Monday, February 8, 2010

GMO Panel deliberations on the paper by de Vendômois et al. (2009, A Comparison of the Effects of Three GM Corn Varieties on Mammalian Health, International Journal of Biological Sciences, 5: 706-726)

EFSA: Adopted part of the minutes of the 55th plenary meeting of the Scientific Panel on Genetically Modified Organisms held on 27-28 January 2010 to be published at http://www.efsa.europa.eu/en/events/event/gmo100127.htm

GMO Panel deliberations on the paper by de Vendômois et al. (2009, A Comparison of the Effects of Three GM Corn Varieties on Mammalian Health, International Journal of Biological Sciences, 5: 706-726)
 
The EFSA GMO Panel has considered the paper by de Vendômois et al. (2009, A Comparison of the Effects of Three GM Corn Varieties on Mammalian Health, International Journal of Biological Sciences, 5: 706-726), a statistical reanalysis of data from three 90-day rat feeding studies already assessed by the GMO Panel (EFSA, 2003a,b; EFSA 2004a,b; EFSA 2009b,c). The GMO Panel concludes that the authors’ claims, regarding new side effects indicating kidney and liver toxicity, are not supported by the data provided in their paper. There is no new information that would lead it to reconsider its previous opinions on the three maize events MON810, MON863 and NK603, which concluded that there were no indications of adverse effects for human, animal health and the environment.

The GMO Panel notes that several of its fundamental statistical criticisms (EFSA, 2007a,b) of the authors' earlier study (Seralini et al., 2007) of maize MON863 are also applicable to the new paper by de Vendômois et al. In the GMO Panel's extensive evaluation of Seralini et al. (2007), reasons for the apparent excess of significant differences found for MON863 (8%) were given and it was shown that this raised no safety concerns. The percentage of variables tested reported by de Vendômois et al. that were significant for NK603 (9%) and MON810 (6%) were of similar magnitude to that for MON863.

The GMO Panel considers that de Vendômois et al.: (1) make erroneous statements concerning the use of reference varieties to provide estimates of variability that allow equivalence testing to place statistically significant results into biological context as advocated by EFSA (2008, 2009a); (2) do not use the available information concerning normal background variability between animals fed with different diets, to place observed differences into biological context; (3) do not present results using their False Discovery Rate methodology in a meaningful way; (4) give no evidence to relate wellknown gender differences in response to diet to claims of effects due to the respective GMOs; (5) estimate statistical power based on inappropriate analyses and magnitudes of difference.

The significant differences highlighted by de Vendômois et al. have all been considered previously by the GMO Panel in its previous opinions on the three maize events MON810, MON863 and NK603.  The study by de Vendômois et al. provides no new evidence of toxic effects. The approach used by de Vendômois et al. does not allow a proper assessment of the differences claimed between the GMOs and their respective counterparts for their toxicological relevance because: (1) results are presented exclusively in the form of percentage differences for each variable, rather than in their actual measured units; (2) the calculated values of the toxicological parameters tested are not related to the normal range for the species concerned; (3) the calculated values of the toxicological parameters tested are not compared with ranges of variation found in test animals fed with diets containing different reference varieties; (4) the statistically significant differences did not show consistency patterns over endpoint variables and doses; (5) the inconsistencies between the purely statistical arguments of de Vendômois et al., and the results for these three animal feeding studies which relate to organ pathology, histopathology and histochemistry, are not addressed. Regarding claims made by de Vendômois et al.  concerning the inadequacy of the experimental design of these three animal feeding studies, the GMO Panel notes that they were all carried out to agreed internationally-defined standards consistent with OECD protocols. 




