Democratic Accountability, Deficit Bias, and Independent Fiscal Agencies

An IMF working paper by Xavier Debrun "illustrates key features of a model of independent fiscal agencies, and in particular the need (1) to incorporate the intrinsically political nature of fiscal policy - which precludes credible delegation of instruments to unelected decisionmakers - and (2) to focus on characterizing "commitment technologies" likely to credibly increase fiscal discipline."


Introduction:

The fiscal legacy of the economic and financial crisis of 2008-09 brought to the fore serious concerns about the capacity of governments to maintain sustainable public finances. Several vulnerable countries came under severe market pressure, while government bond yields in countries considered so far as safe havens also started rising. Of particular concern is the fact that the large fiscal deficits and ballooning government debts caused by the crisis came on top of already substantial inherited liabilities and ahead of intensifying demographic pressures on entitlement spending. These trends are on a collision course with the intertemporal budget constraint, making ambitious and sustained consolidations unavoidable.  The challenge is formidable and markets are on the watch, pushing governments to look for ways to firm up the credibility of their commitments to sound public finances.

While formal fiscal policy rules have long been used to contain tendencies toward fiscal profligacy (e.g. Fabrizio and Mody, 2006; and Debrun and others, 2008), it has been argued that many of the limitations and failures associated with numerical rules—most notably their inflexibility in the face of unusual circumstances—could be overcome by establishing nonpartisan agencies. Through independent analysis, assessments, and forecasts, such bodies could enhance policymakers’ incentives to deliver sustainable policies.

Despite a fairly active public debate, no full-fledged theory has either established the desirability of such institutions or derived first-order principles likely to secure their effectiveness. In a sense, this is hardly surprising, as one can only theorize about a welldefined object. In reality, the literature on independent fiscal agencies covers a wide array of specific (and sometimes outlandish) academic proposals as well as a number of existing institutions, including the Central Planning Bureau in the Netherlands, the High Council of Finance in Belgium, and the more recent Swedish Fiscal Policy Council and United Kingdom’s Office of Budget Responsibility. At best, existing papers propose a taxonomy (Debrun and others, 2009; Calmfors, 2010), but there currently is no consensus on the tasks these agencies should be assigned, what institutional form they should take, and on whether they should complement or instead substitute for a rules-based framework.

Expositions of the rationale for non-partisan agencies nevertheless share a common thread, the canonical illustration of which is Wyplosz (2005). First, there is a review of the many reasons why fiscal policy tends to systematically deviate from a socially optimal solution, with often an emphasis on common pool problems, short-termism, and time-inconsistency.  Second, the author(s) lament(s) the ineffectiveness of fiscal policy rules. It is argued that the main problem with the latter is that the simplicity required for their smooth operation limits their appropriateness outside normal circumstances, undermining their credibility as soon as uncommon conditions prevail. For example, deficit ceilings fail to trigger discipline in good times—when compliance is more likely to result from automatic stabilizers rather than conscious actions—but bind in bad times, forcing undesirable procyclical contractions. Third, the author(s) call(s) on our sense of déjà vu to draw a parallel with the case for central bank independence, which is also based on the idea of an expansive bias affecting unconstrained discretionary policies, and on the manifest failure of rigid rules (e.g. caps on the growth of certain monetary aggregates) to address that bias.

The aim of this paper is to assess the theoretical framework anchoring the policy debate on politically independent fiscal agencies. After setting-up a basic model of fiscal policy (Section II), I show that the parallel with independent central banks is theoretically flawed because most models of fiscal bias cannot demonstrate why elected officials would want to establish such institutions in the first place (Section III). In addition, the idea of fiscal delegation is misleading because the very fear of delegating may motivate principled, yet baseless opposition from politicians. I then suggest—still using simple formal illustrations— that any full-fledged theory of fiscal agencies should (1) incorporate the intrinsically political nature of fiscal policy and the infeasibility of delegating policy instruments to unelected officials and (2) focus on characterizing mechanisms that encourage ex-post compliance with ex-ante commitments (“commitment technologies”) to fiscal discipline (Section IV). Some practical conclusions are drawn in Section V.

Concluding remarks:

The paper discussed from a theoretical perspective the role of independent fiscal agencies in enhancing fiscal discipline. The key point is that the effectiveness of such institutions depends on their capacity to deal with the root cause of deficit bias, including informational asymmetries between voters—the only legitimate principal in the policy game—and politicians. A number of practical implications emerge:

1. The delegation of fiscal policy prerogatives to unelected officials is unworkable from a positive perspective, reinforcing the normative argument against fiscal delegation emanating from Alesina and Tabellini (2007). The model indeed illustrates that the very decision to delegate macro-relevant dimensions of fiscal policy—such as the level of the deficit, as suggested by Wyplosz (2005)—simply violates participation constraints of elected decisionmakers.

2. An independent fiscal agency is more likely to credibly enhance fiscal discipline if a broad mandate allows it to address the various manifestations of the deficit bias (from creative accounting to masking policy slippages or biasing revenue forecasts). This includes having the discretion to make normative assessments of the fiscal stance—albeit within the boundaries of elected politician’s own ex-ante commitments—in the light of cyclical conditions, public debt dynamics, and risks to public sector’s long-term solvency.

3. The agency’s effectiveness is likely to be greater if it receives specific instruments to trigger a public debate where elected officials would have to publicly explain slippages (with respect to ex-ante targets) deemed inappropriate by the agency. By becoming a reliable source on the overall quality of fiscal policy, the agency can help voters identify ex-post deviations related to “bad policies” (as opposed to “bad luck”) and hold policymakers accountable. This is a task that rules-based fiscal frameworks—bound to remain simple to be operational—cannot by themselves deliver. Indeed, mere deviations from preset benchmarks do not always signal policy mistakes.

4. As politicians may be reluctant to bear the short-term costs of deviations from ex-ante commitments, an effective fiscal agency ideally requires a degree of political independence enshrined in primary legislation (Constitutional or framework law) and guaranteed by ringfenced, multi-year budget appropriations or rules-based extra-budgetary financing (e.g.  through a fixed transfer from the central bank) commensurate with the agency’s tasks.

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Past ability to execute "indicates the degree to which we can provide the kinds of support and good service that the American people expect"

Past ability to execute "indicates the degree to which we can provide the kinds of support and good service that the American people expect"
WSJ, Jun 11, 2010

Byron York writing in the Washington Examiner, June 6:

It's not mentioned much now, but in the late summer of 2008, a major hurricane, Gustav, was in the Gulf of Mexico and headed toward New Orleans, threatening a replay of the disastrous Katrina experience. On September 1, 2008, Barack Obama, fresh from his Roman-colonnade speech on the final night of the Democratic convention in Denver, talked to CNN's Anderson Cooper about Gustav and the Gulf. The question: As president, could he handle an emergency like that? Obama pointed to the size of his campaign and its multi-million dollar budget as evidence of his executive abilities. "Our ability to manage large systems and to execute, I think, has been made clear over the last couple of years," Obama said. That executive ability, he added, "indicates the degree to which we can provide the kinds of support and good service that the American people expect."

The 'Disclose' Act would make election law even more incomprehensible and subject to selective enforcement for political gain

Chuck Schumer vs. Free Speech. By Joan Aikens, Lee Ann Elliott, Thomas Josefiak, David Mason, Bradley Smith, Hans A. von Spakovsky, Michael Toner and Darryl R. Wold
The 'Disclose' Act would make election law even more incomprehensible and subject to selective enforcement for political gain.
WSJ, May 19, 2010

Editor's note: The following article is co-authored by former Federal Election Commissioners Joan Aikens, Lee Ann Elliott, Thomas Josefiak, David Mason, Bradley Smith, Hans A. von Spakovsky, Michael Toner and Darryl R. Wold:

As former commissioners on the Federal Election Commission with almost 75 years of combined experience, we believe that the bill proposed on April 30 by Sen. Chuck Schumer and Rep. Chris Van Hollen to "blunt" the Supreme Court's decision in Citizens United v. FEC is unnecessary, partially duplicative of existing law, and severely burdensome to the right to engage in political speech and advocacy.

Moreover, the Democracy Is Strengthened by Casting Light On Spending in Elections Act, or Disclose Act, abandons the longstanding policy of treating unions and businesses equally, suggesting partisan motives that undermine respect for campaign finance laws.

At least one of us served on the FEC at all times from its inception in 1975 through August 2008. We are well aware of the practical difficulties involved in enforcing the overly complex Federal Election Campaign Act and the problems posed by additional laws that curtail the ability of Americans to participate in the political process.

