Wednesday, March 25, 2009

Holman W Jenkins: The Real AIG Disgrace

The Real AIG Disgrace, by Holman W Jenkins Jr
WSJ, Mar 25, 2009

The stock market was intoxicated with the Obama administration's toxic asset plan. Whatever its contempt for the upper middle class that acquires wealth through salaried work and bonuses, Team Obama still has eyes for the hedge fund class, which will be ladled out taxpayer dollars to make one-way bets on problematic bank assets.

Yet the AIG bonus episode, the administration's one true disgrace so far, will not soon be forgotten.

Tim Geithner is rightly on the hot seat for saying he didn't know about the bonuses until just weeks ago -- because he should have quelled this furor before it ever got started. Instead he played dumb and climbed aboard the outrage bandwagon -- and let Mr. Obama do the same.

There is not a shred of justice in the hysteria that followed. As AIG chief Ed Liddy explained on the Hill last week, the people receiving retention bonuses were not the same people who launched AIG's unhedged housing bets that brought the company down. Those people were gone. Their pay is already being clawed back.

Those who remained had been asked a year ago to stay and work themselves out of a job. In accepting the terms offered to them, they committed no offense (say, failing to pay taxes). Their only crime was possessing marketable knowledge -- all the more marketable because of the opportunity for hedge funds and other counterparties to profit from AIG's distress. Had the company submitted to Chapter 11 rather than a government takeover, a bankruptcy judge might well have authorized identical incentives to minimize losses and maximize recovery for legitimate stakeholders.

The Washington Post, which has consistently distinguished itself with its reporting about the real antecedents of this "scandal," yesterday followed up by detailing "months of assurances to Financial Products employees that the insurance giant would honor those contracts, according to numerous internal AIG e-mails and memos . . . ."

Whether Mr. Geithner knew the specifics is unimportant. The retention plan was known to his staff. The details had been disclosed over and over in public filings. As far back as October, New York Attorney General Andrew Cuomo had summoned the Treasury-appointed Mr. Liddy to hammer out a deal on AIG's pay practices. Said Mr. Cuomo in a statement afterward: "These actions are not intended to jeopardize the hard-earned compensation of the vast majority of AIG's employees, including retention and severance arrangements, who are essential to rebuilding AIG and the economy of New York."

The voluble Rep. Elijah Cummings had been railing about AIG retention bonuses almost continually, on air, in the print media, and in publicly released letters to Mr. Liddy, since Dec. 1.

On March 3, Mr. Geithner himself was quizzed during a congressional hearing in detail about the AIGFP retention plan by Democratic Rep. Joe Crowley -- a week before Mr. Geithner now says he heard of the plan.

It may be that the full picture was kicked up to him only when a political decision was needed, but by then his one decent choice was to insist on the bonuses' legality. However politically inopportune the bonuses may be, the president only dirtied himself by authorizing a feel-good, bipartisan hate storm aimed at innocent AIG employees. And it's hard to believe Mr. Obama would have done so, or the subsequent spectacle would have unfolded as it did, without Mr. Geithner's seminal prevarications (and we say this fully acknowledging that he's had a rough ride in an inhumanly difficult job).

Barney Frank, who doesn't have the excuse of being stupid, was last seen bullying Mr. Liddy to do what on any other day Mr. Frank would flay Mr. Liddy for doing -- violating the privacy rights of his employees. Charles Grassley? His early bloviating about the duty of AIG executives to kill themselves almost begins to look like a grace note, since it alerted the public to the hyperbolic playacting about to come.

Paul Kanjorski, before running off to host a hearing, proclaimed on CNBC that AIG's Mr. Liddy would be responsible if Congress now failed to summon the political courage to take necessary steps to address the financial crisis.

Pause to let it sink in. Mr. Liddy, who is doing his job with grit and personal sacrifice, is blamed in advance if Congress proves too cowardly to do its own job.

But the biggest lesson here is the old one that the price of freedom is eternal vigilance -- beginning with insistence on the rule of law. Americans clearly cannot trust their elected officials to defend their rights and interests, or care whether justice is served, when the slightest political risk might attach to doing so.

Which brings us back to Mr. Cuomo, whose office has been implicitly threatening to publish names of AIG employees who don't relinquish pay they were contractually entitled to.

Mr. Cuomo is a thug, but at least he reminds us: It can happen here.

Transnational Progressive Nominated as Legal Advisor for State - Harold Koh

Transnational Progressive Nominated as Legal Advisor for State. By John Fonte
The Corner/NRO, Tuesday, March 24, 2009

The Transnational Progressive assault on the sovereignty of the American liberal democratic nation-state has just kicked into high gear with the nomination by the Obama administration of Yale Law School Dean Harold Koh to be the Legal Advisor to the U.S. State Department. Dean Koh wants to “trigger a transnational legal process” that will “generate legal interpretations that in turn can be internalized into domestic law.” Put simply, he favors opening a transnational legal space beyond the Constitution and the democratic decision-making process of our liberal democracy. My comments on Koh’s theories below are excerpted from my Bradley Symposium essay of June 2008, “Global Governance vs. the Liberal Democratic Nation State: What is the Best Regime?

Harold Koh, the dean of Yale University Law School, served as assistant secretary of state for democracy, human rights, and labor during the Clinton Administration. In a detailed article in the Stanford Law Review responding to the Bush foreign policy, Koh articulates the central viewpoint of the American governing left.

Koh chastises the US for failing to “obey global norms.”America, Koh tells us, “promotes double standards” by refusing to ratify the International Criminal Court treaty; “claiming a Second Amendment exclusion from a proposed global ban on the illicit transfer of small arms and light weapons”; and “declining to implement the orders of the International Court of Justice with regard to the death penalty.”Indeed, Koh complains: “The World Court finally found that the United States had violated the Vienna Convention” (on the death penalty), but “American courts have essentially ignored” the ruling of the ICJ.

Koh’s proposed remedy to American exceptionalism is for “American lawyers, scholars and activists” to “trigger a transnational legal process,” of “transnational interactions” that will “generate legal interpretations that can in turn be internalized into the domestic law of even resistant nation-states.”For example, Koh suggests that, “human rights advocates” should litigate “not just in domestic courts, but simultaneously before foreign and international arenas.”Moreover, they should encourage foreign governments (such as Mexico) and transnational NGOs to challenge the US on the death penalty and other human rights issues.

Supporters of the International Criminal Court should, Koh recommends, “provoke interactions between the United States government and the ICC” that might lead to the US becoming enmeshed in the ICC process (by, for example, having the US provide evidence in ICC trials). These interactions with the ICC would show cooperation with the tribunal and therefore “could be used to undermine” the official US “unsigning” of the treaty because it might “constitute a de-facto repudiation” of the “act of unsignature.”

Of course, the “transnational legal process,” advocated by Koh (and others in the governing center-left) is a process outside of American constitutional democracy. The American people have a Constitution, judicial institutions, and a democratic political system. Transnational “interactions” (such as appealing to foreign courts) are not part of the institutional authority and accountability inherent in the meaning of the phrase: “We the People of the United States.” Koh’s “interactions” are something “outside” of the “People of the United States” and “beyond” the Constitution and our democratic process. Therefore, they could be characterized as extra-constitutional, post-constitutional, or post-democratic. In effect, they seek to achieve results that could not necessarily be achieved through the regular process of American democracy. This clearly raises the core “regime” questions of what constitutes legitimate political authority and who is responsible to whom in a democratic state.

— John Fonte is a senior fellow at the Hudson Institute.

Erecting Trade Barriers: The Return of Smoot-Hawley

Erecting Trade Barriers: The Return of Smoot-Hawley
IER, March 24, 2009

Free trade is one of the greatest forces for positive change the world has ever seen. It opens new economic frontiers for American good and services, allows America access to the best the world has to offer, and promotes peace between nations. But free trade is coming under increasing assault as some in Washington, including the Obama administration, promote restricting free trade in the name of limiting carbon dioxide emissions. Secretary of Energy Steven Chu recently advocated using tariff duties as a “weapon” to restrict free trade, and some policymakers have also advocated increasing tariffs to “protect” some politically connected U.S. businesses.

These attacks are a serious threat to free trade and, if enacted, would deepen the recession. At the start of the Great Depression, Herbert Hoover made some bad economic decisions, and it appears President Obama is now considering following Hoover’s example.

In the early 1930s, in an effort to stem the economic downturn, President Hoover implemented massive deficit spending and tax hikes. This wrecked an already crippled economy. One of the worst episodes occurred when Hoover signed the infamous Smoot-Hawley tariff bill in 1930, which crippled international trade in the midst of the Depression. The Obama administration is considering a similar mistake in the form of “carbon tariffs” to prevent U.S. businesses from outsourcing to other countries after a cap-and-trade regulation makes it too economically difficult to do business in the United States. Just as in the 1930s, this Smoot-Hawley redux would punish American consumers at the worst possible time.


The Original Smoot-Hawley

Contrary to popular belief, Herbert Hoover was no fan of the free market or small government. After the stock market crashed in 1929, Hoover engaged in unprecedented peacetime deficit spending and other measures that increased the role of the federal government in the economy. Arguably, the most detrimental of his actions was the Smoot-Hawley Tariff Act of 1930, which sharply hiked taxes on thousands of imports.

