Self-identified liberals and Democrats do badly on questions of basic economics

Are You Smarter Than a Fifth Grader? By DANIEL B. KLEIN
Self-identified liberals and Democrats do badly on questions of basic economics.WSJ, Jun 08, 2010

Who is better informed about the policy choices facing the country—liberals, conservatives or libertarians? According to a Zogby International survey that I write about in the May issue of Econ Journal Watch, the answer is unequivocal: The left flunks Econ 101.

Zogby researcher Zeljka Buturovic and I considered the 4,835 respondents' (all American adults) answers to eight survey questions about basic economics. We also asked the respondents about their political leanings: progressive/very liberal; liberal; moderate; conservative; very conservative; and libertarian.

Rather than focusing on whether respondents answered a question correctly, we instead looked at whether they answered incorrectly. A response was counted as incorrect only if it was flatly unenlightened.

Consider one of the economic propositions in the December 2008 poll: "Restrictions on housing development make housing less affordable." People were asked if they: 1) strongly agree; 2) somewhat agree; 3) somewhat disagree; 4) strongly disagree; 5) are not sure.

Basic economics acknowledges that whatever redeeming features a restriction may have, it increases the cost of production and exchange, making goods and services less affordable. There may be exceptions to the general case, but they would be atypical.

Therefore, we counted as incorrect responses of "somewhat disagree" and "strongly disagree." This treatment gives leeway for those who think the question is ambiguous or half right and half wrong. They would likely answer "not sure," which we do not count as incorrect.

In this case, percentage of conservatives answering incorrectly was 22.3%, very conservatives 17.6% and libertarians 15.7%. But the percentage of progressive/very liberals answering incorrectly was 67.6% and liberals 60.1%. The pattern was not an anomaly.

The other questions were: 1) Mandatory licensing of professional services increases the prices of those services (unenlightened answer: disagree). 2) Overall, the standard of living is higher today than it was 30 years ago (unenlightened answer: disagree). 3) Rent control leads to housing shortages (unenlightened answer: disagree). 4) A company with the largest market share is a monopoly (unenlightened answer: agree). 5) Third World workers working for American companies overseas are being exploited (unenlightened answer: agree). 6) Free trade leads to unemployment (unenlightened answer: agree). 7) Minimum wage laws raise unemployment (unenlightened answer: disagree).

How did the six ideological groups do overall? Here they are, best to worst, with an average number of incorrect responses from 0 to 8: Very conservative, 1.30; Libertarian, 1.38; Conservative, 1.67; Moderate, 3.67; Liberal, 4.69; Progressive/very liberal, 5.26.

Americans in the first three categories do reasonably well. But the left has trouble squaring economic thinking with their political psychology, morals and aesthetics.

To be sure, none of the eight questions specifically challenge the political sensibilities of conservatives and libertarians. Still, not all of the eight questions are tied directly to left-wing concerns about inequality and redistribution. In particular, the questions about mandatory licensing, the standard of living, the definition of monopoly, and free trade do not specifically challenge leftist sensibilities.

Yet on every question the left did much worse. On the monopoly question, the portion of progressive/very liberals answering incorrectly (31%) was more than twice that of conservatives (13%) and more than four times that of libertarians (7%). On the question about living standards, the portion of progressive/very liberals answering incorrectly (61%) was more than four times that of conservatives (13%) and almost three times that of libertarians (21%).

The survey also asked about party affiliation. Those responding Democratic averaged 4.59 incorrect answers. Republicans averaged 1.61 incorrect, and Libertarians 1.26 incorrect.

Adam Smith described political economy as "a branch of the science of a statesman or legislator." Governmental power joined with wrongheadedness is something terrible, but all too common. Realizing that many of our leaders and their constituents are economically unenlightened sheds light on the troubles that surround us.

Mr. Klein is a professor of economics at George Mason University. This op-ed is based on an article published in the May 2010 issue of the journal he edits, Econ Journal Watch, a project sponsored by the American Institute for Economic Research.

Press Briefing

Jun 08, 2010

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Travel Diary: Secretary Clinton Addresses Organization of American States 40th General Assembly
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Are You Smarter Than a Fifth Grader? - Self-identified liberals and Democrats do badly on questions of basic economics
http://online.wsj.com/article/SB10001424052748703561604575282190930932412.html

The Bullish Case for U.S. Equities - Though America faces long-term problems, our economy is making extraordinary improvements, especially compared to Europe
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Public Education Costlier Than You Think
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Press Briefing

Jun 07, 2010

Press Briefing on the New START Treaty. By Rose Gottemoeller, Assistant Secretary, Bureau of Verification, Compliance, and Implementation, Geneva, Switzerland
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Travel Diary: “Wheels Up” With Secretary Clinton to Latin America and the Caribbean
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James R. Clapper Jr. as DNI: "Four Decades of Service"
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News briefing at WH to discuss the progress of the ongoing crisis in the Gulf.
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The U.S.-ROK Alliance and China: Beyond the Sinking of the Cheonan. By Ji-Young Lee
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Tax Hikes and the 2011 Economic Collapse - Today's corporate profits reflect an income shift into 2010. These profits will tumble next year, preceded most likely by the stock market
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Press Briefing

Jun 05, 2010

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The Ongoing Administration-Wide Response to the Deepwater Oil Spill: June 4, 2010
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The 2010 U.S. QDR and Its Impact on China, by Shen Dingli
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Larry Lindsey: Up to 20% of May Private Sector Job Growth May Be Due to BP Oil Spill
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Federal President's Meeting with Arizona's Governor
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Dead in the Water: A Floating Cemetery for Hong Kong
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Hoosiers vs. Crony Capitalism - How Indiana took on the federal bailout machine and restored the rule of law

Hoosiers vs. Crony Capitalism. By MITCH DANIELS
How my state took on the Obama bailout machine and restored the rule of law.WSJ, June 04, 2010

June 10 will be a silent anniversary, but one worth noting by those alarmed at the past year's assault on free institutions. It was last June 10 when the federal government tossed aside the option of proven, workable bankruptcy procedures in order to nationalize Chrysler on behalf of its union allies.

In order to provide preferential treatment to its cronies, the Obama administration confiscated the property of those creditors who had lent money to Chrysler in good faith, believing that their interest was legally secured and that they stood at the head of the line in the event of the auto company's failure.

The shock wave through the economic markets from this arbitrary redefinition of "secured creditors" rights was profound. Could centuries of crystal-clear law really be overthrown by executive fiat? Apparently, yes. The Supreme Court declined to intervene in the takeover. The cost of corporate borrowing was clearly headed upward as the U.S. for the first time imitated those Third World despotisms where economic rules can be changed without warning at the ruler's whim and convenience.

Equally profound was the message sent to the legal community, which quickly began to cite the "Chrysler precedent" as the now-acceptable judicial model for stripping secured creditors' rights in the name of expediency. Just days after the decision, the Phoenix Coyotes of the National Hockey League invoked the Chrysler case in an attempt to undermine secured creditors' rights and hasten bankruptcy.

Those brave few who protested the brute force taking of their money were attacked by administration apparatchiks for the sin of doing their fiduciary duty to their investors and shareholders. Calls went out from the White House, encouraging submission and warning of the consequences of opposition. One by one, potential plaintiffs surrendered.

The one effort to stop the Chrysler cramdown was launched by three Indiana pension funds. Believing they were making both a wise investment and a gesture supportive of a longtime state employer, Hoosier retired teachers and state policemen had purchased some $19 million in Chrysler's secured debt. The market consensus at the time was that, at 43 cents to par, the bonds were well below their value if bankruptcy ultimately came.

Bankruptcy came, all right, but in a new, extra-legal form run by the federal government. The United Auto Workers, who owned no interest in the company, were simply handed a 55% interest, a gift valued then at $4.5 billion. When no one else wanted to buy the firm, Fiat was given a 20% stake for free to take it over. After this looting, the legitimate creditors were told to be happy with the remnants. For Indiana's retired teachers and state policemen, this amounted to 29 cents on the dollar, a loss of $6 million versus the purchase price and millions more below the expected value in a standard Chapter 11 proceeding.

When, alone among the victims, Indiana retirees went to court, they caused a lot of discomfort but no change in the outcome. The Second District U.S. Court of Appeals declined to overturn the cramdown, but the judges refused to go within a mile of the merits. How could they? The law calls certain instruments "secured" credit for a reason, and there was absolutely zero precedent for the Chrysler confiscation.

In an article by Zach Lowe published last fall in the Am Law Daily and the American Lawyer magazine, UCLA Law School Prof. Lynn LoPucki said of the cramdown: "What happened . . . was so outrageous and illegal that until March of this year [2009], nobody even conceptualized it." The Second Circuit opinion, like the Supreme Court's refusal to stay the nationalization, went out of its way to state that the ruling did not reach the substantive issues raised.

Aided by incensed counsel donating much of their time pro bono, Indiana returned to the Supreme Court with a slim hope of recovering its pensioners' assets, reinstating traditional American property rights and making secured credit secure once more. It seemed to some an exercise in futility: The judge in the Coyotes case commented from the bench that the "poor pension manager from Indiana . . . was kind of like the gentlemen in Tiananmen Square when the tanks came rolling."

