May 07, 2010
http://bit.ly/a816l3 Yuriko Koike: How to Undermine an Alliance
http://digs.by/bz8N5M Future Nuclear Arms Control and Nonproliferation: New START and Beyond, by Rose Gottemoeller, Assistant Secretary, Bureau of Verification, Compliance, and Implementation. Remarks at National Defense University, Center for the Study of Weapons of Mass Destruction 10th Annual Symposium. Washington, DC, May 5, 2010
http://digs.by/9uXyU7 Sergei Karaganov: The Dangers of Nuclear Disarmament
http://digs.by/cLRm3d The Next Capital Insurgency- In 1978 Jimmy Carter signed a cap gains cut to lift a sagging economy.
http://digs.by/dkxApG History is littered with tales of men who turned to violence because of bad real-estate investments
http://digs.by/aSKNOB Julius Caesar of the Internet - The FCC puts another industry under political control
http://digs.by/9rhbN8 At Last, More Jobs - The latest jobs report
http://digs.by/bcdSoY Moms to the Barricades - 'The tea parties are an extension of our need to protect the future for our children.'
http://digs.by/c0swOd The Markets Have Good Reasons To Be Nervous - Nobody will trust the euro like they used to.
http://digs.by/dvaCvj Cancer and the Environment
http://digs.by/a68PnA Deepwater Horizon - Focus on Cleanup, Not Politics
Sunday, May 9, 2010
Thursday, May 6, 2010
Derivatives Clearinghouses Are No Magic Bullet - Another kind of institution that's too big to fail?
Derivatives Clearinghouses Are No Magic Bullet. By MARK J. ROE
Will the Dodd bill create another kind of institution that's too big to fail?WSJ, May 06, 2010
As the Senate finalizes its financial reform legislation, a consensus is developing that if we could just get derivatives traded through a centralized clearinghouse we could avoid a financial crisis like the one we just went through. This is false. Clearinghouses provide efficiencies in transparency and trading, but they are no cure-all. They can even exacerbate problems in a financial crisis.
If I agree to sell you a product next month through a clearinghouse, I'll deliver the product to the clearinghouse and you'll deliver the cash to the clearinghouse on the due date. Let's say we both have many trades going through the clearinghouse and we've posted collateral to cover any single trade that fails. This is more efficient than each of us posting collateral privately for each trade. Moreover, we're not worried that I won't deliver or you won't pay because we both count on the clearinghouse to deliver and pay up if one of us doesn't.
This clearing system makes trading more efficient. If you default, the cost is spread through the clearinghouse so I don't get hurt severely. And if the clearinghouse has enough collateral from you, there's no loss to spread. But there's also a potential downside: The clearinghouse reduces our incentives to worry about counterparty risk. Your business might collapse before you need to pay up, but that's not my problem because the clearinghouse pays me anyway. The clearinghouse weakens private market discipline.
Still, if the clearinghouse is as good or better at checking up on your creditworthiness as I am, all will be well. But one has to wonder how good a clearinghouse will be, or can be.
Consider two of our biggest derivatives-related failures—Long-Term Capital Management in 1998 and the subprime market in 2008. When Russia's ruble dropped unexpectedly, LTCM was exposed on its more than $1 trillion in interest-rate and foreign-exchange derivatives. It could not pay up and collapsed. Ten years later the market rapidly revalued subprime mortgage securities, rendering several institutions insolvent. AIG was over-exposed in credit default swaps tied to the value of subprime mortgages.
Could a clearinghouse really have been ahead of the curve in getting sufficient capital posted before these problems became serious and well-known? I'm not so sure. Worse yet, major types of derivatives have built-in discontinuities—"jump-to-default" in derivatives-speak.
For a credit default swap, one counterparty guarantees the debt of another company to you, in return for you paying a fee for that guarantee. If no one goes bankrupt, the counterparty just collects the fees from you. But if the guarantee is called because the company you were worried about goes bankrupt, the counterparty must all of a sudden pay out a huge amount immediately.
Yet the guarantor is often called upon to pay in a weak economy, just when it can itself be too weak to pay. You get credit default protection on your real-estate investments from me, just in case the economy turns sour. But just when you need me the most, in a sour economy, I turn out to be so overextended I can't pay up. Collateralizing and monitoring such discontinuous obligations will not be so easy for the clearinghouse.
Moreover, if trillions of dollars of derivatives trading goes through a clearinghouse, we will have created another institution that's too big to fail. Regulators worried that an interconnected Bear or AIG could drag down the economy. Imagine what an interconnected clearinghouse's failure could do.
AIG needed $85 billion in government cash to avoid defaulting on its debts, including its derivatives obligations. Could one clearinghouse meet even a fraction of that call without backup from the U.S.? True, we could have many clearinghouses, each not too big to fail—but then maybe each would be too small to do enough good.
The Senate bill would allow a clearinghouse to grab new collateral out from failing derivatives-trading banks to cover old, but suddenly toxic, debts the banks owe to the clearinghouse. This could harm other creditors and cause the firm to suffer a run. Nevertheless, to protect itself in a declining market, a clearinghouse would have to make those big collateral calls. That's good if it protects the clearinghouse. But it's bad if it starts a run on a weakened but important bank.
One key but missing element in the search for reform has yet to gain traction in Washington. Derivatives players obtained exceptions from typical bankruptcy and bank resolution rules in the past few decades for their contracts with a bankrupt counterparty. This allowed them to grab and keep collateral other creditors cannot. That gives derivatives traders reason to pay less attention to their counterparties' riskiness and weakens market discipline. These rules should be changed before the Senate is done.
To say that a clearinghouse solution is very incomplete is not to say there is an easy solution out there. We may be unable to do more than to make incomplete improvements and muddle through.
Derivatives trades first of all should not just be centrally cleared, but should also be taken out from the government-guaranteed entities, such as commercial banks (or at least we need to impose tight capital requirements on those banks that deal in derivatives). Derivatives traders like doing business with Citibank because they know the government won't let Citibank go down. But this puts taxpayers at risk. It would be better to run those trades through an affiliate, not through the bank, so counterparties realize they might not be bailed out if the affiliate failed. If a banking affiliate's counterparty is the clearinghouse, then the clearinghouse will have incentives to make sure that the affiliate is well-capitalized. This is particularly so if the clearinghouse won't get any special priority treatment in a bankruptcy.
Critics of proposals to establish separate bank affiliates for derivatives trading complain about the large amount of capital that would be needed for such affiliates. But the capital that might be needed to buttress a bank affiliate indicates some level of the value (i.e., the taxpayer subsidy) to derivatives players of trading with a too-big-to-fail entity that they know the government will step in to save. They are implicitly getting insurance and should pay for it.
And, since a clearinghouse is itself at risk of being too big to fail, regulators need to police its capital and collateral requirements. If the derivatives market sees the clearinghouse as too big to fail, the potential for derivatives players making overly risky derivatives trades becomes real. Clearinghouses can help manage some systemic risk if they're run right. If not, they can become the Fannie and Freddie of the next financial meltdown.
Mr. Roe is a professor at Harvard Law School, where he teaches bankruptcy and corporate law.
Will the Dodd bill create another kind of institution that's too big to fail?WSJ, May 06, 2010
As the Senate finalizes its financial reform legislation, a consensus is developing that if we could just get derivatives traded through a centralized clearinghouse we could avoid a financial crisis like the one we just went through. This is false. Clearinghouses provide efficiencies in transparency and trading, but they are no cure-all. They can even exacerbate problems in a financial crisis.
If I agree to sell you a product next month through a clearinghouse, I'll deliver the product to the clearinghouse and you'll deliver the cash to the clearinghouse on the due date. Let's say we both have many trades going through the clearinghouse and we've posted collateral to cover any single trade that fails. This is more efficient than each of us posting collateral privately for each trade. Moreover, we're not worried that I won't deliver or you won't pay because we both count on the clearinghouse to deliver and pay up if one of us doesn't.
This clearing system makes trading more efficient. If you default, the cost is spread through the clearinghouse so I don't get hurt severely. And if the clearinghouse has enough collateral from you, there's no loss to spread. But there's also a potential downside: The clearinghouse reduces our incentives to worry about counterparty risk. Your business might collapse before you need to pay up, but that's not my problem because the clearinghouse pays me anyway. The clearinghouse weakens private market discipline.
Still, if the clearinghouse is as good or better at checking up on your creditworthiness as I am, all will be well. But one has to wonder how good a clearinghouse will be, or can be.
Consider two of our biggest derivatives-related failures—Long-Term Capital Management in 1998 and the subprime market in 2008. When Russia's ruble dropped unexpectedly, LTCM was exposed on its more than $1 trillion in interest-rate and foreign-exchange derivatives. It could not pay up and collapsed. Ten years later the market rapidly revalued subprime mortgage securities, rendering several institutions insolvent. AIG was over-exposed in credit default swaps tied to the value of subprime mortgages.
Could a clearinghouse really have been ahead of the curve in getting sufficient capital posted before these problems became serious and well-known? I'm not so sure. Worse yet, major types of derivatives have built-in discontinuities—"jump-to-default" in derivatives-speak.
For a credit default swap, one counterparty guarantees the debt of another company to you, in return for you paying a fee for that guarantee. If no one goes bankrupt, the counterparty just collects the fees from you. But if the guarantee is called because the company you were worried about goes bankrupt, the counterparty must all of a sudden pay out a huge amount immediately.
Yet the guarantor is often called upon to pay in a weak economy, just when it can itself be too weak to pay. You get credit default protection on your real-estate investments from me, just in case the economy turns sour. But just when you need me the most, in a sour economy, I turn out to be so overextended I can't pay up. Collateralizing and monitoring such discontinuous obligations will not be so easy for the clearinghouse.
Moreover, if trillions of dollars of derivatives trading goes through a clearinghouse, we will have created another institution that's too big to fail. Regulators worried that an interconnected Bear or AIG could drag down the economy. Imagine what an interconnected clearinghouse's failure could do.
AIG needed $85 billion in government cash to avoid defaulting on its debts, including its derivatives obligations. Could one clearinghouse meet even a fraction of that call without backup from the U.S.? True, we could have many clearinghouses, each not too big to fail—but then maybe each would be too small to do enough good.
The Senate bill would allow a clearinghouse to grab new collateral out from failing derivatives-trading banks to cover old, but suddenly toxic, debts the banks owe to the clearinghouse. This could harm other creditors and cause the firm to suffer a run. Nevertheless, to protect itself in a declining market, a clearinghouse would have to make those big collateral calls. That's good if it protects the clearinghouse. But it's bad if it starts a run on a weakened but important bank.