Even conventional American history textbooks assign partial blame for the severity of the Depression to Hoover’s blow against international trade. In response to the legislation, European countries levied their own retaliatory tariffs and even repudiated their debts from World War I because (they claimed) the U.S. government was making it impossible for them to export goods to earn the dollars to pay back Uncle Sam’s loans.

Even without retaliation, a unilateral tariff increase makes Americans poorer. The gains to the workers in the “protected” domestic industry are more than offset by the loss to consumers who have to pay higher prices. A tariff is a tax on American consumers; the government says to its own citizens, “If you want to buy a product from a foreign producer, you have to make a side payment to the U.S. Treasury.” You don’t make a country richer by jacking up taxes on its own consumers.

International trade allows countries to specialize in their “comparative advantage,” or their areas of relative expertise. It would be catastrophic if everyone had to grow his own food, sew his own clothes, and drill his own cavities. We all benefit tremendously from the ability to specialize in occupations at which we are better than our peers, and then trade with each other.

The same principle applies to entire countries, which are simply aggregates of the individuals living in them. Because of differences in resource endowments, industrial infrastructure, weather, and the skills of the workforce, it is much more efficient for certain regions of the world to concentrate on a few key items and export them to other regions. When the government raises tax barriers, it interferes with this process and makes everyone poorer on average.

Ironically, when Herbert Hoover raised U.S. tariffs, he didn’t simply hurt American consumers, but he also crippled American exporters. Ultimately, other nations pay for their imports through their own exports. If Uncle Sam makes it more difficult for foreigners to sell their goods to Americans, then those same foreigners will not have the ability to buy goods produced by Americans. Indeed, total U.S. exports dropped from $7.2 billion in 1929 to $2.5 billion in 1932,[i] although some of this fall was no doubt due to the general price decline and the sharp drop in economic activity.


Smoot-Hawley II

True to form, the Obama administration—under the guise of fighting climate change—is testing the waters with new restrictions on imports. Specifically, lawmakers on the House Energy and Commerce Committee are considering imposing “carbon tariffs” to prevent foreign nations from gaining a competitive advantage vis-à-vis U.S. producers who are burdened with a forthcoming cap-and-trade regime. The idea is that the U.S. government would slap a huge “compensatory” tax on imports that were produced in foreign nations that do not impose carbon legislation on their manufacturers.

This is a very disturbing trend. Regardless of whether the World Trade Organization deems such “carbon tariffs” to be an acceptable infringement on trade, U.S. and European carbon tariffs will spawn another destructive trade war, just as the world suffered in the early 1930s. (If the WTO rules against the carbon tariffs, then the besieged countries will have the right to levy their own retaliatory tariffs, and if the WTO signs off on them, other countries will then find some excuse for levying tariffs to compensate themselves for the “overconsumption” of the Western nations or some such sin against the environment.)

Even if the threat from man-made climate change is as serious as some scientists claim, this fact would not overturn the centuries of work done by economic scientists. We know from both theory and history that raising trade barriers in the middle of a severe worldwide recession is a terrible policy. We also know from theory and history that government central planning does not work. When the technocrats reorder the economy, deciding which firms will survive and which prices are too high or too low, the results are disastrous. It doesn’t matter whether the justification is “fighting the Depression” (as in the 1930s) or “fighting climate change” (as in today’s discussions). Either way, central planning will wreck the economy, and it won’t even achieve its ostensible goals.


Conclusion

It is encouraging that the politicians are finally taking seriously the effects that cap-and-trade would have on U.S. manufacturers. The fact that lawmakers are finally admitting that the new burden would force many American firms to lay off domestic workers and relocate abroad is a positive development in the highly emotional debate about carbon dioxide regulations. But instead of abandoning their plans for cap-and-trade, the proposed solution of levying a fresh round of new taxes on American consumers who are merely trying to buy the best products at the lowest prices just adds insult to injury.


Notes

[i] Burton Folsom, Jr., New Deal or Raw Deal? How FDR’s Legacy Has Damaged America (New York: Threshold Editions, 2008), p. 31.

State Sec Clinton on US programs against tuberculosis

World Tuberculosis Day 2009, by Hillary Rodham Clinton, Secretary of State
Washington, DC, March 24, 2009

Today marks World Tuberculosis Day, and I join others around the world in saying “I am stopping TB.”

Tuberculosis (TB) kills almost 5000 people each day, and is the leading cause of death for people living with HIV/AIDS. According to the World Health Organization, almost 40% of TB cases are not properly detected and treated. While treatment for TB exists, more and more individuals are being diagnosed with multidrug-resistant (MDR) TB or extensively drug-resistant (XDR) TB, which are difficult and expensive to treat.

Our government is taking steps to address the global burden of TB. The U.S. Government is the largest contributor to the Global Fund to Fight AIDS, Tuberculosis, and Malaria, which has detected and treated over 4 million cases of TB. The President's Emergency Plan for AIDS Relief (PEPFAR) is working to improve the diagnosis and treatment of TB for co-infected persons, and is engaged in infection control efforts to prevent new cases of TB. In addition, the United States Agency for International Development (USAID) has tuberculosis programs in more than 35 countries and is working to strengthen the capacity of health systems to identify, detect and control TB, particularly MDR and XDR TB.

While much has been accomplished in the fight against this disease, there is still much more to be done if we are to meet the Millennium Development Goal of halting and reversing the spread of TB by 2015. I strongly believe the State Department should continue and expand its commitment to reducing the global burden of TB, and I look forward to working to improve the global response to this and other leading causes of death for the world's poorest communities.

PRN: 2009/252

US State Dept Calls for Release of Political Prisoners in Burma

UN Working Group on Arbitrary Detention Calls for Release of Political Prisoners in Burma. By Robert Wood, Acting Department Spokesman, Office of the Spokesman
US State Dept, Washington, DC, March 24, 2009

The United Nations Working Group on Arbitrary Detention issued opinions today affirming that the continued detentions of Aung San Suu Kyi, Aung Myin, Ko Jimmy, Paw Oo Tun, and Mtay Win Aung are arbitrary and unjustified and that the detention of Aung San Suu Kyi is in contravention of Burma’s own law. The U.N. working group urged the Burmese government to release these individuals immediately.

We are disappointed that the regime continues to ignore the calls of the international community, including the UN Security Council, to release the more than 2,100 political prisoners immediately and unconditionally. We once again urge the Burmese authorities to release all political prisoners and initiate a genuine dialogue that can help move the country forward.
# # #

PRN: 2009/254

USAID Collaborates with Iraqis to Reopen Vocational Training School

USAID Collaborates with Iraqis to Reopen Vocational Training School
USAID, March 24, 2009

BAGHDAD, IRAQ-The U.S. Agency for International Development (USAID), in collaboration with the Mada'in District Council, reopened Salman Pak Industrial School today. The school's mission is to improve Iraqis' skills that will enable them to find a better life through further employment and improved businesses in their communities.

The Iraqi Ministry of Education (MoE) offers technical and vocational training in the last three years of secondary education. There are about 154 industrial vocational education schools in Iraq, according to the ministry. The renovated Salman Pak school has the capacity to train up to 700 students in eight courses: sewing, generator maintenance; welding; automotive repair; plumbing; electrical installation; masonry; and carpentry.

In his remarks at the opening, USAID's country director Christopher D. Crowley said, "The reopening of the school will provide Iraqis with useful skills in a competitive job market and local employers with a qualified labor force that increases their productivity." He also said that he hoped the Iraqis who receive training at the school will contribute to an expanding and diversified private sector and help the Iraqi government in its reconstruction efforts.

Local Iraqi officials identified the renovation of Salman Pak Industrial School as an important community priority, after insurgent-led attacks had destroyed much of the building. The MoE and the Mada'in District Council worked in partnership with the embedded Provincial Reconstruction Team, the U.S. military, and the local security officials to complete the project, which created short-term jobs for unemployed laborers and long-term jobs for the staff.

USAID invested $600,000 in the project, as a part of its country-wide efforts to help create an environment for stability and establish the conditions for long-term development to take hold in violence-affected areas. The Government of Iraq contributed approximately $58,000 in labor to remove and dispose of trash and debris from the grounds, and drain the standing water that had accumulated in the garden. Moving forward, the MoE will maintain the building grounds, provide a full-time guard and hire and retain qualified teachers for the school.

Since 2003, USAID has partnered with Iraq in more than $6 billion of programs; all designed to stabilize communities; foster economic and agricultural growth; and build the capacity of the national, local, and provincial governments to respond to the needs of the Iraqi people.

USAID Announces Newly Approved FC2 Female Condom® to Protect Sexual Health of Women in Developing Countries

USAID Announces Newly Approved FC2 Female Condom® to Protect Sexual Health of Women in Developing Countries
US State Dept, March 24, 2009

WASHINGTON, D.C. - MARCH 24, 2009 - The U.S. Agency for International Development (USAID) has announced that the U.S. Food and Drug Administration (FDA) has approved use of the FC2 Female Condom® (FC2) made by the Female Health Company (FHC). FC2 is a woman-initiated barrier method that helps protect against sexually transmitted infections, HIV/AIDS, and unintended pregnancy. Its design and method of use is similar to its predecessor - FC1 - and studies have shown that FC2 performs in a comparable manner to FC1 in terms of safety, failure rates and acceptability.