On Dec. 14, 2009, in the under-reported news story of the year, the Supreme Court granted the request of Indiana pensioners and took the case. The Court immediately ruled from the bench to strike down the decision of the Second Circuit Court of Appeals, eliminating it as a possible precedent in any future proceeding. Our retirees are still out the $6 million but enjoyed the small vindication of being awarded the court clerk's costs at Chrysler's expense.

The nation is not safe from crony capitalism. In the past year we've experienced the nationalization of the student loan industry and the passage of national health-care and financial-services regulation, each of which is rife with new opportunities for government favoritism and preferential handouts to favored corporations like Chrysler.

But thanks to a quiet correction by the Supreme Court—and a little Hoosier stubbornness—the rule of law has been re-established. The greatest benefits will accrue not to lenders and borrowers but to all those whose jobs are created because investors once again can trust that the money they've risked is safe from seizure by the state.

Mr. Daniels, a Republican, is the governor of Indiana.

Press Briefing

Jun 04, 2010

Consensus Achieved at Critical Nuclear Nonproliferation Conference
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Hoosiers vs. Crony Capitalism - How Indiana took on the federal bailout machine and restored the rule of law
http://online.wsj.com/article/SB10001424052748703561604575282412364326230.html

Capital Gains Taxes and the Recovery - Long-term investments should be rewarded with lower rates
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The Gaza Blockade and International Law - Israel's position is reasonable and backed by precedent
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'To Be Fair' - When does the statute of limitation run out on blaming George W. Bush for all the world's problems?
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Federal Spending by the Numbers 2010
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Could More Cancer Be a Good Sign?
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iRobot Demonstrates New Weaponized Robot
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Turkey's Radical Drift - The Islamic charity behind the Gaza flotilla and its links to terror
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Wireless Heart Pressure Monitor Promises Revolution In Coronary Care
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Tom Vilsack’s Unconvincing Case for Farm Subsidies
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Obama and the Oil Spill
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Press Briefing

Jun 03, 2010

Health and Safety Tips for Your Summer Vacation (Update 2010)
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How Far Will the Gulf Gusher Spread? - Trapped in water pockets, the oil from Deepwater Horizon will ride the Gulf Stream across the Atlantic. In years to come, some will even wash up on European shores
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Central bank co-operation and international liquidity in the financial crisis of 2008-9. By Richhild Moessner and William Allen. Working Papers No 310. June 2010
http://www.bis.org/publ/work310.htm
The financial crisis that began in August 2007 has blurred the sharp distinction between monetary and financial stability.It has also led to a revival of practical central bank co-operation. This paper explains how things have changed. The main innovation in central bank cooperation during this crisis was the emergency provision of international liquidity through bilateral central bank swap facilities, which have evolved to form interconnected swap networks. We discuss the reasons for establishing swap facilities, relate the probability of a country receiving a swap line in a currency to a measure of currency-specific liquidity shortages based on the BIS international banking statistics, and find a significant relationship in the case of the US dollar, the euro, the yen and the Swiss franc. We also discuss the role and effectiveness of swap lines in relieving currency-specific liquidity shortages, the risks that central banks run in extending swap lines and the limitations to their utility in relieving liquidity pressures. We conclude that the credit crisis is likely to have a lasting effect on the international liquidity policies of governments and central banks.


India’s Future Aircraft Carrier Force and the Need for Strategic Flexibility
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Entitlement Reform and the Global Budget Crisis - Putting Social Security on a sustainable path isn't nearly enough. But it would do a lot to convince markets that Washington can be serious
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Introducing U.S. Cyber Command, by William J Lynn III, Deputy Defense Sec
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Iran's Nuclear Progress - Even the U.N. now says Iran has enough fuel for two weapons
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Pacific Partnership Arrives in Vietnam
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Maybe the constitutional case for ObamaCare isn't so open and shut: Justice Needs More Time
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The Blue Dogs Roll Over - How they abet Pelosi's spending agenda
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Erdogan and the Decline of the Turks - When I asked the prime minister about stories alleging a U.S.-Israeli murder and organ selling scheme in Iraq, he could not bring himself to condemn them
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Remarks Before the Ministerial Meeting at the Alliance of Civilizations Rio Forum. By Esther Brimmer, Assistant Secretary, Bureau of International Organization Affairs. Rio de Janeiro, Brazil, May 28, 2010
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Rethinking Darfur, by Marc Gustafson
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Remarks by the President After Meeting with BP Oil Spill Commission Co-Chairs
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BP Oil Spill: Who's Your Daddy?, by Gene Healy
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Breast Cancer Vaccine (For Mice)
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Obamacare’s True Costs Coming to Light
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Press Briefing

Jun 02, 2010

Pacific Partnership Arrives in Vietnam
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The Meaningless Mantra of 'Border Security' - It's become the most overused—and least understood—concept in the struggle over what to do about our broken immigration system
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Afghanistan: Building Partnerships Through Humanitarian Mine Action
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Strategy vs. Tactics in Afghanistan - Good counterinsurgency can't make up for the lack of a political plan
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What Issue Is Critical To Building a 21st Century U.S.-India Partnership?
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The Gulf Spill and Alaska - We see signs that the Obama administration wants to use the disaster to shut down oil production even in the safest areas
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Voters vs. George Soros - Taking judicial selection away from the lawyers guild
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Another Terror War Success - Drones are a crucial U.S. advantage.
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Buffett and the Ratings Cartel - How the Moody's investor can reduce the odds of another credit meltdown
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The Obama administration's plan to raise California's Nummi auto plant from the dead, at least until the November midterm elections.
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The Irish Example - Dublin is showing other indebted governments how to cut spending
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Economic Growth and Institutional Innovation: Outlines of a Reform Agenda
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HSAs an Endangered Species under Obamacare
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Assessing the New Course in U.S.-Italian Relations
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Why Our Poverty Measure Misleads
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What is going on in Turkey?
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Time to Change Course in the Middle East
http://blog.heritage.org/2010/06/01/morning-bell-time-to-change-course-in-the-middle-east

Anti-Salt Crusaders' Bland Arguments
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The negatives of a stronger Chinese currency—higher prices and lower exports for the U.S.—offset the positives.

The Yin and Yang of Yuan Appreciation. By RAY C. FAIR
The negatives of a stronger Chinese currency—higher prices and lower exports for the U.S.—offset the positives.WSJ, Jun 01, 2010

China is under increasing U.S. pressure to allow its currency to appreciate. Many argue that a yuan appreciation would result in more American jobs. Late last year New York Times columnist Paul Krugman said his "back-of-the-envelope" calculation suggested that if there is no appreciation, then over the next several years what he calls "Chinese mercantilism" "may end up reducing U.S. employment by around 1.4 million jobs."

But that's by no means a foregone conclusion. The question of what a Chinese appreciation of the yuan would do to the world economy is complicated. There are many economic links among countries, and they need to be accounted for in analyzing the effects of exchange-rate changes. The standard link that has been stressed in the media is that if the yuan appreciates, Chinese export prices rise in dollars and the U.S. substitutes away from now more expensive Chinese exports to now relatively cheaper American-produced goods. This is good for U.S. output and employment—U.S. jobs are created.

A second link is that China may buy more U.S.-produced goods because they are now cheaper relative to Chinese-produced goods. (The yuan price of U.S. produced goods is lower because a given number of yuan buys more dollars than before.) This is also good for U.S. output and employment.

A third link is that China's output is lower because it is exporting less. With a less robust economy, China imports less, some of which are imports from America. So from this link U.S. exports are lower, which is bad for U.S. output and employment. The second link is a relative price link—China substitutes towards U.S.-produced goods. The third link is an income link—China contracts and buys fewer imports. Which link is larger is an empirical question.

A fourth link is what I will call a U.S. price link. Import prices on Chinese goods are higher. When shoppers go to Wal-Mart they will find higher prices on Chinese-produced goods. This may lead some U.S. firms to raise their own prices since Chinese price competition is now less. So prices in the U.S. will rise. An increase in U.S. prices leads to a fall in real wealth and usually a fall in real wages, since nominal wages usually adjust slowly to increasing prices. This is bad for U.S. consumption demand and thus for U.S. output and employment. In addition, the Federal Reserve may raise interest rates in response to the increase in prices (although probably not much in the present climate), which decreases consumption and investment demand.

Other issues that matter when analyzing the effects of a yuan appreciation against the dollar are what the euro, pound and yen do relative to the dollar, what the monetary authorities in other countries do, and how closely tied countries are to each other regarding trade. One needs a multi-country model to take into account all these effects. I have such a model and have used it to analyze the effects on the world economy of a Chinese yuan appreciation against the dollar. It turns out that the two positive links mentioned above are roughly offset by the two negative links—the net effect on U.S. output and employment is small. The net effect is in fact slightly negative, but given the margin of uncertainty the bottom line is roughly no net effect at all.

It thus seems to be the case, at least from the properties of my model, that the two negative links mentioned above are larger than many people realize. Chinese output is down enough to have a nontrivial effect on Chinese imports. In addition, the negative effects from the increase in U.S. prices are nontrivial. It seems unlikely that there will be a large increase in U.S. jobs if the yuan does in fact appreciate, contrary to what many think.

Mr. Fair is a professor of economics at Yale University.