As we noted in our amicus brief supporting Citizens United, the FEC now has regulations for 33 types of contributions and speech and 71 different types of speakers. Regardless of the abstract merit of the various arguments for and against limits on political contributions and spending, this very complexity raises serious concerns about whether the law can be enforced consistent with the First Amendment.

Those regulatory burdens often fall hardest not on large-scale players in the political world but on spontaneous grass-roots movements, upstart, low-budget campaigns, and unwitting volunteers. Violating the law by engaging in forbidden political speech can land you in a federal prison, a very un-American notion. The Disclose Act exacerbates many of these problems and is a blatant attempt by its sponsors to do indirectly, through excessively onerous regulatory requirements, what the Supreme Court told Congress it cannot do directly—restrict political speech.

Perhaps the most striking thing about the Disclose Act is that, while the Supreme Court overturned limits on spending by both corporations and unions, Disclose seeks to reimpose them only on corporations. The FEC must constantly fight to overcome the perception that the law is merely a partisan tool of dominant political interests. Failure to maintain an evenhanded approach towards unions and corporations threatens public confidence in the integrity of the electoral system.

For example, while the Disclose Act prohibits any corporation with a federal contact of $50,000 or more from making independent expenditures or electioneering communications, no such prohibition applies to unions. This $50,000 trigger is so low it would exclude thousands of corporations from engaging in constitutionally protected political speech, the very core of the First Amendment. Yet public employee unions negotiate directly with the government for benefits many times the value of contracts that would trigger the corporate ban.

This prohibition is supposedly needed to address concerns that government contractors might use the political process to steer contracts their way; but unions have exactly the same conflict of interest. So do other recipients of federal funds, such as nonprofit organizations that receive federal grants and earmarks. Yet there is no ban on their independent political expenditures.

Disclose also bans expenditures on political advocacy by American corporations with 20% or more foreign ownership, but there is no such ban on unions—such as the Service Employees International Union, or the International Brotherhood of Electrical Workers—that have large numbers of foreign members and foreign nationals as directors.

Existing law already prohibits foreign nationals, including corporations headquartered or incorporated outside of the U.S., from participating in any U.S. election. Thus Disclose does not ban foreign speech but speech by American citizen shareholders of U.S. companies that have some element of foreign ownership, even when those foreigners have no control over the decisions made by the Americans who run the company.

For example, companies such as Verizon Wireless, a Delaware corporation headquartered in New Jersey with 83,000 U.S. employees and 91 million U.S. customers, would be silenced because of the British Vodafone's minority ownership in the corporation. But competing telecommunications companies could spend money to influence elections or issues being debated in Congress.

The new disclosure requirements are unnecessary, duplicating information already available to the public or providing information of low value at a significant cost in reduced clarity for grass-roots political speech. In many 30-second ads, Disclose would require no fewer than six statements as to who is paying for the ad (the current law already requires one such statement). These disclaimers would take up as much as half of every ad.

The Disclose Act also creates new disclosure requirements for nonprofit advocacy groups that speak out. These groups already have to disclose their sponsorship, but Disclose requires them to go further and provide the government with a membership list. This infringes on the First Amendment rights of private associations recognized by the Supreme Court in NAACP v. Alabama. Groups can avoid this only by creating a new type of political action committee called a "campaign related activities account."

The result of these overly complex and unnecessary provisions is to force nonprofits to choose between two options that have each been found unconstitutional by the Supreme Court: Either disclose their members to the government or restrict their political spending to the campaign related activities account. This runs contrary to the explicit holding in Citizens United that corporations (and unions) may engage in political speech using their general treasuries.

These requirements will be especially burdensome to small businesses and grass-roots organizations, which typically lack the resources for compliance. So the end effect of all of this "enhanced disclosure" will be to ensure that only large corporations, unions and advocacy groups can make political expenditures—the exact opposite of what the sponsors claim to desire.

While the Disclose Act does include an exemption for major media corporations, it does not include websites or the Internet, which means the government can regulate (and potentially censor) political dialogue on the Web. Additionally, the law would require any business or organization making political expenditures to create and maintain an extensive, highly sophisticated website with advanced search features to track its political activities.

As a result, small businesses, grass-roots organizations, and union locals that maintain only basic websites would be discouraged from making any expenditures for political advocacy, because doing so would require them to spend thousands of dollars to upgrade their websites and purchase software to report information that is already readily available to the public from the FEC. Large companies and unions could probably meet this requirement, so once again the bill benefits large, institutional players over small businesses and grass-roots organizations.

The Disclose Act's abandonment of the historical matching treatment of unions and corporations will cause a substantial portion of the public to doubt the law's fairness and impartiality. It makes election law even more complex, more incomprehensible to ordinary voters, and more open to subjective enforcement by those seeking partisan gain.

Shahzad and the Pre-9/11 Paradigm - In the 1990s we mocked the ineptness of jihadists and were confident civilian courts could handle them

Shahzad and the Pre-9/11 Paradigm. By MICHAEL B. MUKASEY
In the 1990s we mocked the ineptness of jihadists and were confident civilian courts could handle them. Look where that got us.
WSJ, May 12, 2010

Some good news from the attempted car bombing in Times Square on May 1 is that—at the relatively small cost of disappointment to Broadway theater-goers—it teaches valuable lessons to help deal with Islamist terrorism. The bad news is that those lessons should already have been learned.

One such lesson has to do with intelligence gathering. Because our enemies in this struggle do not occupy a particular country or location, intelligence is our only tool for frustrating their plans and locating and targeting their leaders. But as was the case with Umar Faruk Abdulmutallab, who tried to detonate a bomb aboard an airplane over Detroit last Christmas Day, principal emphasis was placed on assuring that any statements Faisal Shahzad made could be used against him rather than simply designating him an unlawful enemy combatant and assuring that we obtained and exploited any information he had.

On Sunday, Attorney General Eric Holder said that in regard to terrorism investigations he supports "modifying" the Miranda law that requires law enforcement officials to inform suspects of their rights to silence and counsel. But his approach—extension of the "public safety exemption" to terror investigations—is both parsimonious and problematic. The public safety exemption allows a delay in Miranda warnings until an imminent threat to public safety—e.g., a loaded gun somewhere in a public place that might be found by a child—has been neutralized. In terror cases it is impossible to determine when all necessary intelligence, which in any event might not relate to an imminent threat, has been learned.

The lesson from our experience with Abdulmutallab, who stopped talking soon after he was advised of his rights and did not resume for weeks until his family could be flown here to persuade him to resume, should have been that intelligence gathering comes first. Yes, Shahzad, as we are told, continued to provide information even after he was advised of his rights, but that cooperation came in spite of and not because of his treatment as a conventional criminal defendant.

Moreover, once Shahzad cooperated, it made no more sense with him than it did with Abdulmutallab to publicize his cooperation and thereby warn those still at large to hide and destroy whatever evidence they could. The profligate disclosures in Shahzad's case, even to the point of describing his confession, could only hinder successful exploitation of whatever information he provided.

The Shahzad case provides a reminder of the permanent harm leaks of any kind can cause. An Associated Press story citing unnamed law enforcement sources reported that investigators were on the trail of a "courier" who had helped provide financing to Shahzad.

A courier would seem oddly out of place in the contemporary world where money can be transferred with the click of a mouse—that is, until one recalls that in 2006 the New York Times disclosed on its front page a highly classified government program for monitoring electronic international money transfers through what is known as the Swift system.

That monitoring violated no law but was leaked and reported as what an intelligence lawyer of my acquaintance referred to as "intelliporn"—intelligence information that is disclosed for no better reason than that it is fun to read about, and without regard for the harm it causes. Of course, terrorists around the world took note, and resorted to "couriers," making it much harder to trace terrorist financing.

In the hours immediately following the discovery and disarming of the car bomb, media outlets and public figures fell all over themselves to lay blame as far as possible from where it would ultimately be found. Secretary of Homeland Security Janet Napolitano suggested the incident was entirely isolated and directed her agency's personnel to stand down. New York Mayor Michael Bloomberg sportingly offered to wager a quarter on the proposition that the bomb was the work of a solitary lunatic, perhaps someone upset over passage of the health-care bill, and much merriment was had over how primitive the bomb had been and how doomed it was to fail.

This sort of reaction goes back much further than this administration. Consider the chain of events leading to the 1993 World Trade Center bombing and eventually 9/11.

In November 1990, Meir Kahane, a right-wing Israeli politician, was assassinated after delivering a speech at a Manhattan hotel by El-Sayid Nosair, quickly pigeonholed as a lone misfit whose failures at work had driven him over the edge. The material seized from his home lay largely unexamined in boxes until a truck bomb was detonated under the World Trade Center in 1993, when the perpetrators of that act announced that freeing Nosair from prison was one of their demands.