One key but missing element in the search for reform has yet to gain traction in Washington. Derivatives players obtained exceptions from typical bankruptcy and bank resolution rules in the past few decades for their contracts with a bankrupt counterparty. This allowed them to grab and keep collateral other creditors cannot. That gives derivatives traders reason to pay less attention to their counterparties' riskiness and weakens market discipline. These rules should be changed before the Senate is done.
To say that a clearinghouse solution is very incomplete is not to say there is an easy solution out there. We may be unable to do more than to make incomplete improvements and muddle through.
Derivatives trades first of all should not just be centrally cleared, but should also be taken out from the government-guaranteed entities, such as commercial banks (or at least we need to impose tight capital requirements on those banks that deal in derivatives). Derivatives traders like doing business with Citibank because they know the government won't let Citibank go down. But this puts taxpayers at risk. It would be better to run those trades through an affiliate, not through the bank, so counterparties realize they might not be bailed out if the affiliate failed. If a banking affiliate's counterparty is the clearinghouse, then the clearinghouse will have incentives to make sure that the affiliate is well-capitalized. This is particularly so if the clearinghouse won't get any special priority treatment in a bankruptcy.
Critics of proposals to establish separate bank affiliates for derivatives trading complain about the large amount of capital that would be needed for such affiliates. But the capital that might be needed to buttress a bank affiliate indicates some level of the value (i.e., the taxpayer subsidy) to derivatives players of trading with a too-big-to-fail entity that they know the government will step in to save. They are implicitly getting insurance and should pay for it.
And, since a clearinghouse is itself at risk of being too big to fail, regulators need to police its capital and collateral requirements. If the derivatives market sees the clearinghouse as too big to fail, the potential for derivatives players making overly risky derivatives trades becomes real. Clearinghouses can help manage some systemic risk if they're run right. If not, they can become the Fannie and Freddie of the next financial meltdown.
Mr. Roe is a professor at Harvard Law School, where he teaches bankruptcy and corporate law.
Time to Junk the Corporate Tax
Time to Junk the Corporate Tax. By MICHAEL J. BOSKIN
Nobel Laureate Robert Lucas says reform would deliver great benefits at little cost, making it "the largest genuinely true free lunch I have seen.'WSJ, May 06, 2010
President Obama has put tax reform on the agenda, but surprisingly little attention is being paid to fixing the most growth-inhibiting, anticompetitive tax of all: the corporate income tax. Reducing or eliminating the corporate tax would curtail numerous wasteful tax distortions, boost growth in both the short and long run, increase America's global competitiveness, and raise future wages.
The U.S. has the second-highest corporate income tax rate of any advanced economy (39% including state taxes, 50% higher than the OECD average). Many major competitors, Germany and Canada among them, have reduced their corporate tax rate, rendering American companies less competitive globally.
Of course, various credits and deductions—such as for depreciation and interest—reduce the effective corporate tax rate. But netting everything, our corporate tax severely retards and misaligns investment, problems that will only get worse as more and more capital becomes internationally mobile. Corporate income is taxed a second time at the personal level as dividends or those capital gains attributable to reinvestment of the retained earnings of the corporation. Between the new taxes in the health reform law and the expiration of the Bush tax cuts, these rates are soon set to explode.
This complex array of taxes on corporate income produces a series of biases and distortions. The most important is the bias against capital formation, decreasing the overall level of investment and therefore future labor productivity and wages. Also important are the biases among types of investments, depending on the speed of tax vs. true economic depreciation, against corporate (vs. noncorporate) investment, and in favor of highly leveraged assets and industries. These biases assure that overall capital formation runs steeply uphill, while some investments run more, some less uphill. It would be comical if the deleterious consequences weren't so severe.
Of course, the corporation is a legal entity; only people pay taxes. In a static economy with no international trade, the tax is likely borne by shareholders. The U.S. economy is neither static nor closed to trade, and taxes tend to be borne by the least mobile factor of production. Capital is much more mobile globally than labor, and the part of the corporate tax that is well above that of our lowest tax competitors will eventually be borne by workers. In a growing economy, the lower investment slows productivity growth and future wages.
There is considerable evidence that high corporate taxes are economically dangerous. In a 2008 working paper entitled "Taxation and Economic Growth," the Organization for Economic Cooperation and Development concluded that "Corporate taxes are found to be most harmful for growth, followed by personal income taxes and then consumption taxes." Virtually every major tax reform proposal in recent decades has centered on lowering taxes on capital income and moving toward a broad-based, low-rate tax on consumption. This could be accomplished by junking the separate corporate income tax, integrating it with the personal income tax (e.g., attributing corporate income and taxes to shareholders or eliminating personal taxes on corporate distributions), and/or allowing an immediate tax deduction (expensing) for investment (which cancels the tax at the margin on new investment and hence is the priority of most economists). The Hall-Rabushka Flat Tax, the Bradford progressive consumption tax, a value-added Tax (VAT), the FairTax retail sales tax, four decades of Treasury proposals and the 2005 President's Tax Commission proposals would all move in this direction.
Reducing or eliminating the negative effects of the corporate tax on investment would increase real GDP and future wages significantly. Junking both the corporate and personal income taxes and replacing them with a broad revenue-neutral consumption tax would produce even larger gains. Nobel Laureate Robert Lucas concluded that implementing such reforms would deliver great benefits at little cost, making it "the largest genuinely true free lunch I have seen."
Reducing taxes on new investment could help strengthen what is a historically slow recovery from such a deep recession. It would also strengthen the economy long-term. American workers would benefit from more jobs in the short run and higher wages in the long run.
However, if a new tax device is used to grow government substantially, it will seriously erode our long-run standard of living. The VAT has served that purpose in Europe and, while better than still-higher income taxes, the larger-size governments it has enabled there are the prime reason European living standards are 30% lower than ours. Trading a good tax reform for a much larger government is beyond foolish. No tax reform can offset losses that large. Hence, a VAT should only be on the table if it is not only revenue-neutral but accompanied by serious spending control.
Further, the fraction of Americans paying no income taxes is approaching 50%. That sets up a dangerous political dynamic of voting ever-rising taxes to pay for ever-rising spending. We need more people with a stake in controlling spending. Replacing corporate and personal income taxes with a broad-based consumption tax could increase the number of those with "skin in the game." But some reforms, for example a VAT, might be much less transparent and may not serve this purpose.
Congresses (and presidents) seem unable to avoid continually tinkering with the tax code. A tax reform that is quickly riddled with special features would lose much of its economic benefit. We need a stable tax system that changes much less frequently, so families and firms can more reliably plan their future. Current fiscal policy, loaded with immense deficits, ever-growing debt, and the prospect of higher future taxes, is the biggest threat to such stability. To balance proposed spending in Mr. Obama's budget in 2015, his Deficit Commission's target year, will require at least a 43% increase in everyone's income tax. Thus, spending control is vital to tax stability.
American companies and their workers compete in the global marketplace saddled with a costly, anachronistic corporate tax system. To compete successfully in the 21st century, we will need to reform corporate taxation. There are several paths to doing so, each with its advantages. Unfortunately, tax policy is headed in exactly the wrong direction, raising taxes on corporate source income. Business investment is growing again after the collapse in the recession, which is usual in a cyclical recovery with very low interest rates. But eventually structural drags, from our antiquated tax code to massive public debt, will impede investment and economic growth.
Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.
Nobel Laureate Robert Lucas says reform would deliver great benefits at little cost, making it "the largest genuinely true free lunch I have seen.'WSJ, May 06, 2010
President Obama has put tax reform on the agenda, but surprisingly little attention is being paid to fixing the most growth-inhibiting, anticompetitive tax of all: the corporate income tax. Reducing or eliminating the corporate tax would curtail numerous wasteful tax distortions, boost growth in both the short and long run, increase America's global competitiveness, and raise future wages.
The U.S. has the second-highest corporate income tax rate of any advanced economy (39% including state taxes, 50% higher than the OECD average). Many major competitors, Germany and Canada among them, have reduced their corporate tax rate, rendering American companies less competitive globally.
Of course, various credits and deductions—such as for depreciation and interest—reduce the effective corporate tax rate. But netting everything, our corporate tax severely retards and misaligns investment, problems that will only get worse as more and more capital becomes internationally mobile. Corporate income is taxed a second time at the personal level as dividends or those capital gains attributable to reinvestment of the retained earnings of the corporation. Between the new taxes in the health reform law and the expiration of the Bush tax cuts, these rates are soon set to explode.
This complex array of taxes on corporate income produces a series of biases and distortions. The most important is the bias against capital formation, decreasing the overall level of investment and therefore future labor productivity and wages. Also important are the biases among types of investments, depending on the speed of tax vs. true economic depreciation, against corporate (vs. noncorporate) investment, and in favor of highly leveraged assets and industries. These biases assure that overall capital formation runs steeply uphill, while some investments run more, some less uphill. It would be comical if the deleterious consequences weren't so severe.
Of course, the corporation is a legal entity; only people pay taxes. In a static economy with no international trade, the tax is likely borne by shareholders. The U.S. economy is neither static nor closed to trade, and taxes tend to be borne by the least mobile factor of production. Capital is much more mobile globally than labor, and the part of the corporate tax that is well above that of our lowest tax competitors will eventually be borne by workers. In a growing economy, the lower investment slows productivity growth and future wages.
There is considerable evidence that high corporate taxes are economically dangerous. In a 2008 working paper entitled "Taxation and Economic Growth," the Organization for Economic Cooperation and Development concluded that "Corporate taxes are found to be most harmful for growth, followed by personal income taxes and then consumption taxes." Virtually every major tax reform proposal in recent decades has centered on lowering taxes on capital income and moving toward a broad-based, low-rate tax on consumption. This could be accomplished by junking the separate corporate income tax, integrating it with the personal income tax (e.g., attributing corporate income and taxes to shareholders or eliminating personal taxes on corporate distributions), and/or allowing an immediate tax deduction (expensing) for investment (which cancels the tax at the margin on new investment and hence is the priority of most economists). The Hall-Rabushka Flat Tax, the Bradford progressive consumption tax, a value-added Tax (VAT), the FairTax retail sales tax, four decades of Treasury proposals and the 2005 President's Tax Commission proposals would all move in this direction.