Press Briefing

Jun 01, 2010

Madeleine Albright on the future of NATO
http://www.washingtonpost.com/wp-dyn/content/video/2010/03/12/VI2010031202502.html

Europe's GDP Envy - The effort to hide its poor economic performance with a new metric won't fool anyone
http://online.wsj.com/article/SB10001424052748703559004575256794032784642.html

The Ongoing Administration-Wide Response to the Deepwater BP Oil Spill: May 30 and May 31, 2010
http://www.whitehouse.gov/blog/2010/05/31/ongoing-administration-wide-response-deepwater-bp-oil-spill-may-30-and-may-31-2010

WaPo Editorial: The flotilla fiasco
http://www.washingtonpost.com/wp-dyn/content/article/2010/05/31/AR2010053103160.html

The West's Wrong Turn on Natural Resources - If democracies don't extract oil, dictatorships will
http://online.wsj.com/article/SB10001424052748704596504575272790583630252.html

It's time to end secret holds on Senate legislation
http://www.washingtonpost.com/wp-dyn/content/article/2010/05/31/AR2010053103161.html

The New Cannery Row - Congress wants $18 million to offset the jobs it destroyed in Samoa
http://online.wsj.com/article/SB10001424052748704596504575272991349796452.html

Statement of the Press Secretary on the President's Briefing Call with National Incident Commander Admiral Thad Allen and

Assistant to the President for Energy and Climate Change Policy Carol Browner
http://www.whitehouse.gov/the-press-office/statement-press-secretary-presidents-briefing-call-today-with-national-incident-com

Peter Wehner on Federal President's thin skin
http://online.wsj.com/article/SB10001424052748704596504575272894271786952.html

Peter Wehner writing last week at PoliticsDaily.com:

Obama is among the most thin-skinned presidents we have had, and we see evidence of it in every possible venue imaginable, from one-on-one interviews to press conferences, from extemporaneous remarks to set speeches.

The president is constantly complaining about what others are saying about him. He is upset at Fox News, and conservative talk radio, and Republicans, and people carrying unflattering posters of him. He gets upset when his avalanche of faulty facts are challenged, like on health care. He gets upset when he is called on his hypocrisy, on everything from breaking his promise not to hire lobbyists in the White House to broadcasting health care meetings on C-SPAN to not curtailing earmarks to failing in his promises of transparency and bipartisanship.

In Obama's eyes, he is always the aggrieved, always the violated, always the victim of some injustice. He is America's virtuous and valorous hero, a man of unusually pure motives and uncommon wisdom, under assault by the forces of darkness.

It is all so darn unfair.

Not surprisingly, Obama's thin skin leads to self pity. As Daniel Halper of The Weekly Standard pointed out, in a fundraising event for Sen. Barbara Boxer, Obama said,

"Let's face it: this has been the toughest year and a half since any year and a half since the 1930s."

Really, now? Worse than the period surrounding December 7, 1941 and September 11, 2001? Worse than what Gerald Ford faced after the resignation of Richard Nixon and Watergate, which constituted the wors[t] constitutional scandal in our history and tore the country apart? Worse than what Ronald Reagan faced after Jimmy Carter (when interest rates were 22 percent, inflation was more than 13 percent, and Reagan faced something entirely new under the sun, "stagflation")? Worse than 1968, when Bobby Kennedy and Martin Luther King, Jr. were assassinated and there was rioting in our streets? Worse than what LBJ faced during Vietnam—a war which eventually claimed more than 58,000 lives? Worse than what John Kennedy faced in the Bay of Pigs and in the Cuban Missile Crisis, when we and the Soviet Union edged up to the brink of nuclear war? Worse than what Franklin Roosevelt faced on the eve of the Normandy invasion? Worse than what Bush faced in Iraq in 2006, when that nation was on the edge of civil war, or when the financial system collapsed in the last months of his presidency? Worse than what Truman faced in defeating imperial Japan, in reconstructing post-war Europe, and in responding to North Korea's invasion of South Korea?


Nuclear Non-Proliferation Treaty Review Conference Final Document
http://www.state.gov/r/pa/prs/ps/2010/05/142374.htm

The Yin and Yang of Yuan Appreciation - The negatives of a stronger Chinese currency—higher prices and lower exports for

the U.S.—offset the positives.
http://www.bipartisanalliance.com/2010/05/negatives-of-stronger-chinese.html

Background Briefing on Nuclear Nonproliferation Efforts with Regard to Iran and the Brazil/Turkey Agreement
http://www.state.gov/r/pa/prs/ps/2010/05/142375.htm

Israel's Gaza Flotilla Fiasco - Israel had no obligation to allow the ships to reach Gaza, but surely there was a smarter way to stop them.
http://online.wsj.com/article/SB10001424052748704366504575278621338138694.html

Israel's Gaza Choices - How is the Jewish state supposed to stop Hamas from re-arming?
http://online.wsj.com/article/SB10001424052748704490204575278931593199598.html

United States Closing Statement at the 2010 NPT Review Conference
http://www.state.gov/t/us/142370.htm

The Union Pension Bailout - A scheme for taxpayers to cover mismanaged multi-employer plans
http://online.wsj.com/article/SB10001424052702303491304575188263180553530.html

The Lessons of the GM Bankruptcy - Everybody knew it was ridiculous and unsustainable to pay UAW workers not to work.
http://online.wsj.com/article/SB10001424052748704113504575264641145227612.html

Seoul Reviews U.S. Military Ties

Seoul Reviews U.S. Military Ties. By JAY SOLOMON
WSJ, May 31, 2010

In the wake of North Korea's alleged sinking of a South Korean naval vessel, South Korean President Lee Myung-bak's government is reviewing its long-term defense policy in ways that could significantly impact the Washington-Seoul military alliance, according to officials engaged in the reform process here and in the U.S.

Over the past week, U.S. and South Korean leaders have outlined plans to conduct new war games and strategy sessions to better equip the South for combating the type of submarine attack Pyongyang is accused by international investigators to have staged this March, killing 46 South Korean sailors.

But longer-term, Mr. Lee's conservative government also could seek to alter the alliance's command structure and Seoul's weapons arsenal in ways that would challenge the Pentagon's current strategic planning for Northeast Asia, according to these officials.

South Korean defense strategists already are publicly pressing Mr. Lee to delay the planned 2012 transfer of operational control of the combined U.S.-South Korean fighting force to Seoul from Washington, arguing South Korea isn't prepared yet to oversee American forces. The agreement between Washington and Seoul has a clause that allows South Korea's president to formally request a suspension of the transfer. The U.S. currently deploys 29,000 troops in South Korea, and the South Korean military deploys 600,000.

Some South Korean officials involved in the president's military-reform drive also are calling for Seoul to develop more offensive strategic weapons as a means to deter the nuclear-armed North from future aggression. Currently, South Korea isn't allowed by its defense agreement with the U.S. to deploy precision-guided missiles with a range of more than 300 kilometers.

"We need to have our own ways to threaten North Korea," said Kim Tae-woo, a South Korean defense expert who sits on one of two committees President Lee has established to assess Seoul's military preparedness. "We need to have this dialogue with our allies."

Mr. Lee took office in 2008 calling for an overhaul of South Korea's military apparatus, which his party had charged was weakened during 10 years of liberal rule in Seoul. But South Korea's new government initially agreed with its predecessor's plans to shrink the size of Seoul's military ranks while reining in defense spending.

Many in South Korea have viewed North Korea's million-man military as largely targeted at the U.S. South Korea's late President Roh Moo-hyun successfully pushed for the U.S. to lower it military profile in his country and to transfer control of the joint-military command to South Korea's defense department.

The North's alleged attack March 26 on the South Korean naval vessel, the Cheonan, however, has shaken up Seoul's strategic thinking, according to South Korean and U.S. officials. A major concern here now is that Pyongyang's development of nuclear technologies has provided leader Kim Jong Il with a deterrent against the more-advanced militaries of the U.S. and South Korea. This, in turn, could allow Pyongyang to stage more-aggressive conventional attacks on the South, with the belief that Seoul won't retaliate for fear of an escalation.

This fear seems to have been borne out in recent days as Mr. Lee's government has shown a reluctance to take some new steps to challenge Pyongyang over the Cheonan incident. Seoul, for example, stepped back from an initial pledge to use loudspeakers to blast pro-South Korean propaganda across the Demilitarized Zone between the two Koreas after the North threatened to attack the broadcasting infrastructure.

South Korea's leaders also have publicly sought to play down the idea that the North's two recent nuclear tests have given it a military advantage or that it has succeeded in developing atomic weapons. "Regarding North Korea's nuclear capabilities, we have not been able to verify those capabilities," South Korean Foreign Minister Yu Myung-hwan said last week at a joint-news conference with U.S. Secretary of State Hillary Clinton.

Still, many leading defense thinkers in Seoul said Pyongyang's growing nuclear technologies are "game changers" that now require South Korea to significantly upgrade its own capabilities. In addition to developing longer-range missiles, many are calling for the purchases of advanced new strike-fighters and antiballistic-missile batteries. They also are calling for the Pentagon to remain in charge of the joint-military command in South Korea beyond 2012, given the lethal effectiveness displayed by North Korea's mini-submarine fleet during the Choenan attack.