Authorities then examined the neglected boxes and found jihadi literature urging the attacks on Western civilization through a terror campaign that would include toppling tall buildings that were centers of finance and tourism. An amateur video of Kahane's speech the night he was assassinated revealed that one of the 1993 bombers, Mohammed Salameh, was present in the hall when Nosair committed his act, and the ensuing investigation disclosed that Nosair was supposed to have made his escape with the help of another, Mahmoud Abouhalima, who was waiting outside at the wheel of a cab.

Nosair jumped into the wrong cab and the terrified driver pulled over and ducked under the dashboard, at which point Nosair tried to flee on foot and was captured. Salameh was captured when the vehicle identification number on the truck that carried the bomb led investigators to a rental agency, where he showed up days later to try to retrieve the deposit on the truck so that he could finance his escape.

Despite the toll from the first World Trade Center blast—six killed, hundreds injured, tens of millions of dollars in damage—and the murder of Kahane, much sport was made of how inept the perpetrators were.

Nosair and the 1993 Trade Center bombers were disciples of cleric Omar Abdel Rahman, known as the "blind sheikh," who was tried and convicted in 1995 along with nine others for conspiring to wage a war of urban terror that included not only that bombing and the Kahane assassination but also a plot to bomb simultaneously the Holland and Lincoln Tunnels, the George Washington Bridge and the United Nations.

One of the unindicted co-conspirators in that case was a then-obscure Osama bin Laden, who would declare in 1996 and again in 1998 that militant Islamists were at war with the United States. In 1998, his organization, al Qaeda, arranged the near-simultaneous bombing of American Embassies in Kenya and Tanzania.

Despite the declaration of war and the act of war, the criminal law paradigm continued to define our response. Along with immediate perpetrators, and some remote perpetrators including Khalid Sheikh Mohammed, bin Laden was indicted, and the oft-repeated vow to "bring them to justice" was repeated. Unmoved, and certainly undeterred, bin Laden in 2000 unleashed the attack in Yemen on the destroyer USS Cole, killing 17.

That was followed by Sept. 11, 2001, and it appeared for a time that Islamist fanaticism would no longer be greeted with condescending mockery. To the phrase "bring them to justice" was added "bring justice to them." The country appeared ready to adopt a stance of war, and to be ready to treat terrorists as it had the German saboteurs who landed off Long Island and Florida in 1942—as unlawful combatants under the laws of war who were not entitled to the guarantees that the Constitution grants to ordinary criminals.

There have been more than 20 Islamist terrorist plots aimed at this country since 9/11, including the deadly shooting by U.S. Army Maj. Nidal Hasan, those of Abdulmutallab and Shahzad, and those of Najibullah Zazi and his cohorts, Bryant Neal Vinas and his, against commuter railroads and subways in New York; of plotters who targeted military personnel at Fort Dix, N.J., Quantico, Va., and Goose Creek, S.C., and who murdered an Army recruiter in Little Rock, Ark.; of those who planned to blow up synagogues in New York, an office building in Dallas, and a courthouse in Illinois, among others.

Yet the pre-9/11 criminal law paradigm is again setting the limit of Attorney General Holder's response, even to the point of considering the inapposite public safety exception to Miranda as a way to help intelligence gathering. He continues to press for a civilian trial for Khalid Sheikh Mohammed and others who had long since been scheduled to be tried before military commissions.

A significant lesson lurking in Shahzad's inadequacy, and the history that preceded it, is that one of the things terrorists do is persist. Ramzi Yousef's shortcomings in the first attempt to blow up the World Trade Center were made up for by Khalid Sheikh Mohammed. We should see to the good order of our institutions and our attitudes before someone tries to make up for Faisal Shahzad's shortcomings.

Mr. Mukasey was attorney general of the United States from 2007 to 2009.

Free Speech for Some - Unions get a pass from new campaign finance disclosure rules

Free Speech for Some. WSJ Editorial
Unions get a pass from new campaign finance disclosure rules.WSJ, May 03, 2010

Democrats in Congress last week introduced White House-backed legislation that would indirectly reinstate free-speech restrictions that the Supreme Court declared unconstitutional in January. Backers say the measure will force disclosure of corporate money in politics, but the real goal is to muzzle criticism—at least from some people.

The legislation, sponsored by Democrats Charles Schumer in the Senate and Chris Van Hollen in the House, would prevent government contractors and corporate beneficiaries of the Troubled Asset Relief Program from spending money on U.S. elections. It would also ban U.S. subsidiaries of foreign companies from making political contributions if a foreign national owns 20% or more of the voting shares in the company, or if foreign nationals comprise a majority of the board of directors.

The provisions are designed to undermine this year's landmark Supreme Court Citizens United decision, which held that limits on independent campaign expenditures by corporations or unions violate First Amendment free speech guarantees. But, under the bill, unions with government contracts would not be subject to the same restrictions as corporations.

If, as proponents claim, their worry is that a company will use campaign contributions to win government contracts (pay-to-play), why does their bill not show equal concern that labor unions will support candidates with the goal of getting government contracts driven to union companies? The legislation also fails to impose limits on the foreign involvement of unions with global reach, such as the Service Employees International Union or the International Brotherhood of Electrical Workers.

It's no coincidence that the lead authors of these bills are the current head of the Democratic Congressional Campaign Committee (Mr. Van Hollen) and the immediate past head of the Democratic Senatorial Campaign Committee (Mr. Schumer). And it's no surprise that Republicans have been reluctant to sign on. The House bill has two GOP sponsors and the Senate bill has none.

When President Obama berated the High Court earlier this year for its free speech ruling, he was very specific about whose free speech he opposed. "This is a major victory for Big Oil, Wall Street banks, health insurance companies and other powerful interests," said Mr. Obama of the decision, suggesting that despite the good governance rhetoric, this legislation is not about muzzling spenders generally so much as specific spenders who don't always salute the Democratic agenda.

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.

Europeans' worship of the state and corresponding suspicion of free markets doom their countries to economic stagnation

Europe's Crisis of Ideas. By BRET STEPHENS
Europeans' worship of the state and corresponding suspicion of free markets doom their countries to economic stagnation.WSJ, Feb 23, 2010

Europe is in a crisis. Superficially, the crisis is about money: the Greek budget, a German-led bailout, the risk of contagion, moral hazard, the fragility of the euro. Fundamentally, it's a crisis of ideas.

At last month's meeting of the World Economic Forum in Davos, Greek Prime Minister George Papandreou offered a view on the source of Europe's woes. "This is an attack on the euro zone by certain other interests, political or financial," he said, without specifying who or what those interests might be. In Madrid, the government has reportedly ordered its intelligence service to investigate "collusion" between U.S. investors and the media to bring Spain's economy low.

Maybe the paladins of Spanish and Greek politics seriously imagine that hedge-fund managers sit around dimly lit conference rooms like so many Lex Luthors and—cue the sinister cackles—decide on a whim to sink this or that economy. Or maybe they think there are political dividends to reap by playing to peanut galleries already inclined toward these kinds of fantasies.

Whichever way, the recrudescence of conspiracy-theory politics, among governments that supposedly belong to the First World, is just one symptom of Europe's intellectual malaise. On the other end of the spectrum is the view that the Greek crisis is the perfect opportunity to expand the regulatory reach and taxing authority of Brussels. Never mind that Greece's economic woes are transparently the result of a government spending beyond its means while failing to promote growth. In this reading of events, the ideal resolution is to extend the prerogatives of a bureaucracy to an even higher level of unaccountability. This is a bit like saying that if your toenail appears to be seriously infected, consider having brain surgery.

Why do Europeans so often find themselves trapped in this sterile dialectic of populist obscurantism and technocratic irrelevancy? Largely because those are the options that remain when other modes of analysis and prescription have been ruled out of bounds. "All European economic policies are the cultural derivatives of one dominant, nearly totalitarian statist ideology: the state is good, the market is bad," says French economist Guy Sorman. The free market, he adds, is "perceived as fundamentally American, while statism is the ultimate form of patriotism."

In the U.S., faith in the general efficacy of markets isn't simply a cultural inheritance. It is sustained by the work of serious university economics departments; think tanks like the Hoover Institution and grant-makers like the Kauffman Foundation, plus a few editorial pages here and there. It's also the default position of the Republican Party, at least rhetorically.

By contrast, in continental Europe the dominant mode of conservative politics is sometimes pro-business but rarely pro-market: During his 12-year presidency of France, Jacques Chirac railed against "Anglo-Saxon ultraliberalism," a phrase that became so ubiquitous as to almost obscure its crassly xenophobic appeal. There are think tanks, but they are almost invariably funded by political parties and hew to the party line. Not a single economics faculty in Europe is remotely competitive with a Chicago or a George Mason: Since 1990, only three of the 36 winners of the Nobel Prize in Economics were then affiliated with a European university.

