risk to the financial sector, but the continued conservatorship of the two firms means that taxpayers remain on the hook for their losses, including losses suffered intentionally to support the administration's public policy goals such as reducing foreclosures.
An appropriate future for Fannie and Freddie would focus them on the socially useful function of securitizing mortgages and thereby fostering housing liquidity. There might still be a role for a government backstop against another catastrophic decline in housing prices, but this public support should be made explicit and the GSEs should pay for it.
With the government standing behind Fannie and Freddie, their huge portfolios of mortgage-backed securities are no longer needed as a buyer of last resort for bundled mortgages to ensure that funding is available for housing. The portfolios were the channel through which Fannie and Freddie enjoyed private gains while imposing risks on taxpayers, and they were the source of systemic risk posed by the firms. The financial regulatory reform bill should ensure a new and sustainable model for Fannie and Freddie that makes explicit any public support for the firms and limits taxpayer exposure to future losses.
There is bipartisan agreement that financial reform is needed. But the details matter. On nonbank resolution, derivatives and consumer protection, the approach in the Dodd bill could well increase financial risks to the economy rather than heading them off. Fixing these issues, along with addressing the risks posed by Fannie and Freddie, will yield a reform that truly learns the lessons from the financial crisis.
Mr. Swagel is a visiting professor at the McDonough School of Business, Georgetown University, and nonresident scholar at the American Enterprise Institute. He was assistant secretary for economic policy at the Treasury Department from December 2006 to January 2009.
Killing the $50 billion bailout fund would be a good startWSJ, Apr 30, 2010
Imagine a future in which Sen. Chris Dodd's financial reform bill was law and a firm like AIG or Lehman Brothers failed. Without a vote of Congress, the government could guarantee the firm's debts or put money into the failing firm to keep it afloat and reduce the hit taken by creditors such as banks and pension funds that lent the firm money.
The temptation will be huge; after all, no government official will want to be blamed for allowing another post-Lehman meltdown. But so is the danger that risky behavior and bailouts will become more common.
This scenario is a key defect in the Dodd bill that the Senate has begun to debate. True, the shareholders of a failed financial firm would be wiped out, but creditors—the people who lent it the money that got it in trouble in the first place—will be bailed out. And this has real consequences, because if market participants know they can be rescued for imprudent behavior, they will likely behave more imprudently.
In coming days and weeks, as amendments to the Dodd bill are publicly offered and private negotiations proceed, removing the $50 billion bailout fund would be a good start. A more important way to address the problem of "too big to fail" is to have a resolution process centered on bankruptcy—and in which bailouts would require a vote of Congress. Bankruptcy would make it more likely that the division of resources would be in the hands of judges, not political officials using public money to support favored creditors. When GM and Chrysler were failing, the two firms were used as conduits for a transfer of TARP money to the auto unions.
Other aspects of the Dodd proposal are worrisome. One need not think too creatively to imagine a media-obsessed head of a new consumer financial protection agency looking to impose her will across all aspects of commerce, with attendant hits to lending for consumers and businesses, small and large. The idea of a systemic risk council empowered to gather data and ensure that no firm slips between regulatory cracks is useful—and on this there is bipartisan agreement. Yet regulators and bank supervisors have considerable power already and were not able to head off the recent crisis. Giving more power to a new regulatory agency is not a sure-fire solution and could have unintended negative consequences for jobs and growth.
The bill's approach to taking derivatives trading out of banks is similarly problematic. This trading takes place in large financial institutions for a reason: These are the firms with the expertise and large balance sheets needed to carry it out. And while derivatives can be misused, the bottom line is that they have socially useful purposes, including for financial firms. A community bank, for example, might legitimately want to use derivatives to offset some of the risk it faces from its lending for housing and commercial real estate in a local community. By hobbling this activity, the approach espoused by Sen. Dodd and Sen. Blanche Lincoln threatens to increase rather than limit risk.
Administration officials dissolve into mumbles when asked about the derivatives piece of the bill, suggesting that they recognize the problem. Hopefully they will have the courage to fix this even if it gives the appearance of seeming to "weaken" the bill.
Finally, financial regulatory reform will not be complete without addressing the awkward status of Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) whose loan guarantees contributed to the housing bubble behind the crisis. It was appropriate to take over Fannie and Freddie to avoid further risk to the financial sector, but the continued conservatorship of the two firms means that taxpayers remain on the hook for their losses, including losses suffered intentionally to support the administration's public policy goals such as reducing foreclosures.
An appropriate future for Fannie and Freddie would focus them on the socially useful function of securitizing mortgages and thereby fostering housing liquidity. There might still be a role for a government backstop against another catastrophic decline in housing prices, but this public support should be made explicit and the GSEs should pay for it.
With the government standing behind Fannie and Freddie, their huge portfolios of mortgage-backed securities are no longer needed as a buyer of last resort for bundled mortgages to ensure that funding is available for housing. The portfolios were the channel through which Fannie and Freddie enjoyed private gains while imposing risks on taxpayers, and they were the source of systemic risk posed by the firms. The financial regulatory reform bill should ensure a new and sustainable model for Fannie and Freddie that makes explicit any public support for the firms and limits taxpayer exposure to future losses.
There is bipartisan agreement that financial reform is needed. But the details matter. On nonbank resolution, derivatives and consumer protection, the approach in the Dodd bill could well increase financial risks to the economy rather than heading them off. Fixing these issues, along with addressing the risks posed by Fannie and Freddie, will yield a reform that truly learns the lessons from the financial crisis.
Mr. Swagel is a visiting professor at the McDonough School of Business, Georgetown University, and nonresident scholar at the American Enterprise Institute. He was assistant secretary for economic policy at the Treasury Department from December 2006 to January 2009.
Saturday, April 24, 2010
Miss Me Yet? The Freedom Agenda After George W. Bush
Miss Me Yet? The Freedom Agenda After George W. Bush. By Bari Weiss
Dissidents in the world's most oppressive countries aren't feeling the love from President Obama.WSJ, Apr 24, 2010
Dallas
No one seems to know precisely who is behind the "Miss Me Yet?" billboard—the cheeky one featuring a grinning George W. Bush that looks out over I-35 near Wyoming, Minn. But Syrian dissident Ahed Al-Hendi sympathizes with the thought.
In 2006, Mr. Hendi was browsing pro-democracy Web sites in a Damascus Internet café when plainclothes cops carrying automatic guns swooped in, cuffed him, and threw him into the trunk of a car. He spent over a month in prison, some of it alone in a 5-by-3 windowless basement cell where he listened to his friend being tortured in the one next door. Those screams, he says, were cold comfort—at least he knew his friend hadn't been killed.
Mr. Hendi was one of the lucky ones: He's now living in Maryland as a political refugee where he works for an organization called Cyberdissidents.org. And this past Monday, he joined other international dissidents at a conference sponsored by the Bush Institute at Southern Methodist University to discuss the way digital tools can be used to resist repressive regimes.
He also got to meet the 43rd president. In a private breakfast hosted by Mr. and Mrs. Bush, Mr. Hendi's message to the former president was simple: "We miss you." There have been "a lot of changes" under the current administration, he added, and not for the better.
Adrian Hong, who was imprisoned in China in 2006 for his work helping North Koreans escape the country (a modern underground railroad), echoed that idea. "When I was released [after 10 days] I was told it was because of very strong messaging from the White House and the culture you set," he told Mr. Bush.
The former president, now sporting a deep tan, didn't mention President Obama once on or off the record. The most he would say was, "I'm really concerned about an isolationist mentality . . . I don't think it lives up to the values of our country." The dissidents weren't so diplomatic.
Mr. Hendi elaborated on the policy changes he thinks Mr. Obama has made toward his home country. "In Syria, when a single dissident was arrested during the administration of George W. Bush, at the very least the White House spokesman would condemn it. Under the Obama administration: nothing."
Nor is Mr. Hendi a fan of this administration's efforts to engage the regime, most recently by deciding to send an ambassador to Damascus for the first time since 2005. "This gives confidence to the regime," he says. "They are not capable of a dialogue; they don't believe in it. They believe in force."
Mr. Hong put things this way: "When you look at the championing of dissidents . . . and even the rhetoric, it's dropped off sharply." Under Mr. Bush, he says, there were many high-profile meetings with North Korean dissidents. "They went out of their way to show this was a priority."
Then there is Marcel Granier, the president of RCTV, Venezuela's oldest and most popular television station. He employs several thousand people—or at least he did until Hugo Chávez cancelled the network's license in 2007. Now, he's struggling to maintain an independent channel on cable: Mr. Chávez ordered the cable networks not to carry his station in January. Government supporters have attacked his home with tear gas twice, yet he remains in the country, tirelessly advocating for media freedom.
Like many of the democrats at the conference, Mr. Granier was excited by Mr. Obama's historic election, and inspired by the way he energized American voters. But a year and a half later, he's disturbed by the administration's silence as his country slips rapidly towards dictatorship. "In Afghanistan," he quips, "at least they know that America will be involved for the next 18 months."
This sense of abandonment has been fueled by real policy shifts. Just this week word came that the administration cut funds to promote democracy in Egypt by half. Programs in countries like Jordan and Iran have also faced cuts. Then there are the symbolic gestures: letting the Dalai Lama out the back door, paltry statements of support for Iranian demonstrators, smiling and shaking hands with Mr. Chávez, and so on.
Daniel Baer, a representative from the State Department who participated in the conference, dismissed the notion that the White House has distanced itself from human-rights promotion as a baseless "meme" when I raised the issue. But in fact all of this is of a piece of Mr. Obama's overarching strategy to make it abundantly clear that he is not his predecessor.
Mr. Bush is almost certainly aware that the freedom agenda, the centerpiece of his presidency, has become indelibly linked to the war in Iraq and to regime change by force. Too bad. The peaceful promotion of human rights and democracy—in part by supporting the individuals risking their lives for liberty—are consonant with America's most basic values. Standing up for them should not be a partisan issue.
Yet for now Mr. Bush is simply not the right poster boy: He can't successfully rebrand and depoliticize the freedom agenda. So perhaps he hopes that by sitting back he can let Americans who remain wary of publicly embracing this cause become comfortable with it again. For the sake of the courageous democrats in countries like Iran, Cuba, North Korea, Venezuela, Colombia, China and Russia, let's hope so.
Ms. Weiss is an assistant editorial features editor at the Journal.
Dissidents in the world's most oppressive countries aren't feeling the love from President Obama.WSJ, Apr 24, 2010
Dallas
No one seems to know precisely who is behind the "Miss Me Yet?" billboard—the cheeky one featuring a grinning George W. Bush that looks out over I-35 near Wyoming, Minn. But Syrian dissident Ahed Al-Hendi sympathizes with the thought.
In 2006, Mr. Hendi was browsing pro-democracy Web sites in a Damascus Internet café when plainclothes cops carrying automatic guns swooped in, cuffed him, and threw him into the trunk of a car. He spent over a month in prison, some of it alone in a 5-by-3 windowless basement cell where he listened to his friend being tortured in the one next door. Those screams, he says, were cold comfort—at least he knew his friend hadn't been killed.
Mr. Hendi was one of the lucky ones: He's now living in Maryland as a political refugee where he works for an organization called Cyberdissidents.org. And this past Monday, he joined other international dissidents at a conference sponsored by the Bush Institute at Southern Methodist University to discuss the way digital tools can be used to resist repressive regimes.
He also got to meet the 43rd president. In a private breakfast hosted by Mr. and Mrs. Bush, Mr. Hendi's message to the former president was simple: "We miss you." There have been "a lot of changes" under the current administration, he added, and not for the better.
Adrian Hong, who was imprisoned in China in 2006 for his work helping North Koreans escape the country (a modern underground railroad), echoed that idea. "When I was released [after 10 days] I was told it was because of very strong messaging from the White House and the culture you set," he told Mr. Bush.
The former president, now sporting a deep tan, didn't mention President Obama once on or off the record. The most he would say was, "I'm really concerned about an isolationist mentality . . . I don't think it lives up to the values of our country." The dissidents weren't so diplomatic.
Mr. Hendi elaborated on the policy changes he thinks Mr. Obama has made toward his home country. "In Syria, when a single dissident was arrested during the administration of George W. Bush, at the very least the White House spokesman would condemn it. Under the Obama administration: nothing."
Nor is Mr. Hendi a fan of this administration's efforts to engage the regime, most recently by deciding to send an ambassador to Damascus for the first time since 2005. "This gives confidence to the regime," he says. "They are not capable of a dialogue; they don't believe in it. They believe in force."
Mr. Hong put things this way: "When you look at the championing of dissidents . . . and even the rhetoric, it's dropped off sharply." Under Mr. Bush, he says, there were many high-profile meetings with North Korean dissidents. "They went out of their way to show this was a priority."
Then there is Marcel Granier, the president of RCTV, Venezuela's oldest and most popular television station. He employs several thousand people—or at least he did until Hugo Chávez cancelled the network's license in 2007. Now, he's struggling to maintain an independent channel on cable: Mr. Chávez ordered the cable networks not to carry his station in January. Government supporters have attacked his home with tear gas twice, yet he remains in the country, tirelessly advocating for media freedom.
Like many of the democrats at the conference, Mr. Granier was excited by Mr. Obama's historic election, and inspired by the way he energized American voters. But a year and a half later, he's disturbed by the administration's silence as his country slips rapidly towards dictatorship. "In Afghanistan," he quips, "at least they know that America will be involved for the next 18 months."
This sense of abandonment has been fueled by real policy shifts. Just this week word came that the administration cut funds to promote democracy in Egypt by half. Programs in countries like Jordan and Iran have also faced cuts. Then there are the symbolic gestures: letting the Dalai Lama out the back door, paltry statements of support for Iranian demonstrators, smiling and shaking hands with Mr. Chávez, and so on.