"There has been an asymmetrical shift that has weakened our deterrence structure," said Kim Byungki of Seoul's Korea University. "We are supposed to have air, ground and sea dominance."

South Korea's effort to renegotiate in the coming months its decades-old nuclear-cooperation agreement with the U.S. could now prove particularly tricky, according to current and former U.S. officials.

South Korea, under the 1974 pact, faces strict guidelines on its ability to store and reprocess the spent nuclear fuel produced by the country's 20 power reactors, because of fears it could be diverted for military purposes. The U.S. is seeking to limit any major alterations in the treaty, which expires in 2014, so as not to undermine Washington's efforts to contain the nuclear advances of countries like North Korea and Iran.

South Korean officials have said they are seeking to amend the agreement to in a bid to allow Seoul to better manage the storage of its nuclear waster. They are specifically citing South Korea's need to reprocess the spent fuel into a form that can be more easily disposed. But some analysts said Mr. Lee's government also could resist the constrictive terms being sought by the U.S. by citing the North's flouting of a 1992 agreement calling for the removal of all atomic weapons on the Korean Peninsula.

"This incident with the Cheonan could be the spark for turning around a number of things" between the U.S. and South Korea, said Victor Cha, who served as a senior White House official working on Asia during President George W. Bush's second term.

Press Briefing

May 31, 2010

Readout of the President's Call with Prime Minister Netanyahu of Israel
http://www.whitehouse.gov/the-press-office/readout-presidents-call-with-prime-minister-netanyahu-israel

Seoul Reviews U.S. Military Ties
http://www.bipartisanalliance.com/2010/05/seoul-reviews-us-military-ties.html

The Return of the Raj - India should be America's key strategic and military partner in ordering the Eastern Hemisphere for the 21st-century, argues C. Raja Mohan
http://www.the-american-interest.com/article.cfm?piece=803

The Next Financial Crisis. By Jeremy C. Stein, Thursday, May 27, 2010
http://www.thecrimson.com/article/2010/5/27/assets-swifts-banks-over/

Exonerating the Community Reinvestment Act (from causing the crisis anyway)
http://www.coordinationproblem.org/2010/05/exonerating-the-community-reinvestment-act-from-causing-the-crisis-anyway.html

NYC’s Environmental Protection Dept spent $81,000 to study the city’s water supply after a scaremongering “pharmawater” investigation by The Associated Press in 2008 found traces of pharmaceuticals in municipal drinking water around the nation
http://www.acsh.org/factsfears/newsID.1479/news_detail.asp

Press Briefing

May 29, 2010

Statement by the President on Efforts by Secretary Gates to Reform Pentagon Spending
http://www.whitehouse.gov/the-press-office/statement-president-efforts-secretary-gates-reform-pentagon-spending

The global financial crisis: Why were some countries hit harder? By S. Pelin Berkmen, Gaston Gelos, Robert Rennhack, James P. Walsh
http://www.voxeu.org/index.php?q=node/4806

The Top Ten Lessons of the Global Economic Meltdown. By Walter Russell Mead
http://blogs.the-american-interest.com/wrm/2010/05/24/the-top-ten-lessons-of-the-global-economic-meltdown/

On Memorial Day - What we owe to the fallen, and to those now serving.
http://online.wsj.com/article/SB10001424052748704596504575272732097688358.html

'Pieces of Eight': The Constitution and the Dollar - With everyone suddenly fretting about the need for a new world reserve currency, unorthodox views on the Federal Reserve are getting a new hearing.
http://online.wsj.com/article/SB10001424052748704852004575258282696297108.html

Empire State Charter Victory - But unions extract some pieces of Silver
http://online.wsj.com/article/SB10001424052748704596504575272632354287918.html

Move Right and Lose: Evidence from the 2000-2008 U.S. Senate Elections
http://www.thedemocraticstrategist.org/strategist/2010/05/move_right_and_lose_evidence_f.php

Entitlements Are Forever - The legal fight over California's attempt to balance its budget.
http://online.wsj.com/article/SB10001424052748703691804575254330454011848.html

Whither Fannie and Freddie? A Proposal for Reforming the Housing GSEs
http://economics21.org/commentary/whither-fannie-and-freddie-proposal-reforming-housing-gses

Uribe, The Man Who Saved Colombia - Eight years ago, Latin America's oldest democracy was on the brink. The outgoing president explains how he restored the peace.
http://online.wsj.com/article/SB10001424052748704717004575268763528382500.html

The Fruits of Stagnation - Europe's shrunken economies yield good news for global-warming campaigners.
http://online.wsj.com/article/SB10001424052748704269204575270143314430382.html

Memorandum from White House Counsel Regarding the Review of Discussions Relating to Congressman Sestak
http://www.whitehouse.gov/the-press-office/memorandum-white-house-counsel-regarding-review-discussions-relating-congressman-se

Rahm to Bill to Joe - The former president as political cutout in the case of Sestak
http://online.wsj.com/article/SB10001424052748704596504575272702149862906.html

All The News That Fits: Junk science and The New York Times. By Henry I. Miller
http://www.forbes.com/2010/05/19/science-new-york-times-agriculture-opinions-columnists-henry-i-miller.html
On Andrew Pollack's news articles on issues related to genetic engineering applied to agriculture

No, We Don't Need a Teacher Bailout. By Neal McCluskey
http://www.cato.org/pub_display.php?pub_id=11852

A Look at the Senate Democratic Proposal for Immigration Reform: Is the Glass Half Empty, Half Full or Shattered on the Ground?
http://www.cato.org/pubs/irb/irb_may2010.pdf

Press Briefing

May 28, 2010

Joint Statement of the U.S.-Japan Security Consultative Committee
http://www.state.gov/r/pa/prs/ps/2010/05/142318.htm

Meatloaf From a Petri Dish Is Innovator’s Goal for the Masses
http://www.bloomberg.com/apps/news?pid=20601124&sid=aI9nZXjYAzeE

What Our Intelligence Agencies Could Learn from Silicon Valley - The clamor to increase the power of the Director of National Intelligence is mistaken. We need less hierarchy and centralization.
http://online.wsj.com/article/SB10001424052748704717004575268783383613118.html

Bank funding and liquidity management: new report from the Committee on the Global Financial System
http://www.bis.org/press/p100527.htm

Canceling, delaying, banning domestic offshore exploration will increase tanker traffic, foreign imports
http://www.instituteforenergyresearch.org/2010/05/27/white-house-pr-political-response-misguided/

Toward a global risk map, by Stephen Cecchetti, Ingo Fender and Patrick McGuire. BIS Working Papers No 309
http://www.bis.org/publ/work309.htm

Global risk maps are unified databases that provide risk exposure data to supervisors and the broader financial market community worldwide. We think of them as giant matrices that track the bilateral (firm-level) exposures of banks, non-bank financial institutions and other relevant market participants. While useful in principle, these giant matrices are unlikely to materialise outside the narrow and targeted efforts currently being pursued in the supervisory domain. This reflects the well known trade-offs between the macro and micro dimensions of data collection and dissemination. It is possible, however, to adapt existing statistical reporting frameworks in ways that would facilitate an analysis of exposures and build-ups of risk over time at the aggregate (sectoral) level. To do so would move us significantly in the direction of constructing the ideal global risk map. It would also help us sidestep the complex legal challenges surrounding the sharing or dissemination of firm-level data, and it would support a two-step approach to systemic risk monitoring. That is, the alarms sounded by the aggregate data would yield the critical pieces of information to inform targeted analysis of more detailed data at the firm- or market-level.


What Our Intelligence Agencies Could Learn from Silicon Valley - The clamor to increase the power of the Director of National Intelligence is mistaken. We need less hierarchy and centralization.
http://online.wsj.com/article/SB10001424052748704717004575268783383613118.html

Near-zero interest rates have made investors susceptible to the same stresses at the same time.
http://www.bipartisanalliance.com/2010/05/fed-and-may-6-flash-crash-near-zero.html

Medicare and Double Standards - An ObamaCare mailer tells some howlers.
http://www.bipartisanalliance.com/2010/05/this-week-medicare-sent-flyer-to.html

How to Handle North Korea - Pass the South Korea free trade agreement and give up on negotiating with Kim Jong Il
http://online.wsj.com/article/SB10001424052748704717004575268992030246802.html

Statement by the President on Votes to Repeal “Don’t Ask, Don’t Tell”
http://www.whitehouse.gov/the-press-office/statement-president-votes-repeal-don-t-ask-don-t-tell

Obama's Blowout Preventer - In case you hadn't heard, Ken Salazar had a reform plan . . .
http://www.bipartisanalliance.com/2010/05/obamas-blowout-preventer-in-case-you.html

Study Reveals that Regulatory Spending and Staffing Reaches All-Time High. The George Washington University and Washington University in St. Louis
http://www.gwu.edu/explore/mediaroom/newsreleases/studyrevealsthatregulatoryspendingandstaffingreachesalltimehigh

Regulatory Spending Rose under Bush
http://www.cato-at-liberty.org/2010/05/26/regulatory-spending-actually-rose-under-bush/

White House: Growing Businesses and Putting Unemployed Workers Back on the Job
http://www.whitehouse.gov/blog/2010/05/27/growing

Obamacare’s Cooked Books and the “Doc Fix”
http://fixhealthcarepolicy.com/in-the-news/obamacares-cooked-books-and-the-doc-fix