Then there is the media. Last week, German Foreign Minister Guido Westerwelle, who leads the country's market-friendly Free Democrats, took to the pages of Die Welt to lament that Germany's working poor make less than welfare recipients. "For too long," he wrote, "we have perfected in Germany the redistribution [of wealth], forgetting where prosperity comes from."

For his banal observations, Mr. Westerwelle was roundly accused of "[defaming] millions of welfare recipients" and urged to apologize to them. It takes a remarkably stultified intellectual climate for an op-ed to spark this kind of brouhaha: It is the empire of the Emperor's New Clothes, adapted to the 21st century welfare state.

This is all the more remarkable given that Europe's economic travails aren't exactly difficult to grasp. Greece in a nutshell? It costs $10,218 to obtain all the permitting needed to start a new business there, according to Harvard economist Alberto Alesina. In the U.S., it takes $166. But tyrannies of thought are hard to break, especially when the beneficiaries of state largess—from college students to government workers to captains of subsidized industries—become a political majority. The U.S. may now be approaching just such a point itself.

Is there a way out? "I am deeply convinced," says Mr. Sorman, "that I belong to a continuous tradition of liberty against the state, with a fine pedigree: Montesquieu, Tocqueville, Jean Baptiste Say, Jacques Rueff, Raymond Aron, Jean-Francois Revel." Not an Anglo-Saxon name among them. Europe's recovery—and the recovery of Europe—will come only when they are no longer prophets without honor in their own lands.

My Gift to the Obama Presidency - Bush lawyers were protecting the executive's power to fight a vigorous war on terror

My Gift to the Obama Presidency. By JOHN YOO
Though the White House won't want to admit it, Bush lawyers were protecting the executive's power to fight a vigorous war on terror.
WSJ, Feb 24, 2010

Barack Obama may not realize it, but I may have just helped save his presidency. How? By winning a drawn-out fight to protect his powers as commander in chief to wage war and keep Americans safe.

He sure didn't make it easy. When Mr. Obama took office a year ago, receiving help from one of the lawyers involved in the development of George W. Bush's counterterrorism policies was the furthest thing from his mind. Having won a great electoral victory, the new president promised a quick about-face. He rejected "as false the choice between our safety and our ideals" and moved to restore the law-enforcement system as the first line of defense against a hardened enemy devoted to killing Americans.

In office only one day, Mr. Obama ordered the shuttering of the detention facility at Guantanamo Bay, followed later by the announcement that he would bring terrorists to an Illinois prison. He terminated the Central Intelligence Agency's ability to use "enhanced interrogations techniques" to question al Qaeda operatives. He stayed the military trial, approved by Congress, of al Qaeda leaders. He ultimately decided to transfer Khalid Sheikh Mohammed, the planner of the 9/11 attacks, to a civilian court in New York City, and automatically treated Umar Farouk Abdulmutallab, who tried to blow up a Detroit-bound airliner on Christmas Day, as a criminal suspect (not an illegal enemy combatant). Nothing better could have symbolized the new president's determination to take us back to a Sept. 10, 2001, approach to terrorism.

Part of Mr. Obama's plan included hounding those who developed, approved or carried out Bush policies, despite the enormous pressures of time and circumstance in the months immediately after the September 11 attacks. Although career prosecutors had previously reviewed the evidence and determined that no charges are warranted, last year Attorney General Eric Holder appointed a new prosecutor to re-investigate the CIA's detention and interrogation of al Qaeda leaders.

In my case, he let loose the ethics investigators of the Justice Department's Office of Professional Responsibility (OPR) to smear my reputation and that of Jay Bybee, who now sits as a federal judge on the court of appeals in San Francisco. Our crime? While serving in the Justice Department's Office of Legal Counsel in the weeks and months after 9/11, we answered in the form of memoranda extremely difficult questions from the leaders of the CIA, the National Security Council and the White House on when interrogation methods crossed the line into prohibited acts of torture.

Rank bias and sheer incompetence infused OPR's investigation. OPR attorneys, for example, omitted a number of precedents that squarely supported the approach in the memoranda and undermined OPR's preferred outcome. They declared that no Americans have a right of self-defense against a criminal prosecution, not even when they or their government agents attempt to stop terrorist attacks on the United States. OPR claimed that Congress enjoyed full authority over wartime strategy and tactics, despite decades of Justice Department opinions and practice defending the president's commander-in-chief power. They accused us of violating ethical standards without ever defining them. They concocted bizarre conspiracy theories about which they never asked us, and for which they had no evidence, even though we both patiently—and with no legal obligation to do so—sat through days of questioning.

OPR's investigation was so biased, so flawed, and so beneath the Justice Department's own standards that last week the department's ranking civil servant and senior ethicist, David Margolis, completely rejected its recommendations.

Attorney General Holder could have stopped this sorry mess earlier, just as his predecessor had tried to do. OPR slow-rolled Attorney General Michael Mukasey by refusing to deliver a draft of its report until the 2008 Christmas and New Year holidays. OPR informed Mr. Mukasey of its intention to release the report on Jan. 12, 2009, without giving me or Judge Bybee the chance to see it—as was our right and as we'd been promised.

Mr. Mukasey and Deputy Attorney General Mark Filip found so many errors in the report that they told OPR that the entire enterprise should be abandoned. OPR decided to run out the clock and push the investigation into the lap of the Obama administration. It would have been easy for Mr. Holder to concur with his predecessors—in fact, it was critical that he do so to preserve the Justice Department's impartiality. Instead the new attorney general let OPR's investigators run wild. Only Mr. Margolis's rejection of the OPR report last week forced the Obama administration to drop its ethics charges against Bush legal advisers.

Why bother fighting off an administration hell-bent on finding scapegoats for its policy disagreements with the last president? I could have easily decided to hide out, as others have. Instead, I wrote numerous articles (several published in this newspaper) and three books explaining and defending presidential control of national security policy. I gave dozens of speeches and media appearances, where I confronted critics of the administration's terrorism policies. And, most importantly, I was lucky to receive the outstanding legal counsel of Miguel Estrada, one of the nation's finest defense attorneys, to attack head-on and without reservation, each and every one of OPR's mistakes, misdeeds and acts of malfeasance.

I did not do this to win any popularity contests, least of all those held in the faculty lounge. I did it to help our president—President Obama, not Bush. Mr. Obama is fighting three wars simultaneously in Iraq, Afghanistan, and against al Qaeda. He will call upon the men and women serving under his command to make choices as hard as the ones we faced. They cannot meet those challenges with clear minds if they believe that a bevy of prosecutors, congressional committees and media critics await them when they return from the battlefield.

This is no idle worry. In 2005, a Navy Seal team dropped into Afghanistan encountered goat herders who clearly intended to inform the Taliban of their whereabouts. The team leader ordered them released, against his better military judgment, because of his worries about the media and political attacks that would follow.

In less than an hour, more than 80 Taliban fighters attacked and killed all but one member of the Seal team and 16 Americans on a helicopter rescue mission. If a president cannot, or will not, protect the men and women who fight our nation's wars, they will follow the same risk-averse attitudes that invited the 9/11 attacks in the first place.

Without a vigorous commander-in-chief power at his disposal, Mr. Obama will struggle to win any of these victories. But that is where OPR, playing a junior varsity CIA, wanted to lead us. Ending the Justice Department's ethics witch hunt not only brought an unjust persecution to an end, but it protects the president's constitutional ability to fight the enemies that threaten our nation today.

Mr. Yoo, a law professor at the University of California, Berkeley and visiting scholar at the American Enterprise Institute, was a Justice Department official from 2001-03. He is the author, among other books, of "Crisis and Command: A History of Executive Power from George Washington to George W. Bush" (Kaplan, 2010).

"The President's Proposal" on health-care

ObamaCare at Ramming Speed. WSJ Editorial
The White House shows it has no interest in compromise.WSJ, Tuesday, February 23, 2010 As of 3:09 AM

A mere three days before President Obama's supposedly bipartisan health-care summit, the White House yesterday released a new blueprint that Democrats say they will ram through Congress with or without Republican support. So after election defeats in Virginia, New Jersey and even Massachusetts, and amid overwhelming public opposition, Democrats have decided to give the voters what they don't want anyway.

Ah, the glory of "progressive" governance and democratic consent.

"The President's Proposal," as the 11-page White House document is headlined, is in one sense a notable achievement: It manages to take the worst of both the House and Senate bills and combine them into something more destructive. It includes more taxes, more subsidies and even less cost control than the Senate bill. And it purports to fix the special-interest favors in the Senate bill not by eliminating them—but by expanding them to everyone.