Daniel Baer, a representative from the State Department who participated in the conference, dismissed the notion that the White House has distanced itself from human-rights promotion as a baseless "meme" when I raised the issue. But in fact all of this is of a piece of Mr. Obama's overarching strategy to make it abundantly clear that he is not his predecessor.
Mr. Bush is almost certainly aware that the freedom agenda, the centerpiece of his presidency, has become indelibly linked to the war in Iraq and to regime change by force. Too bad. The peaceful promotion of human rights and democracy—in part by supporting the individuals risking their lives for liberty—are consonant with America's most basic values. Standing up for them should not be a partisan issue.
Yet for now Mr. Bush is simply not the right poster boy: He can't successfully rebrand and depoliticize the freedom agenda. So perhaps he hopes that by sitting back he can let Americans who remain wary of publicly embracing this cause become comfortable with it again. For the sake of the courageous democrats in countries like Iran, Cuba, North Korea, Venezuela, Colombia, China and Russia, let's hope so.
Ms. Weiss is an assistant editorial features editor at the Journal.
Friday, April 23, 2010
China and the US, Two Energy Giants: A Contrast In Approach
Two Energy Giants: A contrast in approach
IER, Apr 22, 2010
China’s economy is growing with dizzying speed, and the government is fueling the growth with plentiful energy. In fact, China’s electrification program and its ability to secure future oil supplies are second to none. By contrast, the U.S. economy is growing more slowly and its energy strategy is limiting that growth. The United States has slowed its electrification, adding only select forms of generating capacity, and has taken steps to reduce its flexibility in securing safe oil supplies.
China Setting Records: China Oil Demand, Coal Production and Vehicle Sales Up in 2010
During January, February, and March of this year, China was again setting records with huge year-over-year increases in oil demand. In February, China’s oil demand rose 19.4 percent over a year earlier, the second fastest rise on record. According to Reuters, China is the world’s second largest oil user (second to the United States) and consumed 8.65 million barrels of oil per day in February, an increase of 9.4 percent or 604,000 barrels per day over January’s consumption.[i] Oil imports were up 13.8 percent in March over February, reaching 4.95 million barrels per day, according to preliminary data from China’s General Administration of Customs.[ii] In part, these large oil increases are fueling China’s passenger car fleet. New passenger car sales rose 55 percent in February from a year earlier, following a 116 percent increase in January, most likely aided by the extension of government incentives to boost purchases of smaller vehicles and spur rural demand for cars. [iii]
China has spent nearly $200 billion on oil deals during the past few years, joining with more than 19 countries —including Russia, Turkmenistan, Kuwait, Yemen, Libya, Angola, Venezuela and Brazil— and paying for exploration, production, infrastructure construction, as well as “loans for energy” deals.[iv] Recently, China’s Sinopec International Petroleum Exploration and Production Company agreed to buy, for $4.65 billion, the 9 percent interest that ConocoPhillips holds in Syncrude,[v] a Canadian business involved in the production of oil sands (an asphalt-like heavy oil).[vi] Approval from the Canadian and Chinese governments is expected in the third quarter of this year.
Along with China’s Canadian oil pursuits, long thought to be a safe and secure supply for U.S. oil demand, the state-owned China Development Bank has promised to lend $20 billion to Venezuela to build new power plants, highways, and other projects, which will be repaid with Venezuelan crude oil. Venezuela’s President Hugo Chavez has long complained about the United States’ standing as the largest buyer of Venezuelan oil, and so he is more than pleased to offer his country’s oil to China instead.[vii] Both the Canadian crude and the Venezuelan crude are heavy oils, and the United States owns most of the refineries that can process heavy crude oils. So, to prepare itself for future heavy oil supplies, China has approved plans for construction of such a refinery. As the United States loses neighboring oil supplies to China, one wonders how the U.S. will meet future oil demand, especially as the Obama Administration has been slow to open new offshore areas to oil development (claiming further study is needed) but speedy at advocating climate legislation and a low-carbon fuel standard, both policies aimed at reducing the demand for fossil fuels without providing comparable energy substitutes.
Oil resources are not the only target on China’s energy wish-list. It also plans to increase its consumption of natural gas; last year, its liquefied natural gas imports rose by two-thirds, to 5.53 million tons or 7.7 billion cubic meters.[viii] China also continues to consume large quantities of its primary fuel, coal, in its industrial and electric generation sectors. According to China’s National Bureau of Statistics, the country’s coal output grew more than 28 percent, to well over 751 million tons in the first quarter of 2010. A report by China’s National Coal Association estimates China’s total coal production capacity exceeds 3.6 billion tons.[ix] This is in sharp contrast to coal mining in the United States, where the Environmental Protection Agency (EPA) has issued a new policy aimed at curbing mountain top removal mining[x] and is scrutinizing surface coal mine permits. EPA is revoking or blocking Clean Water Act permits for mountain top mining citing irreversible damage to the environment. Some of the permits were awarded years ago.[xi]
Seventy percent of China’s energy comes from coal,[xii] the most carbon-intensive fossil fuel. China already consumes more than twice the coal as the United States, and by 2030, China is expected to consume 3.7 times as much coal.[xiii] As a result, China emits more carbon dioxide than any other country in the world including the United States, and by 2030, it is expected to release 82 percent more carbon dioxide emissions than the United States.[xiv]
China’s Race to Electrification; U.S. Stagnation
Between 2004 and 2008, China added 346 gigawatts of generating capacity, of which 272 gigawatts were conventional thermal power (mostly coal) and 66 gigawatts were hydroelectric power. This compares to a total installed US hydroelectric capacity of 77 gigawatts. China is estimated to have added an additional 85 gigawatts in 2009, reaching a total of 874 gigawatts,[xv] about 15 percent less than the total capacity in the United States. Of the 85 gigawatts added in 2009, 51 gigawatts were conventional thermal, again mostly coal, 25 gigawatts were hydroelectric, and 9 gigawatts were wind power.[xvi] Many of China’s wind turbines were funded by the U.N.’s Clean Development Mechanism, under which wealthy countries fund projects in developing countries and receive carbon credits so long as those projects would not have been accomplished otherwise.[xvii]
In contrast, the United States added only 47 gigawatts of generating capacity from 2004 to 2008 (14 percent of the capacity China added), of which 26 gigawatts were natural gas-fired units and 18 gigawatts were wind turbines. New coal-fired capacity additions are practically non-existent in the United States primarily owing to objections regarding emissions of carbon dioxide. Coal-fired projects in the United States have either been cancelled or delayed because of permitting problems, reviews and re-reviews by EPA and resulting financing problems. While the United States has more coal than any other country in the world, with over 200 years of reserves at current usage rates, coal’s share of new U.S. generating markets has been replaced by natural gas and renewable units that are more politically in vogue.
China’s Economic Growth and Export Market
China’s economy, the second-largest in the world in terms of purchasing power, is currently about half the size of the U.S. gross domestic product. According to China’s central bank, the country’s economy grew at an annual rate of 10.7 percent in the fourth quarter of 2009,[xviii] a rate almost twice the U.S. rate of 5.6 percent for the same time period.[xix] And in the first quarter of 2010, China’s economy grew by 11.9 percent. Forecasters predict that China’s economy will exceed that of the United States in 10 to 15 years.[xx]
China became the world’s largest exporter last year, edging out Germany and the United States. Despite a decline in total world trade, China’s exports fell less than those of other big powers. A report by the World Trade Organization calculates that the total value of merchandise exports fell by 23 percent in 2009. Among the top ten exporters, Japan’s shipments were the worst affected, falling by 26 percent. Because China’s exports fell by only 16 percent, it is now the single largest exporter. The World Trade Organization expects trade to rebound by nearly 10 percent this year.[xxi]
Lessons to Be Learned
Many environmentalists and politicians seem to believe that China is winning the green energy race, but nothing could be further from reality.[xxii] China is in a race for energy—all forms of energy—to fuel its growing economy. The size and scope of its investments in conventional forms of energy dwarf their commitment to “green energy.” It is providing loans around the world to invest in future oil projects, and it cares not that the oil is less than the lightest and sweetest. Canadian oil sands and Venezuelan heavy crude are perfectly fine. China is building a coal-fired generating plant each and every week on average, and increasing its coal mining capacity to fuel them. This belies any stated concerns about increasing their carbon dioxide emissions, already the highest of any country in the world. China is building wind turbines too, but if wealthy countries are willing to pay—why not? It matters not at all that the transmission capacity is not yet there to operate almost a third of these wind turbines. And China’s large-scale hydroelectric projects are engineering feats par excellence, built regardless of environmental concerns.
China is ensuring energy supplies will be available to fuel its growing economy. The United States should take note.
References
China’s economy is growing with dizzying speed, and the government is fueling the growth with plentiful energy. In fact, China’s electrification program and its ability to secure future oil supplies are second to none. By contrast, the U.S. economy is growing more slowly and its energy strategy is limiting that growth. The United States has slowed its electrification, adding only select forms of generating capacity, and has taken steps to reduce its flexibility in securing safe oil supplies.
China Setting Records: China Oil Demand, Coal Production and Vehicle Sales Up in 2010
During January, February, and March of this year, China was again setting records with huge year-over-year increases in oil demand. In February, China’s oil demand rose 19.4 percent over a year earlier, the second fastest rise on record. According to Reuters, China is the world’s second largest oil user (second to the United States) and consumed 8.65 million barrels of oil per day in February, an increase of 9.4 percent or 604,000 barrels per day over January’s consumption.[i] Oil imports were up 13.8 percent in March over February, reaching 4.95 million barrels per day, according to preliminary data from China’s General Administration of Customs.[ii] In part, these large oil increases are fueling China’s passenger car fleet. New passenger car sales rose 55 percent in February from a year earlier, following a 116 percent increase in January, most likely aided by the extension of government incentives to boost purchases of smaller vehicles and spur rural demand for cars. [iii]
China has spent nearly $200 billion on oil deals during the past few years, joining with more than 19 countries —including Russia, Turkmenistan, Kuwait, Yemen, Libya, Angola, Venezuela and Brazil— and paying for exploration, production, infrastructure construction, as well as “loans for energy” deals.[iv] Recently, China’s Sinopec International Petroleum Exploration and Production Company agreed to buy, for $4.65 billion, the 9 percent interest that ConocoPhillips holds in Syncrude,[v] a Canadian business involved in the production of oil sands (an asphalt-like heavy oil).[vi] Approval from the Canadian and Chinese governments is expected in the third quarter of this year.
Along with China’s Canadian oil pursuits, long thought to be a safe and secure supply for U.S. oil demand, the state-owned China Development Bank has promised to lend $20 billion to Venezuela to build new power plants, highways, and other projects, which will be repaid with Venezuelan crude oil. Venezuela’s President Hugo Chavez has long complained about the United States’ standing as the largest buyer of Venezuelan oil, and so he is more than pleased to offer his country’s oil to China instead.[vii] Both the Canadian crude and the Venezuelan crude are heavy oils, and the United States owns most of the refineries that can process heavy crude oils. So, to prepare itself for future heavy oil supplies, China has approved plans for construction of such a refinery. As the United States loses neighboring oil supplies to China, one wonders how the U.S. will meet future oil demand, especially as the Obama Administration has been slow to open new offshore areas to oil development (claiming further study is needed) but speedy at advocating climate legislation and a low-carbon fuel standard, both policies aimed at reducing the demand for fossil fuels without providing comparable energy substitutes.
Oil resources are not the only target on China’s energy wish-list. It also plans to increase its consumption of natural gas; last year, its liquefied natural gas imports rose by two-thirds, to 5.53 million tons or 7.7 billion cubic meters.[viii] China also continues to consume large quantities of its primary fuel, coal, in its industrial and electric generation sectors. According to China’s National Bureau of Statistics, the country’s coal output grew more than 28 percent, to well over 751 million tons in the first quarter of 2010. A report by China’s National Coal Association estimates China’s total coal production capacity exceeds 3.6 billion tons.[ix] This is in sharp contrast to coal mining in the United States, where the Environmental Protection Agency (EPA) has issued a new policy aimed at curbing mountain top removal mining[x] and is scrutinizing surface coal mine permits. EPA is revoking or blocking Clean Water Act permits for mountain top mining citing irreversible damage to the environment. Some of the permits were awarded years ago.[xi]
Seventy percent of China’s energy comes from coal,[xii] the most carbon-intensive fossil fuel. China already consumes more than twice the coal as the United States, and by 2030, China is expected to consume 3.7 times as much coal.[xiii] As a result, China emits more carbon dioxide than any other country in the world including the United States, and by 2030, it is expected to release 82 percent more carbon dioxide emissions than the United States.[xiv]
China’s Race to Electrification; U.S. Stagnation
Between 2004 and 2008, China added 346 gigawatts of generating capacity, of which 272 gigawatts were conventional thermal power (mostly coal) and 66 gigawatts were hydroelectric power. This compares to a total installed US hydroelectric capacity of 77 gigawatts. China is estimated to have added an additional 85 gigawatts in 2009, reaching a total of 874 gigawatts,[xv] about 15 percent less than the total capacity in the United States. Of the 85 gigawatts added in 2009, 51 gigawatts were conventional thermal, again mostly coal, 25 gigawatts were hydroelectric, and 9 gigawatts were wind power.[xvi] Many of China’s wind turbines were funded by the U.N.’s Clean Development Mechanism, under which wealthy countries fund projects in developing countries and receive carbon credits so long as those projects would not have been accomplished otherwise.[xvii]
In contrast, the United States added only 47 gigawatts of generating capacity from 2004 to 2008 (14 percent of the capacity China added), of which 26 gigawatts were natural gas-fired units and 18 gigawatts were wind turbines. New coal-fired capacity additions are practically non-existent in the United States primarily owing to objections regarding emissions of carbon dioxide. Coal-fired projects in the United States have either been cancelled or delayed because of permitting problems, reviews and re-reviews by EPA and resulting financing problems. While the United States has more coal than any other country in the world, with over 200 years of reserves at current usage rates, coal’s share of new U.S. generating markets has been replaced by natural gas and renewable units that are more politically in vogue.