The second generation female condom FC2 is made of a synthetic latex. It consists of a soft, loose fitting sheath, a rolled outer ring made of nitrile polymer and one flexible inner ring made of polyurethane and other materials. The nitrile polymer allows FC2 to be produced more economically than FC1. FC2 will also cost distributors about 33 percent less than FC1, depending on the volume of purchases. Like the FC1, the approved label for the FC2 is not reusable.

The FDA approval of FC2 will allow USAID to procure the second-generation female condom at a lower unit cost for U.S.-supported HIV/AIDS prevention and family planning programs around the world.

FC2 is currently available in 77 countries, and is produced at FHC's facilities in Malaysia and India.

The USAID DELIVER PROJECT is preparing a new contract to purchase this product on behalf of USAID. All pending orders in the system for FC1 will be filled until the new FC2 contract is in place. All new orders will be filled with FC2 once the contract is awarded with FHC and registration/importation requirements in the countries where USAID works have been secured.

USAID has long recognized the importance of the female condom and the role it plays in sexual and reproductive health programs worldwide. The Agency has been a committed purchaser of the female condom, and its missions have worked to introduce and integrate the female condom at the country level.

Does Red Meat Increase Risk of Early Death?

Does Red Meat Increase Risk of Early Death? By Ruth Kava, Ph.D., R.D.
American Council on Science and Health, March 24, 2009

Should we be wary of eating red meat? Taken at face value, a new study suggests that might be a good idea -- but a more careful consideration does not.

A report in the March 23 issue of the Archives of Internal Medicine describes a very large study -- over half a million people initially aged fifty-one to seventy-one years -- who reported their diets at the study's outset and were then followed for ten years. Over 300,000 men and over 200,000 women participated in the study. During the follow-up period approximately 48,000 men and 23,000 women died.

The researchers tabulated the numbers who died from cancer, cardiovascular disease, injuries and sudden deaths, and from all other causes. When they divided the subjects according to how much red, processed, and white meat they reported eating at baseline, the researchers found some increases in the risk of death in those reporting the highest intake of red and processed meats compared to those reporting the lowest intake. Conversely, the highest intake of white meat -- chicken, turkey, and fish in various forms -- was associated with a reduced risk of dying of cancer and other causes of death.While the sheer size of the study means it should not be taken lightly, there are reasons to look askance at some of the scary stories now making the rounds that are not really supported by the science.

•First, participants in the study didn't actually measure the amount of foods they ate. While this may not be very important for foods and beverages that are purchased in discrete quantities (e.g., a fast food hamburger or a bottle of soft drink), meat can be purchased and consumed in a wide variety of forms and sizes. Thus, the accuracy of the data depends on how well participants can estimate the quantities of the various foods they consumed, as well as how accurate they are when they recall how often they ate or drank particular items. Neither of these estimates is the most reliable indicator of actual consumption.
•Second, intake of various food items was ascertained only once -- at the start of the study. There is no information about whether or not people changed their diets over the course of the follow-up period -- this may well have had an impact on any disease-diet relationships.
•Third, the increases in risk did not reach the levels that would make most epidemiologists sit up and take notice -- a relative risk of 2 (a 100% increase) or greater. In fact, the increased risk of all deaths in the men in the highest group of red meat intake was 31% and for cancer was 22%. For women, the corresponding increases were 36 and 20%.As the authors concluded, the highest intakes of red and processed meats were associated with "a modest increase in risk of total mortality, cancer, and CVD mortality in both men and women."

At best, this study supports the oft-repeated advice that a healthful diet should be based on moderation, variety, and balance. What's so new about that?

Ruth Kava, Ph.D., R.D., is Director of Nutrition at the American Council on Science and Health (ACSH.org, HealthFactsAndFears.com).

Tuesday, March 24, 2009

Having nightmares about broadening prosperity

What Gives the Alarmists Nightmares? By Greg Pollowitz
Planet Gore/NRO, Mar 23, 2009

Would you believe it's the Nano, a $2000 car produced in India? From the Green, Inc. blog at the NYTimes.com:

People across India have been saving money for months with the goal of purchasing the car, made by Tata Motors, a branch of the Indian conglomerate Tata Group, and which will be priced at about $2,000. For many, it would represent a leap, overnight, from the indignity of two-wheeled motor scooters to the relative luxury of four wheels and a roof.

For millions the car has become emblematic of their aspirations, as Vishal Bhatia, a Green Inc. reader in Mumbai, suggested in his comment the last time I posted about the Nano:

“I’m buying it because it gives a sense of freedom,” Mr. Bhatia wrote, “freedom to go to someplace in uncrumpled clothes, with my deodorant still being able to mask my body odor. But above all to see the look in my family’s eyes when they see it in person.”

Environmentalists, however, have decried the Nano and its low-cost imitators as an impending disaster. Certainly, the seemingly guaranteed success of the Nano may create more traffic and strain on India’s already rickety urban infrastructure.

And although the car may emit fewer greenhouse gases than some two-wheelers, its launch still has troubled officials leading efforts on global climate protection. Last year, the Nobel Prize winner Rajendra Pachauri, who is head of the Intergovernmental Panel on Climate Change, was quoted as saying he was “having nightmares” about the car.

Unbelievable. These guys actually have nightmares about broadening prosperity — and the economic freedom that brings it about.

Monday, March 23, 2009

Iran Has Started an Arms Race in the Mideast and Beyond

Iran Has Started a Mideast Arms Race. By Amir Taheri
States throughout the region are looking to establish nuclear programs.
WSJ, Mar 23, 2009

In the capitals of Western nations, Abdul Qadeer Khan, the man regarded as the father of the Pakistani atom bomb, is regarded as a maverick with a criminal past. In addition to his well-documented role in developing a nuclear device for Pakistan, he helped Iran and North Korea with their nuclear programs.

But since his release from house arrest a month ago, Mr. Khan has entertained a string of official visitors from across the Middle East. All come with messages of sympathy; and some governments in that region are looking to him for the knowledge and advice they need to fast track their own illicit nuclear projects.

Make no mistake: The Middle East may be on the verge of a nuclear arms race triggered by the inability of the West to stop Iran's quest for a bomb. Since Tehran's nuclear ambitions hit the headlines five years ago, 25 countries -- 10 of them in the greater Middle East -- have announced plans to build nuclear power plants for the first time.

The six-nation Gulf Cooperation Council (Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates [UAE] and Oman) set up a nuclear exploratory commission in 2007 to prepare a "strategic report" for submission to the alliance's summit later this year. But Saudi Arabia is not waiting for the report. It opened negotiations with the U.S. in 2008 to obtain "a nuclear capacity," ostensibly for "peaceful purposes."

Egypt also signed a nuclear cooperation agreement, with France, last year. Egyptian leaders make no secret of the fact that the decision to invest in a costly nuclear industry was prompted by fears of Iran. "A nuclear armed Iran with hegemonic ambitions is the greatest threat to Arab nations today," President Hosni Mubarak told the Arab summit in Riyadh, Saudi Arabia two weeks ago.

Last November, France concluded a similar nuclear cooperation accord with the UAE, promising to offer these oil-rich lands "a complete nuclear industry." According to the foreign ministry in Paris, the French are building a military base close to Abu Dhabi ostensibly to protect the nuclear installations against "hostile action," including the possibility of "sensitive material" being stolen by terrorist groups or smuggled to Iran.

The UAE, to be sure, has signed a cooperation agreement with the U.S. forswearing the right to enrich uranium or produce plutonium in exchange for American nuclear technology and fuel. The problem is that the UAE's commercial hub, the sheikhdom of Dubai, has been the nerve center of illicit trade with Iran for decades, according to Western and Arab intelligence. Through Dubai, stolen U.S. technology and spent fuel needed for producing raw material for nuclear weapons could be smuggled to Iran.

Qatar, the smallest GCC member by population, is also toying with the idea of creating a nuclear capability. According to the Qatari media, it is shopping around in the U.S., France, Germany and China.

Newly liberated Iraq has not been spared by the new nuclear fever. Recall the history. With help from France, Iraq developed a nuclear capacity in the late 1970s to counterbalance its demographic inferiority vis-à-vis Iran. In 1980, Israel destroyed Osirak, the French-built nuclear center close to Baghdad, but Saddam Hussein restored part of that capacity between 1988 and 1991. What he rebuilt was dismantled by the United Nations' inspectors between 1992 and 2003. But with Saddam dead and buried, some Iraqis are calling for a revival of the nation's nuclear program as a means of deterring "bullying and blackmail from the mullahs in Tehran," as parliamentarian Saleh al-Mutlaq has put it.

"A single tactical nuclear attack on Basra and Baghdad could wipe out a third of our population," a senior Iraqi official told me, on condition of anonymity. Since almost 90% of Iraqis live within 90 miles of the Iranian border, the "fear is felt in every town and village," he says.

Tehran, meanwhile, is playing an active part in proliferation. So far, Syria and Sudan have shown interest in its nuclear technology, setting up joint scientific committees with Iran, according to the official Islamic Republic News Agency. Iranian media reports say Tehran is also setting up joint programs with a number of anti-U.S. regimes in Latin America, notably Venezuela, Bolivia, Nicaragua and Ecuador, bringing proliferation to America's backyard.

According to official reports in Tehran, in 2006 and 2007 the Islamic Republic also initialed agreements with China to build 20 nuclear-power stations in Iran. The first of these stations is already under construction at Dar-Khuwayn, in the oil-rich province of Khuzestan close to the Iraqi border.