Remarks by the President on the Gulf Oil Spill
http://www.whitehouse.gov/the-press-office/remarks-president-gulf-oil-spill

Panicked Republicans risk future energy development
http://online.wsj.com/article/SB10001424052748704269204575270842009220082.html

American Action Forum: Labor Markets and Health Care Reform: New Results (PDF)
http://americanactionforum.org/files/LaborMktsHCRAAF5-27-10.pdf

The White House Blog: A Blueprint for Pursuing the World that We Seek
http://www.whitehouse.gov/blog/2010/05/27/a-blueprint-pursuing-world-we-seek

Recommitting to a Strong National Defense, by The Honorable Eric Cantor
http://www.heritage.org/Research/Lecture/Recommitting-to-a-Strong-National-Defense

Budget Hearing for the University of the District of Columbia. By Alice M. Rivlin, Senior Fellow, Economic Studies. Brookings Institution.
http://www.brookings.edu/testimony/2010/0414_community_college_rivlin.aspx

Republicans in the Senate: Evaluating the Kagan Nomination - What is known, so far, about President Obama’s choice for the Supreme Court
http://rpc.senate.gov/public/_files/EvaluatingtheKaganNominationFINAL052610_2_.pdf

This week Medicare sent a flyer to seniors: The act passed by Congress "will provide you and your family greater savings and increased quality health care"

Medicare and Double Standards. WSJ Editorial
An ObamaCare mailer tells some howlers.WSJ, May 28, 2010

In the full-circle department, recall the moment last September when Senator Max Baucus and Medicare went after the insurer Humana for having the nerve to criticize one part of ObamaCare. It turns out those same regulators have different standards for their own political advocacy.

This week Medicare sent a flyer to seniors, ostensibly to inform them of what ObamaCare "means for you." Many elderly Americans are worried—and rightly so—about where they'll rank in national health care, given that the new entitlement is funded by nearly a half-trillion dollars in Medicare cuts. They must have been relieved to hear that "The Affordable Care Act passed by Congress and signed by President Obama this year will provide you and your family greater savings and increased quality health care."

That's the first sentence of the four-page mailer, and it gives a flavor of the Administration's respect for the public's intelligence. It goes on to mention "improvements to Medicare Advantage," the program that Democrats hate because it gives nearly one out of four seniors private health insurance options. "If you are in a Medicare Advantage plan, you will still receive guaranteed Medicare benefits."

But that's not what Medicare's own actuary thinks. In an April memo, Richard Foster estimated that the $206 billion hole in Advantage will reduce benefits, cause insurers to withdraw from the program and reduce overall enrollment by half. Doug Elmendorf and his team at the Congressional Budget Office came to the same conclusion, as did every other honest expert.

That's also what Humana told its customers, warning that seniors "could lose many of the important benefits and services that make Medicare Advantage so valuable." Medicare threatened the Kentucky-based company with fines and regulatory punishments for "misleading and confusing" beneficiaries, then issued a blanket gag order on Advantage insurers. The agency later backed down, once its Cosa Nostra message had been signed, sealed and delivered.

Medicare's flyer includes answers to other pressing questions in Boca Raton and Scottsdale, such as allowing children up to age 26 to remain on their parents' health plans, and further misleading commentary about keeping the program "strong and solvent." Dave Camp, the ranking Republican on the Ways and Means Committee, believes the mailer may violate the prohibition on using taxpayer dollars for political propaganda.

The larger issue is the White House's view of political opposition. It seems to think its assertions will be true if they are repeated often enough, as long as no one is allowed to disagree.

The Fed and the May 6 'Flash Crash' - Near-zero interest rates have made investors susceptible to the same stresses at the same time

The Fed and the May 6 'Flash Crash'. By MARK SPITZNAGEL
Near-zero interest rates have made investors susceptible to the same stresses at the same time.WSJ, May 28, 2010

Regulators have been busy searching for the cause of the May 6 "flash crash" when the market dropped by 9.3% and then recovered within minutes. I think it's a good bet no cause will be found; there is still no consensus on what triggered the one-day 20% stock market crash of 1987. But even if there was no trigger, market conditions created by the Federal Reserve's easy money policy definitely made the crash more likely.

The market is a critical system. To illustrate, let's consider another fragile system: the earth's crust. Imagine geologists scouring through the debris of a big earthquake in search of its trigger—as in, "Let's investigate anyone jack hammering in the minutes leading up to the quake." It is intuitively obvious that earthquakes don't have identifiable triggers. We know that big earthquakes, which happen very rarely, are nothing more than many little earthquakes piled on top of each other due to stresses built up within intricate networks of faults. These little fissures cascade into enormous ruptures. The more correlated the fissures, the more delicate the system.

Back to markets. Think of every investor holding a risky position. Then think of all of these investors together in a big herd. Each member of the herd focuses on what the others will do next, since the only reason anyone takes a position is because others are initiating like-minded ones.

When imitative behavior starts happening in markets en masse, expect funny things to happen to liquidity. All you need to know about market dynamics—as I learned as a Chicago pit trader—is that market prices always adjust to the level where market-makers see balanced two-way order flow between buyers and sellers. All market-makers want to do is buy at the bid price, sell at the offer price, and at the end of the day go home unscathed. When there are only buy orders, for instance, expect market-makers to be unwilling to sell to those buyers until the price has adjusted to the point where they see roughly equal buyers and sellers again. To expect them to do anything else is to imagine them as charities.

So when you combine imitative behavior with noncharitable market-makers, there will be seismic waves from time to time. What makes our current system particularly prone to global ruptures is that hair-trigger traders have crowded into exceedingly risky bets. Why would that be, with the crash of 2008 so fresh in traders' minds?

This type of alignment among investors in risky positions is precisely what the central economic planners at the Federal Reserve intended when, in response to the historic credit collapse, they commanded interest rates to zero and signaled that they would prop up all risky assets.

The profitability of an investment is simply its return on capital beyond the cost of that capital. It is against this spread that investors must assess risk. So when the Fed distorted the cost of capital following the 2008 collapse by lowering it for many by roughly 2% (to about 0% for banks), it had the same effect as the 2% higher aggregate dividend yield for stocks or higher credit spreads for investment grade bonds. Suddenly what was toxic looked cheap.

The Fed lured everyone to buy everything and anything that was risky—and did so itself with outright purchases of risky assets like mortgage-backed bonds. Anyone eager for easy profits fell right in line, bidding up dangerous assets like clockwork. Sensing safety in numbers, the herd quickly followed, and in no time the market had consumed the Fed's gifted 2% profit spread and then some.

All in all, it seemed like an impressively engineered recovery. In reality, it was an ephemeral illusion caused by distorting investors' assessment of risk. Despite what zero interest rates were signaling, savers flush with cash weren't flooding the capital markets and credit wasn't expanding.

The Fed has managed to align every little market fault right with each other such that they all succumb to the very same stresses at the very same time. Meanwhile—no surprise—the world remains a very seismically active place. What's extraordinary is that the Fed continues this intentional deception about the real cost of credit, even as we've repeatedly witnessed the consequences of this policy.

Left alone, the market works naturally, with waves of buy-order ruptures and waves of sell-order ruptures. Sometimes mini-ruptures coincide to form much larger ones, such as on May 6. But searching for a discreet trigger for such events is futile. To find the real source of the system's excessive fragility, the regulators will need to look much closer to home.

Mr. Spitznagel is the founder and chief investment officer of the hedge fund Universa Investments LP, based in Santa Monica, Calif.

Obama's Blowout Preventer - In case you hadn't heard, Ken Salazar had a reform plan . . .

Obama's Blowout Preventer. WSJ Editorial
In case you hadn't heard, Ken Salazar had a reform plan . . .WSJ, May 28, 2010

BP and the Coast Guard yesterday were cautiously optimistic that the "top kill" maneuver could stanch the Gulf of Mexico oil leak, and let us hope this is the beginning of the end of the disaster. In Washington, meanwhile, the White House's panicked efforts to put a tourniquet on the political consequences were notably less successful.

"I take responsibility," President Obama said at his press conference yesterday—though responsibility for what? As he explained it, the Deepwater Horizon disaster was predominantly a failure of government, namely, the "scandalously close relationship between oil companies and the agency that regulates them." Mr. Obama is referring to the Minerals Management Service, or MMS, and he claims the Administration had a plan to end this putative regulatory capture.

Interior Secretary Ken Salazar "was in the process of making these reforms," Mr. Obama continued. "But the point that I'm making is, is that, obviously, they weren't happening fast enough. If they had been happening fast enough, this might have been caught." In other words, this is really the fault of the Bush Administration, like everything else.

It would certainly be interesting to hear more details about this no doubt ambitious and unprecedented reform that no one knew anything about until this oil disaster. Mr. Obama made no mention of it when he announced in late March that new offshore areas would be opened to oil and gas development.

"This is not a decision that I've made lightly," the President said at the time. "It's one that Ken and I—as well as Carol Browner, my energy adviser, and others in my Administration—looked at closely for more than a year."

The ex post facto reform effort did get off to a start yesterday with Elizabeth Birnbaum's sacking as the head of MMS. The Administration wants Americans to believe that, finally, someone less corrupted by industry will run the joint—though it has been run for years, under Democratic and Republican Administrations, with rules established by Congress.