The bill's one new inspiration is a powerful federal board that would regulate premiums in the individual insurance market. In all 50 states, insurers are already required to justify premium increases to insurance commissioners, who generally have the power to give a regulatory go-ahead, or not. But their primary concern is actuarial soundness and capital standards, making sure that companies have enough cash to pay claims.

The White House wants to create another layer of review that will be able to reject any rate increase that is "unreasonable or unjustified." Any insurer deemed guilty of such an infraction by this new bureaucracy "must lower premiums, provide rebates, or take other actions to make premiums affordable." In other words, de facto price controls.

Insurance premiums are rising too fast; therefore, premium increases should be illegal. Q.E.D. The result of this rate-setting board will be less competition in the individual market, as insurers flee expensive states or regions, or even a cascade of bankruptcies if premiums are frozen and the cost of the care they are expected to cover continues to rise. For all the Dickensian outrage about profiteering by WellPoint and other companies, insurance is a low-margin business even for health care, and at least 85 cents of the average premium dollar, usually more, is devoted to actual health services.

Price controls are always the first resort of national health care—i.e., Medicare's administered prices for doctors and hospitals. This new White House gambit is merely a preview of ObamaCare's inevitable planned medical economy, which will reduce choice and quality.

The coercive flavor that animates this exercise is best captured in the section that purports to accept the Senate's "grandfather clause" allowing people who like their current health plan to keep it. Except that "The President's Proposal adds certain consumer protections to these 'grandfathered' plans. Within months of legislation being enacted, it requires plans . . . prohibits . . . mandates . . . requires . . . the President's Proposal adds new protections that prohibit . . . ban . . . and prohibit . . . The President's Proposal requires . . ." After all of these dictates, no "grandfathered" plan will exist.

Meanwhile, the new White House plan further vitiates the remnants of cost-control that remained in the House and Senate bills. Now the highly vaunted excise tax on high-cost insurance plans won't kick in until 2018, whereas it would have started in 2013 in the Senate bill, and this tax will only apply to coverage that costs more than $27,500.

Very few plans ever reach that threshold, and sure enough, this is the same $60 billion deal the White House cut in December with union leaders who have negotiated very costly benefits. Now it is extended to all to avoid the taint of political favoritism.

While the White House claims to eliminate the "Cornhusker Kickback," the Medicaid bribe that bought Nebraska Senator Ben Nelson's vote, political appearances are deceiving. As with the union payoff, what the White House really does is broaden the same to all states, with all new Medicaid spending through 2017 and 90% after 2020 transferred to the federal balance sheet. Governors will love this ruse, but national taxpayers will pay more.

And more again, because the White House has adopted the House's firehose insurance subsidies. People earning up to 400% of the poverty line—or about $96,000 for a family of four in 2016—will qualify for government help, and, naturally, this new entitlement is designed to expand over time.

The Administration also claims to have discarded the House's 5.4-percentage-point surtax on joint-filers earning more than $1 million a year, but it sneaks it back in by expanding the Senate's expansion of the 2.9% Medicare payroll tax to joint income about $250,000. The White House would now apply that tax for the first time to income from "interest, dividends, annuities, royalties and rents," details to come.
***

The larger political message of this new proposal is that Mr. Obama and Democrats have no intention of compromising on an incremental reform, or of listening to Republican, or any other, ideas on health care. They want what they want, and they're going to play by Chicago Rules and try to dragoon it into law on a narrow partisan vote via Congressional rules that have never been used for such a major change in national policy. If you want to know why Democratic Washington is "ungovernable," this is it.

Yoo: Obama misunderstands his constitutional role

Getting It Backwards. By John Yoo

Obama misunderstands his constitutional role.

The Weekly Standard, February 15, 2010, Vol. 15, No. 21

Democratic postmortems on Barack Obama’s disappointing first year in the Oval Office have emphasized, as the president himself did, difficulties inherited from “the last eight years.” Republicans, for their part, credit public opposition to Obama’s overreaching policies. But a full explanation goes much deeper. Obama is failing because he has turned the constitutional functions of the presidency upside down.

The 2010 State of the Union address nicely summed up Obama’s topsy-turvy approach to the presidency. He pressed for a new jobs bill, more domestic spending, and health care nationalization. He attributed his political setbacks not to broad opposition to his domestic ambitions but to “a deficit of trust—deep and corrosive doubts about how Washington works that have been growing for years.”

National security amounted to an afterthought. He devoted one paragraph each—out of the approximately 110 paragraphs in the speech—to Iraq, Afghanistan, and terrorism. It is as if Lincoln had spent most of his Inaugural Addresses on the transcontinental railroad and the Homestead Act.

Obama believes the president should lead a revolution in society, the economy, and the political system, but defer on national security and foreign policy to the other branches of government. This upends the Framers’ vision of the presidency. They thought the chief executive’s powers would expand broadly to meet external challenges while playing a modest role at home.

The latest Democratic president is repeating the mistake of the first. When Thomas Jefferson entered office 210 years ago, Chief Justice John Marshall warned that Jefferson would “embody himself in the House of Representatives.” This would “increase his personal power,” Marshall predicted, but it would lead to the “weakening of the office of the President.” The chief justice meant that his political rival (and distant cousin) would gain power by joining forces with his party’s legislative majorities. But the combination would realize the Framers’ fear that Congress would come to dominate the executive branch.

Marshall’s observation explains much about Obama’s first year. By associating himself so closely with congressional Democrats, Obama became responsible for their every misstep. Their reckless overspending and earmarks became his. Their corrupt deal to buy Senator Ben Nelson’s support for nationalized health care became his sordid bargain. Their command-and-control approach to global warming, which will set nationwide limits on energy use and industrial production, became his socialist program.

Putting the president’s fortune in Congress’s hands not only makes for poor politics, it runs counter to the Framers’ plans for the office. They saw Congress, not the presidency, as the main threat to the people’s liberties. In a democracy, James Madison wrote in The Federalist, “the legislative authority, necessarily, predominates” because it has access to the “pockets of the people.” He warned that “it is against the enterprising ambition” of Congress “that the people ought to indulge all their jealousy and exhaust all their precautions.”

The Framers expected the presidency to counterbalance the “impetuous vortex” of Congress. A vigorous executive, Alexander Hamilton wrote in The Federalist, would protect against those “irregular and high-handed combinations which sometimes interrupt the ordinary course of justice” and provide security against “enterprises and assaults of ambition, of faction, and of anarchy” which would emanate from the “humours of the legislature.” The great threat to the Constitution, Hamilton wrote, was the “propensity of the legislative department to intrude upon the rights and absorb the powers of other departments” such as the executive branch, the courts, and the states. The president’s veto would not only protect the executive’s constitutional rights from Congress, he wrote, it would also furnish “an additional security against the enaction of improper laws” and allow the president “to guard the community against the effects of faction, precipitancy, or of any impulse unfriendly to the public good.”

The initiative to regulate the domestic economy and society—limited as it originally was to have been—rested with Congress. The president was to restrain the legislature when it favored party or special interests over the public good. This was no easy job. To give it institutional backbone, the Framers clothed the presidency with independent election, consistent pay, and control over the execution of the laws. Still, Hamilton could only hope that when the legislature gave in to demagogues or temporary passions, the president would “be in a situation to dare to act his own opinion with vigor and decision.” Obama has inverted the presidency in domestic affairs by transforming it from a check into a facilitator of Congress.

Obama’s second and even more significant reversal of the presidency’s constitutional position is his hesitance toward, and even retreat from, its core role as the protector of the nation’s security.

Throughout his first year, Obama has placed the national security second to his ambitious plan to remake the American economy and society. Even as Obama delayed and delayed on whether to send 30,000 additional troops to Afghanistan, he retreated from his predecessor’s aggressive strategy against al Qaeda. He remains intent on closing the detention facility at Guantánamo Bay, Cuba, despite the clear and growing evidence that released jihadists have rejoined al Qaeda and were even linked to the Christmas Day bombing attempt. He announced the end of the tough interrogation of al Qaeda leaders that had yielded crucial intelligence on their plans. He announced the transfer of the trial of Khalid Sheikh Mohammed (KSM) and other 9/11-attack plotters from specially created military tribunals to federal court in New York. Sending KSM and the Christmas bomber into the civilian law enforcement system effectively gives the final say over terrorists to the judicial branch, not the commander in chief.

As Hamilton wrote, the presidency was to be the one part of government that could respond with “decision, activity, secrecy, and dispatch” to unforeseen crises, especially war. Borrowing liberally from John Locke, Hamilton argued in The Federalist that the central function of the executive was to be a branch of the government always in being, one that could respond swiftly to emergencies. War would make the most demands on the presidency. “Of all the cares or concerns of government,” Hamilton wrote, “the direction of war most peculiarly demands those qualities which distinguish the exercise of power by a single hand.”