Reducing or eliminating the negative effects of the corporate tax on investment would increase real GDP and future wages significantly. Junking both the corporate and personal income taxes and replacing them with a broad revenue-neutral consumption tax would produce even larger gains. Nobel Laureate Robert Lucas concluded that implementing such reforms would deliver great benefits at little cost, making it "the largest genuinely true free lunch I have seen."
Reducing taxes on new investment could help strengthen what is a historically slow recovery from such a deep recession. It would also strengthen the economy long-term. American workers would benefit from more jobs in the short run and higher wages in the long run.
However, if a new tax device is used to grow government substantially, it will seriously erode our long-run standard of living. The VAT has served that purpose in Europe and, while better than still-higher income taxes, the larger-size governments it has enabled there are the prime reason European living standards are 30% lower than ours. Trading a good tax reform for a much larger government is beyond foolish. No tax reform can offset losses that large. Hence, a VAT should only be on the table if it is not only revenue-neutral but accompanied by serious spending control.
Further, the fraction of Americans paying no income taxes is approaching 50%. That sets up a dangerous political dynamic of voting ever-rising taxes to pay for ever-rising spending. We need more people with a stake in controlling spending. Replacing corporate and personal income taxes with a broad-based consumption tax could increase the number of those with "skin in the game." But some reforms, for example a VAT, might be much less transparent and may not serve this purpose.
Congresses (and presidents) seem unable to avoid continually tinkering with the tax code. A tax reform that is quickly riddled with special features would lose much of its economic benefit. We need a stable tax system that changes much less frequently, so families and firms can more reliably plan their future. Current fiscal policy, loaded with immense deficits, ever-growing debt, and the prospect of higher future taxes, is the biggest threat to such stability. To balance proposed spending in Mr. Obama's budget in 2015, his Deficit Commission's target year, will require at least a 43% increase in everyone's income tax. Thus, spending control is vital to tax stability.
American companies and their workers compete in the global marketplace saddled with a costly, anachronistic corporate tax system. To compete successfully in the 21st century, we will need to reform corporate taxation. There are several paths to doing so, each with its advantages. Unfortunately, tax policy is headed in exactly the wrong direction, raising taxes on corporate source income. Business investment is growing again after the collapse in the recession, which is usual in a cyclical recovery with very low interest rates. But eventually structural drags, from our antiquated tax code to massive public debt, will impede investment and economic growth.
Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.
Monday, May 3, 2010
Drilling in Deep Water - A ban on offshore production won't mean fewer oil spills
Drilling in Deep Water. WSJ Editorial
A ban on offshore production won't mean fewer oil spills.WSJ, May 04, 2010
It could be months before we know what caused the explosion and oil spill below the drilling rig Deepwater Horizon. But as we add up the economic costs and environmental damage (and mourn the 11 oil workers who died), we should also put the disaster in some perspective.
Washington is, as usual, showing no such restraint. As the oil in the Gulf of Mexico moves toward the Louisiana and Florida coasts, the left is already demanding that President Obama reverse his baby steps toward more offshore drilling. The Administration has partly obliged, declaring a moratorium pending an investigation. The President has raised the political temperature himself, declaring yesterday that the spill is a "massive and potentially unprecedented environmental disaster."
The harm will be considerable, which is why it is fortunate that such spills are so rare. The most recent spill of this magnitude was the Exxon Valdez tanker accident in 1989. The largest before that was the Santa Barbara offshore oil well leak in 1969.
The infrequency of big spills is extraordinary considering the size of the offshore oil industry that provides Americans with affordable energy. According to the Interior Department's most recent data, in 2002 the Outer Continental Shelf had 4,000 oil and gas facilities, 80,000 workers in offshore and support activities, and 33,000 miles of pipeline. Between 1985 and 2001, these offshore facilities produced seven billion barrels of oil. The spill rate was a minuscule 0.001%.
According to the National Academy of Sciences—which in 2002 completed the third version of its "Oil in the Sea" report—only 1% of oil discharges in North Americas are related to petroleum extraction. Some 62% of oil in U.S. waters is due to natural seepage from the ocean floor, putting 47 million gallons of crude oil into North American water every year. The Gulf leak is estimated to have leaked between two million and three million gallons in two weeks.
Such an accident is still unacceptable, which is why the drilling industry has invested heavily to prevent them. The BP well had a blowout preventer, which contains several mechanisms designed to seal pipes in the event of a problem. These protections have worked in the past, and the reason for the failure this time is unknown. This was no routine safety failure but a surprising first.
One reason the industry has a good track record is precisely because of the financial consequences of accidents. The Exxon Valdez dumped 260,000 barrels of oil, and Exxon spent $3.14 billion on cleanup. Do the math, and Exxon spent nearly 600 times more on cleanup and litigation than what the oil was worth at that time.
As for the environmental damage in the Gulf, much will depend on the weather that has made it more difficult to plug the leak and contain the spill before it reaches shore. The winds could push oil over the emergency containment barriers, or they could keep the oil swirling offshore, where it may sink and thus do less damage.
It is worth noting that this could have been worse. The Exxon Valdez caused so much damage in part because the state of Alaska dithered over an emergency spill response. Congress then passed the 1990 Oil Pollution Act that mandated more safety measures, and it gave the Coast Guard new powers during spill emergencies. We have seen the benefits in the last two weeks as the Coast Guard has deployed several containment techniques—from burning and chemical dispersants to physical barriers. America sometimes learns from its mistakes.
On the other hand, Washington's aversion to drilling closer to shore has pushed the industry into deeper, more difficult, waters farther out to sea. BP's well is 5,000 feet down, at a depth and pressure that test the most advanced engineering and technology. The depth complicates containment efforts when there is a disaster.
As for a drilling moratorium, it is no guarantee against oil spills. It may even lead to more of them. Political fantasies about ending our oil addiction notwithstanding, the U.S. economy will need oil and other fossil fuels for decades to come. If we don't drill for it at home, the oil will have to arrive by tanker and barges. Tankers are responsible for more spills than offshore wells, and those spills tend to be bigger and closer to shore—which usually means more environmental harm.
The larger reality is that energy production is never going to be accident free. No difficult human endeavor is, whether space travel or using giant cranes to build skyscrapers. The rest of the world is working to exploit its offshore oil and gas reserves despite the risk of spills. We need to be mindful of such risks, and to include prevention and clean up in the cost of doing business, but a modern economy can't run without oil.
A ban on offshore production won't mean fewer oil spills.WSJ, May 04, 2010
It could be months before we know what caused the explosion and oil spill below the drilling rig Deepwater Horizon. But as we add up the economic costs and environmental damage (and mourn the 11 oil workers who died), we should also put the disaster in some perspective.
Washington is, as usual, showing no such restraint. As the oil in the Gulf of Mexico moves toward the Louisiana and Florida coasts, the left is already demanding that President Obama reverse his baby steps toward more offshore drilling. The Administration has partly obliged, declaring a moratorium pending an investigation. The President has raised the political temperature himself, declaring yesterday that the spill is a "massive and potentially unprecedented environmental disaster."
The harm will be considerable, which is why it is fortunate that such spills are so rare. The most recent spill of this magnitude was the Exxon Valdez tanker accident in 1989. The largest before that was the Santa Barbara offshore oil well leak in 1969.
The infrequency of big spills is extraordinary considering the size of the offshore oil industry that provides Americans with affordable energy. According to the Interior Department's most recent data, in 2002 the Outer Continental Shelf had 4,000 oil and gas facilities, 80,000 workers in offshore and support activities, and 33,000 miles of pipeline. Between 1985 and 2001, these offshore facilities produced seven billion barrels of oil. The spill rate was a minuscule 0.001%.
According to the National Academy of Sciences—which in 2002 completed the third version of its "Oil in the Sea" report—only 1% of oil discharges in North Americas are related to petroleum extraction. Some 62% of oil in U.S. waters is due to natural seepage from the ocean floor, putting 47 million gallons of crude oil into North American water every year. The Gulf leak is estimated to have leaked between two million and three million gallons in two weeks.
Such an accident is still unacceptable, which is why the drilling industry has invested heavily to prevent them. The BP well had a blowout preventer, which contains several mechanisms designed to seal pipes in the event of a problem. These protections have worked in the past, and the reason for the failure this time is unknown. This was no routine safety failure but a surprising first.
One reason the industry has a good track record is precisely because of the financial consequences of accidents. The Exxon Valdez dumped 260,000 barrels of oil, and Exxon spent $3.14 billion on cleanup. Do the math, and Exxon spent nearly 600 times more on cleanup and litigation than what the oil was worth at that time.
As for the environmental damage in the Gulf, much will depend on the weather that has made it more difficult to plug the leak and contain the spill before it reaches shore. The winds could push oil over the emergency containment barriers, or they could keep the oil swirling offshore, where it may sink and thus do less damage.
It is worth noting that this could have been worse. The Exxon Valdez caused so much damage in part because the state of Alaska dithered over an emergency spill response. Congress then passed the 1990 Oil Pollution Act that mandated more safety measures, and it gave the Coast Guard new powers during spill emergencies. We have seen the benefits in the last two weeks as the Coast Guard has deployed several containment techniques—from burning and chemical dispersants to physical barriers. America sometimes learns from its mistakes.
On the other hand, Washington's aversion to drilling closer to shore has pushed the industry into deeper, more difficult, waters farther out to sea. BP's well is 5,000 feet down, at a depth and pressure that test the most advanced engineering and technology. The depth complicates containment efforts when there is a disaster.
As for a drilling moratorium, it is no guarantee against oil spills. It may even lead to more of them. Political fantasies about ending our oil addiction notwithstanding, the U.S. economy will need oil and other fossil fuels for decades to come. If we don't drill for it at home, the oil will have to arrive by tanker and barges. Tankers are responsible for more spills than offshore wells, and those spills tend to be bigger and closer to shore—which usually means more environmental harm.
The larger reality is that energy production is never going to be accident free. No difficult human endeavor is, whether space travel or using giant cranes to build skyscrapers. The rest of the world is working to exploit its offshore oil and gas reserves despite the risk of spills. We need to be mindful of such risks, and to include prevention and clean up in the cost of doing business, but a modern economy can't run without oil.
Sunday, May 2, 2010
The State Department is sitting on funds to free the flow of information in closed societies
Mrs. Clinton, Tear Down this Cyberwall. By L. GORDON CROVITZ
The State Department is sitting on funds to free the flow of information in closed societies.WSJ, May 03, 2010
When a government department refuses to spend money that Congress has allocated, there's usually a telling backstory. This is doubly so when the funds are for a purpose as uncontroversial as making the Internet freer.