China’s Economic Growth and Export Market
China’s economy, the second-largest in the world in terms of purchasing power, is currently about half the size of the U.S. gross domestic product. According to China’s central bank, the country’s economy grew at an annual rate of 10.7 percent in the fourth quarter of 2009,[xviii] a rate almost twice the U.S. rate of 5.6 percent for the same time period.[xix] And in the first quarter of 2010, China’s economy grew by 11.9 percent. Forecasters predict that China’s economy will exceed that of the United States in 10 to 15 years.[xx]
China became the world’s largest exporter last year, edging out Germany and the United States. Despite a decline in total world trade, China’s exports fell less than those of other big powers. A report by the World Trade Organization calculates that the total value of merchandise exports fell by 23 percent in 2009. Among the top ten exporters, Japan’s shipments were the worst affected, falling by 26 percent. Because China’s exports fell by only 16 percent, it is now the single largest exporter. The World Trade Organization expects trade to rebound by nearly 10 percent this year.[xxi]
Lessons to Be Learned
Many environmentalists and politicians seem to believe that China is winning the green energy race, but nothing could be further from reality.[xxii] China is in a race for energy—all forms of energy—to fuel its growing economy. The size and scope of its investments in conventional forms of energy dwarf their commitment to “green energy.” It is providing loans around the world to invest in future oil projects, and it cares not that the oil is less than the lightest and sweetest. Canadian oil sands and Venezuelan heavy crude are perfectly fine. China is building a coal-fired generating plant each and every week on average, and increasing its coal mining capacity to fuel them. This belies any stated concerns about increasing their carbon dioxide emissions, already the highest of any country in the world. China is building wind turbines too, but if wealthy countries are willing to pay—why not? It matters not at all that the transmission capacity is not yet there to operate almost a third of these wind turbines. And China’s large-scale hydroelectric projects are engineering feats par excellence, built regardless of environmental concerns.
China is ensuring energy supplies will be available to fuel its growing economy. The United States should take note.
References
[i] Reuters, China oil demand rise second fastest, inventories drag, March 22, 2010, http://in.reuters.com/article/oilRpt/idINTOE62L01Z20100322?sp=true [ii] Reuters, Oil falls as demand, inventories weigh, April 12, 2010, http://www.reuters.com/article/idUSTRE6142V820100412
[iii] Reuters, China oil demand rise second fastest, inventories drag, March 22, 2010, http://in.reuters.com/article/oilRpt/idINTOE62L01Z20100322?sp=true
[iv] Politico, To compete with China, U.S. must tap natural gas, April 13, 2010, http://www.politico.com/news/stories/0410/35689.html#ixzz0kyYru8gb
[v] Reuters, China bags oil sands stake, not finished yet, April 13, 2010, http://www.reuters.com/article/idUSTRE63C17X20100413 and www.conocophillips.com
[vi] Syncrude, http://www.syncrude.ca/users/folder.asp?FolderID=5753
[vii] The Wall Street Journal, China’s $20 Billion Bolsters Chavez, April 18, 2010, http://online.wsj.com/article/SB10001424052748703594404575191671972897694.html
[viii] Reuters, China bags oil sands stake, not finished yet, April 13, 2010, http://www.reuters.com/article/idUSTRE63C17X20100413
[ix] China Daily, China’s coal output up 28.1% in Q1, April 15, 2010, http://www.chinadaily.com.cn/bizchina/2010-04/15/content_9736151.htm
[x] Environmental protection Agency, New Releases, EPA issues comprehensive guidance to protect Appalachian communities from harmful environmental impacts of mountaintop mining, April 1, 2010, http://yosemite.epa.gov/opa/admpress.nsf/d0cf6618525a9efb85257359003fb69d/4145c96189a17239852576f8005867bd!OpenDocument
[xi] Associated Press, Arch Coal sues EPA over veto of W.Va. mine permit, April 2, 2010, http://news.yahoo.com/s/ap/20100402/ap_on_bi_ge/wv_epa_coal_lawsuit
[xii] Energy Information Administration, China, http://www.eia.doe.gov/emeu/cabs/China/Background.html
[xiii] Energy Information Administration, International Energy Outlook 2009, http://www.eia.doe.gov/oiaf/ieo/index.html
[xiv] Energy Information Administration, International Energy Outlook 2009, http://www.eia.doe.gov/oiaf/ieo/index.html
[xv] http://en.wikipedia.org/wiki/Energy_policy_of_China
[xvi] China’s power generation goes greener with total capacity up 10%, January 7, 2010, http://news.xinhuanet.com/english/2010-01/07/content_12771880.htm
[xvii] http://www.instituteforenergyresearch.org/2010/03/24/kyotos-clean-development-mechanism-is-it-producing-results-for-whom/
[xviii] Politico, To compete with China, U.S. must tap natural gas, April 13, 2010, http://www.politico.com/news/stories/0410/35689.html#ixzz0kyYru8gb
[xix] http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
[xx] Energy Information Administration, International Energy Outlook 2009, http://www.eia.doe.gov/oiaf/ieo/index.html
[xxi] China overtakes Germany to become the biggest exporter of all, March 31, 2010, http://www.economist.com/daily/news/displaystory.cfm?story_id=15836406&fsrc=nwl
[xxii] http://www.instituteforenergyresearch.org/2010/03/15/the-u-s-in-the-world-race-for-clean-electric-generating-capacity/
[iii] Reuters, China oil demand rise second fastest, inventories drag, March 22, 2010, http://in.reuters.com/article/oilRpt/idINTOE62L01Z20100322?sp=true
[iv] Politico, To compete with China, U.S. must tap natural gas, April 13, 2010, http://www.politico.com/news/stories/0410/35689.html#ixzz0kyYru8gb
[v] Reuters, China bags oil sands stake, not finished yet, April 13, 2010, http://www.reuters.com/article/idUSTRE63C17X20100413 and www.conocophillips.com
[vi] Syncrude, http://www.syncrude.ca/users/folder.asp?FolderID=5753
[vii] The Wall Street Journal, China’s $20 Billion Bolsters Chavez, April 18, 2010, http://online.wsj.com/article/SB10001424052748703594404575191671972897694.html
[viii] Reuters, China bags oil sands stake, not finished yet, April 13, 2010, http://www.reuters.com/article/idUSTRE63C17X20100413
[ix] China Daily, China’s coal output up 28.1% in Q1, April 15, 2010, http://www.chinadaily.com.cn/bizchina/2010-04/15/content_9736151.htm
[x] Environmental protection Agency, New Releases, EPA issues comprehensive guidance to protect Appalachian communities from harmful environmental impacts of mountaintop mining, April 1, 2010, http://yosemite.epa.gov/opa/admpress.nsf/d0cf6618525a9efb85257359003fb69d/4145c96189a17239852576f8005867bd!OpenDocument
[xi] Associated Press, Arch Coal sues EPA over veto of W.Va. mine permit, April 2, 2010, http://news.yahoo.com/s/ap/20100402/ap_on_bi_ge/wv_epa_coal_lawsuit
[xii] Energy Information Administration, China, http://www.eia.doe.gov/emeu/cabs/China/Background.html
[xiii] Energy Information Administration, International Energy Outlook 2009, http://www.eia.doe.gov/oiaf/ieo/index.html
[xiv] Energy Information Administration, International Energy Outlook 2009, http://www.eia.doe.gov/oiaf/ieo/index.html
[xv] http://en.wikipedia.org/wiki/Energy_policy_of_China
[xvi] China’s power generation goes greener with total capacity up 10%, January 7, 2010, http://news.xinhuanet.com/english/2010-01/07/content_12771880.htm
[xvii] http://www.instituteforenergyresearch.org/2010/03/24/kyotos-clean-development-mechanism-is-it-producing-results-for-whom/
[xviii] Politico, To compete with China, U.S. must tap natural gas, April 13, 2010, http://www.politico.com/news/stories/0410/35689.html#ixzz0kyYru8gb
[xix] http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
[xx] Energy Information Administration, International Energy Outlook 2009, http://www.eia.doe.gov/oiaf/ieo/index.html
[xxi] China overtakes Germany to become the biggest exporter of all, March 31, 2010, http://www.economist.com/daily/news/displaystory.cfm?story_id=15836406&fsrc=nwl
[xxii] http://www.instituteforenergyresearch.org/2010/03/15/the-u-s-in-the-world-race-for-clean-electric-generating-capacity/
Thursday, April 22, 2010
Cash for Tanners - A new subsidy for hitting the beach
Cash for Tanners. WSJ Editorial
A new subsidy for hitting the beach.WSJ, Apr 23, 2010
Liberté, égalité, St. Tropez. That could be the motto of the European Union's "social tourism" project, which advocates subsidized holidays for the underprivileged. According to European Commissioner Antonio Tajani, visiting foreign countries is a "right," and one that could soon be financed by EU taxpayers. This gives a whole new meaning to the concept of "paid vacation."
The EU last year launched a €1 million project to promote social tourism throughout the Continent. The program, which goes by the slight misnomer Calypso—the lonely nymph from Greek mythology was famously confined to an island—seeks, among other things, to identify and promote measures governments have already taken to help the needy to go on holiday. Calypso specifically targets the disabled, poor families, senior citizens and "youth," a group that in geriatric Europe includes people up to 30 years of age.
Cash for tanners is also being touted as good economic policy. At a "Calypso Awareness Building Meeting" in October, the main theme was "Social Tourism: An Opportunity to Overcome the Crisis?" The conference highlighted the example of the Spanish government, which already helps more than one million senior citizens go on organized trips at a cost of €75 million. Thanks to the VAT and other taxes, Madrid claims it's getting back €1.70 for every euro spent.
It probably didn't occur to the sages in Spain that without the subsidies, the seniors would have either still gone on vacation, spent the money on other goods or services or saved it, which would have made it available for other investors. The subsidies merely directed spending to a politically favored purpose without creating additional wealth.
At an EU meeting last week, Spanish Tourism Minister Miguel Sebastian said tourism "should be an asset all citizens can enjoy, in particular those with physical disabilities or financially disadvantaged." With 19% unemployment and rising, Madrid will no doubt have ample demand for its new growth industry. And given the European policy arc in Congress, look for vacation subsidies here too.
A new subsidy for hitting the beach.WSJ, Apr 23, 2010
Liberté, égalité, St. Tropez. That could be the motto of the European Union's "social tourism" project, which advocates subsidized holidays for the underprivileged. According to European Commissioner Antonio Tajani, visiting foreign countries is a "right," and one that could soon be financed by EU taxpayers. This gives a whole new meaning to the concept of "paid vacation."
The EU last year launched a €1 million project to promote social tourism throughout the Continent. The program, which goes by the slight misnomer Calypso—the lonely nymph from Greek mythology was famously confined to an island—seeks, among other things, to identify and promote measures governments have already taken to help the needy to go on holiday. Calypso specifically targets the disabled, poor families, senior citizens and "youth," a group that in geriatric Europe includes people up to 30 years of age.
Cash for tanners is also being touted as good economic policy. At a "Calypso Awareness Building Meeting" in October, the main theme was "Social Tourism: An Opportunity to Overcome the Crisis?" The conference highlighted the example of the Spanish government, which already helps more than one million senior citizens go on organized trips at a cost of €75 million. Thanks to the VAT and other taxes, Madrid claims it's getting back €1.70 for every euro spent.
It probably didn't occur to the sages in Spain that without the subsidies, the seniors would have either still gone on vacation, spent the money on other goods or services or saved it, which would have made it available for other investors. The subsidies merely directed spending to a politically favored purpose without creating additional wealth.
At an EU meeting last week, Spanish Tourism Minister Miguel Sebastian said tourism "should be an asset all citizens can enjoy, in particular those with physical disabilities or financially disadvantaged." With 19% unemployment and rising, Madrid will no doubt have ample demand for its new growth industry. And given the European policy arc in Congress, look for vacation subsidies here too.
Sunday, March 28, 2010
'Basically an Optimist'—Still. Nobel economist Gary Becker says the health-care bill will cause serious damage, but that the American people can be trusted to vote for limited government in November
'Basically an Optimist'—Still. By PETER ROBINSON
The Nobel economist says the health-care bill will cause serious damage, but that the American people can be trusted to vote for limited government in November.WSJ, Mar 27, 2010
Stanford, Calif.
"No, no. Not at all."
So says Gary Becker when asked if the financial collapse, the worst recession in a quarter of a century, and the rise of an administration intent on expanding the federal government have prompted him to reconsider his commitment to free markets.
Mr. Becker is a founder, along with his friend and teacher the late Milton Friedman, of the Chicago school of economics. More than four decades after winning the John Bates Clark Medal and almost two after winning the Nobel Prize, the 79-year-old occupies an unusual position for a man who has spent his entire professional life in the intensely competitive field of economics: He has nothing left to prove. Which makes it all the more impressive that he works as hard as an associate professor trying to earn tenure. He publishes regularly, carries a full-time teaching load at the University of Chicago (he's in his 32nd year), and engages in a running argument with his friend Judge Richard Posner on the "Becker-Posner Blog," one of the best-read Web sites on economics and the law.
When his teaching schedule permits, Mr. Becker visits the Hoover Institution, the think tank at Stanford where he has been a fellow since 1988. The day he and I meet in his Hoover office, Mr. Becker has already attended a meeting with former Treasury Secretary Hank Paulson and spent several hours touring Apple headquarters down the road in Cupertino with his wife, Guity Nashat, a historian of the Middle East, and their grandson. "I guess you'd call our grandson a computer whiz," he explains proudly. "He's just 14, but he has already sold a couple of apps."
I begin with the obvious question. "The health-care legislation? It's a bad bill," Mr. Becker replies. "Health care in the United States is pretty good, but it does have a number of weaknesses. This bill doesn't address them. It adds taxation and regulation. It's going to increase health costs—not contain them."