There is no doubt that the current nuclear race in the Middle East is largely prompted by the fear of a revolutionary Iran using an arsenal as a means of establishing hegemony in the region. Iran's rivals for regional leadership, especially Turkey, Egypt and Saudi Arabia, are aware of the propaganda appeal of the Islamic Republic's claim of being " the first Muslim superpower" capable of defying the West and rivaling it in scientific and technological fields. In that context, Tehran's development of long-range missiles and the Muslim world's first space satellite are considered political coups.

Mohamed al Quwaihis, a member of Saudi Arabia's appointed parliament, the Shura Council, warns of Iran's growing influence. Addressing the Shura Council earlier this month, he described Iranian interferences in Arab affairs as "overt," and claimed that Iran is "endeavoring to seduce the Gulf States, and recruit some of the citizens of these countries to work for its interests."

The Shura devoted a recent session to "the Iranian threat," insisting that unless Tehran abandoned its nuclear program, Saudi Arabia should lead the Arabs in developing their own "nuclear response." The debate came just days after the foreign ministry in Riyadh issued a report identifying the Islamic Republic's nuclear program as the "principal security threat to Arab nations."

A four-nation Arab summit held in the Saudi capital on March 11 endorsed that analysis, giving the green light for a pan-Arab quest for "a complete nuclear industry." Such a project would draw support from Pakistan, whose nuclear industry was built with Arab money. Mr. Khan and his colleagues have an opportunity to repay that debt by helping Arabs step on a ladder that could lead them to the coveted "threshold" to becoming nuclear powers in a few years' time.

Earlier this month, Mohamed ElBaradei, the retiring head of the International Atomic Energy Agency, warned that the Nuclear Nonproliferation Treaty has become a blunt instrument in preventing a nuclear arms race. Meanwhile, the U.S., France, Russia and China are competing for nuclear contracts without developing safeguards to ensure that projects which start as peaceful undertakings are not used as cover for clandestine military activities.

The Obama administration should take the growing threat of nuclear proliferation seriously. It should try to provide leadership in forging a united response by the major powers to what could become the world's No. 1 security concern within the next few years.

Mr. Taheri's new book, "The Persian Night: Iran Under The Khomeinist Revolution," is published by Encounter Books.

Federal President's Latest Appointments with the FDA - Joshua Sharfstein

Obama's Latest Troubling Appointments with the FDA. By Jeff Stier, Esq.
American Council on Science and Health, Wednesday, March 18, 2009

The president tapped into broadly held public sentiment in his radio address on Saturday, calling for reform at the Food and Drug Administration. But understanding why his assertion that the government can ensure "the medicines we take...don't cause harm" is simplistic can also help us understand why his choice for the person who will have that impossible responsibility is folly.
In naming Dr. Joshua Sharfstein as deputy commissioner, the president decided that absolute drug safety should come first--even at the cost of the drugs' availability to sick patients. That doesn't bode well for our chances of getting the new medications needed to keep pace with our enviable improvements in quality of life and life expectancy.

Let's be clear: There is no such thing as a "safe" medication. All medications come with benefits and risks. It is the role of a physician to work with the patient to evaluate each person's unique circumstances to decide whether the benefits of a drug outweigh the risks. That calculation is different for everyone and, whenever possible, should be made in the doctor's office rather than a federal agency. I doubt whether the president or his new appointment agree.

An evaluation of his work makes it clear where Dr. Sharfstein falls on the spectrum between those who see the companies he is about to regulate as part of the problem or part of the solution. Dr. Sharfstein's relatively brief career is rich with examples of criticism of pharmaceutical companies--including his stint working for anti-pharmaceutical crusader Sidney Wolfe--plus support for safe-seeming but failed policies and initiatives that grab adoring headlines but do little to fix serious problems.

His shortsighted, partisan and perversely populist "attack big pharma" approach won't work at this critical time when major reform is in order. Change of this type calls for the ability to bring various and sometimes opposing stakeholders together.

Sharfstein, only 39, has a long history of antagonizing the pharmaceutical industry. Consider the example recently reported online by Scientific American, based on an October 1992 report in the Harvard Crimson, written when Sharfstein was a first-year medical student. He led a student campaign urging classmates to return textbooks donated by a pharmaceutical company.

Sharfstein and his group wrote that the texts "are paid for by consumers in the form of higher drug prices. Accepting gifts from companies violates an ethical obligation to our future patients." They set up a drop-box where, like a gun amnesty program, students were guilted to return the books. Fortunately, at the time of the Crimson report, only eight books had been returned. (Sharfstein told the Crimson that more had been returned, but some had been stolen from the box.) Even back then, it seems, Dr. Sharfstein was way to the left of his colleagues.

It is not fair to predict an official's approach to issues based only on his activism in school. But young Dr. Sharfstein's "us vs. them" view toward the pharmaceutical industry was not an outlier--it was a template for his future career. He went on to work for Rep. Henry Waxman, D-Calif., who personifies the divisive approach, which seeks to persecute innovative pharmaceutical companies.

I talked with Dr. Sharfstein while he was working on Rep. Waxman's legislation that would give the FDA authority to regulate tobacco. I tried to encourage him to be open to the concept of harm reduction for smokers. The approach would allow makers of smokeless tobacco to explain that their product was less harmful than cigarettes. Dr. Sharfstein impressed me with his familiarity of the evidence from Sweden supporting this way to help smokers reduce their risk from tobacco.

What startled me was that despite his knowledge of the facts, he was still ardently against it. Rather than acknowledge the complexity of the issues and the need to weigh the pros and cons, he dismissed the approach out of hand, choosing instead the "quit or die" approach that has been failing smokers for years. I believe his rigid ideology overshadowed his willingness to support a different, but scientifically valid, way of thinking about the country's leading public health problem.

During his tenure as commissioner of health in Baltimore, he continued to grab headlines with initiatives that drew him praise but failed to solve serious problems. Take for instance his approach to a real but diminishing public health problem: childhood lead poisoning.

Dr. Sharfstein campaigned for the notion that there is "no safe level" of exposure to lead. Yet there is little scientific support for this view. Citizens would have been better served had the commissioner placed his emphasis on the scientifically sound goal of eliminating chipping and peeling lead paint in Baltimore's inner city.

Twenty years ago, nearly a quarter of the children tested in Baltimore had elevated blood lead levels (a much lower level than that considered "lead poisoned"). Today, only 3.5% of the children tested have that level. Similar improvements across the country can be traced to the removal of lead from gasoline and interior paint over a generation ago. There is no evidence that extremely low levels of lead contribute to lead poisoning.

Dr. Sharfstein's misguided approach is the type of distorted policymaking that brought us the hugely unpopular Consumer Produce Safety Improvement Act (CPSIA), championed by his former boss, Rep. Waxman, which today is putting thousands of people out of work, causing stores to throw away safe merchandise and not making anyone any safer. This history sheds a troubling light on how Dr. Sharfstein would deal with today's most pressing and controversial issues relating to the complex and sensitive task of regulating pharmaceuticals.

The job, especially now, takes nuance and the ability to weigh benefits and risks. And it requires a willingness to put partisan approaches aside so the agency can endorse the best available science. Certainly Dr. Sharfstein has tipped his hand to how he would deal with calls by activists to forbid free drug samples to consumers. Would he allow FDA panels to benefit from top experts? Or would he consider them bias if they ever worked for industry. Would he hold anti-industry scientists to the same tough standards?

His record indicates he would blacklist scientists who were capable enough to be hired by companies and leave panels skewed with scientists who were either not competent enough to get jobs--or so anti-industry that they refused to work for them in the first place. This would hamper the agency's ability to evaluate complex science above the fray of politics. A deputy commissioner so invested against the success of the pharmaceutical industry is poised to fail consumers.

Perhaps Dr. Sharfstein's reputation for stridency explains the reported move to split the agency--one part headed by Dr. Margaret Hamburg, who will serve as commissioner for food and tobacco (if the agency gets control of it) and one part with Dr. Sharfstein as deputy commissioner fully responsible for pharmaceutical issues. This allows Dr. Sharfstein to act as FDA commissioner with regard to medicine, while circumventing a Senate confirmation, where senators who don't share his vitriol for drugmakers were prepared to ask him tough questions about his views. So much for a new, transparent way of doing the people's business in Washington.

In his Inaugural address, the president promised to "restore science to its rightful place." With this appointment, he has taken a step in the wrong direction.

Jeff Stier is an associate director of the American Council on Science and Health.

Populist Anger Is Hard to Contain - The president could have spoken more responsibly about AIG

Populist Anger Is Hard to Contain. By SUZANNE GARMENT
The president could have spoken more responsibly about AIG.
WSJ, Mar 23, 2009

Last week's collective screech about the AIG bonuses should leave the participants shaken, the way you feel when you've done something really stupid in traffic and realize you could have killed yourself. Populism is dangerous. The AIG death threats gave us an inkling of just how dangerous. A political leader can't simply stir up a little bit of populism, then turn it off when it gets inconvenient -- not even a leader as eloquent as President Barack Obama.

When Edward Liddy, AIG's government-appointed CEO, made Treasury Secretary Tim Geithner aware that bonuses would be paid to employees of AIG's Financial Products unit -- which had virtually destroyed AIG, prompting a $173 billion bailout -- the administration didn't want to be the chief target of the criticism that would follow. It decided to get out in front, as chief criticizer. First, White House economist Larry Summers said that AIG's behavior was "outrageous" but that the bonus contracts could not be abrogated. "We are a nation of laws," he said, and an administration "can't govern out of anger."