So why has the State Department refused to spend $45 million in appropriations since 2008 to "expand access and information in closed societies"? The technology to circumvent national restrictions is being provided by volunteers who believe that with funding they can bring Web access to many more people, from Iran to China.
A bipartisan group in Congress intended to pay for tests aimed at expanding the use of software that brings Internet access to "large numbers of users living in closed societies that have acutely hostile Internet environments." The most successful of these services is provided by a group called the Global Internet Freedom Consortium, whose programs include Freegate and Ultrasurf.
When Iranian demonstrators last year organized themselves through Twitter posts and brought news of the crackdown to the outside world, they got past the censors chiefly by using Freegate to get access to outside sites.
The team behind these circumvention programs understands how subversive their efforts can be. As Shiyu Zhou, deputy director of the Global Internet Freedom Consortium, told Congress last year, "The Internet censorship firewalls have become 21st-century versions of Berlin Walls that isolate and dispirit the citizens of closed-society dictatorships."
Repressive governments rightly regard the Internet as an existential threat, giving people powerful ways to communicate and organize. These governments also use the Web as a tool of repression, monitoring emails and other traffic. Recall that Google left China in part because of hacking of human-rights activists' Gmail accounts.
To counter government monitors and censors, these programs give online users encrypted connections to secure proxy servers around the world. A group of volunteers constantly switches the Internet Protocol addresses of the servers—up to 10,000 times an hour. The group has been active since 2000, and repressive governments haven't figured out how to catch up. More than one million Iranians used the system last June to post videos and photos showing the government crackdown.
Mr. Zhou tells me his group would use any additional money to add equipment and to hire full-time technical staff to support the volunteers. For $50 million, he estimates the service could accommodate 5% of Chinese Internet users and 10% in other closed societies—triple the current capacity.
So why won't the State Department fund this group to expand its reach, or at least test how scalable the solution could be? There are a couple of explanations.
The first is that the Global Internet Freedom Consortium was founded by Chinese-American engineers who practice Falun Gong, the spiritual movement suppressed by Beijing. Perhaps not the favorites of U.S. diplomats, but what other group has volunteers engaged enough to keep such a service going? As with the Jewish refuseniks who battled the Soviet Union, sometimes it takes a persecuted minority to stand up to a totalitarian regime.
The second explanation is a split among technologists—between those who support circumvention programs built on proprietary systems and others whose faith is on more open sources of code. A study last year by the Berkman Center at Harvard gave more points to open-source efforts, citing "a well-established contentious debate among software developers about whether secrecy about implementation details is a robust strategy for security." But whatever the theoretical objections, the proprietary systems work.
Another likely factor is realpolitik. Despite the tough speech Hillary Clinton gave in January supporting Internet freedom, it's easy to imagine bureaucrats arguing that the U.S. shouldn't undermine the censorship efforts of Tehran and Beijing. An earlier generation of bureaucrats tried to edit, as overly aggressive, Ronald Reagan's 1987 speech in Berlin urging Mikhail Gorbachev: "Tear down this wall."
It's true that circumvention doesn't solve every problem. Internet freedom researcher and advocate Rebecca MacKinnon has made the point that "circumvention is never going to be the silver bullet" in the sense that it can only give people access to the open Web. It can't help with domestic censorship.
During the Cold War, the West expended huge effort to get books, tapes, fax machines, radio reports and other information, as well as the means to convey it, into closed societies. Circumvention is the digital-age equivalent.
If the State Department refuses to support a free Web, perhaps there's a private solution. An anonymous poster, "chinese.zhang," suggested on a Google message board earlier this year that the company should fund the Global Internet Freedom Consortium as part of its defense against Chinese censorship. "I think Google can easily offer more servers to help to break down the Great Firewall," he wrote.
The State Department is sitting on funds to free the flow of information in closed societies.WSJ, May 03, 2010
When a government department refuses to spend money that Congress has allocated, there's usually a telling backstory. This is doubly so when the funds are for a purpose as uncontroversial as making the Internet freer.
So why has the State Department refused to spend $45 million in appropriations since 2008 to "expand access and information in closed societies"? The technology to circumvent national restrictions is being provided by volunteers who believe that with funding they can bring Web access to many more people, from Iran to China.
A bipartisan group in Congress intended to pay for tests aimed at expanding the use of software that brings Internet access to "large numbers of users living in closed societies that have acutely hostile Internet environments." The most successful of these services is provided by a group called the Global Internet Freedom Consortium, whose programs include Freegate and Ultrasurf.
When Iranian demonstrators last year organized themselves through Twitter posts and brought news of the crackdown to the outside world, they got past the censors chiefly by using Freegate to get access to outside sites.
The team behind these circumvention programs understands how subversive their efforts can be. As Shiyu Zhou, deputy director of the Global Internet Freedom Consortium, told Congress last year, "The Internet censorship firewalls have become 21st-century versions of Berlin Walls that isolate and dispirit the citizens of closed-society dictatorships."
Repressive governments rightly regard the Internet as an existential threat, giving people powerful ways to communicate and organize. These governments also use the Web as a tool of repression, monitoring emails and other traffic. Recall that Google left China in part because of hacking of human-rights activists' Gmail accounts.
To counter government monitors and censors, these programs give online users encrypted connections to secure proxy servers around the world. A group of volunteers constantly switches the Internet Protocol addresses of the servers—up to 10,000 times an hour. The group has been active since 2000, and repressive governments haven't figured out how to catch up. More than one million Iranians used the system last June to post videos and photos showing the government crackdown.
Mr. Zhou tells me his group would use any additional money to add equipment and to hire full-time technical staff to support the volunteers. For $50 million, he estimates the service could accommodate 5% of Chinese Internet users and 10% in other closed societies—triple the current capacity.
So why won't the State Department fund this group to expand its reach, or at least test how scalable the solution could be? There are a couple of explanations.
The first is that the Global Internet Freedom Consortium was founded by Chinese-American engineers who practice Falun Gong, the spiritual movement suppressed by Beijing. Perhaps not the favorites of U.S. diplomats, but what other group has volunteers engaged enough to keep such a service going? As with the Jewish refuseniks who battled the Soviet Union, sometimes it takes a persecuted minority to stand up to a totalitarian regime.
The second explanation is a split among technologists—between those who support circumvention programs built on proprietary systems and others whose faith is on more open sources of code. A study last year by the Berkman Center at Harvard gave more points to open-source efforts, citing "a well-established contentious debate among software developers about whether secrecy about implementation details is a robust strategy for security." But whatever the theoretical objections, the proprietary systems work.
Another likely factor is realpolitik. Despite the tough speech Hillary Clinton gave in January supporting Internet freedom, it's easy to imagine bureaucrats arguing that the U.S. shouldn't undermine the censorship efforts of Tehran and Beijing. An earlier generation of bureaucrats tried to edit, as overly aggressive, Ronald Reagan's 1987 speech in Berlin urging Mikhail Gorbachev: "Tear down this wall."
It's true that circumvention doesn't solve every problem. Internet freedom researcher and advocate Rebecca MacKinnon has made the point that "circumvention is never going to be the silver bullet" in the sense that it can only give people access to the open Web. It can't help with domestic censorship.
During the Cold War, the West expended huge effort to get books, tapes, fax machines, radio reports and other information, as well as the means to convey it, into closed societies. Circumvention is the digital-age equivalent.
If the State Department refuses to support a free Web, perhaps there's a private solution. An anonymous poster, "chinese.zhang," suggested on a Google message board earlier this year that the company should fund the Global Internet Freedom Consortium as part of its defense against Chinese censorship. "I think Google can easily offer more servers to help to break down the Great Firewall," he wrote.
A Centrist Agenda for Economic Growth
A Centrist Agenda for Economic Growth. By JIM OWENS
Freer trade plus lower corporate and investment taxes would go a long way.WSJ, May 03, 2010
The long-term health of the U.S. economy is at risk. There are signs of recovery from the worst recession since the Great Depression. But not enough.
We need a renewed, centrist political agenda to support economic policies that will enhance our global competitiveness. America cannot sustain itself as a great country without a strong economy. Yet significant economic decisions are made in Washington with little consideration as to how they will affect the global competitiveness of the small and large companies that employ our citizens.
Here are a few policy suggestions:
• Restore fiscal discipline. Simply stated, we must balance the books. This means deciding how much government we want and the best way to generate the tax revenues to pay for it.
To get there, federal and state governments must be required to use the same transparent accounting standards required of corporations for employee retirement benefits. With baby boomers retiring, we have a ticking time bomb on our hands. Transparency would make it clear to everyone just where the unfunded obligations are and get us on road to begin funding them. Further, we should mandate that federal budget deficits be balanced over a business cycle.
• Simplify the federal tax code with flat personal income taxes. This means incentivizing savings and investment with significantly lower rates for dividends and long-term capital gains. Use consumption taxes to raise additional funds to achieve social goals, such as lowering emissions or tobacco consumption.
• Tax business only on profits earned in the United States. This means adopting a territorial tax system for U.S.-based global companies, which will encourage them to repatriate global profits (billions await) to the United States and increase the likelihood of investment here. We should also recruit foreign direct investment to serve U.S. customers and to pay taxes to our government.
Recognizing that the U.S. has one of the highest corporate tax rates in the world, the government should not eliminate the current provision that allows companies to "defer" paying a U.S. tax on foreign income until it is brought back into this country. Over time this would destroy U.S.-based global companies.
• Increase infrastructure investment. Since the 1970s U.S. investment in infrastructure has grown at only half the rate of GDP growth. Today, our roads are crumbling, bridges are in need of repair, and our power grid is inefficient. Meanwhile, emerging economies (notably China, India and Brazil) are making huge investments in modern infrastructure.
Infrastructure is the foundation for an economy's global competitiveness. We don't want to wake up in 10 years and find ourselves hopelessly behind.
• Free up international trade. The U.S. needs to provide leadership for completion of the World Trade Organizations' Doha Development Round of Trade Negotiations. Moreover, Americans need to pressure Washington to ratify the three Free Trade Agreements (FTAs)—for Panama, Colombia and South Korea—that have already been negotiated. Passage of these agreements will show the world we're open for business, create immediate exports and related jobs, and it would also strengthen the economies of three important allies.