Drafting a good bill would have been easy, he continues. Health savings accounts could have been expanded. Consumers could have been permitted to purchase insurance across state lines, which would have increased competition among insurers. The tax deductibility of health-care spending could have been extended from employers to individuals, giving the same tax treatment to all consumers. And incentives could have been put in place to prompt consumers to pay a larger portion of their health-care costs out of their own pockets.
"Here in the United States," Mr. Becker says, "we spend about 17% of our GDP on health care, but out-of-pocket expenses make up only about 12% of total health-care spending. In Switzerland, where they spend only 11% of GDP on health care, their out-of-pocket expenses equal about 31% of total spending. The difference between 12% and 31% is huge. Once people begin spending substantial sums from their own pockets, they become willing to shop around. Ordinary market incentives begin to operate. A good bill would have encouraged that."
Despite the damage this new legislation appears certain to cause, Mr. Becker believes we're probably stuck with it. "Repealing this bill will be very, very difficult," he says. "Once you've got a piece of legislation in place, interest groups grow up around it. Look at Medicare and Medicaid. Originally, the American Medical Association opposed Medicare and Medicaid. Then the AMA came to see them as a source of demand for physicians' services. Today the AMA supports Medicare and Medicaid as staunchly as anyone. Something like that will happen with this new legislation."
Bad legislation, maintained by self-seeking interest groups. Back in 1982, I remind Mr. Becker, the economist Mancur Olson published a book, "The Rise and Decline of Nations," predicting just that trend. Over time, Olson argued, interest groups would form to press for policies that would almost invariably prove protectionist, redistributive or antitechnological. Policies, in a word, that would inhibit economic growth. Yet since the benefits of such policies would accrue directly to interest groups while the costs would be spread across the entire population, very little opposition to such self-seeking would ever develop. Interest groups—and bad policies—would proliferate, and the nation would stagnate.
Olson may have sketched his portrait during the 1980s, but doesn't it display a remarkable likeness to the United States today? Mr. Becker thinks for a moment, swiveling toward the window. Then he swivels back. "Not necessarily," he replies.
"The idea that interest groups can derive specific, concentrated benefits from the political system—yes, that's a very important insight," he says. "But you can have competing interest groups. Look at the automobile industry. The domestic manufacturers in Detroit want protectionist policies. But the auto importers want free trade. So they fight it out. Now sometimes in these fights the dark forces prevail, and sometimes the forces of light prevail. But if you have competing interest groups you don't end up with a systematic bias toward bad policy."
Mr. Becker places his hands behind his head. Once again, he reflects, then smiles wryly. "Of course that doesn't mean there isn't any systematic bias toward bad policy," he says. "There's one bias that we're up against all the time: Markets are hard to appreciate."
Capitalism has produced the highest standard of living in history, and yet markets are hard to appreciate? Mr. Becker explains: "People tend to impute good motives to government. And if you assume that government officials are well meaning, then you also tend to assume that government officials always act on behalf of the greater good. People understand that entrepreneurs and investors by contrast just try to make money, not act on behalf of the greater good. And they have trouble seeing how this pursuit of profits can lift the general standard of living. The idea is too counterintuitive. So we're always up against a kind of in-built suspicion of markets. There's always a temptation to believe that markets succeed by looting the unfortunate."
As he speaks, Mr. Becker appears utterly at ease. He wears loose-fitting clothes and slouches comfortably in his chair. His hair, wispy and white, sets off his most striking feature—penetrating eyes so dark they seem nearly black. Yet those dark eyes display not foreboding, but contentment. He does not have the air of a man contemplating national decline.
I read aloud from an article by historian Victor Davis Hanson that had appeared in the morning newspaper. "[W]e are in revolutionary times," Mr. Hanson argues, "in which the government will grow to assume everything from energy to student loans." Next I read from a column by economist Thomas Sowell. "With the passage of the legislation allowing the federal government to take control of the medical system," Mr. Sowell asserts, "a major turning point has been reached in the dismantling of the values and institutions of America."
"They're very eloquent," Mr. Becker replies, his equanimity undisturbed. "And maybe they're right. But I'm not that pessimistic." The temptation to view markets with suspicion, he explains, is just that: a temptation. Although voters might succumb to the temptation temporarily, over time they know better.
"One of the points Secretary Paulson made earlier today was how outraged—how unexpectedly outraged—the American people became when the government bailed out the banks. This belief in individual responsibility—the belief that people ought to be free to make their own decisions, but should then bear the consequences of those decisions—this remains very powerful. The American people don't want an expansion of government. They want more of what Reagan provided. They want limited government and economic growth. I expect them to say so in the elections this November."
Even if ordinary Americans still want limited government, I ask, what about those who dominate the press and universities? What about the molders of received opinion who claim that the financial crisis marked the demise of capitalism, rendering the Chicago school irrelevant?
"During the financial crisis," he replies, "the government and markets—or rather, some aspects of markets—both failed."
The Federal Reserve, Mr. Becker explains, kept interest rates too low for too long. Freddie Mac and Fannie Mae made the mistake of participating in the market for subprime instruments. And as the crisis developed, regulators failed to respond. "The Fed and the Treasury didn't see the crisis coming until very late. The SEC didn't see it at all," he says.
"The markets made mistakes, too. And some of us who study the markets made mistakes. Some of my colleagues at Chicago probably overestimated the ability of the Fed to smooth disruptions. I didn't write much about the Fed, but if I had I would probably have overestimated the Fed myself. As the banks developed new instruments, economists paid too little attention to the systemic risks—the risks the instruments posed for the whole financial system—as opposed to the risks they posed for individual institutions.
"I learned from Milton Friedman that from time to time there are going to be financial problems, so I wasn't surprised that we had a financial crisis. But I was surprised that the financial crisis spilled over into the real economy. I hadn't expected the crisis to become that bad. That was my mistake."
Once again, Mr. Becker reflects. "So, yes, we economists made mistakes. But has the experience of the past few years invalidated the finding that markets remain the most efficient means for producing economic growth? Not in any way.
"Look at growth in developed countries since the Second World War," he continues. "Even after you take into account the various recessions, including this one, you still end up with a good record. So even if a recession as bad as this one were the price of free markets—and I don't believe that's the correct way of looking at it, because government actions contributed so greatly to the current problem—but even if a bad recession were the price, you'd still decide it was worth paying.
"Or look at developing countries," he says. "China, India, Brazil. A billion people have been lifted out of poverty since 1990 because their countries moved toward more market-based economies—a billion people. Nobody's arguing for taking that back."
My last question involves a little story. Not long before Milton Friedman's death in 2006, I tell Mr. Becker, I had a conversation with Friedman. He had just reviewed the growth of spending that was then taking place under the Bush administration, and he was not happy. After a pause during the Reagan years, Friedman had explained, government spending had once again begun to rise. "The challenge for my generation," Friedman had told me, "was to provide an intellectual defense of liberty." Then Friedman had looked at me. "The challenge for your generation is to keep it."
What was the prospect, I asked Mr. Becker, that this generation would indeed keep its liberty? "It could go either way," he replies. "Milton was right about that."
Mr. Becker recites some figures. For years, federal spending remained level at about 20% of GDP. Now federal spending has risen to 25% of GDP. On current projections, federal spending would soon rise to 28%. "That concerns me," Mr. Becker says. "It concerns me a great deal.
"But when Milton was starting out," he continues, "people really believed a state-run economy was the most efficient way of promoting growth. Today nobody believes that, except maybe in North Korea. You go to China, India, Brazil, Argentina, Mexico, even Western Europe. Most of the economists under 50 have a free-market orientation. Now, there are differences of emphasis and opinion among them. But they're oriented toward the markets. That's a very, very important intellectual victory. Will this victory have an effect on policy? Yes. It already has. And in years to come, I believe it will have an even greater impact."
The sky outside his window has begun to darken. Mr. Becker stands, places some papers into his briefcase, then puts on a tweed jacket and cap. "When I think of my children and grandchildren," he says, "yes, they'll have to fight. Liberty can't be had on the cheap. But it's not a hopeless fight. It's not a hopeless fight by any means. I remain basically an optimist."
Mr. Robinson, a former speechwriter for President Ronald Reagan, is a fellow at Stanford University's Hoover Institution.
The Nobel economist says the health-care bill will cause serious damage, but that the American people can be trusted to vote for limited government in November.WSJ, Mar 27, 2010
Stanford, Calif.
"No, no. Not at all."
So says Gary Becker when asked if the financial collapse, the worst recession in a quarter of a century, and the rise of an administration intent on expanding the federal government have prompted him to reconsider his commitment to free markets.
Mr. Becker is a founder, along with his friend and teacher the late Milton Friedman, of the Chicago school of economics. More than four decades after winning the John Bates Clark Medal and almost two after winning the Nobel Prize, the 79-year-old occupies an unusual position for a man who has spent his entire professional life in the intensely competitive field of economics: He has nothing left to prove. Which makes it all the more impressive that he works as hard as an associate professor trying to earn tenure. He publishes regularly, carries a full-time teaching load at the University of Chicago (he's in his 32nd year), and engages in a running argument with his friend Judge Richard Posner on the "Becker-Posner Blog," one of the best-read Web sites on economics and the law.
When his teaching schedule permits, Mr. Becker visits the Hoover Institution, the think tank at Stanford where he has been a fellow since 1988. The day he and I meet in his Hoover office, Mr. Becker has already attended a meeting with former Treasury Secretary Hank Paulson and spent several hours touring Apple headquarters down the road in Cupertino with his wife, Guity Nashat, a historian of the Middle East, and their grandson. "I guess you'd call our grandson a computer whiz," he explains proudly. "He's just 14, but he has already sold a couple of apps."
I begin with the obvious question. "The health-care legislation? It's a bad bill," Mr. Becker replies. "Health care in the United States is pretty good, but it does have a number of weaknesses. This bill doesn't address them. It adds taxation and regulation. It's going to increase health costs—not contain them."
Drafting a good bill would have been easy, he continues. Health savings accounts could have been expanded. Consumers could have been permitted to purchase insurance across state lines, which would have increased competition among insurers. The tax deductibility of health-care spending could have been extended from employers to individuals, giving the same tax treatment to all consumers. And incentives could have been put in place to prompt consumers to pay a larger portion of their health-care costs out of their own pockets.
"Here in the United States," Mr. Becker says, "we spend about 17% of our GDP on health care, but out-of-pocket expenses make up only about 12% of total health-care spending. In Switzerland, where they spend only 11% of GDP on health care, their out-of-pocket expenses equal about 31% of total spending. The difference between 12% and 31% is huge. Once people begin spending substantial sums from their own pockets, they become willing to shop around. Ordinary market incentives begin to operate. A good bill would have encouraged that."
Despite the damage this new legislation appears certain to cause, Mr. Becker believes we're probably stuck with it. "Repealing this bill will be very, very difficult," he says. "Once you've got a piece of legislation in place, interest groups grow up around it. Look at Medicare and Medicaid. Originally, the American Medical Association opposed Medicare and Medicaid. Then the AMA came to see them as a source of demand for physicians' services. Today the AMA supports Medicare and Medicaid as staunchly as anyone. Something like that will happen with this new legislation."
Bad legislation, maintained by self-seeking interest groups. Back in 1982, I remind Mr. Becker, the economist Mancur Olson published a book, "The Rise and Decline of Nations," predicting just that trend. Over time, Olson argued, interest groups would form to press for policies that would almost invariably prove protectionist, redistributive or antitechnological. Policies, in a word, that would inhibit economic growth. Yet since the benefits of such policies would accrue directly to interest groups while the costs would be spread across the entire population, very little opposition to such self-seeking would ever develop. Interest groups—and bad policies—would proliferate, and the nation would stagnate.
Olson may have sketched his portrait during the 1980s, but doesn't it display a remarkable likeness to the United States today? Mr. Becker thinks for a moment, swiveling toward the window. Then he swivels back. "Not necessarily," he replies.
"The idea that interest groups can derive specific, concentrated benefits from the political system—yes, that's a very important insight," he says. "But you can have competing interest groups. Look at the automobile industry. The domestic manufacturers in Detroit want protectionist policies. But the auto importers want free trade. So they fight it out. Now sometimes in these fights the dark forces prevail, and sometimes the forces of light prevail. But if you have competing interest groups you don't end up with a systematic bias toward bad policy."
Mr. Becker places his hands behind his head. Once again, he reflects, then smiles wryly. "Of course that doesn't mean there isn't any systematic bias toward bad policy," he says. "There's one bias that we're up against all the time: Markets are hard to appreciate."
Capitalism has produced the highest standard of living in history, and yet markets are hard to appreciate? Mr. Becker explains: "People tend to impute good motives to government. And if you assume that government officials are well meaning, then you also tend to assume that government officials always act on behalf of the greater good. People understand that entrepreneurs and investors by contrast just try to make money, not act on behalf of the greater good. And they have trouble seeing how this pursuit of profits can lift the general standard of living. The idea is too counterintuitive. So we're always up against a kind of in-built suspicion of markets. There's always a temptation to believe that markets succeed by looting the unfortunate."
As he speaks, Mr. Becker appears utterly at ease. He wears loose-fitting clothes and slouches comfortably in his chair. His hair, wispy and white, sets off his most striking feature—penetrating eyes so dark they seem nearly black. Yet those dark eyes display not foreboding, but contentment. He does not have the air of a man contemplating national decline.
I read aloud from an article by historian Victor Davis Hanson that had appeared in the morning newspaper. "[W]e are in revolutionary times," Mr. Hanson argues, "in which the government will grow to assume everything from energy to student loans." Next I read from a column by economist Thomas Sowell. "With the passage of the legislation allowing the federal government to take control of the medical system," Mr. Sowell asserts, "a major turning point has been reached in the dismantling of the values and institutions of America."