Some presidential advisers thought the "outrageous" part wasn't plain enough. So the next day Mr. Obama angrily denounced AIG's "recklessness and greed" and said he would "pursue every single legal avenue" to block the bonuses.

Mayhem followed. The calls and emails poured in. Virtually every member of Congress assured the public of his or her personal anger and disgust. Last Wednesday, Mr. Liddy appeared before a House subcommittee as a prop for a Congressional Day of Rage. At the end of the week the House passed its 90% surtax on the bonuses. By then, there were protesters in the streets, threats of bodily harm to AIG employees, and beefed-up security at their homes. A legislative clawback of the bonuses may now be unnecessary. The employees have been asked to give them back, which suddenly seems like the best of a set of bad options, law or no law.

Within hours after Mr. Obama's initial anger announcement, the White House started trying to turn down the temperature -- without giving up its position at the head of the outrage parade. "I don't want to quell anger," Mr. Obama said. "I think people are right to be angry. I'm angry. What I want us to do, though, is channel our anger in a constructive way." At week's end, with the Senate working on its own clawback bill, White House Press Secretary Robert Gibbs said the president would judge any such bill according to whether it adequately reflected "taxpayer anger and frustration" and whether it maintained "our ability to stabilize the financial system and ensure that credit flows."

These statements are clever and ridiculous. You can't "channel" this kind of anger, let alone constructively. Populist anger is often illiberal and indiscriminate. The post-Civil War populist movement brought needed changes but also disenfranchised African-Americans in the South through Jim Crow laws and physical terror. As historian Richard Hofstadter noted in his famous book "The Age of Reform" (1955), the connection was not accidental. Further, Hofstadter cautioned, it is hard for political leaders to see the moment at which a populist outburst "has passed beyond the demand for necessary reforms" to "the expression of a resentment so inclusive" that it attacks the capacity of society to sustain values such as the rule of law.

It is one of the miracles of American politics that this type of misjudgment hasn't occurred more often and that populist excess has not done more damage. We should not take the miracle for granted.

Presidential adviser David Axelrod, explaining why Mr. Obama supplanted Mr. Summers's early statement about the bonuses with an angrier one, said that while Mr. Summers had to weigh the effect of the government's actions on its ability to manage the financial system, "the president's job is to speak for the country."

That is deeply wrong. Precisely because the president speaks for the country, it is his job, and not just Mr. Summers's job, to weigh the economic consequences of his words. The president's job is not to express populist anger but to address the anger and talk sense to it.

Ms. Garment, a tax attorney, is the author of "Scandal: The Culture of Mistrust in American Politics" (Random House, 1991).

Treasury Sec Tim Geithner: My Plan for Bad Bank Assets

My Plan for Bad Bank Assets. Treasury Sec Tim Geithner
The private sector will set prices. Taxpayers will share in any upside.
WSJ, Mar 23, 2009

The American economy and much of the world now face extraordinary challenges, and confronting these challenges will continue to require extraordinary actions.

No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk. Those decisions have caused enormous suffering, and much of the damage has fallen on ordinary Americans and small-business owners who were careful and responsible. This is fundamentally unfair, and Americans are justifiably angry and frustrated.

The depth of public anger and the gravity of this crisis require that every policy we take be held to the most serious test: whether it gets our financial system back to the business of providing credit to working families and viable businesses, and helps prevent future crises.

Over the past six weeks we have put in place a series of financial initiatives, alongside the Recovery and Reinvestment Program, to help lay the financial foundation for economic recovery. We launched a broad program to stabilize the housing market by encouraging lower mortgage rates and making it easier for millions to refinance and avoid foreclosure. We established a new capital program to provide banks with a safeguard against a deeper recession. By providing confidence that banks will have a sufficient level of capital even if the outlook is worse than expected, more credit will be available to the economy at lower interest rates today -- making it less likely that the more negative economy they fear will take place.

We started a major new lending program with the Federal Reserve targeted at the securitization markets critical for consumer and small business lending. Last week, we announced additional actions to support lending to small businesses by directly purchasing securities backed by Small Business Administration loans.

Together, actions over the last several months by the Federal Reserve and these initiatives by this administration are already starting to make a difference. They have helped to bring mortgage interest rates near historic lows. Just this month, we saw a 30% increase in refinancing of mortgages, which means millions of Americans are taking advantage of the lower rates. This is good for homeowners, and it's good for the economy. The new joint lending program with the Federal Reserve led to almost $9 billion of new securitizations last week, more than in the last four months combined.

However, the financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.

Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.

This program to address legacy loans and securities is part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

Moving forward, we as a nation must work together to strike the right balance between our need to promote the public trust and using taxpayer money prudently to strengthen the financial system, while also ensuring the trust of those market participants who we need to do their part to get credit flowing to working families and businesses -- large and small -- across this nation.

This requires those in the private sector to remember that government assistance is a privilege, not a right. When financial institutions come to us for direct financial assistance, our government has a responsibility to ensure these funds are deployed to expand the flow of credit to the economy, not to enrich executives or shareholders. These provisions need to be designed and applied in a way that does not deter the participation by the private sector in generally available programs to stabilize the housing markets, jump-start the credit markets, and rid banks of legacy assets.

We cannot solve this crisis without making it possible for investors to take risks. While this crisis was caused by banks taking too much risk, the danger now is that they will take too little. In working with Congress to put in place strong conditions to prevent misuse of taxpayer assistance, we need to be very careful not to discourage those investments the economy needs to recover from recession. The rule of law gives responsible entrepreneurs and investors the confidence to invest and create jobs in our nation. Our nation's commitment to pursue economic policies that promote confidence and stability dates back to the very first secretary of the Treasury, Alexander Hamilton, who first made it clear that when our government gives its word we mean it.

For all the challenges we face, we still have a diverse and resilient financial system. The process of repair will take time, and progress will be uneven, with periods of stress and fragility. But these policies will work. We have already seen that where our government has provided support and financing, credit is more available at lower costs.

But as we fight the current crisis, we must also start the process of ensuring a crisis like this never happens again. As President Obama has said, we can no longer sustain 21st century markets with 20th century regulations. Our nation deserves better choices than, on one hand, accepting the catastrophic damage caused by a failure like Lehman Brothers, or on the other hand being forced to pour billions of taxpayer dollars into an institution like AIG to protect the economy against that scale of damage. The lack of an appropriate and modern regulatory regime and resolution authority helped cause this crisis, and it will continue to constrain our capacity to address future crises until we put in place fundamental reforms.

Our goal must be a stronger system that can provide the credit necessary for recovery, and that also ensures that we never find ourselves in this type of financial crisis again. We are moving quickly to achieve those goals, and we will keep at it until we have done so.

Mr. Geithner is the U.S. Treasury secretary.

Sunday, March 22, 2009

Red Ink Red Alert

Red Ink Red Alert. WaPo Editorial
A congressional report should give the president pause.
WaPo, Sunday, March 22, 2009; A18

THE NEW estimates by the Congressional Budget Office showing a federal deficit of 13.1 percent of gross domestic product for the current budget year, which began Oct. 1, are neither surprising nor particularly alarming, though it's larger than the 12.3 percent foreseen by the White House. Both are stunning numbers -- far and away the largest deficit ratio since World War II. But spending rises in recessions and tax revenue falls, and we're in a big recession. It would be counterproductive to balance the budget in this historic downturn. The huge deficit includes $700 billion for a necessary rescue of the financial sector. Nor is it shocking that the CBO forecasts a deficit of 9.6 percent of GDP in fiscal 2010 if Congress enacts President Obama's $3.6 trillion budget plan -- a deficit also much larger than what the president predicted. The difference largely reflects the CBO's economic forecast, which is more up-to-date and, hence, gloomier than the one Mr. Obama relied on.

What is scary, though, is the CBO's depiction of the remaining years of the president's term, and the half-decade after that -- if his budget is enacted. In none of those years would the federal deficit fall below 4.1 percent of GDP -- and it would be stuck at 5.7 percent of GDP in 2019. This is in stark contrast to the president's projection: that his plan would get the deficit down to about 3 percent or so of GDP by that time. It's true, as Peter R. Orszag, director of the Office of Management and Budget, told us, that the CBO's forecasts are subject to large margins of error, especially in the out years. And Mr. Orszag is correct to point out that, even under the CBO's scenario, the deficit as a share of GDP would decline by half under Mr. Obama.

Still, it's less significant to meet that target than to keep the deficits within sustainable bounds, and few experts believe that years of deficits above 4 percent of GDP are consistent with long-term economic vitality. If the CBO's numbers are subject to revision on account of changing circumstances, then so are the administration's; and those were based on very rosy economic assumptions to begin with. Very little of the claimed deficit reduction in the Obama plan comes from policy changes; it results more or less automatically from the assumed end of the recession, as well as by claiming savings in reducing operations in Iraq and Afghanistan from unrealistically high forecasts. Yet both the White House and House Speaker Nancy Pelosi said that the CBO report is no reason to revise the president's ambitious tax and spending blueprint.