The dependence of executive power on the circumstances was not lost on early observers of the American system. In Democracy in America, Alexis de Tocqueville stated that the presidency would grow with the United States. “The President of the United States possesses almost royal prerogatives, which he has no opportunity of exercising; and the privileges that he can at present use are very circumscribed. The laws allow him to be strong, but circumstances keep him weak.” That would change, -Tocqueville predicted, as America became a great nation. It is in foreign relations “that the executive power of a nation finds occasion to exert its skill and its strength.” If the security of the country “were perpetually threatened, if its chief interests were in daily connection with those of other powerful nations,” Tocqueville continued, “the executive government would assume an increased importance in proportion to the measures expected of it and to those which it would execute.”

Obama, by contrast, has operated the presidency in his first year in exactly the opposite direction. He wants the executive to be a domestic strongman who can speedily dismiss opposition to his health care and economic ambitions. His decisions to try KSM in federal court and to place the Christmas bomber in FBI custody represent an unprecedented effort to leave critical wartime decisions—here, final decisions on the disposition of enemy combatants—up to the other branches.

Obama should take a lesson from his political hero, the last truly great Democratic president, Franklin D. Roosevelt. If World War II had not come, FDR might have ended up an average president. His New Deal, we now know, did not end the Great Depression, though it did wreck his own political party. But FDR joined the pantheon of Washington and Lincoln by foreseeing and preparing for the existential threat posed by Hitler and the Axis powers. As FDR himself said, “Dr. New Deal” had to give way to “Dr. Win the War.”

To save his presidency, Obama should follow the real lesson of FDR and our other great presidents and turn away from the failures of health care reform and nationalization of the economy. He will be remembered if he follows through in Iraq, pursues al Qaeda with the restoration of aggressive measures, and achieves victory in Afghanistan. If he loses in war in favor of an attempt to expand the size of government at home, he will take his place in presidential history alongside Jimmy Carter and Lyndon Johnson, rather than FDR and Ronald Reagan.


John Yoo is a scholar at the American Enterprise Institute and a law professor at the University of California, Berkeley. He is the author of Crisis and Command: A History of Executive Power from George Washington to George W. Bush.

Obama vs. Holder

Obama vs. Holder. By Stephen F. Hayes

The Weekly Standard, February 3, 2010 3:45 PM

In an interview with 60 Minutes last spring, President Obama discussed the handling of captured terrorists and challenged those who claimed the "American system of justice was not up to the task of dealing with these terrorists."

Obama said: "I fundamentally disagree with that. Now -- do these folks deserve Miranda rights? Do they deserve to be treated like a shoplifter -- down the block? Of course not." President Obama ought to call Attorney General Eric Holder.  In a five-page letter to Senator Mitch McConnell, Holder lays out in exhaustive detail exactly why these folks deserve Miranda rights and why his Justice Department will treat them like a shoplifter down the block.

Holder's letter responds to criticism of the Obama administration's handling of Umar Farouk Abdulmutallab, the Christmas Day bomber, from McConnell and other Republicans. Holder writes:

The decision to charge Mr. Abdulmutallab in federal court, and the methods used to interrogate him, are fully consistent with the long-established and publicly known policies and practices of the Department of Justice, the FBI, and the United States Government as a whole, as implemented for many years by Administrations of both parties. Those policies and practices, which were not criticized when employed by previous Administrations, have been and remain extremely effective in protecting national security. They are among the many powerful weapons this country can and should use to win the war against al-Qaeda.
I am confident that, as a result of the hard work of the FBI and our career federal prosecutors, we will be able to successfully prosecute Mr. Abdulmutallab under the federal criminal law. I am equally confident that the decision to address Mr. Abdulmutallab's actions through our criminal justice system has not, and will not, compromise our ability to obtain information needed to detect and prevent future attacks.

Nobody doubts that Abdulmutallab can be prosecuted. There were nearly three hundred people on the plane when he tried to blow it up. He lit himself on fire. Authories gathered his badly burned underpants and the components of the bomb. His prosecution was never seriously in question, which is precisely what makes the decision to Mirandize him quickly so outrageous.

But Holder's second claim is false. Abdulmutallab spoke openly to FBI agents in his initial 50-minute interrogation -- questioning that took place before he was Mirandized.  He then received treatment for his burns. And five hours after his initial interrogation a second team of interrogators was brought in to question him. These interrogators were part of a "clean team," brought in to interrogate him after he was read his Miranda rights. The previous interrogation, while potentially helpful in obtaining intelligence, was "dirty" because he had not yet been Mirandized and thus unusable in his prosecution.  The "clean team" began by reading Abdulmutallab his rights. And Abdulmutallab, advised of his right to remain silent, chose to exercise it.

Does Holder really mean to suggest that the U.S. government would not have obtained more -- and better -- intelligence if the FBI had continued to interrogate him on Christmas Day?

The U.S. intelligence community had put together a dossier of the intelligence collected on Abdulmutallab in the six months prior to the Christmas Day attack. The FBI interrogators did not have access to this information when they questioned him.  Does Holder believe that there was nothing more to be learned by using this information?  Holder argues that the FBI and Justice Department officials "did precisely what they are trained to do, what their policies require them to do, and what this nation expects them to do."

Holder's predecessor, Attorney General Mike Mukasey, disagrees.  "Holding Abdulmutallab for a time in military custody, regardless of where he is ultimately to be charged, would have been entirely lawful—even in the view of the current administration, which has taken the position that it needs no further legislative authority to hold dangerous detainees even for a lengthy period in the United States," Mukasey wrote in the Wall Street Journal on January 7. "Then we could decide at relative leisure where to charge him—whether before a military commission or before a civilian court."

It's certainly cause for concern that Holder either does not recognize or will not admit the many mistakes in the handling of Abdulmutallab. But what's more disturbing is the fact that he is committed to handling future terrorists -- regardless of who they are or what danger the present -- in precisely the same manner.

"Some have argued that had Abdulmutallab been declared an enemy combatant, the government could have held him indefinitely without providing him access to an attorney. But the government's legal authority to do so is far from clear," according to Holder. He also writes that the law and FBI policy require providing "Miranda warnings prior to any custodial interrogation conducted inside the United States," unless a "public safety" exception is permitted.  (To make his point on a public safety exception, Holder uses the example of someone who has committed an armed offense that compels authorities to ask about the location of the gun.)  Holder further argues that "there is no court-approved system currently in place in which suspected terrorists captured inside the United States can be detained and held without access to an attorney."

Follow that logic.  If Holder is correct, the FBI could pick up al Qaeda's chief of operations in, say, Tampa, Florida, and unless he met the criteria for a public safety exception (i.e. had a gun), the FBI would be required to Mirandize him immediately and give him a lawyer. So someone with detailed and intimate knowledge of al Qaeda -- its leaders, its finances, its recruitment, its training and, yes, its future operations -- would be told he has the right to remain silent and provided counsel.

Holder seems to understand that this is a problem.  So his letter seeks to reassure: "While in some cases defense counsel may advise their clients to remain silent, there are situations in which they properly and wisely encourage cooperation because it is in their client's best interest, given the substantial sentences they might face."

Thank goodness.

It's no wonder that Holder couldn't answer Lindsey Graham's question at a hearing last fall about whether the U.S. government would be required to Mirandize Osama bin Laden if he were captured.  Holder's answer: "That all depends." Because if bin Laden were apprehended in the United States -- to take the logic to absurd lengths -- the FBI would read him his rights and get him a lawyer.

So what about Obama's words to 60 Minutes last spring.  "Do these folks deserve Miranda rights? Do they deserve to be treated like a shoplifter-- down the block?"
The president said: "Of course not." His attorney general says: "Yes."

More Nuance Needed in Bank Regulations

More Nuance Needed in Bank Regulations. By Douglas J. Elliott
Brookings, January 22, 2010

January 22, 2010 — On the day President Barack Obama announced his new banking reform proposals, Reuters carried a story that Treasury Secretary Timothy Geithner had privately expressed reservations about the plan. Having had time to digest it, I can see why.

One of the key parts of this plan is a proposal to limit banks' "proprietary investments." Traditionally, banks took in deposits and put the money to work by lending it out and also by holding a substantial amount of fairly safe financial investments that could be readily sold if cash was needed quickly. Over time, banks have substantially increased the level of investments they held primarily for their higher expected returns and managed them as proprietary investments. They also ramped up the extent to which they traded in and out of securities opportunistically. Banks have also created or invested in external hedge funds for similar purposes, as well as to earn fees from managing the hedge funds.