"They're very eloquent," Mr. Becker replies, his equanimity undisturbed. "And maybe they're right. But I'm not that pessimistic." The temptation to view markets with suspicion, he explains, is just that: a temptation. Although voters might succumb to the temptation temporarily, over time they know better.
"One of the points Secretary Paulson made earlier today was how outraged—how unexpectedly outraged—the American people became when the government bailed out the banks. This belief in individual responsibility—the belief that people ought to be free to make their own decisions, but should then bear the consequences of those decisions—this remains very powerful. The American people don't want an expansion of government. They want more of what Reagan provided. They want limited government and economic growth. I expect them to say so in the elections this November."
Even if ordinary Americans still want limited government, I ask, what about those who dominate the press and universities? What about the molders of received opinion who claim that the financial crisis marked the demise of capitalism, rendering the Chicago school irrelevant?
"During the financial crisis," he replies, "the government and markets—or rather, some aspects of markets—both failed."
The Federal Reserve, Mr. Becker explains, kept interest rates too low for too long. Freddie Mac and Fannie Mae made the mistake of participating in the market for subprime instruments. And as the crisis developed, regulators failed to respond. "The Fed and the Treasury didn't see the crisis coming until very late. The SEC didn't see it at all," he says.
"The markets made mistakes, too. And some of us who study the markets made mistakes. Some of my colleagues at Chicago probably overestimated the ability of the Fed to smooth disruptions. I didn't write much about the Fed, but if I had I would probably have overestimated the Fed myself. As the banks developed new instruments, economists paid too little attention to the systemic risks—the risks the instruments posed for the whole financial system—as opposed to the risks they posed for individual institutions.
"I learned from Milton Friedman that from time to time there are going to be financial problems, so I wasn't surprised that we had a financial crisis. But I was surprised that the financial crisis spilled over into the real economy. I hadn't expected the crisis to become that bad. That was my mistake."
Once again, Mr. Becker reflects. "So, yes, we economists made mistakes. But has the experience of the past few years invalidated the finding that markets remain the most efficient means for producing economic growth? Not in any way.
"Look at growth in developed countries since the Second World War," he continues. "Even after you take into account the various recessions, including this one, you still end up with a good record. So even if a recession as bad as this one were the price of free markets—and I don't believe that's the correct way of looking at it, because government actions contributed so greatly to the current problem—but even if a bad recession were the price, you'd still decide it was worth paying.
"Or look at developing countries," he says. "China, India, Brazil. A billion people have been lifted out of poverty since 1990 because their countries moved toward more market-based economies—a billion people. Nobody's arguing for taking that back."
My last question involves a little story. Not long before Milton Friedman's death in 2006, I tell Mr. Becker, I had a conversation with Friedman. He had just reviewed the growth of spending that was then taking place under the Bush administration, and he was not happy. After a pause during the Reagan years, Friedman had explained, government spending had once again begun to rise. "The challenge for my generation," Friedman had told me, "was to provide an intellectual defense of liberty." Then Friedman had looked at me. "The challenge for your generation is to keep it."
What was the prospect, I asked Mr. Becker, that this generation would indeed keep its liberty? "It could go either way," he replies. "Milton was right about that."
Mr. Becker recites some figures. For years, federal spending remained level at about 20% of GDP. Now federal spending has risen to 25% of GDP. On current projections, federal spending would soon rise to 28%. "That concerns me," Mr. Becker says. "It concerns me a great deal.
"But when Milton was starting out," he continues, "people really believed a state-run economy was the most efficient way of promoting growth. Today nobody believes that, except maybe in North Korea. You go to China, India, Brazil, Argentina, Mexico, even Western Europe. Most of the economists under 50 have a free-market orientation. Now, there are differences of emphasis and opinion among them. But they're oriented toward the markets. That's a very, very important intellectual victory. Will this victory have an effect on policy? Yes. It already has. And in years to come, I believe it will have an even greater impact."
The sky outside his window has begun to darken. Mr. Becker stands, places some papers into his briefcase, then puts on a tweed jacket and cap. "When I think of my children and grandchildren," he says, "yes, they'll have to fight. Liberty can't be had on the cheap. But it's not a hopeless fight. It's not a hopeless fight by any means. I remain basically an optimist."
Mr. Robinson, a former speechwriter for President Ronald Reagan, is a fellow at Stanford University's Hoover Institution.
The ObamaCare Writedowns - The corporate damage rolls in, and Democrats are shocked!
The ObamaCare Writedowns. WSJ Editorial
The corporate damage rolls in, and Democrats are shocked!
WSJ, Mar 27, 2010
It's been a banner week for Democrats: ObamaCare passed Congress in its final form on Thursday night, and the returns are already rolling in. Yesterday AT&T announced that it will be forced to make a $1 billion writedown due solely to the health bill, in what has become a wave of such corporate losses.
This wholesale destruction of wealth and capital came with more than ample warning. Turning over every couch cushion to make their new entitlement look affordable under Beltway accounting rules, Democrats decided to raise taxes on companies that do the public service of offering prescription drug benefits to their retirees instead of dumping them into Medicare. We and others warned this would lead to AT&T-like results, but like so many other ObamaCare objections Democrats waved them off as self-serving or "political."
Perhaps that explains why the Administration is now so touchy. Commerce Secretary Gary Locke took to the White House blog to write that while ObamaCare is great for business, "In the last few days, though, we have seen a couple of companies imply that reform will raise costs for them." In a Thursday interview on CNBC, Mr. Locke said "for them to come out, I think is premature and irresponsible."
Meanwhile, Henry Waxman and House Democrats announced yesterday that they will haul these companies in for an April 21 hearing because their judgment "appears to conflict with independent analyses, which show that the new law will expand coverage and bring down costs."
In other words, shoot the messenger. Black-letter financial accounting rules require that corporations immediately restate their earnings to reflect the present value of their long-term health liabilities, including a higher tax burden. Should these companies have played chicken with the Securities and Exchange Commission to avoid this politically inconvenient reality? Democrats don't like what their bill is doing in the real world, so they now want to intimidate CEOs into keeping quiet.
On top of AT&T's $1 billion, the writedown wave so far includes Deere & Co., $150 million; Caterpillar, $100 million; AK Steel, $31 million; 3M, $90 million; and Valero Energy, up to $20 million. Verizon has also warned its employees about its new higher health-care costs, and there will be many more in the coming days and weeks.
As Joe Biden might put it, this is a big, er, deal for shareholders and the economy. The consulting firm Towers Watson estimates that the total hit this year will reach nearly $14 billion, unless corporations cut retiree drug benefits when their labor contracts let them.
Meanwhile, John DiStaso of the New Hampshire Union Leader reported this week that ObamaCare could cost the Granite State's major ski resorts as much as $1 million in fines, because they hire large numbers of seasonal workers without offering health benefits. "The choices are pretty clear, either increase prices or cut costs, which could mean hiring fewer workers next winter," he wrote.
The Democratic political calculation with ObamaCare is the proverbial boiling frog: Gradually introduce a health-care entitlement by hiding the true costs, hook the middle class on new subsidies until they become unrepealable, but try to delay the adverse consequences and major new tax hikes so voters don't make the connection between their policy and the economic wreckage. But their bill was such a shoddy, jerry-rigged piece of work that the damage is coming sooner than even some critics expected.
The corporate damage rolls in, and Democrats are shocked!
WSJ, Mar 27, 2010
It's been a banner week for Democrats: ObamaCare passed Congress in its final form on Thursday night, and the returns are already rolling in. Yesterday AT&T announced that it will be forced to make a $1 billion writedown due solely to the health bill, in what has become a wave of such corporate losses.
This wholesale destruction of wealth and capital came with more than ample warning. Turning over every couch cushion to make their new entitlement look affordable under Beltway accounting rules, Democrats decided to raise taxes on companies that do the public service of offering prescription drug benefits to their retirees instead of dumping them into Medicare. We and others warned this would lead to AT&T-like results, but like so many other ObamaCare objections Democrats waved them off as self-serving or "political."
Perhaps that explains why the Administration is now so touchy. Commerce Secretary Gary Locke took to the White House blog to write that while ObamaCare is great for business, "In the last few days, though, we have seen a couple of companies imply that reform will raise costs for them." In a Thursday interview on CNBC, Mr. Locke said "for them to come out, I think is premature and irresponsible."
Meanwhile, Henry Waxman and House Democrats announced yesterday that they will haul these companies in for an April 21 hearing because their judgment "appears to conflict with independent analyses, which show that the new law will expand coverage and bring down costs."
In other words, shoot the messenger. Black-letter financial accounting rules require that corporations immediately restate their earnings to reflect the present value of their long-term health liabilities, including a higher tax burden. Should these companies have played chicken with the Securities and Exchange Commission to avoid this politically inconvenient reality? Democrats don't like what their bill is doing in the real world, so they now want to intimidate CEOs into keeping quiet.
On top of AT&T's $1 billion, the writedown wave so far includes Deere & Co., $150 million; Caterpillar, $100 million; AK Steel, $31 million; 3M, $90 million; and Valero Energy, up to $20 million. Verizon has also warned its employees about its new higher health-care costs, and there will be many more in the coming days and weeks.
As Joe Biden might put it, this is a big, er, deal for shareholders and the economy. The consulting firm Towers Watson estimates that the total hit this year will reach nearly $14 billion, unless corporations cut retiree drug benefits when their labor contracts let them.
Meanwhile, John DiStaso of the New Hampshire Union Leader reported this week that ObamaCare could cost the Granite State's major ski resorts as much as $1 million in fines, because they hire large numbers of seasonal workers without offering health benefits. "The choices are pretty clear, either increase prices or cut costs, which could mean hiring fewer workers next winter," he wrote.
The Democratic political calculation with ObamaCare is the proverbial boiling frog: Gradually introduce a health-care entitlement by hiding the true costs, hook the middle class on new subsidies until they become unrepealable, but try to delay the adverse consequences and major new tax hikes so voters don't make the connection between their policy and the economic wreckage. But their bill was such a shoddy, jerry-rigged piece of work that the damage is coming sooner than even some critics expected.
Thursday, January 28, 2010
The Latest AIG Story - Regulators can't agree on what the real systemic threat was
The Latest AIG Story. WSJ Editorial
Regulators can't agree on what the real systemic threat was.
WSJ, Jan 28, 2010
Will regulators ever coherently explain why AIG could not be allowed to go bankrupt in September of 2008?
At yesterday's House hearing, Secretary of the Treasury Timothy Geithner and predecessor Hank Paulson said they didn't bail out AIG to save its derivatives counterparties. Instead, said Mr. Geithner, the now-famous 100-cents-on-the-dollar buyouts of credit default swap contracts were necessary to prevent a further downgrade of AIG by credit-ratings agencies.
This topic probably deserves another hearing on its own. Remember, the Federal Reserve Bank of New York, where Mr. Geithner was president, had by that time already seized AIG. We're guessing that a ratings agency is pretty comfortable with the creditworthiness of a firm 79.9%-owned by Uncle Sam. Yet Mr. Geithner is saying that the same credit raters that applied triple-A ratings to tranches of junk mortgages somehow got the yips when the world's most respected borrower was standing behind AIG.
If the agencies had applied to AIG the credit rating of its new owner, there wouldn't have been much need to send more collateral to such counterparties as Goldman Sachs. Instead, AIG could have demanded the return of some of the collateral it had already posted. Bad news for those counterparties.
More broadly, the hearing showed that the story of why AIG could not be allowed to fail continues to change, which inspires little confidence that Washington can be trusted with new powers to identify and address systemic risk. The original Beltway line was that the systemic risk was caused by AIG's inability to back up the credit default swap contracts it sold, thus endangering counterparties on the other end of these deals. In Washington's original telling, the company's insurance subsidiaries, heavily regulated by states, were safely segregated from the mess.
Yesterday, however, Messrs. Geithner and Paulson went further than ever in stating that the real systemic risk was to AIG's heavily regulated insurance businesses. Their testimony directly contradicts that offered to Congress by former New York Insurance Superintendent Eric Dinallo, who was AIG's principal insurance regulator at the time.
Last year Mr. Dinallo told the Senate that "The main reason why the federal government decided to rescue AIG was not because of its insurance companies." He was so confident in the health of the AIG subsidiaries that, before the federal bailout, he was working on a plan to transfer $20 billion of their excess reserves to the parent company.
Yesterday, Mr. Geithner said that the "people responsible" for overseeing the insurance subsidiaries "had no idea" about the risks facing AIG policyholders. He's talking about Mr. Dinallo here. Instead of being safely segregated, Mr. Geithner said the insurance businesses were "tightly connected" to the parent company. Mr. Paulson added that the healthy parts of AIG had been "infected" by the "toxic assets." He added, "One part of the company would have contaminated the other."
This raises some serious issues for financial reform. The Geithner and Paulson story now is essentially that the system of heavy state insurance regulation was a sham. When push came to shove, policyholders were not protected from a default by the parent company.
This also makes us wonder about all of the political and media chatter over the last year that derivatives were the doomsday machine that caused the meltdown. If this testimony is correct, then the systemic risk wasn't that if AIG collapsed it would infect Goldman and other financial companies like falling dominoes across the world.
The real risk was closer to an implosion of AIG that would have jeopardized millions of insurance policies. That's a big problem for insurance regulation. But if bad bets on derivatives would only have ruined AIG and its subsidiaries, that's not the same kind of danger to the entire financial system. And it suggests the need for different regulatory changes. We're not sure that policyholders were really in danger, but Mr. Dinallo and other state regulators deserve a chance to respond on the record, and under oath.
If yesterday's testimony is true, the real systemic risk was not in unregulated markets where the danger is obvious, but in markets where regulation created the illusion of safety.
Regulators can't agree on what the real systemic threat was.
WSJ, Jan 28, 2010
Will regulators ever coherently explain why AIG could not be allowed to go bankrupt in September of 2008?