Mr. Obama should treat the CBO report as an incentive to fulfill his repeated promises, during and after the campaign, to make hard choices on the budget. Until now he has offered a host of new spending -- on health care, middle-class tax cuts, education and alternative energy -- without calling for much sacrifice from anyone except the top 5 percent of the income scale. Though his emphasis on controlling health-care costs is welcome, it's not a substitute for reforming the entitlement programs that are the drivers of long-term fiscal crisis, Medicare and Social Security. Yet the president has offered no plan for either and no road map even for achieving a plan. Several members of his own party in the Senate have been expressing doubts about his strategy, and the CBO report will lend credibility to their concerns. He should heed them.

How the U.S. can help revitalize economies in Pakistan and Afghanistan

Plowshares for Peace. WaPo Editorial
How the U.S. can help revitalize economies in Pakistan and Afghanistan
WaPo, Sunday, March 22, 2009; page A18

AS THE Obama administration formulates its strategy for Pakistan and Afghanistan, pretty much everyone agrees that spurring the economy in both countries -- creating jobs -- is key to defusing militancy. The usual prescription is more foreign aid, which is sure to figure in any new plan. But what doesn't always get acknowledged in these discussions is that such aid often doesn't do much good. The United States wasted billions of dollars in Iraqi reconstruction aid, and given the dangerous environment -- which discourages inspection and monitoring -- you can expect a rerun in Afghanistan and Pakistan. A more effective way to boost both economies would be to allow them to export their products tariff-free into the United States. But that idea arouses the enmity of U.S. labor unions, which means that it's not going to get far in a Democratic Congress.

Enter Rep. Chris Van Hollen, Montgomery County Democrat and member of the House leadership, with a practical alternative. Mr. Van Hollen, with co-sponsors, has introduced legislation to create "reconstruction opportunity zones" within both countries. Certain products, including some (not all) textiles, produced within the zones would enjoy duty-free access to the U.S. market for 15 years. This would encourage investment by local businessmen, who best know the terrain, and create jobs. There's no better formula for discouraging Taliban recruitment.

It's not a magic formula, of course. The investment areas have to be drawn widely enough to make the prospect of investment realistic; if you limit them to the most intense battle zones, you're not going to see many jobs created. The bigger they are, though, the likelier the bill will arouse union opposition, so the politics are tricky. Mr. Van Hollen and his co-sponsors -- including Reps. Sander M. Levin (D-Mich), Peter Hoekstra (R-Mich.) and Mark Steven Kirk (R-Ill.) -- have tried to find the sweet spot, and their bill also insists that any factories in the zones meet core international standards in their treatment of workers.

Maybe the strongest argument for the opportunity zones is that there is no down side; the worst that could possibly happen is they don't trigger much investment. But they would immediately provide a signal of U.S. commitment -- the governments of both countries strongly support the idea -- and they could have a substantial positive effect reasonably quickly, at almost no cost to the U.S. Treasury. Congress and the administration should get behind this idea.

Executives Detail Card Check Legislation Compromise

Executives Detail Labor Bill Compromise. By Alec MacGillis
Washington Post, Sunday, March 22, 2009; A02

As business and labor gird for battle over legislation that would make it easier for workers to organize, the debate could be transformed by a "third way" proposed by three companies that like to project a progressive image: Costco, Starbucks and Whole Foods.

Like other businesses, the three companies are opposed to two of the Employee Free Choice Act's components -- a provision that would allow workers to form a union if a majority sign pro-union cards, without having to hold a secret-ballot election, and one that would impose binding arbitration when employers and unions fail to reach a contract after 120 days.

But the companies' chief executive officers say they also recognize that just opposing the legislation, commonly called "card check," is not enough because of the widespread perception in Democrat-dominated Washington that there is not a level playing field between labor and business. So the CEOs have come up with ideas they hope will form the basis of new legislation.

Their proposal would maintain management's right to demand a secret-ballot election and would leave out binding arbitration. The proposal would keep the third main element of card check -- toughening the penalties for companies that retaliate against workers before union elections or refuse to engage in collective bargaining. But it would also toughen penalties for union violations, and it would make it easier for businesses to call elections to try to decertify a union.

To address labor's concern that businesses intimidate workers before elections, it would set a fixed period in which an election must be held, limiting the delays that give employers time to exert pressure. The proposal does not specify what the time period should be.

The proposal would also provide unions equal access to workers before elections -- for instance, by allowing organizers to address workers on a lunch break in the company cafeteria just as management can.

"We wanted to see what we can do to come up with a compromise position that is going to address the concerns of labor and also protect the sanctity of the collective bargaining process and secret ballot," said Costco Wholesale chief executive James D. Sinegal.

Starbucks chief executive Howard Schultz cast the proposal in more defensive terms. "The way the wind is blowing, we're heading toward a bill that is not the right approach," he said. "My responsibility is to not be a bystander but to offer a voice of reason, offer a more positive alternative that levels the playing field."

The effort is being led in Washington by Lanny Davis, a former special counsel to President Bill Clinton. Davis said he had approached about 20 Senate offices and gotten an overwhelmingly encouraging response. The Employee Free Choice Act has majority support in both chambers, but there are signs it may have trouble getting a filibuster-proof 60 votes in the Senate, where several centrist Democrats who previously supported it are expressing reservations.

Sen. Mark Pryor (D-Ark.), a centrist who is ambivalent about card check, praised the companies' proposal. "I appreciate a good-faith effort that could result in a reasonable compromise on what has become a highly polarizing matter," he said.

Davis said he thought that the proposal would intrigue President Obama, who as a senator was a co-sponsor of the card-check bill in 2007 but signaled in an interview before his inauguration that he was also open to other proposals to help organized labor. "This is consistent with President Obama's overall approach of avoiding polarized positions and looking for third-way ideas," Davis said.

The business lobby has been warning against any moves to tweak card check just enough to give centrists cover to support it. And word that a compromise is circulating from three "progressive" companies prompted business groups to warn yesterday against premature compromise.

But it is possible that the proposal will generate even greater opposition among unions and their supporters in Congress. Some business groups say they are open to limited changes in organizing rules, separate from card check -- a position not so far from what the three companies propose.

Labor unions, though, are adamant that workers be able to choose to organize via card check so they can avoid employer intimidation before elections. They say binding arbitration is needed because so many companies refuse to bargain -- nearly half of new unions never even get a contract.

The three CEOs are at odds with those planks. Whole Foods Market chief executive John Mackey said that binding arbitration is "not the way we normally do things in the United States" and that allowing workers to organize without a secret ballot "violates a bedrock principle of American democracy."

And the CEOs also do not share the labor movement's underlying belief that the decline of organized labor has contributed to income inequality and the economy's current imbalance. "That so few companies are unionized is not for a lack of trying but because [unions] are losing elections -- workers aren't choosing to have labor representation," Mackey said. "I don't feel things are worse off for labor today."

Of the three companies, only Costco has a substantial minority of employees that are unionized -- about a fifth of its hourly employees belong to the Teamsters, with whom it has good relations. Starbucks and Whole Foods have resisted most unionizing efforts.

Giving organizers the ability to use card check, Schultz said, would lead to a slew of separate bargaining units at a company like his, leading to "havoc and significant cost and disruption." Mackey had an even grimmer view. "Armed with those weapons, you will see unionization sweep across the United States and set workplaces at war with each other," he said. "I do not think it would be a good thing."

Saturday, March 21, 2009

President Obama's health benefits tax plans

Vindicating McCain. WSJ Editorial
WSJ, Mar 21, 2009

The worst-kept secret on Capitol Hill is that Democrats have always planned to tax health benefits to pay for their "universal" health-care plans. Now White House aides are whispering that they're also open to the idea. Maybe they will all now apologize to John McCain for trashing his proposal to do the same thing in the Presidential campaign.

Democrats are desperately searching for the $1.2 trillion and more they'll need to subsidize middle-class health coverage. With deficits already at epic levels, more spending is politically a harder sell. So they're now circling the tax deduction that employers receive to offer insurance to their workers for the same reason that Willie Sutton robbed banks, because that's where the money is.

Most likely, Democrats will cap the exclusion by income or cost of the health plan, so that those with the most gold-plated benefits pay more for the privilege. The Congressional Budget Office estimates that a ceiling at the 75th percentile of current levels would generate $452 billion over 10 years.

But hold on. John McCain also wanted to reform this tax break, which goes only to business. Individuals don't get the same tax break if they buy insurance themselves. Mr. McCain proposed to gradually replace the workplace deduction with a refundable tax credit available to all Americans, regardless of where they acquired their coverage. Mr. Obama attacked him ruthlessly for it.

"And this is your plan, John," he said at one debate. "For the first time in history, you will be taxing people's health-care benefits." Mr. Obama added that the McCain proposal was "radical," "the biggest middle-class tax increase in history," "out of line with our basic values" and that "the choice you'll have is having your employer no longer provide you health care." Combined with heavy advertising and Mr. McCain's inability to defend his own ideas, these distortions were highly effective.

In a deeply cynical turnabout, the White House now says a tax on employer benefits is acceptable as long as someone else proposes it. We suppose anyone would be embarrassed to endorse a fundamental insight that he once claimed was vile and destructive.

The reality is that the employer-based tax deduction is the original sin of our health-care system. Particularly indefensible is the coverage gap it creates between those who receive it from their employers and those who pay (or can't afford to pay) for their own policies with after-tax dollars. A universal deduction or credit would restore tax parity -- and gradually stimulate the demand for new, less expensive insurance where consumers, not their bosses, are in charge.