But is this the same Elizabeth Birnbaum who Mr. Salazar nominated to run MMS last June? Why yes, it is. "Her in-depth knowledge of energy issues, natural resource policy and environmental law as well as her managerial expertise and work in coalition building," Mr. Salazar said then, "will be especially important as we advance President Obama's new energy frontier and lay the foundation for a clean energy economy."

Mr. Obama's faith in government is so expansive that he thinks it can build a "new energy economy," so perhaps it's not surprising that he also thinks government could have averted the Gulf spill:

To wit, that a far-flung bureaucracy like MMS would have prevented a platform 40 miles offshore—using the planet's most advanced engineering technology to execute the undersea equivalent of landing on the moon—from suffering a massive explosion that killed 11 people and caused the rig to sink 4,993 feet to the ocean floor. Presumably, too, this oversight would have ensured that the cement around the wellhead's casing pipe sealed properly, and that the blowout preventer didn't malfunction, among other miracles.

Mr. Obama added yesterday, with his customary modesty, that "we're also moving quickly on steps to ensure that a catastrophe like this never happens again." This mainly seems to mean delaying or banning any offshore drilling leases in America.

The White House extended its moratorium on deep water drilling permits for another six months, suspended upcoming lease sales in the Gulf, suspended indefinitely 33 deep water exploratory wells, and delayed a drilling program in Alaska's Chukchi and Beaufort seas that was scheduled for next month. The green lobby has been obsessed with the last item for years; a crisis is a terrible thing to waste.

Drilling on the Outer Continental Shelf accounts for about 27% of U.S. domestic oil production, and overreacting politically to a genuine disaster isn't in anyone's interests. Senator Mary Landrieu (D., La.) noted in a recent letter to Mr. Salazar that the moratorium even on the 57 Gulf platforms drilling in shallow water, which is much safer and with fewer risks, will result in more than 5,000 lost jobs if work doesn't resume within six weeks.

More broadly, whatever Mr. Obama's ambitions for windmills and plug-in cars, the world is dependent on oil. Most of the demand growth is coming from China, India and the developing world, and if America doesn't produce its own energy it will merely import it from somewhere else.

Messrs. Obama and Salazar claim to believe that one more bureaucratic reshuffle can prevent oil spills. They would be more honest, and reduce cynicism about government, if they acknowledged that no human endeavor is without risk, and that government can't prevent every accident.

Obamacare's Cooked Books and the “Doc Fix”

Obamacare's Cooked Books and the “Doc Fix”, by James Capretta
May 26, 2010

The Obama administration continues to insist (see this post from White House budget director Peter Orszag) that the recently enacted health-care law will reduce the federal budget deficit by $100 billion over ten years and by ten times that amount in the second decade of implementation. They cite the Congressional Budget Office’s cost estimate for the final legislation to back their claims.

And it is undeniably true that CBO says the legislation, as written, would reduce the federal budget deficit by $124 billion over ten years from the health-related provisions of the new law.
But that’s not whole story about Obamacare’s budgetary implications — not by a long shot.

For starters, CBO is not the only game in town. In the executive branch, the chief actuary of the Medicare program is supposed to provide the official health-care cost projections for the administration — at least he always has in the past. His cost estimate for the new health law differs in important ways from the one provided by CBO and calls into question every major contention the administration has advanced about the bill. The president says the legislation will slow the pace of rising costs; the actuary says it won’t. The president says people will get to keep their job-based plans if they want to; the actuary says 14 million people will lose their employer coverage, many of whom would certainly rather keep it than switch into an untested program. The president says the new law will improve the budget outlook; in so many words, the chief actuary says, don’t bet on it.

All of this helps explain why the president of the United States would be so sensitive about the release of the actuary’s official report that he would dispatch political subordinates to undermine it with the media.

It’s not the chief actuary’s assignment to provide estimates of non-Medicare-related tax provisions, so his cost projections for Obamacare do not capture all of the needed budget data to estimate the full impact on the budget deficit. But it’s possible to back into such a figure by using the Joint Tax Committee’s estimates for the tax provisions missing from the chief actuary’s report. When that is done, $50 billion of deficit reduction found in the CBO report is wiped out.

And that’s before the other gimmicks, double counting, and hidden costs are exposed and removed from the accounting, too.

For instance, this week House and Senate Democratic leaders are rushing to approve a massive, budget-busting, tax-and-spending bill. Among its many provisions is a three-year Medicare “doc fix,” which will effectively undo the scheduled 21 percent cut in Medicare physician fees set to go into effect in June. CBO says this version of the “doc fix” would add $65 billion to the budget deficit over 10 years. The entire bill would pile another $134 billion onto the national debt over the next decade.

If the Obama administration gets its way, this three-year physician-fee fix will eventually get extended again, and also without offsets. Over a full 10-year period, an unfinanced “doc fix” would add $250 to $400 billion to the budget deficit, depending on design and who is doing the cost projection (CBO or the actuary).

Administration officials and their outside enthusiasts (see here) say the Democratic Congress shouldn’t have to find offsets for the “doc fix” because everybody knows a fix needs to be enacted and therefore should go into the baseline. (By the way, the history of the sustainable growth rate [SGR] that Ezra Klein provides at the link above is a misleading one. The SGR was a replacement for a predecessor program that too had run off the rails — the so-called “Volume Performance Standard” enacted by a Democratic Congress in 1989.)

But supporting a “doc fix” is not the same as supporting an unfinanced one on a long-term or permanent basis. Not everybody in Congress is for running up more debt to pay for a permanent repeal of the scheduled fee cuts, which is why such a repeal has never been passed before. In the main, the previous administration and Congresses worked to find ways to prevent Medicare fee cuts while finding offsets to pay for it.

But that’s not the policy of the Obama administration. The truth is the president and his allies in Congress worked overtime to pull together every Medicare cut they could find — nearly $500 billion in all over ten years — and put them into the health law to pay for the massive entitlement expansion they so coveted. They could have used those cuts to pay for the “doc fix” if they had wanted to, as well as for a slightly less expansive health program. But that’s not what they did. That wasn’t their priority. They chose instead to break their agenda into multiple bills, and “pay for” the massive health entitlement (on paper) while claiming they shouldn’t have to find offsets for the “doc fix.” But it doesn’t matter to taxpayers if they enact their agenda in one, two, or ten pieces of legislation. The total cost is still the same. All of the supposed deficit reduction now claimed from the health-care law is more than wiped out by the Democrats’ insistent march to borrow and spend for Medicare physician fees.

And the games don’t end there. CBO’s cost estimate assumes $70 billion in deficit reduction from the so-called “CLASS Act.” This is the new voluntary long-term-care insurance program that hitched a ride on Obamacare because it too created the illusion of deficit reduction. People who sign up for the insurance must pay premiums for at least five years before they are eligible to draw benefits. By definition, then, at start-up and for several years thereafter, there will be a surplus in the program as new entrants pay premiums and very few people draw benefits. That’s the source of the $70 billion “savings.” But the premiums collected in the program’s early years will be needed very soon to pay actual claims. Not only that, but the new insurance program is so poorly designed it too will need a federal bailout. So this is far worse than a benign sleight of hand. The Democrats have created a budgetary monster even as they used misleading estimates to tout their budgetary virtue.

There is much more, of course. CBO’s cost projections don’t reflect the administrative costs required to micromanage the health system from the Department of Health and Human Services. The number of employers looking to dump their workers into subsidized insurance is almost certainly going to be much higher than either CBO or the chief actuary now projects. And the price inflation from the added demand of the newly entitled isn’t factored into any of the official cost projections.

We’ve seen this movie before. When the government creates a new entitlement, politicians lowball the costs to get the law passed, and then blame someone else when program costs soar. Witness Massachusetts. Most Americans are sensible enough to know already that’s what can be expected next with Obamacare.

Zero-Sum Earmarks - A new study finds that pork hurts at home

Zero-Sum Earmarks. WSJ Editorial
A new study finds that pork hurts at homeWSJ, May 27, 2010

For Members of Congress, becoming a committee chairman means more power to spend and thus help for the home district, right? That's certainly the common wisdom. But according to new research from Harvard Business School, the increased federal spending causes local companies to lose sales and cut back on research, payroll and other expenses.

The results surprised Harvard professors Lauren Cohen, Christopher Malloy and Joshua Coval, who expected to see politically connected firms prosper from federal largesse. Instead, the research, which covered 1967 to 2008, found that "strong and widespread evidence of corporate retrenchment" accompanied Congressional seniority. According to Mr. Coval, the research shows federal dollars "directly supplant private sector activity—they literally undertake projects the private sector was planning to do on its own."

The chairmanship of a powerful Senate committee such as Finance or Appropriations typically brings an increase of 40% to 50% in earmark spending for the home state. In the House, top dogs haul an average of 20% more to their states. Yet in the first year after a chairman's rise, the paper notes, the average firm in his state "cuts back capital expenditures by roughly 15%." The behavior typically continues until the Congressman steps down, and it is felt in particular by firms that have the strongest ties to the home state.