At yesterday's House hearing, Secretary of the Treasury Timothy Geithner and predecessor Hank Paulson said they didn't bail out AIG to save its derivatives counterparties. Instead, said Mr. Geithner, the now-famous 100-cents-on-the-dollar buyouts of credit default swap contracts were necessary to prevent a further downgrade of AIG by credit-ratings agencies.
This topic probably deserves another hearing on its own. Remember, the Federal Reserve Bank of New York, where Mr. Geithner was president, had by that time already seized AIG. We're guessing that a ratings agency is pretty comfortable with the creditworthiness of a firm 79.9%-owned by Uncle Sam. Yet Mr. Geithner is saying that the same credit raters that applied triple-A ratings to tranches of junk mortgages somehow got the yips when the world's most respected borrower was standing behind AIG.
If the agencies had applied to AIG the credit rating of its new owner, there wouldn't have been much need to send more collateral to such counterparties as Goldman Sachs. Instead, AIG could have demanded the return of some of the collateral it had already posted. Bad news for those counterparties.
More broadly, the hearing showed that the story of why AIG could not be allowed to fail continues to change, which inspires little confidence that Washington can be trusted with new powers to identify and address systemic risk. The original Beltway line was that the systemic risk was caused by AIG's inability to back up the credit default swap contracts it sold, thus endangering counterparties on the other end of these deals. In Washington's original telling, the company's insurance subsidiaries, heavily regulated by states, were safely segregated from the mess.
Yesterday, however, Messrs. Geithner and Paulson went further than ever in stating that the real systemic risk was to AIG's heavily regulated insurance businesses. Their testimony directly contradicts that offered to Congress by former New York Insurance Superintendent Eric Dinallo, who was AIG's principal insurance regulator at the time.
Last year Mr. Dinallo told the Senate that "The main reason why the federal government decided to rescue AIG was not because of its insurance companies." He was so confident in the health of the AIG subsidiaries that, before the federal bailout, he was working on a plan to transfer $20 billion of their excess reserves to the parent company.
Yesterday, Mr. Geithner said that the "people responsible" for overseeing the insurance subsidiaries "had no idea" about the risks facing AIG policyholders. He's talking about Mr. Dinallo here. Instead of being safely segregated, Mr. Geithner said the insurance businesses were "tightly connected" to the parent company. Mr. Paulson added that the healthy parts of AIG had been "infected" by the "toxic assets." He added, "One part of the company would have contaminated the other."
This raises some serious issues for financial reform. The Geithner and Paulson story now is essentially that the system of heavy state insurance regulation was a sham. When push came to shove, policyholders were not protected from a default by the parent company.
This also makes us wonder about all of the political and media chatter over the last year that derivatives were the doomsday machine that caused the meltdown. If this testimony is correct, then the systemic risk wasn't that if AIG collapsed it would infect Goldman and other financial companies like falling dominoes across the world.
The real risk was closer to an implosion of AIG that would have jeopardized millions of insurance policies. That's a big problem for insurance regulation. But if bad bets on derivatives would only have ruined AIG and its subsidiaries, that's not the same kind of danger to the entire financial system. And it suggests the need for different regulatory changes. We're not sure that policyholders were really in danger, but Mr. Dinallo and other state regulators deserve a chance to respond on the record, and under oath.
If yesterday's testimony is true, the real systemic risk was not in unregulated markets where the danger is obvious, but in markets where regulation created the illusion of safety.
Wednesday, January 27, 2010
Thursday, January 14, 2010
Health Experts and Double Standards - Jonathan Gruber, Peter Orszag and the press corps
Health Experts and Double Standards. WSJ Editorial
Jonathan Gruber, Peter Orszag and the press corps.
The Wall Street Journal, page A18, Jan 14, 2010
The press corps is agonizing, or claims to be agonizing, over the news of Jonathan Gruber's conflict of interest: The MIT economist has been among the foremost promoters of ObamaCare—even as he had nearly $400,000 in consulting contracts with the Administration that weren't disclosed in the many stories in which he was cited as an independent authority.
Mr. Gruber is a health economist and former Clinton Treasury hand, as well an architect of Mitt Romney's 2006 health plan in Massachusetts that so closely resembles ObamaCare. His econometric health-care modelling is well-regarded. So his $297,600 plum from the Department of Health and Human Services in March for "technical assistance" estimating changes in insurance costs and coverage under ObamaCare, plus another $95,000 job, is at least defensible.
However, this financial relationship only came to wide notice when Mr. Gruber wrote a commentary for the New England Journal of Medicine, which has a more stringent disclosure policy than most media outlets. Last week the New York Times said it would have disclosed Mr. Gruber's financial ties had it known when it published one of his op-eds last year. Mr. Gruber told Politico's Ben Smith that "at no time have I publicly advocated a position that I did not firmly believe—indeed, I have been completely consistent with my academic track record."
We don't doubt Mr. Gruber's sincerity about his research, though the same benefit of the political doubt wasn't extended to, say, Armstrong Williams when it was revealed that the conservative pundit had a contract with the Department of Education during the No Child Left Behind debate. Any number of former Generals-turned-TV-analysts were skewered in the New York Times in 2008 merely because of continuing contact—and no financial ties—with the Pentagon.
The political exploitation of Mr. Gruber's commentary is another matter. His work figured heavily into a recent piece by Ron Brownstein in the Atlantic Monthly that the Administration promoted as an antidote to skepticism about ObamaCare's cost control (or lack thereof). White House budget director Peter Orszag has also relied on a letter from Mr. Gruber and other economists endorsing the Senate bill.
In a December conference call with reporters, Mr. Orszag said that "I agree with Jon Gruber that basically everything that has been put forward in health policy discussions for a decade is in this bill." He also praised "the folks who have actually done the reporting and read the bill and gone through and done the hard work to actually examine, rather than just going on buzz and sort of loose talk, but actually gone through and looked at the specific details in the bill," citing Mr. Brownstein in particular. Which is to say, the journalists who had "done the reporting" were those who agreed with the Gruber-White House spin.
Mr. Orszag never mentioned Mr. Gruber's contract. Nor did HHS disclose the contract when Mike Enzi, the ranking Republican on the Senate health committee, asked specifically for a list of all consultants as part of routine oversight in July. His request noted that "Transparency regarding these positions will help ensure that the public has confidence in the qualifications, character and abilities of individuals serving in these positions."
We're not Marxists who think everyone's opinion depends entirely on financial circumstances. But if Mr. Gruber qualifies as a health expert despite his self-interest, then the studies of self-interested businesses deserve at least as much media attention. The insurer WellPoint has built a very detailed and rigorous model on the likely impact of ObamaCare, using its own actuarial data in regional markets, and found that insurance costs will spike across the board. The White House trashed it, and the press corps ignored it.
This is a double standard that has corroded much of the coverage of ObamaCare, with journalists treating government claims as oracular but business arguments as self-serving. We'll bet Messrs. Orszag and Brownstein that WellPoint's analysis will more closely reflect the coming insurance reality than the fruits of Mr. Gruber's government paycheck.
Jonathan Gruber, Peter Orszag and the press corps.
The Wall Street Journal, page A18, Jan 14, 2010
The press corps is agonizing, or claims to be agonizing, over the news of Jonathan Gruber's conflict of interest: The MIT economist has been among the foremost promoters of ObamaCare—even as he had nearly $400,000 in consulting contracts with the Administration that weren't disclosed in the many stories in which he was cited as an independent authority.
Mr. Gruber is a health economist and former Clinton Treasury hand, as well an architect of Mitt Romney's 2006 health plan in Massachusetts that so closely resembles ObamaCare. His econometric health-care modelling is well-regarded. So his $297,600 plum from the Department of Health and Human Services in March for "technical assistance" estimating changes in insurance costs and coverage under ObamaCare, plus another $95,000 job, is at least defensible.
However, this financial relationship only came to wide notice when Mr. Gruber wrote a commentary for the New England Journal of Medicine, which has a more stringent disclosure policy than most media outlets. Last week the New York Times said it would have disclosed Mr. Gruber's financial ties had it known when it published one of his op-eds last year. Mr. Gruber told Politico's Ben Smith that "at no time have I publicly advocated a position that I did not firmly believe—indeed, I have been completely consistent with my academic track record."
We don't doubt Mr. Gruber's sincerity about his research, though the same benefit of the political doubt wasn't extended to, say, Armstrong Williams when it was revealed that the conservative pundit had a contract with the Department of Education during the No Child Left Behind debate. Any number of former Generals-turned-TV-analysts were skewered in the New York Times in 2008 merely because of continuing contact—and no financial ties—with the Pentagon.
The political exploitation of Mr. Gruber's commentary is another matter. His work figured heavily into a recent piece by Ron Brownstein in the Atlantic Monthly that the Administration promoted as an antidote to skepticism about ObamaCare's cost control (or lack thereof). White House budget director Peter Orszag has also relied on a letter from Mr. Gruber and other economists endorsing the Senate bill.
In a December conference call with reporters, Mr. Orszag said that "I agree with Jon Gruber that basically everything that has been put forward in health policy discussions for a decade is in this bill." He also praised "the folks who have actually done the reporting and read the bill and gone through and done the hard work to actually examine, rather than just going on buzz and sort of loose talk, but actually gone through and looked at the specific details in the bill," citing Mr. Brownstein in particular. Which is to say, the journalists who had "done the reporting" were those who agreed with the Gruber-White House spin.
Mr. Orszag never mentioned Mr. Gruber's contract. Nor did HHS disclose the contract when Mike Enzi, the ranking Republican on the Senate health committee, asked specifically for a list of all consultants as part of routine oversight in July. His request noted that "Transparency regarding these positions will help ensure that the public has confidence in the qualifications, character and abilities of individuals serving in these positions."
We're not Marxists who think everyone's opinion depends entirely on financial circumstances. But if Mr. Gruber qualifies as a health expert despite his self-interest, then the studies of self-interested businesses deserve at least as much media attention. The insurer WellPoint has built a very detailed and rigorous model on the likely impact of ObamaCare, using its own actuarial data in regional markets, and found that insurance costs will spike across the board. The White House trashed it, and the press corps ignored it.
This is a double standard that has corroded much of the coverage of ObamaCare, with journalists treating government claims as oracular but business arguments as self-serving. We'll bet Messrs. Orszag and Brownstein that WellPoint's analysis will more closely reflect the coming insurance reality than the fruits of Mr. Gruber's government paycheck.
Tuesday, December 22, 2009
Sometimes the good guys do commit 'war crimes'
The Real Rules of War. By WARREN KOZAK
Sometimes the good guys do commit 'war crimes.'
WSJ, Dec 23, 2009
Five years ago, a particularly gruesome image made its way to our television screens from the war in Iraq. Four U.S. civilian contractors working in Fallujah were ambushed and killed by al Qaeda. Their bodies were burned, then dragged through the streets. Two of the charred bodies were hung from the Euphrates Bridge and left dangling.
This barbaric act left an impression that our military did not forget: In a special operation earlier this year, Navy SEALs captured the mastermind of that attack, Ahmed Hashim Abed. But after he was taken into custody in September, Abed claimed he was punched by his captors. He showed a fat lip to prove it. Three of the SEALS are now awaiting a courts-martial on charges ranging from assault to dereliction of duty and making false statements.
This incident and its twisted irony takes me back to an oddly serene setting many years ago. When I was in college, I joined my parents on a trip to retrace my father's wartime experience in Europe. We drove from France, through Holland and Belgium and on to Germany—the same route he had taken with the U.S. Army in 1944-45. At a field outside the Belgian town of Malmedy, we got out of our rented car where my father described something I had never heard before.
During the Battle of the Bulge, in the bleak December of 1944, the Germans had quickly overrun the American lines. They took thousands of prisoners as they pushed through in a last chance gamble to turn the war around. One unit, part of the First SS Panzer Division, had captured over a hundred GIs. They were moving fast, and they didn't care to be burdened by prisoners. So the SS troops put the American soldiers in that field and mowed them down with machine guns.
Around 90 Americans were killed in that barrage. The Germans then walked through the tangle of bodies, shooting those who were still alive in the back of the head. The few that survived were brought to where my father was located in the nearby town of Liege where word of the massacre quickly spread.
My father was never a talker. And in spite of the fact that we were on a trip to look at his past, he didn't open up much, or couldn't. When I asked him what the reaction was among the U.S. troops, he answered without emotion: "We didn't take prisoners for two weeks." I immediately understood what he meant, and had the sense not to press the issue any further. I just looked out at the field, now green and peaceful on a beautiful summer day, and realized he was looking at the same field and seeing something quite different.
In the weeks following the Malmedy massacre, U.S. troops clearly broke the rules of the Geneva Conventions. Justified or not, they were technically guilty of war crimes.
My guess is that the American correspondents imbedded with those troops knew all about this and chose not to report it. So did their officers. They understood the gravity of the war, as well as the absolute importance of its outcome. And they understood that disclosing this information might ultimately help the enemy. In other words, they used common sense. Was the U.S. a lesser country because these GIs weren't arrested? Was the Constitution jeopardized? Somehow it survived.
You don't have to dig too deep to understand that war brings out behavior in people that they would never demonstrate in normal life. In Paul Fussell's moving memoir, "The Boys' Crusade," the former infantryman relates a story about the liberation of Dachau. There were about 120 SS guards who had been captured by the Americans. Even though the Germans were being held at gunpoint, they still had the arrogance—or epic stupidity—to continue to heap verbal abuse and threats on the inmates. Their American guards, thoroughly disgusted by what they had already witnessed in the camp, had seen enough and opened fire on the SS. Some of the remaining SS guards were handed over to the inmates who tore them limb from limb. Another war crime? No doubt. Justified? It depends on your point of view. But before you weigh in, realize that you didn't walk through the camp. You didn't smell it. You didn't witness the obscene horror of the Nazis.