This relic of the World War II era has also left us with a health-care financing "system" that only a central planner could love, with neither a functional price mechanism nor the capacity to recognize value. The employer-exclusive deduction has created what is essentially a giant money laundering operation, an endless cycle of third parties lacking any direct stake in controlling costs elsewhere -- when they're not profiting from the waste.

Capping the open-ended tax exclusion is a perfectly sensible idea, which would discipline the excess health insurance that contributes to rising health spending. The problem is that reducing the exclusion means withdrawing a benefit, which is easy to demagogue, as Mr. Obama showed in 2008. It is also unpopular among unions, which have often secured Cadillac health plans in labor contracts. But we suspect the unions will come around if they get the taxpayers to pay for health care instead.

The deeper problem is that Democrats don't want to create a new private market for individual health insurance. Their goal in reducing the employer tax deduction is to apply the revenue to finance a new "public option," a subsidized program modeled after Medicare and open to the middle class that would crowd out private insurers. Another idea is to provide the tax subsidy only to businesses that comply with a new federally mandated benefits package.

The almost certain long-run outcome of these efforts is the total nationalization of health care. Anyone who believed Mr. Obama when he said that under his plan "you can keep your health insurance, keep your choice of doctor, keep your plan" should think twice. Everything else he said during his campaign is obviously subject to change, as John McCain can attest.

Governor: Why South Carolina doesn't want 'stimulus'

Why South Carolina doesn't want 'stimulus'. By Mark Sanford
WSJ, Mar 21, 2009

Columbia, S.C.

America's states are laboratories of democracy. They are both affected by, and relevant to, the larger national debate. What we've found in our own corner of the country is that carrying a substantial debt load limits our options when it comes to running government.

A recent report by the American Legislative Exchange Council ranked us 47th worst in the nation for annual debt service as a percentage of tax revenue. Our state dedicates nearly 11% of its annual tax revenue to paying debt. On top of that, South Carolina has another $20 billion in unfunded, long-term political promises for pensions and other liabilities. The state budget has already been cut four times in recent months as the national economic downturn has impacted South Carolina and driven down tax revenue.

President Barack Obama recently signed a "stimulus" bill that will spend about $2 billion through "programmatic means" in South Carolina. In other words, the federal government will put this money directly into existing funding formulas and programs such as Medicaid. But there is an additional $700 million that I as governor have influence over, and it is the disposition of this money that has drawn the national spotlight to South Carolina.

Here's the background: Before the stimulus bill passed, I asked for states not to be bailed out. After it was signed into law, I said that a state bailout would create more problems than it solved, and that we shouldn't spend money we don't have. That debate was lost, so I looked for a reasonable middle ground. I asked the president for his support in using the $700 million to pay down state debt.

If we're going to spend money we don't have at the federal level, it becomes all the more important that our state balance sheet is in good order -- particularly if this is a protracted downturn. But many people do not realize that the stimulus money runs out in 24 months -- at which point South Carolina will be forced to find a new source of funding to sustain the new level of spending, or to make sharp cuts. Sure, I could kick the can down the road; in two years, I'll be safely out of office. But it would be irresponsible.

If South Carolina could use stimulus money to pay down debt, in two years we will be able to spend, cut taxes or invest even if the federal government can no longer provide more money -- not a remote possibility. In fact, paying debt related to education would free up over $162 million in debt service in the first two years and save roughly $125 million in interest payments over the next 13 years -- just as paying off a family's mortgage early frees up money for other uses.

When you're in a hole, the first order of business is stop digging. South Carolina is in a hole, and it's not a shallow one. Spending stimulus money on ongoing programs would mean 10% of our entire state budget would be paid for with one-time federal funds -- the largest recorded level in state history.

Also, spending stimulus money will delay needed state restructuring. General Motors recently found itself in a similar spot. It needs to be restructured if it is to prosper, but a federal bailout enabled it to put off hard decisions. Likewise, taking federal stimulus money will only postpone changes essential to South Carolina's prosperity. Though well-intended, it forestalls hard choices we must make.

One of Mr. Obama's central campaign themes was his pledge to do away with politics of the past. In his inaugural address, he proclaimed "an end to the petty grievances and false promises, the recriminations and worn-out dogmas, that for far too long have strangled our politics."

This idea connected with millions of voters, myself included. I've always believed ideas should rise and fall on their merits. In fact, I saw such historical significance in his candidacy and the change he spoke of that I published an op-ed on it before South Carolina's presidential primary last year. It was not an endorsement, but it did note the historic nature of his candidacy and the potential positive change in tone it represented. That potential may now be disappearing.

Last week I reached out to the president, asking for a federal waiver from restrictions on stimulus money. I got a most unusual response. Before I even received an acknowledgment of the request from the White House, I got word that the Democratic National Committee was launching campaign-style TV attack-ads against me for making it.

Is this the new brand of politics we were promised? Instead of engaging with me and other governors on the merits of our dissent, I am to be attacked in television ads? In the end, I just don't believe a problem created by too much debt will be solved by piling on more debt. This doesn't strike me as an unreasonable or extremist position.

Nevertheless, the White House declined my request for a waiver yesterday afternoon. That's unfortunate. But in coming months we'll continue advancing the debate at the state level about the merits of debt repayment. The fact remains that while we'd all like to spend unlimited dollars on the very real needs that exist in our state, we must spend in the context of what is sustainable.

Mr. Sanford, a Republican, is the governor of South Carolina.

Nobel Prize Becker: Now Is No Time to Give Up on Markets

Now Is No Time to Give Up on Markets. Gary Becker, the winner of the 1992 Nobel Prize in Economic Sciences
WSJ, Mar 21, 2009

"What can we do that would be beneficial? [One thing] is lower corporate taxes and businesses taxes and maybe taxes in general. Particularly, you want to lower the tax on capital so you raise the after-tax return to investing and get more investing going on."

Gary Becker, the winner of the 1992 Nobel Prize in Economic Sciences, is in New York to speak to a special meeting of the Mont Pelerin Society on the global meltdown. He has agreed to sit down to chat with me on the subject of his lecture.

Slumped in a soft chair in a noisy hotel coffee lounge, the 78-year-old University of Chicago professor is relaxed and remarkably humble for a guy who has achieved so much. As I pepper him with the economic and financial riddles of our time, I am impressed by how many times his answers, delivered in a pronounced Brooklyn accent, include an "I think" and sometimes even an "I don't know the answer to that." It is a reminder of why he is so highly valued. In contrast to a number of other big-name practitioners of the dismal science, he is a solid empiricist genuinely in search of answers -- not the job as the next chairman of the Federal Reserve. What he sees is what you get.

What Mr. Becker has seen over a career spanning more than five decades is that free markets are good for human progress. And at a time when increasing government intervention in the economy is all the rage, he insists that economic liberals must not withdraw from the debate simply because their cause, for now, appears quixotic.

As a young academic in 1956, Mr. Becker wrote an important paper against conscription. He was discouraged from publishing it because, at the time, the popular view was that the military draft could never be abolished. Of course it was, and looking back, he says, "that taught me a lesson." Today as Washington appears unstoppable in its quest for more power and lovers of liberty are accused of tilting at windmills, he says it is no time to concede.

Mr. Becker sees the finger prints of big government all over today's economic woes. When I ask him about the sources of the mania in housing prices, the first culprit he names is the Fed. Low interest rates, he says, were "partly, maybe mainly, due to the Fed's policy of keeping [its] interest rates very low during 2002-2004." A second reason rates were low was the "high savings rates primarily from Asia and also from the rest of the world."

"People debate the relative importance of the two and I don't think we know exactly," Mr. Becker admits. But what is clear is that "when you have low interest rates, any long-lived assets tend to go up in price because they are based upon returns accruing over many years. When interest rates are low you don't discount these returns very much and you get high asset prices."

On top of that, Mr. Becker says, there were government policies aimed at "extending the scope of homeownership in the United States to low-credit, low-income families." This was done through "the Community Reinvestment Act in the '70s and then Fannie Mae and Freddie Mac later on" and it put many unqualified borrowers into the mix.

The third effect, Mr. Becker says, was the "bubble mentality." By this "I mean that much of the additional lending and borrowing was based on expectations that prices would continue to rise at rates we now recognize, and should have recognized then, were unsustainable."

Could this behavior be considered rational? "There is a lot of debate in economics about whether we can understand bubbles within a rational framework. There are models where you can do it, but it's not easy," he says. What he does seem sure about is that "the lending would not have continued unless there was this expectation that prices would continue to rise and therefore one could refinance these assets through the higher prices." That mentality was at least partly related to Fed action, he says, because the low interest rates "generated an increase in prices and I think that helped generate some of this excess of optimism."

Mr. Becker says that the market-clearing process, so important to recovery, is well underway. "Construction in new residential housing is way down and prices are way down. Maybe 25% down. Lower prices stimulate demand, reduced construction reduces supply."

That's the good news. But he complains about "counterproductive" government policies "designed to lower mortgage rates to stimulate demand." He says he was against the Bush Treasury's idea of capping mortgage rates (which was only floated) and he has "opposed the mortgage plan of President Obama." "It goes against both these adjustments . . . it would hold up prices and increase construction. I think that's a bad idea at this time."