The argument for limiting proprietary investments is essentially that cheap depositor funds, and other federal support, should not support gambling in the markets. The administration also cited the potential for conflicts of interest when a bank is both working with customers and making its own investments.

But the plan to limit proprietary investments is problematic for a number of reasons. It is so vague that we may find that the eventual details are downright harmful to the economy. In addition, the proposal lacks the subtlety and balance that underlay the administration's earlier financial reform proposals. Previously Obama and his team struck a good balance between the need for regulation and the benefits of letting financial markets work to find the most efficient solutions on their own. Thursday's proposals forbid activities outright, rather than providing appropriate incentives, disincentives and protections.

There is a clear appeal to keeping banks from taking undue investment risks. On the surface, it would appear fairly clear-cut that they ought not to have major proprietary investment positions. However, the issue becomes far more complicated and less clear as one examines it in more detail.

First, it is hard to tell the difference between traditional investment activity, which is a necessary part of banking, and proprietary investments, which are purely discretionary. Banks need to hold significant investment positions as part of their liquidity management. It is in everyone's interest for the return on those investments to be maximized, within acceptable risk limits, since more profitable banks are stronger and less likely to need a taxpayer bailout. It is important not to throw the baby out with the bath water.

Second, banks have long conducted trading activities to serve their clients in which it is often necessary to buy positions from sellers before the bank has an end-buyer. This brings trading risk, since the banks own the position for a time. It was a natural next step to allow the expert traders at the banks to take positions on a longer-term basis when they sensed that the market was moving in one direction. It is not always easy to distinguish these types of trades from ones motivated purely by customer demand.

Third, these investment activities should be unusually profitable for banks on average. They already have the traders and equipment in place, so the additional cost is low. Also, a great deal of information flows through the largest banks that can legitimately be shared. The insight gained from this provides a significant market advantage. Again, it is generally good public policy for banks to engage in profitable activities.

The key issue is to determine when the risk of proprietary investing exceeds the gain. The administration appears to have suddenly decided it is always too risky no matter what the circumstances.

I believe the situation is more nuanced; regulators ought to set limitations on proprietary investments and create capital requirements that are tough enough to hold the risk to the public to a very low level. Unfortunately, banking, like life, is not black and white.

Restricting Bank Activities

Restricting Bank Activities. By Douglas J. Elliott
Brookings, January 21, 2010

January 21, 2010 — President Obama has proposed various measures to restrict the size and scope of activity of the nation’s largest banks. These proposals are broadly in line with ideas being pushed by former Federal Reserve Chairman Paul Volcker and were announced in conjunction with a meeting between Volcker and the president. The key proposals all appear to require legislation and therefore are likely to undergo modification as a result of negotiations in Congress.

As this brief paper will hopefully make clear, the issues being addressed are complicated. This is a classic example of the devil being in the details and many of those details are simply unavailable. My own initial reaction is concern that the administration may be over-reacting to the risks it is trying to address, but it may be that further refinement of the proposals will address my concerns.

The biggest news comes from the president’s proposals to restrict proprietary trading and investments at the banks. Traditionally, banks took in deposits and put the money to work by lending it out and also by holding a substantial amount of fairly safe financial investments. These investments were held primarily because they provided more liquidity than loans, since they could be readily sold if needed, unlike loans. Sometimes investments were held because they would provide an unusually high return, but this was less common. Over the last couple of decades banks have substantially increased the level of investments that they held primarily for their higher expected returns and have ramped up the extent to which they traded in and out of securities opportunistically. Most of this activity is now done in units devoted to such “proprietary trading” where the bank’s own funds are invested in search of excess returns. Banks have also created or invested in external hedge funds for similar purposes, sometimes linked to an ability to earn fees from external investors for managing the hedge fund.

Many of the losses incurred by banks in the recent crisis occurred in their proprietary investment and trading books, although banks certainly lost money in more traditional ways as well. (For example, the mid-sized and smaller banks that are currently failing because of imprudent commercial real estate loans generally made their mistakes in very traditional ways. Larger banks are also losing a great deal of money on parts of their traditional lending activities, such as residential mortgage loans.) Chairman Volcker and a number of other observers have called for a limitation on the ability of banks to benefit from federally insured deposits, and the traditional liquidity supports provided by the Fed, if they are also going to do a significant volume of proprietary investment. The argument essentially is that cheap depositor funds should not be used to gamble in the financial markets.

The president proposes to essentially eliminate proprietary investments and ownership of hedge funds by banks. In addition to the risk management concerns, the administration has also cited the potential for conflicts of interest when a bank is both working with customers and making its own investments.

There is a clear appeal to keeping banks that benefit from deposit insurance and other public support, including potential taxpayer rescues, from taking undue investment risks. On the surface, it would appear fairly clearcut that they ought not to have major proprietary trading positions. However, the issue becomes far more complicated and less clear as one examines it.

First, it is harder than one might think to tell the difference between traditional investment activity, which is a necessary part of banking, and proprietary investments which are purely discretionary. Banks need to hold significant investment positions as part of their liquidity management and it has also generally been considered reasonable to invest the capital supplied by the bank’s shareholders into financial instruments. It is in everyone’s interest for the return on those investments to be maximized, within acceptable risk levels, since more profitable banks are stronger and in a better position to serve their customers. Part of that profit maximization comes from allowing banks to trade in and out of their investment positions as their situation changes or as they see market opportunities or threats. Therefore, it is somewhat difficult to draw a bright line between “proprietary investments” and traditional liquidity management activities. It is also hard to distinguish between investment and trading, since a significant amount of transactional activity can make sense even in a book that is essentially held for liquidity management purposes.

Second, banks have long been allowed to conduct certain trading activities to serve their clients. This is a relatively low risk business to the extent that it consists of trying to match buyers and sellers while earning a small spread for acting as the intermediary. It is often necessary for banks to buy positions from sellers before they have an end-buyer on the other side, in order to provide good service. This brings trading risk, since it is possible that they are not able to find that end-buyer at the price that they themselves paid. The need for these trading activities led banks to employ large numbers of in-house traders who developed substantial expertise. It was a natural next step to allow them to take certain positions on a somewhat longer-term basis when they could sense that the market was going to be moving in one direction or the other. It would not always be easy to distinguish these types of trades from ones that have a purer customer-based motive. Nor is it clear that we would want banks to give up the potential profits from the insights they gain through their general market activities.

Third, there is reason to believe that trading and investment activities should be unusually profitable for banks on average. The infrastructure they use for proprietary investments is generally already in place due to the need to hold large investment portfolios and to serve customers, therefore the marginal cost of adding proprietary investment activity can be low. In addition, a great deal of information flows through the largest banks. Some of this must be held confidential and cannot be shared even within the firm, but much of it can legitimately be shared. The insight gained from these information flows adds up to a significant market advantage that should yield excess returns on average. Again, all else equal, it is good public policy for the banks to engage in profitable activities that will make them stronger.

The key issue, therefore, is to determine when the risk created by proprietary investing exceeds the gain from allowing banks to engage in a generally quite profitable activity. Some observers clearly believe that proprietary investment almost always creates too much risk to the public. It appears that the administration is coming out on that side after a long period in which it had not placed major emphasis on this issue. My own view is that the situation is more nuanced and that regulators ought to have the ability to set limitations on proprietary investment and to set capital requirements for these activities that are high enough to hold the risk to the public to a very low level. Capital requirements can be quite effective as a risk management tool. At the extreme, a 100% capital requirement would mean that all the investment funds could be lost and it would not eat into any of the capital being used to back the rest of the bank’s activities.

The president also proposed that bank regulators be given the power to limit the size of any bank if its scale appears to create undue risk to the financial system. In particular, he proposed that the limits on deposit market share that already exist be extended to include all liabilities. This appears to be consistent with powers already incorporated into the financial regulatory reform bill that passed the House last year, although the president’s emphasis may increase the chance of those provisions surviving Congressional negotiations and even perhaps the probability of those powers being exercised by regulators in practice. If these provisions are included in the final legislation, it will be important to see whether the wording of the law tips the scales towards or away from their actual use. For example, limitations could be negotiated that would narrow the conditions under which regulators could take such an action. Alternatively, the law could provide a presumption that any bank over a certain size would be too big. There would also be a myriad of technical details surrounding how size would be measured. Banks might, for example, be able to able to slim down by moving significant amounts of assets into related entities or securitizing them out to unrelated parties while retaining some stake.

I am concerned, as a general matter, about arbitrarily limiting the size of the banks, since our modern, complicated, global economy demands that the U.S. have at least a few banks capable of providing a very wide range of services each on a large enough scale to be efficient. However, there certainly may be circumstances in which regulators ought to push a bank or banks to be smaller in general or smaller in certain activities. The question is how to balance the considerations and avoid arbitrary limits or decisions.