References

-  EFSA, 2003a. Opinion of the Scientific Panel on genetically modified organisms (GMO) on a request from the Commission related to the safety of foods and food ingredients derived from herbicidetolerant genetically modified maize NK603, for which a request for placing on the market was submitted under Article 4 of the Novel Food Regulation (EC) No 258/97 by Monsanto. http://www.efsa.europa.eu/en/scdocs/scdoc/9.htm
-  EFSA, 2003b. Opinion of the Scientific Panel on genetically modified organisms (GMO) on a request from the Commission related to the Notification (Reference CE/ES/00/01) for the placing on the market of herbicide-tolerant genetically modified maize NK603, for import and processing, under Part C of Directive 2001/18/EC from Monsanto. http://www.efsa.europa.eu/en/scdocs/scdoc/10.htm
-  EFSA, 2004a. Opinion of the Scientific Panel on genetically modified organisms (GMO) on a request from the Commission related to the Notification (Reference C/DE/02/9) for the placing on the market of insect-protected genetically modified maize MON 863 and MON 863 x MON 810, for import and processing, under Part C of Directive 2001/18/EC from Monsanto. http://www.efsa.europa.eu/en/scdocs/scdoc/49.htm
-  EFSA, 2004b. Opinion of the Scientific Panel on genetically modified organisms (GMO) on a request from the Commission related to the safety of foods and food ingredients derived from insectprotected genetically modified maize MON 863 and MON 863 x MON 810, for which a request for placing on the market was submitted under Article 4 of the Novel Food Regulation (EC) No 258/97 by Monsanto. http://www.efsa.europa.eu/en/scdocs/scdoc/50.htm
-  EFSA, 2007a. EFSA review of statistical analyses conducted for the assessment of the MON 863 90- day rat feeding study. http://www.efsa.europa.eu/en/scdocs/scdoc/19r.htm EFSA, 2007b. Statement on the analysis of data from a 90-day rat feeding study with MON 863 maize by the Scientific Panel on genetically modified organisms (GMO).  http://www.efsa.europa.eu/en/scdocs/scdoc/753.htm
-  EFSA, 2008. Updated guidance document for the risk assessment of genetically modified plants and derived food and feed. Annex A. http://www.efsa.europa.eu/en/scdocs/scdoc/293r.htm EFSA, 2009a. Statistical considerations for the safety evaluation of GMOs. http://www.efsa.europa.eu/en/scdocs/scdoc/1250.htm
-  EFSA, 2009b. Applications (references EFSA-GMO-NL-2005-22, EFSA-GMO-RX-NK603) for the placing on the market of the genetically modified glyphosate tolerant maize NK603 for cultivation, food and feed uses, import and processing and for renewal of the authorisation of maize NK603 as existing products, both under Regulation (EC) No 1829/2003 from Monsanto. http://www.efsa.europa.eu/en/scdocs/scdoc/1137.htm
-  EFSA, 2009c. Applications (EFSA-GMO-RX-MON810) for renewal of authorisation for the continued marketing of (1) existing food and food ingredients produced from genetically modified insect resistant maize MON810; (2) feed consisting of and/or containing maize MON810, including the use of seed for cultivation; and of (3) food and feed additives, and feed materials produced from maize MON810, all under Regulation (EC) No 1829/2003 from Monsanto. http://www.efsa.europa.eu/en/scdocs/scdoc/1149.htm
-  Seralini, G.E., Cellier D., de Vendômois J.S. 2007. New analysis of a rat feeding study with a genetically modified maize reveals signs of hepatorenal toxicity. Arch. Environ. Contam.  Toxicol., 52: 596-602.

Thursday, February 4, 2010

More Mr. Nice Guy - While nukes proliferate, the Federal President fiddles

More Mr. Nice Guy. By John Bolton

In his lengthy State of the Union address, President Obama was brief on national security issues, which he squeezed in toward the end. International terrorism, wars in Iraq and Afghanistan, and even America’s relief efforts in Haiti all flashed past in bullet-point mentions. On Iraq and Afghanistan, Obama emphasized neither victory nor determination, but merely the early withdrawal of U.S. forces from both. His once vaunted Middle East peace process didn’t make the cut.

Nonetheless, during this windshield tour of the world, the president found time to opine more explicitly than ever before that reducing America’s nuclear weapons and delivery systems will temper the global threat of proliferation. Obama boasted that “the United States and Russia are completing negotiations on the farthest-reaching arms control treaty in nearly two decades” and that he is trying to secure “all vulnerable nuclear materials around the world in four years, so that they never fall into the hands of terrorists.”

Then came Obama’s critical linkage: “These diplomatic efforts have also strengthened our hand in dealing with those nations that insist on violating international agreements in pursuit of nuclear weapons.” Obama described the increasing “isolation” of both North Korea and Iran, the two most conspicuous—but far from the only—nuclear proliferators. He also mentioned the increased sanctions imposed on Pyongyang after its second nuclear test in 2009 and the “growing consequences” he says Iran will face because of his policies.

In fact, reducing our nuclear -arsenal will not somehow persuade Iran and North Korea to alter their behavior or encourage others to apply more pressure on them to do so. Obama’s remarks reflect a complete misreading of strategic realities.

We have no need for further arms control treaties with Russia, especially ones that reduce our nuclear and delivery capabilities to Moscow’s economically forced low levels. We have international obligations, moreover, that Russia does not, requiring our nuclear umbrella to afford protection to friends and allies worldwide. Obama’s policy artificially inflates Russian influence and, depending on the final agreement, will likely reduce our nuclear and strategic delivery capabilities dangerously and unnecessarily. (Securing “loose” nuclear materials internationally has long been a bipartisan goal, properly so. Obama said nothing new on that score.) Meanwhile, Obama is considering treaty restrictions on our missile defense capabilities more damaging than his own previous unilateral reductions.

What warrants close attention is the jarring naïveté of arguing that reducing our capabilities will inhibit nuclear proliferators. That would certainly surprise Tehran and Pyongyang. Obama’s insistence that the evil-doers are “violating international agreements” is also startling, as if this were of equal importance with the proliferation itself.