• Improve the health-care system's cost effectiveness. To get there, the country needs to further reform its tort system and to continue to adopt better information technology. It's also critical that consumers have access to better information on health-care prices and outcomes and to be able to purchase competitively priced insurance offered in other states. Finally, citizens must have a personal stake in the costs of their care, which will enable them to make prudent decisions.
• Reform immigration laws to make existing "guest" workers legal, tax-paying employees. We should provide legal avenues for guest workers to apply for U.S. citizenship. It is to our advantage to grant more visas to the best and brightest students from around the world who come to our best universities. Students receiving qualifying advanced degrees (such as in math and science) should get an automatic green card to work in our country.
• Maintain the independence of the Federal Reserve. The task of the central bank is to manage money supply to keep inflation low (0%-2%), employment high and the financial system healthy. Excessive political influence could prevent the Fed from taking decisive actions when needed.
These recommendations are not particularly novel. In fact, the majority of economists and business leaders I've talked to agree with virtually all of them. Real GDP growth of 3.5% over the next decade is an aggressive target—but achievable. We need to think like winners.
Mr. Owens is chairman and CEO of Caterpillar Inc.
Freer trade plus lower corporate and investment taxes would go a long way.WSJ, May 03, 2010
The long-term health of the U.S. economy is at risk. There are signs of recovery from the worst recession since the Great Depression. But not enough.
We need a renewed, centrist political agenda to support economic policies that will enhance our global competitiveness. America cannot sustain itself as a great country without a strong economy. Yet significant economic decisions are made in Washington with little consideration as to how they will affect the global competitiveness of the small and large companies that employ our citizens.
Here are a few policy suggestions:
• Restore fiscal discipline. Simply stated, we must balance the books. This means deciding how much government we want and the best way to generate the tax revenues to pay for it.
To get there, federal and state governments must be required to use the same transparent accounting standards required of corporations for employee retirement benefits. With baby boomers retiring, we have a ticking time bomb on our hands. Transparency would make it clear to everyone just where the unfunded obligations are and get us on road to begin funding them. Further, we should mandate that federal budget deficits be balanced over a business cycle.
• Simplify the federal tax code with flat personal income taxes. This means incentivizing savings and investment with significantly lower rates for dividends and long-term capital gains. Use consumption taxes to raise additional funds to achieve social goals, such as lowering emissions or tobacco consumption.
• Tax business only on profits earned in the United States. This means adopting a territorial tax system for U.S.-based global companies, which will encourage them to repatriate global profits (billions await) to the United States and increase the likelihood of investment here. We should also recruit foreign direct investment to serve U.S. customers and to pay taxes to our government.
Recognizing that the U.S. has one of the highest corporate tax rates in the world, the government should not eliminate the current provision that allows companies to "defer" paying a U.S. tax on foreign income until it is brought back into this country. Over time this would destroy U.S.-based global companies.
• Increase infrastructure investment. Since the 1970s U.S. investment in infrastructure has grown at only half the rate of GDP growth. Today, our roads are crumbling, bridges are in need of repair, and our power grid is inefficient. Meanwhile, emerging economies (notably China, India and Brazil) are making huge investments in modern infrastructure.
Infrastructure is the foundation for an economy's global competitiveness. We don't want to wake up in 10 years and find ourselves hopelessly behind.
• Free up international trade. The U.S. needs to provide leadership for completion of the World Trade Organizations' Doha Development Round of Trade Negotiations. Moreover, Americans need to pressure Washington to ratify the three Free Trade Agreements (FTAs)—for Panama, Colombia and South Korea—that have already been negotiated. Passage of these agreements will show the world we're open for business, create immediate exports and related jobs, and it would also strengthen the economies of three important allies.
• Improve the health-care system's cost effectiveness. To get there, the country needs to further reform its tort system and to continue to adopt better information technology. It's also critical that consumers have access to better information on health-care prices and outcomes and to be able to purchase competitively priced insurance offered in other states. Finally, citizens must have a personal stake in the costs of their care, which will enable them to make prudent decisions.
• Reform immigration laws to make existing "guest" workers legal, tax-paying employees. We should provide legal avenues for guest workers to apply for U.S. citizenship. It is to our advantage to grant more visas to the best and brightest students from around the world who come to our best universities. Students receiving qualifying advanced degrees (such as in math and science) should get an automatic green card to work in our country.
• Maintain the independence of the Federal Reserve. The task of the central bank is to manage money supply to keep inflation low (0%-2%), employment high and the financial system healthy. Excessive political influence could prevent the Fed from taking decisive actions when needed.
These recommendations are not particularly novel. In fact, the majority of economists and business leaders I've talked to agree with virtually all of them. Real GDP growth of 3.5% over the next decade is an aggressive target—but achievable. We need to think like winners.
Mr. Owens is chairman and CEO of Caterpillar Inc.
The US EPA opens a re-re-evaulation of atrazine
The War on a Weed Killer. WSJ Editorial
The EPA opens a re-re-evaulation of a safe chemical.WSJ, May 03, 2010
With the headlines full of oil spills and immigration, the Obama Administration's regulatory agenda is getting little attention. That's a mistake. Consider the Environmental Protection Agency's effort to revive an assault on atrazine, one of the oldest, most well-established agricultural chemicals on the market. Just this past week, the EPA held its third "re-evaluation" hearing on atrazine.
Atrazine is the nation's second-most common herbicide. For 50 years it has been the farm industry's primary crop protector. In the U.S., the weed killer is used in the production of 60% of corn, 75% of sorghum and 90% of sugarcane.
Since atrazine's debut in 1959, 10 Administrations have endorsed its use. The EPA in 2006 completed a 12-year review involving 6,000 studies and 80,000 public comments. In re-registering the product, the agency concluded the cumulative risks posed "no harm that would result to the general U.S. population, infant, children or other . . . consumers." The World Health Organization has found no health concerns.
None of this has stopped the most politicized environmental groups, which oppose both chemicals and the idea of industrial farming itself. Organizations such as the Natural Resources Defense Council have spent years ginning up claims that atrazine in groundwater causes cancer, birth defects and other maladies. Manufacturers such as Syngenta have been required to conduct millions of dollars worth of studies investigating these alarmist claims. EPA staff routinely review the studies in atrazine's favor.
But now the Obama Administration has begun to fill such agencies with hires who are either sympathetic to, or even hail from, these activist groups. Consider the EPA's new head for toxic substances, Stephen Owens. As director of Arizona's Department of Environmental Quality, he so aggressively imposed an activist's climate agenda that the state legislature voted to strip his department of authority to enact greenhouse gas rules.
In August, the NRDC and the Pesticide Action Network began a new campaign against atrazine. In October, the EPA announced it would begin a re-re-evaluation of atrazine with a series of scientific panel meeting, and those are underway. The goal seems to be to lay the groundwork to ban atrazine.
Among the environmental lobby's new lines of attack is that some U.S. water systems occasionally show "spikes" in the chemical. This ignores that the EPA's drinking water standard for atrazine—three parts per billion—has a built-in, 1,000-fold safety factor. It ignores EPA findings that atrazine isn't likely to be carcinogenic to humans.
Also re-energized by the EPA's sudden interest in atrazine is, you guessed it, the plaintiffs bar. Tort kingpin Stephen Tillery, joined by Baron & Budd, filed a class action in 2004 against atrazine makers in tort-friendly Madison County, Illinois, but they've struggled even there. The EPA's re-re-evaluation is already helping the lawyers sign up more water-district plaintiffs—Mr. Tillery has filed a new federal class action—and it surely will provide ammunition in court.
There is an agenda here far more ambitious than getting one chemical. The environmental lobby wants more farmland retired to "nature," and one way to do that is to make farming more expensive. The EPA notes that eliminating atrazine would cost $2 billion annually in lost crop yields and substituting more expensive herbicides. Some farmers would go out of business or ask the federal government for more subsidies.
The environmental lobby also figures that if it can take down atrazine with its long record of clean health, it can get the EPA to prohibit anything. Sounds plausible. Between this and its determination to regulate greenhouse gases, the Obama EPA is proving itself a regulatory fundamentalist, with scant regard for good science or economics.
The EPA opens a re-re-evaulation of a safe chemical.WSJ, May 03, 2010
With the headlines full of oil spills and immigration, the Obama Administration's regulatory agenda is getting little attention. That's a mistake. Consider the Environmental Protection Agency's effort to revive an assault on atrazine, one of the oldest, most well-established agricultural chemicals on the market. Just this past week, the EPA held its third "re-evaluation" hearing on atrazine.
Atrazine is the nation's second-most common herbicide. For 50 years it has been the farm industry's primary crop protector. In the U.S., the weed killer is used in the production of 60% of corn, 75% of sorghum and 90% of sugarcane.
Since atrazine's debut in 1959, 10 Administrations have endorsed its use. The EPA in 2006 completed a 12-year review involving 6,000 studies and 80,000 public comments. In re-registering the product, the agency concluded the cumulative risks posed "no harm that would result to the general U.S. population, infant, children or other . . . consumers." The World Health Organization has found no health concerns.
None of this has stopped the most politicized environmental groups, which oppose both chemicals and the idea of industrial farming itself. Organizations such as the Natural Resources Defense Council have spent years ginning up claims that atrazine in groundwater causes cancer, birth defects and other maladies. Manufacturers such as Syngenta have been required to conduct millions of dollars worth of studies investigating these alarmist claims. EPA staff routinely review the studies in atrazine's favor.
But now the Obama Administration has begun to fill such agencies with hires who are either sympathetic to, or even hail from, these activist groups. Consider the EPA's new head for toxic substances, Stephen Owens. As director of Arizona's Department of Environmental Quality, he so aggressively imposed an activist's climate agenda that the state legislature voted to strip his department of authority to enact greenhouse gas rules.
In August, the NRDC and the Pesticide Action Network began a new campaign against atrazine. In October, the EPA announced it would begin a re-re-evaluation of atrazine with a series of scientific panel meeting, and those are underway. The goal seems to be to lay the groundwork to ban atrazine.
Among the environmental lobby's new lines of attack is that some U.S. water systems occasionally show "spikes" in the chemical. This ignores that the EPA's drinking water standard for atrazine—three parts per billion—has a built-in, 1,000-fold safety factor. It ignores EPA findings that atrazine isn't likely to be carcinogenic to humans.