Yet the professor is no laissez-faire ideologue. He says we have to think about what the government can do to "moderate the hit to the real economy," and he says it should start with "the first law of medicine: Do no harm." Instead it has done harmful things, and chief among them has been the "inconsistent policies with the large institutions . . . We let some big banks fail, like Lehman Brothers. We let less-good banks, big [ones] like Bear Stearns, sort of get bailed out and now we bailed out AIG, an insurance company."

Mr. Becker says that he opposed the "implicit protection" that the government gave to Bear Stearns bondholders to the tune of "$30 billion or so." So I wonder if letting Lehman Brothers go belly up was a good idea. "I'm not sure it was a bad idea, aside from the inconsistency." He points out that "the good assets were bought by Nomura and a number of other banks," and he refers to a paper by Stanford economics professor John Taylor showing that the market initially digested the Lehman failure with calm. It was only days later, Mr. Taylor maintains, that the market panicked when it saw more uncertainty from the Treasury. Mr. Becker says Mr. Taylor's work is "not 100% persuasive but it sort of suggest[s] that maybe the Lehman collapse wasn't the cause of the eventual collapse" of the credit markets.

He returns to the perniciousness of Treasury's inconsistency. "I do believe that in a risky environment which is what we are in now, with the market pricing risk very high, to add additional risk is a big problem, and I think this is what we are doing when we don't have consistent policies. We add to the risk."

On the subject of recovery, Mr. Becker repeats his call for lower taxes, applauds the Fed's action to "raise reserves," (meaning money creation, though he said this before the Fed's action a few days ago), and he says "I do believe one has to try to do something more directly to help with the toxic assets of the banks."

How about getting rid of the mark-to-market pricing of bank assets [that is, pricing assets at the current market price] that some say has destroyed bank capital? Mr. Becker says he prefers mark-to-market over "pricing by cost because costs are often completely out of whack with what the real prices are." Then he adds this qualifier: "But when you have a very thin market, you have to be very careful about what it means to mark-to-market. . . . It's a big problem if you literally take mark-to-market in terms of prices continuously based on transactions when there are very few transactions in that market. I am a mark-to-market person but I think you have to do it in a sensible way."

However that issue is resolved in the short run, there will remain the problem of institutions growing so big that a collapse risks taking down the whole system. To deal with the "too big to fail" problem in the long run, Mr. Becker suggests increasing capital requirements for financial institutions, as the size of the institution increases, "so they can't have [so] much leverage." This, he says, "will discourage banks from getting so big" and "that's fine. That's what we want to do."

Mr. Becker is underwhelmed by the stimulus package: "Much of it doesn't have any short-term stimulus. If you raise research and development, I don't see how it's going to short-run stimulate the economy. You don't have excess unemployed labor in the scientific community, in the research community, or in the wind power creation community, or in the health sector. So I don't see that this will stimulate the economy, but it will raise the debt and lead to inefficient spending and a lot of problems."

There is also the more fundamental question of whether one dollar of government spending can produce one and a half dollars of economic output, as the administration claims. Mr. Becker is more than skeptical. "Keynesianism was out of fashion for so long that we stopped investigating variables the Keynesians would look at such as the multiplier, and there is almost no evidence on what the multiplier would be." He thinks that the paper by Christina Romer, chairman of the Council of Economic Advisors, "saying that the multiplier is about one and a half [is] based on very weak, even nonexistent evidence." His guess? "I think it is a lot less than one. It gets higher in recessions and depressions so it's above zero now but significantly below one. I don't have a number, I haven't estimated it, but I think it would be well below one, let me put it that way."

As the interview winds down, I'm thinking more about how people can make pretty crazy decisions with the right incentives from government. Does this explain what seems to be a decreasing amount of personal responsibility in our culture? "When you get a larger government, when you have the government taking over Social Security, government taking over health care and with further proposals now for the government to take over more activities, more entitlements, the rational response is to have less responsibility. You don't have to worry about things and plan on your own as much."

That suggests that there is a risk to the U.S. system with more people relying on entitlements. "Well, they become an interest group," Mr. Becker says. "The more you have dependence on the government, the stronger the interest group of people who want to maintain it. That's one reason why it is so hard to get any major reform in reducing government spending in Scandinavia and it is increasingly so in the United States. The government is spending -- at the federal, state and local level -- a third of GDP, and that share will go up now. The higher it is the more people who are directly or indirectly dependent on the government. I am worried about that. The basic theory of interest-group politics says that they will have more influence and their influence will be to try to maintain this, and it will be hard to go back."

Still, there remain many good reasons to continue the struggle against the current trend, Mr. Becker says. "When the market economy is compared to alternatives, nothing is better at raising productivity, reducing poverty, improving health and integrating the people of the world."

Ms. O'Grady writes the Journal's Americas column.

Japan, China differ over how to deal with North Korea

Japan, China differ over how to deal with North Korea
Saturday March 21, 2009, 06:50 AM JST

BEIJING —
Japanese and Chinese defense ministers agreed Friday it would be best if North Korea refrains from a planned rocket launch, but made demands to each other over ways to deal with the issue. While Japan asked China, North Korea’s traditional ally, to urge Pyongyang’s restraint, Beijing asked Tokyo to handle the issue ‘‘in a calm manner,’’ Japanese Defense Minister Yasukazu Hamada and a Japanese government official said.

North Korea’s planned rocket launch was a topic in Hamada’s meetings with his Chinese counterpart Liang Guanglie as well as Wu Bangguo, chairman of China’s legislature. Liang said ‘‘it would be best if North Korea did not fire’’ the rocket, Hamada said. But he added that countries such as Japan ‘‘should take a cool-headed attitude’’ on the issue, he said.

The Chinese official was believed to be reacting to recent discussions in Japan about intercepting the rocket, which North Korea has said will be launched in early April to put a satellite into orbit.
Countries such as Japan suspect the plan to be a cover for testing a long-range ballistic missile, given the similarities between the technology involved.

Japan has said that even if it is a satellite launch, North Korea would be violating existing U.N. Security Council resolutions that prohibit it from engaging in ballistic missile activities.
China has taken a more nuanced approach. Although it has indicated its desire for North Korea to refrain from the launch, it has not said whether it would view the act as a violation of the resolutions.

Hamada said that Chinese officials did not clarify what Beijing plans to do if the launch takes place.

A Japanese government official said that while Hamada urged China to urge North Korea’s restraint in his meeting with Wu, there was no direct response from the Chinese official.
In their talks, the two defense ministers agreed that the two countries will seek ways to cooperate in antipiracy operations off the coast of Somalia, according to the Japanese government official. Both countries have committed naval vessels to the operations.

Hamada also conveyed Japan’s concern over China’s growing military spending, which will mark the 21st year of double-digit growth in 2009, the official said.

Liang replied that there is no need for concern because Beijing’s policy is defensive, according to the official.

Liang also touched on China’s intention to build an aircraft carrier, telling Hamada that China is the only major nation in the world not to have one, the official said.

‘‘China has a vast sea area and the Chinese Navy needs to develop,’’ the official quoted Liang as saying.

WaPo on El Salvador's election: A presidential election produces a win for the left -- and for liberal democracy

Victory in El Salvador. WaPo Editorial
A presidential election produces a win for the left -- and for liberal democracy.
WaPo, Saturday, March 21, 2009; Page A12

IT'S POSSIBLE to view the outcome of El Salvador's presidential election on Sunday as another lamentable victory for the Latin American leftist populism represented by Hugo Chávez. Mr. Chávez himself was quick to do so, and with some reason: His Venezuelan government has been a financial backer of the Farabundo Marti National Liberation Front, the former guerrilla movement whose candidate, Mauricio Funes, won a narrow victory. But El Salvador's election was also a triumph for a system that Mr. Chávez has disregarded: liberal democracy. Seventeen years after the United Nations brokered a peace accord between the country's left and right -- and after four consecutive election victories by the rightist Nationalist Republican Alliance (ARENA) -- democracy produced an inevitable and necessary alternation of power.

If Mr. Funes as well as the election's losers now respect the rule of law, the result could be the consolidation of the political system the United States was aiming for when it intervened in El Salvador's civil war during the 1980s. At the time, the goal of a successful Salvadoran democracy was dismissed as a mission impossible, just as some now say democracy is unattainable in Iraq and Afghanistan. But the right-wing ARENA party, whose leaders were linked to death squads in the 1980s, proved during the last few years that it could embrace democratic practices. Its presidential candidate, Rodrigo Ávila, acknowledged his defeat on election night.

Now Mr. Funes, a former television anchor who did not fight in the war, is sending the message that the FMLN will also govern responsibly. Among other things, he has said that he will respect private property, preserve El Salvador's free-trade agreements and its use of the dollar as its currency, and seek to preserve close relations with the United States. As his political model, he has cited not Mr. Chávez, but Brazilian President Luiz Inácio Lula da Silva, who has led his country leftward while honoring democracy and the rule of law.

There are reasons for concern about these pledges: Mr. Funes's vice president and other senior FMLN members are more militant and anti-American. The danger is not that they will press for more socialism -- that is their right -- but that they will, like Mr. Chávez or Daniel Ortega in Nicaragua, seek to manipulate or dismantle the democratic system that placed them in office. The Obama administration should make clear to the new government that steps in that direction will endanger relations with the United States. But it should also seek to cooperate with a government that has the potential to complete a victory for Latin American democracy -- and U.S. foreign policy.