Part of the problem is that public money is "crowding out" investment opportunities for firms. "Some of our results point towards the role of competition for state specific factors of production, including labor and fixed assets such as real estates," the authors write. "Public spending appears to increase demand for state-specific factors of production and thereby compel firms to downsize and invest elsewhere." They add that "We also find evidence that the effects are most pronounced in sectors that are the target of earmark spending."

The same side effects may now be observed as the federal stimulus program also ripples through the broader economy: In the first quarter of 2010, USA Today reported, private paychecks made up the lowest share of personal income in history as government spending rose to its highest levels ever. That trend inevitably leads to higher taxes and further economic harm.

Democrats and Republicans have promised earmark reform for years, only to abandon the effort in favor of "bringing home the bacon" and incumbent protection. The Harvard study suggests the Congressmen are really bringing home less economic prosperity.

Obama's Russia Tribute - What he gave away in return for watered-down Iran sanctions

Obama's Russia Tribute. WSJ Editorial
What he gave away in return for watered-down Iran sanctions.WSJ, May 27, 2010

When the Obama Administration last week secured the Kremlin's support for U.N. sanctions on Iran, the White House touted a big dividend from its "reset" in relations with Russia. Now the price for Moscow's cooperation is becoming clearer, and the only ones who should be cheering are the Russians and Iranians.

Three days after Secretary of State Hillary Clinton announced the deal on a diluted Security Council resolution, she quietly met an explicit demand from Russia's Foreign Minister Sergei Lavrov. Buried in last Friday's Federal Register, the State Department announced it was ending long-standing sanctions against four Russian entities that had helped Iran's nuclear weapons and missile programs.

The draft U.N. resolution also includes a loophole for Russia, which would be allowed to deliver the five S-300 surface-to-air missiles that Moscow agreed to sell Tehran in 2005. The S-300s can intercept missiles and aircraft but fall outside the U.N. resolution's ban on the sale of eight categories of conventional weapons to Iran. Mikhail Margelov, the head of the foreign affairs committee of Russia's upper house of parliament, crowed last Friday that sanctions "will not hit current contracts between Russia and Iran."

All of this came on top of the White House decision a week earlier to resubmit to Congress a civilian nuclear cooperation pact with Russia. This was another goodie for Moscow.

These so-called "123 agreements"—named after a section of the Atomic Energy Act of 1954—open the door to technology transfers, commerce in nuclear materials and joint research between the U.S. and select countries. The Bush Administration negotiated the deal with the Kremlin but shelved it after the Russians invaded Georgia in August 2008.

President Obama said that "the situation in Georgia need no longer be considered an obstacle" and that "the level and scope of U.S.-Russia cooperation on Iran are sufficient to justify" the deal. Unlike a treaty, Congress doesn't ratify the pact but has 90 days to act or the deal automatically goes into force. Democrat Edward Markey and Republican Jeff Fortenberry last week introduced a resolution in the House to stop the deal.

It's an uphill but worthy effort. Russia continues illegally to occupy Georgian territory, but the larger problem is its proliferation. Both Republican and Democratic Administration have turned a blind eye to Russian misbehavior. When the Bush Administration submitted the agreement for review, the Government Accountability Office criticized the mandatory accompanying "proliferation statement" on Russia as shoddy and incomplete.

Starting in the 1990s, Moscow sold Iran nuclear centrifuges and missile technology. One company sanctioned until last week, the state arms exporter Rosoboronexport, was put on the list as recently as 2008, while the Moscow Aviation Institute helped Iran develop ballistic missiles.

Nonetheless, the Obama Administration now says "Russia's approach to Iran has evolved," in the words of State spokesman P.J. Crowley. Gary Samore, the White House arms control coordinator, insists that "the Russians understand that the consequences [of shipping the S-300s] would be very severe."

These assurances don't square with Russian statements or actions. The week that President Obama sent the nuclear cooperation pact to Congress, Russian President Dmitry Medvedev was in Damascus touting future nuclear business with Iran's close ally in terrorism. "Cooperation [with Syria] on atomic energy could get a second wind," he said.

In return for all this, the Administration gets weak sanctions similar to the three sets the Bush Administration won without paying such a high tribute. If this represents what the Administration calls "smart diplomacy," we'd hate to see what we give up when we're dumb.

Press Briefing

May 27, 2010

Federal Prez: The Promise of Clean Energy
http://www.youtube.com/watch?v=ulyTh0VtZb8

The Ongoing Administration-Wide Response to the Deepwater BP Oil Spill: May 26, 2010
http://www.whitehouse.gov/blog/2010/05/26/ongoing-administration-wide-response-deepwater-bp-oil-spill-may-26-2010

'Death panels' were an overblown claim – until now
http://dailycaller.com/2010/05/27/death-panels-were-an-overblown-claim-until-now/

Applying the Tools of 21st Century Statecraft to Public Engagement
http://blogs.state.gov/index.php/entries/tools_public_engagement/

Europe-Bank Lenders? Coalition of Unwilling
http://online.wsj.com/article/SB10001424052748703341904575266722784462634.html
Few Step Up to Risk Their Money for Long; New SEC Rule Makes Money Funds Even Less Interested

US State Dept: Citizen Safety in the Western Hemisphere
http://www.state.gov/p/wha/rls/fs/2010/142263.htm

The House has violated PAYGO rules by nearly $1 trillion
http://blog.heritage.org/2010/05/27/morning-bell-this-congress-has-no-shame

The Recovery Starts With Sound Money - The willingness to work for the sake of future prosperity is a universal human quality, but people must believe there is a link between effort and reward
http://online.wsj.com/article/SB10001424052748704026204575266251915530206.html

Notable & Quotable - John Fund on Chris Christie's political toughness
http://online.wsj.com/article/SB10001424052748704717004575268630100057138.html

Zero-Sum Earmarks - A new study finds that pork hurts at home
http://www.bipartisanalliance.com/2010/05/zero-sum-earmarks-new-study-finds-that.html

Congress Gets Mean - The Democratic tax bill's double whammy on carried interest firms
http://online.wsj.com/article/SB10001424052748704026204575266881281707488.html

How Democrats’ Government Takeover of Health Care Will Lead Employers to Drop Coverage
http://rpc.senate.gov/public/_files/ABitterPill.pdf

Rising Rate of Media Misrepresentation
http://www.acsh.org/factsfears/newsID.1468/news_detail.asp
MSNBC's Nightly News last night  devoted a short segment to an "Extreme  Eating" list of high-calorie restaurant meals compiled by the  Center for Science in the Public Interest (CSPI).

Remarks at the African Diplomatic Corp's Celebration of Africa Day. By Johnnie Carson, Assistant Secretary, Bureau of African Affairs
http://www.state.gov/p/af/rls/rm/2010/142261.htm

U.K. Prosecutors Will Drop AIG Financial Unit Probe
http://www.businessweek.com/news/2010-05-26/u-k-prosecutors-will-drop-aig-financial-unit-probe-update1-.html

Britain reveals extent of nuclear arsenal for first time
http://www.japantoday.com/category/world/view/britain-reveals-extent-of-nuclear-arsenal-for-first-time

The Sun is Shining on Solar Subsidies in California Today
http://www.instituteforenergyresearch.org/2010/05/26/the-sun-is-shining-on-solar-subsidies-in-california-today/

President Obama Talks Jobs in California
http://my.barackobama.com/page/community/post/elizabethchan/gGGj9k

Obama's Russia Tribute - What he gave away in return for watered-down Iran sanctions
http://www.bipartisanalliance.com/2010/05/obamas-russia-tribute-what-he-gave-away.html

A New Age of Reform - The mood in the country suggests the U.S. may be at the start of an era of political and economic reform
http://online.wsj.com/article/SB10001424052748704717004575268523673781674.html

The Ongoing Administration-Wide Response to the Deepwater BP Oil Spill: May 25, 2010
http://www.whitehouse.gov/blog/2010/05/25/ongoing-administration-wide-response-deepwater-bp-oil-spill-may-25-2010

Yes, the Gulf Spill Is Obama's Katrina - Where was the White House plan, and why has it been so slow to make decisions?
http://online.wsj.com/article/SB10001424052748704717004575268752362770856.html

ObamaCare vs. Small Business - Why the National Federation of Independent Business supports the constitutional challenge to the health-insurance mandate
http://online.wsj.com/article/SB10001424052748704113504575264802756326086.html

Press Briefing

May 26, 2010

How We Created the First Synthetic Cell - The assembled genome is the largest chemically defined structure ever synthesized in the laboratory.
http://online.wsj.com/article/SB10001424052748704026204575266460432676840.html

Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output
http://www.cbo.gov/doc.cfm?index=11525

A Crisis of Competence in the Gulf
http://blog.heritage.org/2010/05/26/morning-bell-a-crisis-of-competence-in-the-gulf/

The Greatest Myth of the George W. Bush Presidency
http://www.instituteforenergyresearch.org/2010/05/25/the-greatest-myth-of-the-george-w-bush-presidency/

The Case Against the Land-Mine Treaty - Without the DMZ minefield, nuclear weapons would be the main deterrent protecting South Korea
http://online.wsj.com/article/SB10001424052748704852004575258433073503318.html

Corporations Against Corporate Welfare. Note: At least when the political costs outweigh the political favors.
http://online.wsj.com/article/SB10001424052748704026204575266601413204676.html

Of Politics and Oil - The Washington panic, and the realities of the Gulf Coast spill
http://online.wsj.com/article/SB10001424052748704026204575266903446455896.html

The Panic, Round Two: What Would Reagan Do?
http://online.wsj.com/article/SB10001424052748704113504575264940533857802.html
Giant pools of capital are sitting idle in unproductive deposits or inflation hedges. They could easily fund job growth if real, after-tax prospects improved.