Also re-energized by the EPA's sudden interest in atrazine is, you guessed it, the plaintiffs bar. Tort kingpin Stephen Tillery, joined by Baron & Budd, filed a class action in 2004 against atrazine makers in tort-friendly Madison County, Illinois, but they've struggled even there. The EPA's re-re-evaluation is already helping the lawyers sign up more water-district plaintiffs—Mr. Tillery has filed a new federal class action—and it surely will provide ammunition in court.
There is an agenda here far more ambitious than getting one chemical. The environmental lobby wants more farmland retired to "nature," and one way to do that is to make farming more expensive. The EPA notes that eliminating atrazine would cost $2 billion annually in lost crop yields and substituting more expensive herbicides. Some farmers would go out of business or ask the federal government for more subsidies.
The environmental lobby also figures that if it can take down atrazine with its long record of clean health, it can get the EPA to prohibit anything. Sounds plausible. Between this and its determination to regulate greenhouse gases, the Obama EPA is proving itself a regulatory fundamentalist, with scant regard for good science or economics.
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.
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.
How to Avoid a 'Bailout Bill' - A new bankruptcy process is the right way to deal with failing financial institutions
How to Avoid a 'Bailout Bill'. By JOHN B. TAYLOR
A new bankruptcy process is the right way to deal with failing financial institutions.WSJ, May 03, 2010
It's good news there's now bipartisan agreement that the financial reform bill should not be a "bailout bill," and that amendments to Connecticut Sen. Chris Dodd's draft legislation are being proposed and debated with this agreement in mind. The biggest challenge in this bailout reform debate is to avoid giving the federal government more discretionary power, whether by creating a special bailout fund or by providing more ways to bypass proven bankruptcy rules. Experience shows that such power would increase, not decrease, the likelihood of another crisis.
Some say that the government did not have enough power to intervene with certain firms during the financial crisis. But it had plenty of power and it used it, beginning with Bear Stearns. This highly discretionary power—to bail out some creditors and not others, to take over some businesses and not others, to let some firms go through bankruptcy and not others—was a major cause of the financial panic in the fall of 2008. The broad justification used for the bailout of Bear Stearns creditors led many to believe the government would again intervene if another similar institution, such as Lehman Brothers, failed.
But when the Federal Reserve and the Treasury Department could not persuade private firms to provide funds to Lehman to pay its creditors in September 2008, the Fed surprisingly cut off access to its funds. The examiner's report on Lehman makes it very clear there was no preparation for bankruptcy proceedings before the day the government suddenly cut off the funds. No wonder there was a disruption.
Then, the next day, the Fed reopened its balance sheet to make loans to rescue the creditors of AIG, including billions for Goldman Sachs. The funding spigot was then turned off again, and a new program, the Troubled Asset Relief Program (TARP), was proposed. This on-again off-again policy was part of a series of unpredictable and confusing government interventions which led to panic.
This experience demonstrates why it is dangerous for the "orderly liquidation" section of the Dodd bill to institutionalize such a process by giving the government even more discretion and power to take over businesses; the interventions are likely again to cause more harm than good, even with the best of intentions. Many experts doubt the ability of the Federal Deposit Insurance Corp. (FDIC) to take over large, complex financial institutions, as the current bill calls for, without causing disruption.
The moral hazard associated with protecting creditors will continue even if the FDIC has the discretionary authority to claw back later some of the funds it provides in the bailout. The proposed liquidation process would have the unintended consequence of increasing the incentive for creditors and other counterparties to run whenever there is a rumor that a government official is thinking about intervening. Who is going to be helped? Who is going to be hurt? It is up to government officials to decide, not the rule of law.
Fortunately, it is not necessary to provide this additional discretionary authority. During the past year since the administration proposed its financial reforms, bankruptcy experts have been working on a reform to the bankruptcy law designed especially for nonbank financial institutions. Sometimes called Chapter 11F, the goal is to let a failing financial firm go into bankruptcy in a predictable, rules-based way without causing spillovers to the economy and permitting, if possible, people to continue to use its financial services—just as people flew on United Airlines planes, bought Kmart sundries and tried on Hartmax suits when those firms were in bankruptcy.
What would a Chapter 11F amendment look like? It would create a special financial bankruptcy court, or at least a group of "special masters" consisting of judges knowledgeable about financial markets and institutions, which would be responsible for handling the case of a financial firm.
In addition to the normal commencement of bankruptcy petitions by creditors or debtors, an involuntary proceeding could be initiated by a government regulatory agency as prescribed by the new bankruptcy law, and the government would be able to propose a reorganization plan—not simply a liquidation. Defining and defending the circumstances for such an initiation—including demonstrating systemic risk using quantitative measures such as interbank credit exposures—is essential.
Third, Chapter 11F would handle the complexities of repurchase agreements and derivatives by enabling close-out netting of contracts in which offsetting credit exposures are combined into a single net amount, which would reduce likelihood of runs.
Fourth, a wind-down plan, filed in advance by each financial firm with its regulator, would serve as a blueprint for the bankruptcy proceedings.
The advantage of this bankruptcy approach is that debtors and creditors negotiate with clear rules and judicial review throughout the process. In contrast, the proposed "orderly liquidation" authority in the current bill is secretive and potentially capricious. Rather than a government official declaring "we will wipe out the shareholders" or "it's unfair for us to claw back so much from creditors," under Chapter 11F the rule of law applies.
A discretionary punishment can be just as harmful as a discretionary bailout. As George Shultz puts it in the book "Ending Government Bailouts As We Know Them," recently published by the Hoover Press, "Let's write Chapter 11F into the law so that we have a credible alternative to bailouts in practice."
What are the obstacles to following this sensible advice? One is that the proposals are new; much of the creative work was done in the past year since the administration first made its reform proposals. A common perception is that bankruptcy is too slow to deal with systemic risk situations in a large complex institution, but the new proposals would have a team of experts ready to go.
Another obstacle is that the Judiciary Committee rather than the Banking Committee has jurisdiction over bankruptcy law, and it is too hard to coordinate. But bureaucratic silos should not get in the way when the stakes are so high.
Yet another hurdle to reform is that the current bill was put together by many of the same people who were in government at the time of the bailouts. A typical government excuse for the crisis is that government did not have enough power, but a more likely explanation is that it had too much discretionary power and, as is so often the case, did not use it effectively.
You do not prevent bailouts by giving the government more power to intervene in a discretionary manner. You prevent bailouts by requiring adequate capital based on simple, enforceable rules and by making it possible for failing firms to go through bankruptcy without causing disruption to the financial system and the economy.
Mr. Taylor, a professor of economics at Stanford and a senior fellow at the Hoover Institution, is co-editor with Kenneth Scott and George Shultz of "Ending Government Bailouts As We Know Them" (Hoover Press, 2010).
A new bankruptcy process is the right way to deal with failing financial institutions.WSJ, May 03, 2010
It's good news there's now bipartisan agreement that the financial reform bill should not be a "bailout bill," and that amendments to Connecticut Sen. Chris Dodd's draft legislation are being proposed and debated with this agreement in mind. The biggest challenge in this bailout reform debate is to avoid giving the federal government more discretionary power, whether by creating a special bailout fund or by providing more ways to bypass proven bankruptcy rules. Experience shows that such power would increase, not decrease, the likelihood of another crisis.
Some say that the government did not have enough power to intervene with certain firms during the financial crisis. But it had plenty of power and it used it, beginning with Bear Stearns. This highly discretionary power—to bail out some creditors and not others, to take over some businesses and not others, to let some firms go through bankruptcy and not others—was a major cause of the financial panic in the fall of 2008. The broad justification used for the bailout of Bear Stearns creditors led many to believe the government would again intervene if another similar institution, such as Lehman Brothers, failed.
But when the Federal Reserve and the Treasury Department could not persuade private firms to provide funds to Lehman to pay its creditors in September 2008, the Fed surprisingly cut off access to its funds. The examiner's report on Lehman makes it very clear there was no preparation for bankruptcy proceedings before the day the government suddenly cut off the funds. No wonder there was a disruption.
Then, the next day, the Fed reopened its balance sheet to make loans to rescue the creditors of AIG, including billions for Goldman Sachs. The funding spigot was then turned off again, and a new program, the Troubled Asset Relief Program (TARP), was proposed. This on-again off-again policy was part of a series of unpredictable and confusing government interventions which led to panic.
This experience demonstrates why it is dangerous for the "orderly liquidation" section of the Dodd bill to institutionalize such a process by giving the government even more discretion and power to take over businesses; the interventions are likely again to cause more harm than good, even with the best of intentions. Many experts doubt the ability of the Federal Deposit Insurance Corp. (FDIC) to take over large, complex financial institutions, as the current bill calls for, without causing disruption.
The moral hazard associated with protecting creditors will continue even if the FDIC has the discretionary authority to claw back later some of the funds it provides in the bailout. The proposed liquidation process would have the unintended consequence of increasing the incentive for creditors and other counterparties to run whenever there is a rumor that a government official is thinking about intervening. Who is going to be helped? Who is going to be hurt? It is up to government officials to decide, not the rule of law.
Fortunately, it is not necessary to provide this additional discretionary authority. During the past year since the administration proposed its financial reforms, bankruptcy experts have been working on a reform to the bankruptcy law designed especially for nonbank financial institutions. Sometimes called Chapter 11F, the goal is to let a failing financial firm go into bankruptcy in a predictable, rules-based way without causing spillovers to the economy and permitting, if possible, people to continue to use its financial services—just as people flew on United Airlines planes, bought Kmart sundries and tried on Hartmax suits when those firms were in bankruptcy.
What would a Chapter 11F amendment look like? It would create a special financial bankruptcy court, or at least a group of "special masters" consisting of judges knowledgeable about financial markets and institutions, which would be responsible for handling the case of a financial firm.
In addition to the normal commencement of bankruptcy petitions by creditors or debtors, an involuntary proceeding could be initiated by a government regulatory agency as prescribed by the new bankruptcy law, and the government would be able to propose a reorganization plan—not simply a liquidation. Defining and defending the circumstances for such an initiation—including demonstrating systemic risk using quantitative measures such as interbank credit exposures—is essential.
Third, Chapter 11F would handle the complexities of repurchase agreements and derivatives by enabling close-out netting of contracts in which offsetting credit exposures are combined into a single net amount, which would reduce likelihood of runs.
Fourth, a wind-down plan, filed in advance by each financial firm with its regulator, would serve as a blueprint for the bankruptcy proceedings.