Rules of war are important. They are something to strive for as they separate us from our distant ancestors. But when only one side follows these rules, they no longer elevate us. They create a very unlevel field and more than a little frustration. It is equally bizarre for any of us to judge someone's behavior in war by the rules we follow in our very peaceful universe. We sit in homes that are air-conditioned in the summer and warmed in the winter. We have more than enough food in our bellies and we get enough sleep. The stress in our lives won't ever match the stress of battle. Can we honestly begin to decide if a soldier acted in compliance with rules that work perfectly well on Main Street but not, say, in Malmedy or Fallujah?
In his book, Mr. Fussell probably sums up the feelings of many soldiers when he quotes a British captain, John Tonkin, who experienced a great deal of the war. "I have always felt," Capt. Tonkin said, "that the Geneva Convention is a dangerous piece of stupidity, because it leads people to believe that war can be civilized. It can't."
Mr. Kozak is the author of "LeMay: The Life and Wars of General Curtis LeMay" (Regnery, 2009).
Sometimes the good guys do commit 'war crimes.'
WSJ, Dec 23, 2009
Five years ago, a particularly gruesome image made its way to our television screens from the war in Iraq. Four U.S. civilian contractors working in Fallujah were ambushed and killed by al Qaeda. Their bodies were burned, then dragged through the streets. Two of the charred bodies were hung from the Euphrates Bridge and left dangling.
This barbaric act left an impression that our military did not forget: In a special operation earlier this year, Navy SEALs captured the mastermind of that attack, Ahmed Hashim Abed. But after he was taken into custody in September, Abed claimed he was punched by his captors. He showed a fat lip to prove it. Three of the SEALS are now awaiting a courts-martial on charges ranging from assault to dereliction of duty and making false statements.
This incident and its twisted irony takes me back to an oddly serene setting many years ago. When I was in college, I joined my parents on a trip to retrace my father's wartime experience in Europe. We drove from France, through Holland and Belgium and on to Germany—the same route he had taken with the U.S. Army in 1944-45. At a field outside the Belgian town of Malmedy, we got out of our rented car where my father described something I had never heard before.
During the Battle of the Bulge, in the bleak December of 1944, the Germans had quickly overrun the American lines. They took thousands of prisoners as they pushed through in a last chance gamble to turn the war around. One unit, part of the First SS Panzer Division, had captured over a hundred GIs. They were moving fast, and they didn't care to be burdened by prisoners. So the SS troops put the American soldiers in that field and mowed them down with machine guns.
Around 90 Americans were killed in that barrage. The Germans then walked through the tangle of bodies, shooting those who were still alive in the back of the head. The few that survived were brought to where my father was located in the nearby town of Liege where word of the massacre quickly spread.
My father was never a talker. And in spite of the fact that we were on a trip to look at his past, he didn't open up much, or couldn't. When I asked him what the reaction was among the U.S. troops, he answered without emotion: "We didn't take prisoners for two weeks." I immediately understood what he meant, and had the sense not to press the issue any further. I just looked out at the field, now green and peaceful on a beautiful summer day, and realized he was looking at the same field and seeing something quite different.
In the weeks following the Malmedy massacre, U.S. troops clearly broke the rules of the Geneva Conventions. Justified or not, they were technically guilty of war crimes.
My guess is that the American correspondents imbedded with those troops knew all about this and chose not to report it. So did their officers. They understood the gravity of the war, as well as the absolute importance of its outcome. And they understood that disclosing this information might ultimately help the enemy. In other words, they used common sense. Was the U.S. a lesser country because these GIs weren't arrested? Was the Constitution jeopardized? Somehow it survived.
You don't have to dig too deep to understand that war brings out behavior in people that they would never demonstrate in normal life. In Paul Fussell's moving memoir, "The Boys' Crusade," the former infantryman relates a story about the liberation of Dachau. There were about 120 SS guards who had been captured by the Americans. Even though the Germans were being held at gunpoint, they still had the arrogance—or epic stupidity—to continue to heap verbal abuse and threats on the inmates. Their American guards, thoroughly disgusted by what they had already witnessed in the camp, had seen enough and opened fire on the SS. Some of the remaining SS guards were handed over to the inmates who tore them limb from limb. Another war crime? No doubt. Justified? It depends on your point of view. But before you weigh in, realize that you didn't walk through the camp. You didn't smell it. You didn't witness the obscene horror of the Nazis.
Rules of war are important. They are something to strive for as they separate us from our distant ancestors. But when only one side follows these rules, they no longer elevate us. They create a very unlevel field and more than a little frustration. It is equally bizarre for any of us to judge someone's behavior in war by the rules we follow in our very peaceful universe. We sit in homes that are air-conditioned in the summer and warmed in the winter. We have more than enough food in our bellies and we get enough sleep. The stress in our lives won't ever match the stress of battle. Can we honestly begin to decide if a soldier acted in compliance with rules that work perfectly well on Main Street but not, say, in Malmedy or Fallujah?
In his book, Mr. Fussell probably sums up the feelings of many soldiers when he quotes a British captain, John Tonkin, who experienced a great deal of the war. "I have always felt," Capt. Tonkin said, "that the Geneva Convention is a dangerous piece of stupidity, because it leads people to believe that war can be civilized. It can't."
Mr. Kozak is the author of "LeMay: The Life and Wars of General Curtis LeMay" (Regnery, 2009).
The risk of relying on reputational capital: a case study of the 2007 failure of New Century Financial
The risk of relying on reputational capital: a case study of the 2007 failure of New Century Financial, by Allen B Frankel
BIS Working Papers No 294, December 2009
Abstract:
The quality of newly originated subprime mortgages had been visibly deteriorating for some time before the window for such loans was shut in 2007. Nevertheless, a bankruptcy court's directed ex post examination of New Century Financial, one of the largest originators of subprime mortgages, discovered no change, over time, in how that firm went about its business. This paper employs the court examiner's findings in a critical review of the procedures used by various agents involved in the origination and securitisation of subprime mortgages. A contribution of this paper is its elaboration of the choices and incentives faced by the various types of institutions involved in those linked processes of origination and securitisation. It highlights the limited roles played by the originators of subprime loans in screening borrowers and in bearing losses on defective loans that had been sold to securitisers of pooled loan packages (ie, mortgage-backed securities). It also illustrates the willingness of the management of those institutions that became key players in that market to put their reputations with fixed-income investor clients in jeopardy. What is perplexing is that such risk exposures were accepted by investing firms that had the wherewithal and knowledge to appreciate the overall paucity of due diligence in the loan origination processes. This observation, in turn, points to the conclusion that the subprime episode is a case in which reputational capital, a presumptively effective motivator of market discipline, was not an effective incentive device.
JEL Classification Numbers: G10, G20, G30
Keywords: mortgage originators, reputational capital, securitisation
Thursday, October 8, 2009
Down with capitalists, nations, bosses, families, etc. - Commonwealth
Brothers in Marx. By Brian C Anderson
Down with capitalists, nations, bosses, families, etc.
WSJ, Oct 08, 2009
Review of: Commonwealth
By Michael Hardt and Antonio Negri
Harvard University Press, 434 pages, $35
Astonishingly, given the ruin associated with his name, Karl Marx is back in fashion. The global economic downturn has spurred sales of "Das Kapital" to an all-time high; Michael Moore with his latest movie rivals the Original Communist in denouncing the evils of capitalism; and for the past year the news media seem to have delighted in running obituaries for the owners of the means of production. Michael Hardt and Antonio Negri, then, are nicely positioned to take advantage of Marx's revival with the publication of "Commonwealth," which re-imagines Marxism for the 21st century.
Mr. Hardt teaches literature at Duke University and is a postmodernism-steeped radical—that is to say, he is an American college professor. Mr. Negri, a political theorist, has a more unusual background. Three decades ago, the Italian government believed that he was the secret intellectual leader of the leftist terrorists called the Red Brigades and that he was the architect of the group's 1978 kidnapping and murder of Christian Democratic Party leader Aldo Moro. Unable to build a sufficient case to try Mr. Negri for murder—he has always denied the allegation—Italian authorities convicted him of "armed insurrection against the state." Facing 30 years in the slammer, Mr. Negri scooted to France, where he remained, a philosopher in exile, until 1997, when he returned to Italy to serve the remainder of a reduced sentence. He is a left-wing guru whose field work has occurred far from the faculty lounge.
"Commonwealth" completes a trilogy that began in 2000 with "Empire" and continued with "Multitude" in 2004. The book is a witch's brew of contemporary radicalism. Capitalism deserves to die, Messrs. Hardt and Negri believe, for it has abused and corrupted "the common." The common isn't just "the fruits of the soil, and all nature's bounty," they tell us; it is the universe of things necessary for social life—"knowledges, languages, codes, information, affects." Under capitalism, nature is ravaged, society brutalized.
Yet the conditions for people's emancipation are budding within capitalism, the authors believe (just as Marx believed in the mid-19th century). Unlike the factory laborer of yesterday, today's knowledge worker has less and less need for a boss. Companies extract the most value from the worker, we're told, when he is left alone to create, connect and collaborate as he sees fit. This is also true of "affective labor" that offers services to the public, "even in the most constrained and exploited circumstances, such as call centers."
Messrs. Hardt and Negri propose getting rid of bosses, of course, but they also target another bugaboo of the hard left, private property. The possession of property supports unjust power structures—why not agree that the "common wealth" of the human and natural worlds should be everyone's responsibility, everyone's resource? Welcome to The Communist Manifesto 2.0.
"Commonwealth" updates Marx's championing of the proletariat as the agent of revolution. The authors prefer "the multitude," which includes workers of all kinds, naturally, but also gathers the mighty forces of identity politics: black and Hispanic activists, radical feminists, "queer" transgressives and others purportedly harmed by global capitalism. They don't all get along, Messrs. Hardt and Negri admit, so the left must persuade this army-in-waiting to value the importance of "revolutionary parallelism." No Black Power movement that treats woman or homosexuals badly, for instance, will win the day. After the revolution, we're told, identity politics, like class warfare, will dissolve.
For the revolution to succeed, three supposedly corrupt forms of the common must be destroyed. Some of the harshest language in "Commonwealth" targets the family: Mom, dad and the kids might not know it, but they are part of a "pathetic" institution, a "machine" that "grinds down and crushes the common" with "the blindest egoism." Messrs. Hardt and Negri cry: "Down with the family!" The two other killers of the world's spirit: the corporation and the nation. When the multitude seizes "control of the means of production and reproduction," we're promised, the evil trio will wind up on Marx's ash heap of history.
The authors warn the rulers of the capitalist world that if they want to survive a little longer, they need to enact reforms, including global citizenship, a right to income for everyone and participatory democracy. But Messrs. Hardt and Negri don't think that their warning will be heeded. Revolution will erupt—and soon. It could be violent, a prospect that does not seem to trouble them: "What is the best weapon against the ruling powers—guns, peaceful street demonstrations, exodus, media campaigns, labor strikes, transgressing gender norms, silence, irony, or many others—depends on the situation." Pirates, the rioting Muslim banlieusards of Paris and the Black Panthers all are praised in "Commonwealth" as heroes of disruption.
Messrs. Hardt and Negri make little effort to build arguments in support of their wild assertions and predictions. They write as if ignorant of the 20th century and of much else, including economics and social science. (They still quote Lenin and Mao as if they were sources of wise political and economic analysis.) How would abolishing private property not lead to a threadbare totalitarian state, as it has in the past? The authors promise it will be different this time, without explaining why. If you abolish the family, how will children grow into flourishing adults? We must take it on faith that the post-family world will be just fine. (The word "children" almost never appears in the book.) How do the authors explain away capitalist globalization's record of elevating millions of people out of poverty? Answer: They don't.
"Commonwealth" is a dark, evil book, and it is troubling that it appears under the prestigious imprimaturof Harvard University Press. Countless millions were slaughtered by adherents of Karl Marx in the 20th century. God help us if the scourge returns in the 21st.
Mr. Anderson, the editor of City Journal, is the author of "Democratic Capitalism and Its Discontents" and, with Adam Thierer, "A Manifesto for Media Freedom."
Down with capitalists, nations, bosses, families, etc.
WSJ, Oct 08, 2009
Review of: Commonwealth
By Michael Hardt and Antonio Negri
Harvard University Press, 434 pages, $35
Astonishingly, given the ruin associated with his name, Karl Marx is back in fashion. The global economic downturn has spurred sales of "Das Kapital" to an all-time high; Michael Moore with his latest movie rivals the Original Communist in denouncing the evils of capitalism; and for the past year the news media seem to have delighted in running obituaries for the owners of the means of production. Michael Hardt and Antonio Negri, then, are nicely positioned to take advantage of Marx's revival with the publication of "Commonwealth," which re-imagines Marxism for the 21st century.
Mr. Hardt teaches literature at Duke University and is a postmodernism-steeped radical—that is to say, he is an American college professor. Mr. Negri, a political theorist, has a more unusual background. Three decades ago, the Italian government believed that he was the secret intellectual leader of the leftist terrorists called the Red Brigades and that he was the architect of the group's 1978 kidnapping and murder of Christian Democratic Party leader Aldo Moro. Unable to build a sufficient case to try Mr. Negri for murder—he has always denied the allegation—Italian authorities convicted him of "armed insurrection against the state." Facing 30 years in the slammer, Mr. Negri scooted to France, where he remained, a philosopher in exile, until 1997, when he returned to Italy to serve the remainder of a reduced sentence. He is a left-wing guru whose field work has occurred far from the faculty lounge.
"Commonwealth" completes a trilogy that began in 2000 with "Empire" and continued with "Multitude" in 2004. The book is a witch's brew of contemporary radicalism. Capitalism deserves to die, Messrs. Hardt and Negri believe, for it has abused and corrupted "the common." The common isn't just "the fruits of the soil, and all nature's bounty," they tell us; it is the universe of things necessary for social life—"knowledges, languages, codes, information, affects." Under capitalism, nature is ravaged, society brutalized.