The Subjects of the Constitution. By Nicholas Quinn Rosenkranz, Georgetown University Law Center
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1611210
Stanford Law Review, Vol. 62, No. 5, 2010

Reclaiming the Northern Border: The Future of Plan Ecuador
http://blogs.state.gov/index.php/entries/ecuador_future

John Paul Stevens, leader of the Resistance
http://www.scotusblog.com/2010/05/john-paul-stevens-leader-of-the-resistance

President Obama Needs More Legal Tactics Against Terrorists, by Benjamin Wittes, Senior Fellow, Governance Studies
http://www.brookings.edu/opinions/2010/0514_miranda_wittes.aspx

Remarks at Colby College Commencement, by Judith A. McHale, Under Secretary for Public Diplomacy and Public Affairs
Waterville, ME, May 23, 2010
http://www.state.gov/r/remarks/142197.htm

Stimulus by Spending Cuts: Lessons from 1946
http://www.cato.org/pubs/policy_report/v32n3/cp32n3-1.html

International Energy Outlook 2010-Highlights
http://www.eia.doe.gov/oiaf/ieo/index.html

Seniors Will Lose Big Under Obamacare
http://fixhealthcarepolicy.com/in-the-news/side-effects-seniors-will-lose-big-under-obamacare

American Jobbery Act - Dissecting this week's stimulus bill

American Jobbery Act. WSJ Editorial
Dissecting this week's stimulus billWSJ, May 25, 2010

President Obama and Democrats on Capitol Hill are publicly fretting about the dangers of spending and debt, which can mean only one thing: Another big spending "stimulus" bill is in the works. And sure enough, the House plans to vote this week on $190 billion in new spending, $134 billion of which it won't even pretend to pay for.

Sander Levin, the new Ways and Means Chairman, calls this exercise the American Jobs and Closing Tax Loopholes Act. Mr. Levin has waited 28 years to ascend to this throne and this is the best he can do? "Jobs" were also the justification in February 2009 for the $862 billion stimulus that has managed to hold the jobless rate down to a mere 9.9%. Maybe Mr. Levin's spending can hold it down to even greater heights.

The nearby table gives a flavor of what's in this grab bag of political payoffs, corporate welfare and transfer payments. There's $24 billion to help states pay the exploding tab for Medicaid, the same program that ObamaCare expands by some 16 million new recipients. The bill also offers $1 billion for summer jobs for teens, whose jobless rate is 25.4%. Congress could do far more to create teen jobs if it merely suspended last year's minimum wage increase to $7.25 an hour, which priced millions of young workers out of the labor market. But that would be too rational.

The biggest item is $65 billion to prevent a 21% cut in Medicare physician reimbursements. Democrats promised this to the American Medical Association in return for its ObamaCare support, but they left the $65 billion out of the health-care law to make it look less expensive. Now they're pushing it through under separate cover when they assume the press corps won't notice.

The $47 billion to extend unemployment insurance to nearly two full years will bring the total spent on this program to $137 billion during this recession—five times more than in either of the prior two recessions. That's nearly as much as the federal corporate income raised in 2009.
The sages in Congress continue to claim that these payments for not working will lead to more work. Representative Jim McDermott recently declared on the House floor that jobless payments are "one of the most effective forms of economic stimulus" because "every unemployment dollar spent returns $1.64 of economic benefits." So let's lay off everybody, pay them for not working, and watch the economy really boom. Where do they teach this stuff?

This bill is also one of the most expensive corporate welfare giveaways in recent years with subsidies for municipal bond traders, cotton farmers, yarn producers, sheep growers, Hawaiian sugar cane cooperatives, motor sports businesses, renewable energy firms, the steel lobby, and so on. Any industry that doesn't get a tax credit or other handout in this bill should fire its lobbyist.
All of this is "paid for," in the Beltway lingo, with a net tax increase on business of about $40 billion and at least $134 billion of new debt. There's a new 24 cent a barrel tax on oil companies, which would flow to consumers in higher gas prices, because Congress says the industry's profits are excessive.

U.S. multinational companies would pay a higher tax rate on their overseas income, which will not help them create more jobs here. The better way to discourage job outsourcing is to cut the corporate income tax rate, but Mr. Levin and his union allies will have none of that.
Managers of private equity and venture capital firms that provide the start-up and expansion funding to businesses would see their tax rate rise to as high as 35% from 15% today—a huge tax increase when businesses are starved for capital. And small, often family-owned Subchapter S companies that provide professional services would be required to subject more of their profits to the self-employment tax. These firms already pay up to 35% tax on these profits, so under the Democratic plan their tax rate could reach 50%.

Perhaps you're wondering what happened to the "pay as you go" budget rules that Mr. Obama announced to great media fanfare as recently as February. Democrats now say "paygo" doesn't apply because this spending qualifies as an "emergency." But while the new spending isn't paid for, Democrats are insisting that the bill's extension of the R&D tax credit and small business depreciation allowance must be offset by the tax increases.

Oh, and by the way, the President is unveiling a new line-item veto proposal this week to "rein in wasteful spending and hold Congress accountable," as Senator John Kerry put it yesterday in a press release. If any of them were remotely serious, they'd start by line-item vetoing this entire bill.

Press Briefing

May 25, 2010

U.S.-China Strategic and Economic Dialogue 2010 Outcomes of the Strategic Track
http://www.state.gov/r/pa/prs/ps/2010/05/142180.htm

We, Robot. By Peter W. Singer, Director, 21st Century Defense Initiative, The Brookings Institution
http://www.brookings.edu/opinions/2010/0519_drone_wars_singer.aspx

"Power"-less Pakistan. By Charles K. Ebinger, Director, Energy Security Initiative, & Kashif Hasnie, Expert on International Security and Natural Resource Management.
The Brookings Institution
http://www.brookings.edu/opinions/2010/0519_pakistan_ebinger.aspx

How High are Your State’s Electricity Prices?
http://www.instituteforenergyresearch.org/2010/05/04/how-high-are-your-states-electricity-prices/

The Brookings Institution: How We're Doing as Debt Fears Rise
http://www.brookings.edu/papers/2010/0523_recovery_renewal.aspx

Iran and North Korea March On - Pyongyang's behavior shows why we must stop the mullahs from getting the bomb
http://online.wsj.com/article/SB10001424052748704113504575264270768612284.html

Sufrage, Schooling, and Sorting in the Post-Bellum U.S. South. By Suresh Naidu
http://tuvalu.santafe.edu/~snaidu/papers/suffrage.pdf

Cap and Flee - California refutes its own 'green jobs' policy
http://online.wsj.com/article/SB10001424052748703559004575256981030653158.html

Come party with Lady Gaga. By Caitlin Moran
http://entertainment.timesonline.co.uk/tol/arts_and_entertainment/music/article7129672.ece

The Tax Caps Cometh - Massachusetts shows how to put a lid on education spending increases
http://online.wsj.com/article/SB10001424052748704113504575264663842523880.html

Christopher Hitchens: 'I was right and they were wrong'
http://www.guardian.co.uk/books/2010/may/22/christopher-hitchens-decca-aitkenhead
From hero of the left to neocon turncoat, and still battling on: Christopher Hitchens talks to Decca Aitkenhead about old arguments and his new memoir

The Road To Economic Serfdom. By Peter Boone and Simon Johnson
http://baselinescenario.com/2010/05/23/the-european-road-to-economic-serfdom/

Briefing on Trip to Indonesia
http://www.state.gov/g/142165.htm

America’s amazing success since 1980: Why Krugman is wrong.
http://www.themoneyillusion.com/?p=5164

Angels (Back) in America. WSJ Editorial
Dodd spares start-up financiers.
WSJ, May 25, 2010
http://online.wsj.com/article/SB10001424052748703957904575252430233003388.html

We take our policy victories wherever we can get them amid Washington's march to Europe-dom, so we're pleased to report that the Senate finance reform that passed last week did not contain new regulations on investors who finance start-up companies.

Chris Dodd's original draft contained numerous provisions targeting angel investors, the wealthy individuals who directly fund innovative new businesses that are still too small to attract venture capital. Currently they can do so with minimum government interference, but the bill would have subjected entrepreneurs seeking angel capital to a 120-day Securities and Exchange Commission review, which would ensure that many of these budding companies die a slow bureaucratic death. Angel investors would also have been subject to net worth and income requirements more than double today's, as well as a 50-state regulatory scheme that would replace today's single federal standard.

This attack on the businesses that create most new jobs in the U.S. and had nothing to do with 2008's financial panic was too much even for the Senate, which removed these restrictions in an uncontroversial voice vote earlier this month. Special credit goes to Missouri Republican Kit Bond, who led the charge, though Mr. Dodd and other Democrats cosponsored Mr. Bond's amendment and at least had the sense to recognize a mistake.

Still, the fact that such a destructive provision made it that far shows how little the Members and staff now running Congress understand about wealth creation and the sources of American prosperity.


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