The advantage of this bankruptcy approach is that debtors and creditors negotiate with clear rules and judicial review throughout the process. In contrast, the proposed "orderly liquidation" authority in the current bill is secretive and potentially capricious. Rather than a government official declaring "we will wipe out the shareholders" or "it's unfair for us to claw back so much from creditors," under Chapter 11F the rule of law applies.
A discretionary punishment can be just as harmful as a discretionary bailout. As George Shultz puts it in the book "Ending Government Bailouts As We Know Them," recently published by the Hoover Press, "Let's write Chapter 11F into the law so that we have a credible alternative to bailouts in practice."
What are the obstacles to following this sensible advice? One is that the proposals are new; much of the creative work was done in the past year since the administration first made its reform proposals. A common perception is that bankruptcy is too slow to deal with systemic risk situations in a large complex institution, but the new proposals would have a team of experts ready to go.
Another obstacle is that the Judiciary Committee rather than the Banking Committee has jurisdiction over bankruptcy law, and it is too hard to coordinate. But bureaucratic silos should not get in the way when the stakes are so high.
Yet another hurdle to reform is that the current bill was put together by many of the same people who were in government at the time of the bailouts. A typical government excuse for the crisis is that government did not have enough power, but a more likely explanation is that it had too much discretionary power and, as is so often the case, did not use it effectively.
You do not prevent bailouts by giving the government more power to intervene in a discretionary manner. You prevent bailouts by requiring adequate capital based on simple, enforceable rules and by making it possible for failing firms to go through bankruptcy without causing disruption to the financial system and the economy.
Mr. Taylor, a professor of economics at Stanford and a senior fellow at the Hoover Institution, is co-editor with Kenneth Scott and George Shultz of "Ending Government Bailouts As We Know Them" (Hoover Press, 2010).
Saturday, May 1, 2010
India's Government By Quota - The affirmative-action plan to eliminate caste discrimination was supposed to last 10 years. Instead it has become a permanent, and divisive, fact of life
India's Government By Quota. By SHIKHA DALMIA
The affirmative-action plan to eliminate caste discrimination was supposed to last 10 years. Instead it has become a permanent, and divisive, fact of life.WSJ, May 01, 2010
For nearly half a century, group or racial preferences have been America's prescribed remedy for racism and other -isms standing in the way of social equality. But anyone wishing to study the unintended side-effects of this medicine on the body politic need only look at India. There reactionary groups are trying to co-opt a women's quota bill, not to create an egalitarian utopia, but its opposite.
India's ruling secular Congress party has joined hands with Hindu nationalist parties on a bill to guarantee 33% seats in the parliament and state legislatures to women. This is on top of a similar quota that women enjoy at the local or panchayat level. The bill sailed through the upper house but has met stiff resistance by India's lower-caste parties. Why? Because it threatens their monopoly on the country's quota regime.
Just as racism is the bane of America, caste is the bane of India; its rigid strictures for centuries sustained a stratified society where birth is destiny. Although caste has declined in India's large, cosmopolitan cities, elsewhere this system still restricts social mobility for the country's 100 million dalits (untouchables). They are not only consigned to demeaning jobs but they're not even allowed to pray in the same temples as upper castes.
But the scheme that India's founders devised to eradicate the caste system has actually deepened the country's caste divide, and created several more. The women's quota bill is only the latest development in the competition for victimhood status that has pitted every group with any grievance, real or imagined, against every other.
India's founders began on the right track, constitutionally banning untouchability in 1950 and, just as in America, guaranteeing equal treatment under the law for everyone regardless of caste, sex, religion or race. But then came the fatal leap. They created a list or "schedule" of all the dalit sub-castes deserving preferential treatment and handed them 17.5% of the seats in the parliament and state legislatures. They also gave them 22.5% of all public-sector jobs and guaranteed spots in public or publicly funded universities.
The scheme was supposed to last 10 years. Instead it assumed a life of its own, making scheduled-caste status a bigger driver of success than individual merit (at least before liberalization opened opportunities in the private sector).
The tipping point came in the late 1980s when the government's Mandal Commission. This body, charged with examining the plight of the poor and disenfranchised, concluded in its final report that the original list of scheduled castes was too short. It recommended a new, catch-all category called Other Backward Classes covering over half the population and called for reserving 49.5% government jobs and university seats for these groups
The report caused an uproar. Hindu students from nonscheduled castes, particularly from modest backgrounds, exploded into riots. Already rubbed raw from the existing quota regime which allowed academically inferior, scheduled-caste candidates to breeze into the best universities and land secure government jobs while they struggled, they took to the streets. A few immolated themselves, one big reason why the government collapsed in November 1990. But the quota system survived, and post-riot governments have slowly expanded it.
Quotas have become a fact of life in India because they are the major currency with which Indian politicians buy votes. In a few states with their own quotas, almost 70% of government jobs and university seats go to the reserved castes.
The major political resistance to the quota regime during the Mandal riots came from Hindu nationalist parties—but that was before they found a way to make it work for them. In some states like Rajasthan they have actually instituted quotas for the poor "forward castes"—code for upper-caste Hindus.
And these parties wholeheartedly back the latest women's quota bill because it will simultaneously allow them to: establish their progressive bona fides; once again stick it to Muslims, arguably the only genuinely disenfranchised minority without its own legislative quota; and consolidate their power base in parliament since the women elected are likely to be relatively well-off Hindus.
A tragi-comic note in this drama is Raj Thackeray, an ultra-nativist, Hindu politician from Mumbai who wants to chase all out-of-state residents out of his city. He is warning the lower-caste leaders to show respect for women by supporting this bill or else "they will be given a lesson on it."
Protests have broken out in the country, with Muslim and lower-caste women opposing it as currently written and urbane, city feminists demanding its immediate passage. But the lower-caste parties' only objection is that the quota bill doesn't contain a sub-quota for lower-caste women. In other words, the debate in India is no longer about using quotas to redistribute opportunity—it is about redistributing the quotas themselves. No politician or party is opposing this bill on principle.
It would be tempting to blame the abuse of quotas on the degraded state of Indian politics. But, in reality, India is demonstrating the reductio ad absurdum logic of quotas.
Progressives in India—as in America—believe that equal protection of individual rights is insufficient to create equality because it does nothing to address private discrimination. Protecting the property rights of persecuted castes is hardly enough if they can't get jobs in the first place. Hence, in their view, government has to give persecuted groups a leg up to equalize opportunity.
But this turns the system into a zero-sum game, triggering a race for the spoils in which powerful groups can seize the advantage. Because quotas or preferences don't originally apply to them, they become the new aggrieved—victims of "reverse discrimination." And it is easy for them to mobilize this sentiment into a political movement precisely because they are powerful.
India's lesson is that abrogating individual rights through group preferences or quotas institutionalizes the very divisions that these policies are supposed to erase. Human prejudice can't be legislated away. That requires social activism to coax, cajole and shame people out of their intolerance. There are no short cuts.
Ms. Dalmia is a senior analyst at the Reason Foundation and a Forbes columnist.
The affirmative-action plan to eliminate caste discrimination was supposed to last 10 years. Instead it has become a permanent, and divisive, fact of life.WSJ, May 01, 2010
For nearly half a century, group or racial preferences have been America's prescribed remedy for racism and other -isms standing in the way of social equality. But anyone wishing to study the unintended side-effects of this medicine on the body politic need only look at India. There reactionary groups are trying to co-opt a women's quota bill, not to create an egalitarian utopia, but its opposite.
India's ruling secular Congress party has joined hands with Hindu nationalist parties on a bill to guarantee 33% seats in the parliament and state legislatures to women. This is on top of a similar quota that women enjoy at the local or panchayat level. The bill sailed through the upper house but has met stiff resistance by India's lower-caste parties. Why? Because it threatens their monopoly on the country's quota regime.
Just as racism is the bane of America, caste is the bane of India; its rigid strictures for centuries sustained a stratified society where birth is destiny. Although caste has declined in India's large, cosmopolitan cities, elsewhere this system still restricts social mobility for the country's 100 million dalits (untouchables). They are not only consigned to demeaning jobs but they're not even allowed to pray in the same temples as upper castes.
But the scheme that India's founders devised to eradicate the caste system has actually deepened the country's caste divide, and created several more. The women's quota bill is only the latest development in the competition for victimhood status that has pitted every group with any grievance, real or imagined, against every other.
India's founders began on the right track, constitutionally banning untouchability in 1950 and, just as in America, guaranteeing equal treatment under the law for everyone regardless of caste, sex, religion or race. But then came the fatal leap. They created a list or "schedule" of all the dalit sub-castes deserving preferential treatment and handed them 17.5% of the seats in the parliament and state legislatures. They also gave them 22.5% of all public-sector jobs and guaranteed spots in public or publicly funded universities.
The scheme was supposed to last 10 years. Instead it assumed a life of its own, making scheduled-caste status a bigger driver of success than individual merit (at least before liberalization opened opportunities in the private sector).
The tipping point came in the late 1980s when the government's Mandal Commission. This body, charged with examining the plight of the poor and disenfranchised, concluded in its final report that the original list of scheduled castes was too short. It recommended a new, catch-all category called Other Backward Classes covering over half the population and called for reserving 49.5% government jobs and university seats for these groups
The report caused an uproar. Hindu students from nonscheduled castes, particularly from modest backgrounds, exploded into riots. Already rubbed raw from the existing quota regime which allowed academically inferior, scheduled-caste candidates to breeze into the best universities and land secure government jobs while they struggled, they took to the streets. A few immolated themselves, one big reason why the government collapsed in November 1990. But the quota system survived, and post-riot governments have slowly expanded it.
Quotas have become a fact of life in India because they are the major currency with which Indian politicians buy votes. In a few states with their own quotas, almost 70% of government jobs and university seats go to the reserved castes.
The major political resistance to the quota regime during the Mandal riots came from Hindu nationalist parties—but that was before they found a way to make it work for them. In some states like Rajasthan they have actually instituted quotas for the poor "forward castes"—code for upper-caste Hindus.
And these parties wholeheartedly back the latest women's quota bill because it will simultaneously allow them to: establish their progressive bona fides; once again stick it to Muslims, arguably the only genuinely disenfranchised minority without its own legislative quota; and consolidate their power base in parliament since the women elected are likely to be relatively well-off Hindus.
A tragi-comic note in this drama is Raj Thackeray, an ultra-nativist, Hindu politician from Mumbai who wants to chase all out-of-state residents out of his city. He is warning the lower-caste leaders to show respect for women by supporting this bill or else "they will be given a lesson on it."