Yet the conditions for people's emancipation are budding within capitalism, the authors believe (just as Marx believed in the mid-19th century). Unlike the factory laborer of yesterday, today's knowledge worker has less and less need for a boss. Companies extract the most value from the worker, we're told, when he is left alone to create, connect and collaborate as he sees fit. This is also true of "affective labor" that offers services to the public, "even in the most constrained and exploited circumstances, such as call centers."
Messrs. Hardt and Negri propose getting rid of bosses, of course, but they also target another bugaboo of the hard left, private property. The possession of property supports unjust power structures—why not agree that the "common wealth" of the human and natural worlds should be everyone's responsibility, everyone's resource? Welcome to The Communist Manifesto 2.0.
"Commonwealth" updates Marx's championing of the proletariat as the agent of revolution. The authors prefer "the multitude," which includes workers of all kinds, naturally, but also gathers the mighty forces of identity politics: black and Hispanic activists, radical feminists, "queer" transgressives and others purportedly harmed by global capitalism. They don't all get along, Messrs. Hardt and Negri admit, so the left must persuade this army-in-waiting to value the importance of "revolutionary parallelism." No Black Power movement that treats woman or homosexuals badly, for instance, will win the day. After the revolution, we're told, identity politics, like class warfare, will dissolve.
For the revolution to succeed, three supposedly corrupt forms of the common must be destroyed. Some of the harshest language in "Commonwealth" targets the family: Mom, dad and the kids might not know it, but they are part of a "pathetic" institution, a "machine" that "grinds down and crushes the common" with "the blindest egoism." Messrs. Hardt and Negri cry: "Down with the family!" The two other killers of the world's spirit: the corporation and the nation. When the multitude seizes "control of the means of production and reproduction," we're promised, the evil trio will wind up on Marx's ash heap of history.
The authors warn the rulers of the capitalist world that if they want to survive a little longer, they need to enact reforms, including global citizenship, a right to income for everyone and participatory democracy. But Messrs. Hardt and Negri don't think that their warning will be heeded. Revolution will erupt—and soon. It could be violent, a prospect that does not seem to trouble them: "What is the best weapon against the ruling powers—guns, peaceful street demonstrations, exodus, media campaigns, labor strikes, transgressing gender norms, silence, irony, or many others—depends on the situation." Pirates, the rioting Muslim banlieusards of Paris and the Black Panthers all are praised in "Commonwealth" as heroes of disruption.
Messrs. Hardt and Negri make little effort to build arguments in support of their wild assertions and predictions. They write as if ignorant of the 20th century and of much else, including economics and social science. (They still quote Lenin and Mao as if they were sources of wise political and economic analysis.) How would abolishing private property not lead to a threadbare totalitarian state, as it has in the past? The authors promise it will be different this time, without explaining why. If you abolish the family, how will children grow into flourishing adults? We must take it on faith that the post-family world will be just fine. (The word "children" almost never appears in the book.) How do the authors explain away capitalist globalization's record of elevating millions of people out of poverty? Answer: They don't.
"Commonwealth" is a dark, evil book, and it is troubling that it appears under the prestigious imprimaturof Harvard University Press. Countless millions were slaughtered by adherents of Karl Marx in the 20th century. God help us if the scourge returns in the 21st.
Mr. Anderson, the editor of City Journal, is the author of "Democratic Capitalism and Its Discontents" and, with Adam Thierer, "A Manifesto for Media Freedom."
Wednesday, September 30, 2009
How the U.S. Government Rations Health Care
How the U.S. Government Rations Health Care. By SCOTT GOTTLIEB
The agency that would likely run the 'public option' was slow to pay for implantable cardiac defibrillators.
WSJ, Oct 01, 2009
President Barack Obama deflects criticism that his health-care plan will bring on government rationing of medical care by arguing that insurance companies ration care. Everyone knows private payers limit access to some health care. But government does it in far more byzantine and arbitrary ways.
Consider the $450 billion Medicare program. It provides a model for—indeed its bureaucracy could well end up running—the "public option" health plan that Mr. Obama wants to offer all Americans under the age of 65. In recent years, Medicare's staff has been aggressively restricting coverage for costly treatments. Looking for ways to control spending on medical products—and preserve the illusory "trust fund" that pays Medicare claims—is what shapes the culture of the organization and motivates the agency's staff.
This often means limiting access to the costliest technologies. To do this Medicare relies on its rationing and pricing systems. National coverage decisions (NCDs) are assessments issued by Medicare's medical staff that define who is eligible for new but often expensive treatments. Medicare then assigns medical products and procedures with "codes" that determine which regulated category they fall into. Finally, price "schedules" are developed by Medicare's staff each year to assign each unique code with its own updated payment rate. The process for getting a favorable code on a new product is a source of intense lobbying. It can make or break a technology.
For a remote agency like Medicare, far removed from clinical practice, it's easier to try and manage the use of a high-cost but specialty treatment than a much lower-cost but very widely used product. Yet cheaper, more commonly used products can still be mispriced and account for more total cost to the agency. For example, low-tech orthotic devices and other "durable medical equipment" are a known source of wasteful spending. These medical products often evade Medicare's attention in favor of less used but more expensive items such as a biological cancer drug.
Take the agency's tortured decisions concerning the use of implantable defibrillators that jump-start stopped hearts during cardiac arrest. Medicare sharply restricted their use in the 1990s. Mounting research proved that the $30,000 devices could be saving many more lives. So in 2003 Medicare adopted a novel theory to expand coverage to some, but not everyone, who needed one. The agency said only patients with certain measures on their electrocardiograms (called "wide QRS") seemed to benefit.
It was an easily measurable but ultimately imprecise way to allocate the devices. After another major study firmly refuted the QRS theory, Medicare expanded coverage again in 2005, potentially saving 2,500 additional lives according to a press release issued with that decision.
That experience wasn't unique. From 1999 to 2007, Medicare denied access in a third of the treatments it evaluated through its coverage process, taking an average of eight months to complete its reviews. When coverage was granted, in 85% of cases the treatments were restricted, usually to patients with more advanced illnesses.
Medicare is lately increasing its use of the national coverage process and is becoming more tightfisted. Since 2008, according to my review of Medicare data, it conditioned access in 29% of its reviews and denied new or expanded coverage in fully 53% of cases.
Medicare's methods can also be arbitrary. Take the travails of the pharmaceutical company Sepracor and its drug Xopenex, an innovative respiratory medicine that competes with the chemically distinct and much cheaper generic albuterol. Both are inhaled aerosols used to treat asthma and chronic obstructive pulmonary disease. Xopenex has the same benefits as albuterol, but some believe fewer of its cardiac side effects. Medicare didn't agree.
The agency tried to make a "national coverage decision" on Xopenex but couldn't come up with a clinical justification to limit the drug's usage. So Medicare manipulated its payment process, saying it would pay Xopenex a price equivalent to the "least costly alternative" form of generic albuterol, 10 cents a treatment compared to about $2.50 for Xopenex. Then Medicare was sued by a patient, and a Federal court recently ruled the agency exceeded its authority.
Medicare finally succeeded in reigning in the use of Xopenex with its coding system. By issuing Xopenex the same classification as generic albuterol, it was able to pay both products the same "blended" price—an average of the cost of each individual drug. That lowered the price on Xopenex, but ironically increased what Medicare paid for the generics.
It's not a stretch to say that Medicare spent hundreds of cumulative man-hours focusing on Xopenex while other priorities languished. The question is why? There weren't safety concerns. Xopenex may have been used in lieu of a cheaper alternative, but at peak Medicare sales of about $300 million it represented far less than one one-thousandth of the agency's budget. Simply put, a few staffers inside Medicare were consumed with the drug and its higher price—revealing a process that is capricious and often disconnected from science.
Worse still is how impenetrable these programs have become. Drug and device companies spend millions of dollars trying to influence Medicare decisions. The hundreds of consultants they hire to advise them typically command $20,000-a-month retainers.
Formal patient and provider appeals to Medicare took an average of 21 months, according to a report issued in 2003 by the Government Accountability Office (using 2001 data), with delays in "administrative processing" due to "inefficiencies and incompatibility" of data systems eating up 70% of the time spent processing appeals.
There's nothing inherently wrong with a program like Medicare seeking value for taxpayers. But it shouldn't make up the rules as it goes. When private plans ration care, patients can appeal directly to an insurer's medical staff. Only a small fraction of Medicare's denied claims—about 5%—are ever formally appealed because its process is so impenetrable. People can also switch insurers, and in many cases patients chose a policy because it matched their preferences in the first place. These options don't exist in a government health program.
Dr. Gottlieb is a resident fellow at the American Enterprise Institute and a former senior official at the Centers for Medicare and Medicaid Services. He is partner to a firm that invests in health-care companies, and he advises health plans.
The agency that would likely run the 'public option' was slow to pay for implantable cardiac defibrillators.
WSJ, Oct 01, 2009
President Barack Obama deflects criticism that his health-care plan will bring on government rationing of medical care by arguing that insurance companies ration care. Everyone knows private payers limit access to some health care. But government does it in far more byzantine and arbitrary ways.
Consider the $450 billion Medicare program. It provides a model for—indeed its bureaucracy could well end up running—the "public option" health plan that Mr. Obama wants to offer all Americans under the age of 65. In recent years, Medicare's staff has been aggressively restricting coverage for costly treatments. Looking for ways to control spending on medical products—and preserve the illusory "trust fund" that pays Medicare claims—is what shapes the culture of the organization and motivates the agency's staff.
This often means limiting access to the costliest technologies. To do this Medicare relies on its rationing and pricing systems. National coverage decisions (NCDs) are assessments issued by Medicare's medical staff that define who is eligible for new but often expensive treatments. Medicare then assigns medical products and procedures with "codes" that determine which regulated category they fall into. Finally, price "schedules" are developed by Medicare's staff each year to assign each unique code with its own updated payment rate. The process for getting a favorable code on a new product is a source of intense lobbying. It can make or break a technology.
For a remote agency like Medicare, far removed from clinical practice, it's easier to try and manage the use of a high-cost but specialty treatment than a much lower-cost but very widely used product. Yet cheaper, more commonly used products can still be mispriced and account for more total cost to the agency. For example, low-tech orthotic devices and other "durable medical equipment" are a known source of wasteful spending. These medical products often evade Medicare's attention in favor of less used but more expensive items such as a biological cancer drug.
Take the agency's tortured decisions concerning the use of implantable defibrillators that jump-start stopped hearts during cardiac arrest. Medicare sharply restricted their use in the 1990s. Mounting research proved that the $30,000 devices could be saving many more lives. So in 2003 Medicare adopted a novel theory to expand coverage to some, but not everyone, who needed one. The agency said only patients with certain measures on their electrocardiograms (called "wide QRS") seemed to benefit.
It was an easily measurable but ultimately imprecise way to allocate the devices. After another major study firmly refuted the QRS theory, Medicare expanded coverage again in 2005, potentially saving 2,500 additional lives according to a press release issued with that decision.
That experience wasn't unique. From 1999 to 2007, Medicare denied access in a third of the treatments it evaluated through its coverage process, taking an average of eight months to complete its reviews. When coverage was granted, in 85% of cases the treatments were restricted, usually to patients with more advanced illnesses.
Medicare is lately increasing its use of the national coverage process and is becoming more tightfisted. Since 2008, according to my review of Medicare data, it conditioned access in 29% of its reviews and denied new or expanded coverage in fully 53% of cases.
Medicare's methods can also be arbitrary. Take the travails of the pharmaceutical company Sepracor and its drug Xopenex, an innovative respiratory medicine that competes with the chemically distinct and much cheaper generic albuterol. Both are inhaled aerosols used to treat asthma and chronic obstructive pulmonary disease. Xopenex has the same benefits as albuterol, but some believe fewer of its cardiac side effects. Medicare didn't agree.
The agency tried to make a "national coverage decision" on Xopenex but couldn't come up with a clinical justification to limit the drug's usage. So Medicare manipulated its payment process, saying it would pay Xopenex a price equivalent to the "least costly alternative" form of generic albuterol, 10 cents a treatment compared to about $2.50 for Xopenex. Then Medicare was sued by a patient, and a Federal court recently ruled the agency exceeded its authority.
Medicare finally succeeded in reigning in the use of Xopenex with its coding system. By issuing Xopenex the same classification as generic albuterol, it was able to pay both products the same "blended" price—an average of the cost of each individual drug. That lowered the price on Xopenex, but ironically increased what Medicare paid for the generics.
It's not a stretch to say that Medicare spent hundreds of cumulative man-hours focusing on Xopenex while other priorities languished. The question is why? There weren't safety concerns. Xopenex may have been used in lieu of a cheaper alternative, but at peak Medicare sales of about $300 million it represented far less than one one-thousandth of the agency's budget. Simply put, a few staffers inside Medicare were consumed with the drug and its higher price—revealing a process that is capricious and often disconnected from science.
Worse still is how impenetrable these programs have become. Drug and device companies spend millions of dollars trying to influence Medicare decisions. The hundreds of consultants they hire to advise them typically command $20,000-a-month retainers.
Formal patient and provider appeals to Medicare took an average of 21 months, according to a report issued in 2003 by the Government Accountability Office (using 2001 data), with delays in "administrative processing" due to "inefficiencies and incompatibility" of data systems eating up 70% of the time spent processing appeals.
There's nothing inherently wrong with a program like Medicare seeking value for taxpayers. But it shouldn't make up the rules as it goes. When private plans ration care, patients can appeal directly to an insurer's medical staff. Only a small fraction of Medicare's denied claims—about 5%—are ever formally appealed because its process is so impenetrable. People can also switch insurers, and in many cases patients chose a policy because it matched their preferences in the first place. These options don't exist in a government health program.
Dr. Gottlieb is a resident fellow at the American Enterprise Institute and a former senior official at the Centers for Medicare and Medicaid Services. He is partner to a firm that invests in health-care companies, and he advises health plans.
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