Head Start: A Tragic Waste of Money

Head Start: A Tragic Waste of Money. By Andrew J. Coulson

This article appeared in the New York Post on January 28, 2010.

Head Start, the most sacrosanct federal education program, doesn't work.

That's the finding of a sophisticated study just released by President Obama's Department of Health and Human Services.

Created in 1965, the comprehensive preschool program for 3- and 4-year olds and their parents is meant to narrow the education gap between low-income students and their middle- and upper-income peers. Forty-five years and $166 billion later, it has been proven a failure.

The bad news came in the study released this month: It found that, by the end of the first grade, children who attended Head Start are essentially indistinguishable from a control group of students who didn't.

What's so damning is that this study used the best possible method to review the program: It looked at a nationally representative sample of 5,000 children who were randomly assigned to either the Head Start ("treatment") group or to the non-Head Start ("control") group.

Random assignment is the "gold standard" of medical and social-science research: It gives investigators confidence that the treatment and control groups are essentially identical in every respect except their access to Head Start. So if eventual test performances differ, we can be pretty sure that the difference was caused by the program. No previous study of Head Start used this approach on a nationally representative sample of children.

When the researchers gave both groups of students 44 different academic tests at the end of the first grade, only two seemed to show even marginally significant advantages for the Head Start group. And even those apparent advantages vanished after standard statistical controls were applied.

In fact, not a single one of the 114 tests administered to first graders — of academics, socio-emotional development, health care/health status and parenting practice — showed a reliable, statistically significant effect from participating in Head Start.

Some advocates of the program have acknowledged these dramatic results, but suggest that it's not necessarily Head Start's fault if its effects vanish during kindergarten and the first grade — perhaps our K-12 schools are to blame.

But that's beside the point. Even if it's true, it means that Head Start will be of no lasting value to children until we fix our elementary and secondary schools. Until then, money spent on Head Start will continue to be wasted.

Yet the Obama administration remains enthusiastic. Health and Human Services Secretary Kathleen Sibelius and Education Secretary Arne Duncan both want to boost funding for Head Start — that is, to spend more on a program that's sure to fail. That's after the president already raised spending on the program from $6.8 billion to $9.2 billion last year.

Instead of throwing more dollars at this proven failure, President Obama might consider throwing his weight behind proven successes. A federal program that pays private-school tuition for poor DC families, for instance, has been shown to raise students' reading performance by more than two grade levels after just three years, compared to a control group of students who stayed in public schools. And it does so at about a quarter the cost to taxpayers of DC's public schools.

Sadly, Obama and Duncan have ignored the DC program's proven success. Neither lifted a finger to save it when Democrats in Congress pulled the plug on its funding last year.

Perhaps it's unrealistic to expect national Democrats to end a Great Society program, even when it's a proven failure. Perhaps it's unrealistic to expect them to stand up to teachers' union opposition and support private-school-choice programs that are proven successes.

Of course, until last week, it seemed unrealistic to expect a Republican to win the Senate seat long held by Ted Kennedy. If voters get angry enough with federal education politics, national Democrats may start learning from their state-level colleagues who are starting to support effective policies like school choice. Or they may just lose their seats, too.

Andrew J. Coulson directs the Cato Insti tute's Center for Educational Freedom.

Federal President Admits CBO Cost Estimates of ObamaCare Are Incomplete

Obama Admits CBO Cost Estimates of ObamaCare Are Incomplete

Posted by Michael F. Cannon

Yesterday — day #224 of the ObamaCare Cost-Estimate Watch — President Obama told House Republicans:

You can’t structure a bill where suddenly 30 million people have coverage and it costs nothing.

And just like that, the president admitted that the official Congressional Budget Office estimates of his health care plan do not reflect its full costs.

Both the House and Senate versions of ObamaCare would cover millions of uninsured Americans by requiring them to purchase private health insurance. As President Obama notes, even if you force people to spend their own money on health insurance, it still costs something to cover them. And if the government partly subsidizes those premiums, the remaining mandatory premium is still part of the cost of covering them.

Yet Democrats have systematically blocked the CBO from including those costs in its official cost projections. The Senate bill’s estimated price tag of $940 billion, for example, includes only the costs that bill would impose on the federal government. By my count, that’s only 40 percent of total costs. By Mr. Obama’s admission, that’s not the full cost of the bill.

Now that the President of the United States has acknowledged that the CBO’s cost estimates are incomplete, could we maybe get a complete cost estimate? Maybe just for the Senate bill?

Michael F. Cannon • January 30, 2010 @ 8:07 am

A Free Speech Landmark - Campaign-finance reform meets the Constitution

A Free Speech Landmark. WSJ Editorial
Campaign-finance reform meets the Constitution.
The Wall Street Journal, page A18, Jan 22, 2010

Freedom has had its best week in many years. On Tuesday, Massachusetts put a Senate check on a reckless Congress, and yesterday the Supreme Court issued a landmark decision [see slip op.] supporting free political speech by overturning some of Congress's more intrusive limits on election spending.

In a season of marauding government, the Constitution rides to the rescue one more time.

Justice Anthony Kennedy wrote yesterday's 5-4 majority opinion in Citizens United v. Federal Election Commission, which considered whether the government could ban a 90-minute documentary called "Hillary: the Movie" that was set to run on cable channels during the 2008 Presidential campaign. Because it was funded by an incorporated group and was less than complimentary of then-Senator Hillary Clinton, the film became a target of campaign-finance limits.

The 2002 Bipartisan Campaign Finance Act, aka McCain-Feingold, banned corporations and unions from "electioneering communications" within 30 days of a primary or 60 days of a general election. Yesterday, the Justices rejected that limit on corporate spending as unconstitutional. Corporations are entitled to the same right that individuals have to spend money on political speech for or against a candidate.

Justice Kennedy emphasized that laws designed to control money in politics often bleed into censorship, and that this violates core First Amendment principles. "Because speech is an essential mechanism of democracy—it is the means to hold officials accountable to the people—political speech must prevail against laws that would suppress it by design or inadvertence," he wrote. The ban on corporate expenditures had a "substantial, nationwide chilling effect" on political speech, he added.

In last year's oral argument for Citizen's United, the Court got a preview of how far a ban on corporate-funded speech could reach. Deputy Solicitor General Malcolm Stewart explained that, under McCain-Feingold, the government had the authority to "prohibit the publication" of corporate-funded books that called for the election or defeat of a candidate.

That was a shock and awe moment at the Court, as it also should have been to a Washington press corps that has too often been a cheerleader for campaign-spending limits. Mr. Stewart was telling a truth already familiar to campaign-finance lawyers and the speech police at the Federal Election Commission. Former FEC Commissioner Hans von Spakovsky recalled yesterday that in 2004 the agency investigated whether a book written by George Soros critical of George W. Bush violated campaign laws. Liberals as much as conservatives should worry about laws that allow such investigations.

The Court's opinion is especially effective in dismantling McCain-Feingold's arbitrary exemption for media corporations. Thus a corporation that owns a newspaper—News Corp. or the New York Times—retains its First Amendment right to speak freely. "At the same time, some other corporation, with an identical business interest but no media outlet in its ownership structure, would be forbidden to speak or inform the public about the same issue," wrote Justice Kennedy. "This differential treatment cannot be squared with the First Amendment."

For instruction and sheer entertainment, we also recommend Justice Antonin Scalia's concurring opinion that demolishes Justice John Paul Stevens's argument in dissent that corporations lack free speech rights because the Founding Fathers disliked them. "If so, how came there to be so many of them?" Mr. Scalia writes, in one of his gentler lines.

The landmark decision—which overturned two Supreme Court precedents—has already sent the censoring political class into orbit. President Obama was especially un-Presidential yesterday, putting on his new populist facade to call it "a major victory for big oil, Wall Street banks, health insurance companies" and other "special interests." Mr. Obama didn't mention his union friends as one of those interests, but their political spending will also be protected by the logic of this ruling. The reality is that free speech is no one's special interest.

New York Senator Chuck Schumer vowed to hold hearings, and the Naderite Public Citizen lobby is already calling for a constitutional amendment that bans free speech for "for-profit corporations." Liberalism's bullying tendencies are never more on display than when its denizens are at war with the speech rights of its opponents.

Perhaps one day the Court will go even further and overturn Buckley v. Valeo, the 1976 decision that was its original sin in tolerating limits on campaign spending. The Court did yesterday uphold disclosure rules, so a sensible step now would be for Congress to remove all campaign-finance limits subject only to immediate disclosure on the Internet. Citizens United is in any event a bracing declaration that Congress's long and misbegotten campaign-finance crusade has reached a Constitutional dead end.