Protests have broken out in the country, with Muslim and lower-caste women opposing it as currently written and urbane, city feminists demanding its immediate passage. But the lower-caste parties' only objection is that the quota bill doesn't contain a sub-quota for lower-caste women. In other words, the debate in India is no longer about using quotas to redistribute opportunity—it is about redistributing the quotas themselves. No politician or party is opposing this bill on principle.
It would be tempting to blame the abuse of quotas on the degraded state of Indian politics. But, in reality, India is demonstrating the reductio ad absurdum logic of quotas.
Progressives in India—as in America—believe that equal protection of individual rights is insufficient to create equality because it does nothing to address private discrimination. Protecting the property rights of persecuted castes is hardly enough if they can't get jobs in the first place. Hence, in their view, government has to give persecuted groups a leg up to equalize opportunity.
But this turns the system into a zero-sum game, triggering a race for the spoils in which powerful groups can seize the advantage. Because quotas or preferences don't originally apply to them, they become the new aggrieved—victims of "reverse discrimination." And it is easy for them to mobilize this sentiment into a political movement precisely because they are powerful.
India's lesson is that abrogating individual rights through group preferences or quotas institutionalizes the very divisions that these policies are supposed to erase. Human prejudice can't be legislated away. That requires social activism to coax, cajole and shame people out of their intolerance. There are no short cuts.
Ms. Dalmia is a senior analyst at the Reason Foundation and a Forbes columnist.
Friday, April 30, 2010
The North Korea Endgame - However difficult, unification must be the ultimate objective
The North Korea Endgame. By Nicholas Eberstadt
However difficult, unification must be the ultimate objective.WSJ, Apr 30, 2010
However difficult, unification must be the ultimate objective.WSJ, Apr 30, 2010
Ironing Out the Kinks in the Dodd Bill - Killing the $50 billion bailout fund would be a good start
Ironing Out the Kinks in the Dodd Bill. By PHILLIP SWAGEL
Killing the $50 billion bailout fund would be a good startWSJ, Apr 30, 2010
Imagine a future in which Sen. Chris Dodd's financial reform bill was law and a firm like AIG or Lehman Brothers failed. Without a vote of Congress, the government could guarantee the firm's debts or put money into the failing firm to keep it afloat and reduce the hit taken by creditors such as banks and pension funds that lent the firm money.
The temptation will be huge; after all, no government official will want to be blamed for allowing another post-Lehman meltdown. But so is the danger that risky behavior and bailouts will become more common.
This scenario is a key defect in the Dodd bill that the Senate has begun to debate. True, the shareholders of a failed financial firm would be wiped out, but creditors—the people who lent it the money that got it in trouble in the first place—will be bailed out. And this has real consequences, because if market participants know they can be rescued for imprudent behavior, they will likely behave more imprudently.
In coming days and weeks, as amendments to the Dodd bill are publicly offered and private negotiations proceed, removing the $50 billion bailout fund would be a good start. A more important way to address the problem of "too big to fail" is to have a resolution process centered on bankruptcy—and in which bailouts would require a vote of Congress. Bankruptcy would make it more likely that the division of resources would be in the hands of judges, not political officials using public money to support favored creditors. When GM and Chrysler were failing, the two firms were used as conduits for a transfer of TARP money to the auto unions.
Other aspects of the Dodd proposal are worrisome. One need not think too creatively to imagine a media-obsessed head of a new consumer financial protection agency looking to impose her will across all aspects of commerce, with attendant hits to lending for consumers and businesses, small and large. The idea of a systemic risk council empowered to gather data and ensure that no firm slips between regulatory cracks is useful—and on this there is bipartisan agreement. Yet regulators and bank supervisors have considerable power already and were not able to head off the recent crisis. Giving more power to a new regulatory agency is not a sure-fire solution and could have unintended negative consequences for jobs and growth.
The bill's approach to taking derivatives trading out of banks is similarly problematic. This trading takes place in large financial institutions for a reason: These are the firms with the expertise and large balance sheets needed to carry it out. And while derivatives can be misused, the bottom line is that they have socially useful purposes, including for financial firms. A community bank, for example, might legitimately want to use derivatives to offset some of the risk it faces from its lending for housing and commercial real estate in a local community. By hobbling this activity, the approach espoused by Sen. Dodd and Sen. Blanche Lincoln threatens to increase rather than limit risk.
Administration officials dissolve into mumbles when asked about the derivatives piece of the bill, suggesting that they recognize the problem. Hopefully they will have the courage to fix this even if it gives the appearance of seeming to "weaken" the bill.
Finally, financial regulatory reform will not be complete without addressing the awkward status of Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) whose loan guarantees contributed to the housing bubble behind the crisis. It was appropriate to take over Fannie and Freddie to avoid further risk to the financial sector, but the continued conservatorship of the two firms means that taxpayers remain on the hook for their losses, including losses suffered intentionally to support the administration's public policy goals such as reducing foreclosures.
An appropriate future for Fannie and Freddie would focus them on the socially useful function of securitizing mortgages and thereby fostering housing liquidity. There might still be a role for a government backstop against another catastrophic decline in housing prices, but this public support should be made explicit and the GSEs should pay for it.
With the government standing behind Fannie and Freddie, their huge portfolios of mortgage-backed securities are no longer needed as a buyer of last resort for bundled mortgages to ensure that funding is available for housing. The portfolios were the channel through which Fannie and Freddie enjoyed private gains while imposing risks on taxpayers, and they were the source of systemic risk posed by the firms. The financial regulatory reform bill should ensure a new and sustainable model for Fannie and Freddie that makes explicit any public support for the firms and limits taxpayer exposure to future losses.
There is bipartisan agreement that financial reform is needed. But the details matter. On nonbank resolution, derivatives and consumer protection, the approach in the Dodd bill could well increase financial risks to the economy rather than heading them off. Fixing these issues, along with addressing the risks posed by Fannie and Freddie, will yield a reform that truly learns the lessons from the financial crisis.
Mr. Swagel is a visiting professor at the McDonough School of Business, Georgetown University, and nonresident scholar at the American Enterprise Institute. He was assistant secretary for economic policy at the Treasury Department from December 2006 to January 2009.
Killing the $50 billion bailout fund would be a good startWSJ, Apr 30, 2010
Imagine a future in which Sen. Chris Dodd's financial reform bill was law and a firm like AIG or Lehman Brothers failed. Without a vote of Congress, the government could guarantee the firm's debts or put money into the failing firm to keep it afloat and reduce the hit taken by creditors such as banks and pension funds that lent the firm money.
The temptation will be huge; after all, no government official will want to be blamed for allowing another post-Lehman meltdown. But so is the danger that risky behavior and bailouts will become more common.
This scenario is a key defect in the Dodd bill that the Senate has begun to debate. True, the shareholders of a failed financial firm would be wiped out, but creditors—the people who lent it the money that got it in trouble in the first place—will be bailed out. And this has real consequences, because if market participants know they can be rescued for imprudent behavior, they will likely behave more imprudently.
In coming days and weeks, as amendments to the Dodd bill are publicly offered and private negotiations proceed, removing the $50 billion bailout fund would be a good start. A more important way to address the problem of "too big to fail" is to have a resolution process centered on bankruptcy—and in which bailouts would require a vote of Congress. Bankruptcy would make it more likely that the division of resources would be in the hands of judges, not political officials using public money to support favored creditors. When GM and Chrysler were failing, the two firms were used as conduits for a transfer of TARP money to the auto unions.
Other aspects of the Dodd proposal are worrisome. One need not think too creatively to imagine a media-obsessed head of a new consumer financial protection agency looking to impose her will across all aspects of commerce, with attendant hits to lending for consumers and businesses, small and large. The idea of a systemic risk council empowered to gather data and ensure that no firm slips between regulatory cracks is useful—and on this there is bipartisan agreement. Yet regulators and bank supervisors have considerable power already and were not able to head off the recent crisis. Giving more power to a new regulatory agency is not a sure-fire solution and could have unintended negative consequences for jobs and growth.
The bill's approach to taking derivatives trading out of banks is similarly problematic. This trading takes place in large financial institutions for a reason: These are the firms with the expertise and large balance sheets needed to carry it out. And while derivatives can be misused, the bottom line is that they have socially useful purposes, including for financial firms. A community bank, for example, might legitimately want to use derivatives to offset some of the risk it faces from its lending for housing and commercial real estate in a local community. By hobbling this activity, the approach espoused by Sen. Dodd and Sen. Blanche Lincoln threatens to increase rather than limit risk.
Administration officials dissolve into mumbles when asked about the derivatives piece of the bill, suggesting that they recognize the problem. Hopefully they will have the courage to fix this even if it gives the appearance of seeming to "weaken" the bill.
Finally, financial regulatory reform will not be complete without addressing the awkward status of Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) whose loan guarantees contributed to the housing bubble behind the crisis. It was appropriate to take over Fannie and Freddie to avoid further risk to the financial sector, but the continued conservatorship of the two firms means that taxpayers remain on the hook for their losses, including losses suffered intentionally to support the administration's public policy goals such as reducing foreclosures.
An appropriate future for Fannie and Freddie would focus them on the socially useful function of securitizing mortgages and thereby fostering housing liquidity. There might still be a role for a government backstop against another catastrophic decline in housing prices, but this public support should be made explicit and the GSEs should pay for it.
With the government standing behind Fannie and Freddie, their huge portfolios of mortgage-backed securities are no longer needed as a buyer of last resort for bundled mortgages to ensure that funding is available for housing. The portfolios were the channel through which Fannie and Freddie enjoyed private gains while imposing risks on taxpayers, and they were the source of systemic risk posed by the firms. The financial regulatory reform bill should ensure a new and sustainable model for Fannie and Freddie that makes explicit any public support for the firms and limits taxpayer exposure to future losses.
There is bipartisan agreement that financial reform is needed. But the details matter. On nonbank resolution, derivatives and consumer protection, the approach in the Dodd bill could well increase financial risks to the economy rather than heading them off. Fixing these issues, along with addressing the risks posed by Fannie and Freddie, will yield a reform that truly learns the lessons from the financial crisis.
Mr. Swagel is a visiting professor at the McDonough School of Business, Georgetown University, and nonresident scholar at the American Enterprise Institute. He was assistant secretary for economic policy at the Treasury Department from December 2006 to January 2009.
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