The premise underlying these assertions may well be found in Obama’s smug earlier comment that we should “put aside the schoolyard taunts about who is tough.  .  .  .  Let’s leave behind the fear and division.” By reducing to the level of wayward boys the debates over whether his policies are making us more or less secure, Obama reveals a deep disdain for the decades of strategic thinking that kept America safe during the Cold War and afterwards. Even more pertinent, Obama’s indifference and scorn for real threats are chilling auguries of what the next three years may hold.

Obama has now explicitly rejected the idea that U.S. weakness is provocative, arguing instead that weakness will convince Tehran and Pyongyang to do the opposite of what they have been resolutely doing for decades—vigorously pursuing their nuclear and missile programs. Obama’s first year amply demonstrates that his approach will do nothing even to retard, let alone stop, Iran and North Korea.

Neither Bush nor Obama administration efforts toward international sanctions have had any measurable impact. The first Security Council sanctions on North Korea after its ballistic missile and nuclear weapons tests in 2006 did not stop Pyongyang from conducting further missile launches and a second nuclear detonation in 2009. Nor have the measures imposed after that second test, about which Obama boasted, impaired the North’s nuclear program or even brought Pyongyang back to the risible Six-Party Talks. Three sets of Security Council restrictions against Iran have only glancingly affected Tehran’s nuclear program, and the Obama administration’s threats of “crippling sanctions” have disappeared along with last year’s series of “deadlines” that Iran purportedly faced. In response, Tehran’s authoritarianism and belligerence have only increased.

With his counterproliferation strategies, such as they were, in disarray, Obama now pins his hopes on moral suasion, which has never influenced Iran, North Korea, or any other determined proliferator. Perhaps it would have been better had the president’s speech not mentioned national security at all.

John Bolton, former U.S. ambassador to the United Nations, is the author of Surrender Is Not an Option.

Obama vs. Holder

Obama vs. Holder. By Stephen F. Hayes

Tuesday, February 2, 2010

More Nuance Needed in Bank Regulations

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

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

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

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

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

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

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

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

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

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

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

Restricting Bank Activities

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

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

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

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

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

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

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

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

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

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

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

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

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

Defining Deficits Down

Defining Deficits Down. By Isabel V. Sawhill
Brookings, January 29, 2010

January 29, 2010 — When the president submits his budget on February 1, there will be a lot of hand-wringing about the possible economic fallout from a virtually unprecedented accumulation of debt. A long string of deficits out into the future will increase our dependence on foreign lenders, threaten the recovery if borrowers begin to demand higher interest rates, burden taxpayers with the costs of servicing the debt, and leave our children with a less prosperous future. Although these economic consequences are bad enough, the effects on public confidence in their government are even worse. Paralysis in the face of such dire warnings tells the public that their government is not working, undermines trust in our political institutions, and leads to more cynicism about the entire process, with ramifications that go far beyond the fiscal problem itself. Moreover the problem is so dire now that instead of doubling down on our efforts to do something we have moved the goal posts and redefined our deficit reduction goals. Although this may simply reflect the depth of the hole we are in and the difficulty of digging our way out, it may also shift public perceptions toward too ready acceptance of current reality and its associated dangers.

In the past there were bipartisan efforts to deal with deficits that were far smaller than those currently projected. Such efforts were grounded in a common belief that spending beyond one’s means was imprudent, even morally wrong. The goal for most of the pre World War II years was simple: an annually balanced budget. This meant that spending was cut and taxes raised even when the economy was depressed as in the 1930s. Following World War II, economists began to argue that the goal should be amended to allow deficit spending during recessions as long as that was offset by surpluses during periods of full employment. By the 1980s, this slightly amended goal was still extant and enshrined, for example, in the Gramm-Rudman-Hollings bill that called for a balanced budget by 1991. And when Ross Perot campaigned in 1992 on the need for a balanced budget, and won 19 percent of the vote, Clinton responded by working hard throughout his two terms to get to balance. The decade ended with a surplus of $236 billion in the federal budget. Fast forward to this year, and the goal has shifted from balancing the budget to keeping deficits below 3 percent of GDP in the president’s budget. That would mean accepting a deficit of over $400 billion (in today’s dollars) as a goal. However, even this much more modest goal now appears impossible to reach.

The current administration will be criticized for moving the goal posts on deficit reduction and for doing far too little to restore fiscal balance. This year’s budget includes a freeze on non-security discretionary spending, support for pay-go rules, and a presidentially appointed deficit-reduction commission. These are good but totally insufficient steps. The spending freeze will affect only a tiny slice of the budget; the pay-go rules will make it more difficult for Congress to dig the hole deeper but won’t affect currently projected red ink; and the commission will likely be a paper tiger. In short, these proposals will still leave us with unsustainable deficits as far as the eye can see. Granted current deficits were largely inherited and have been further ballooned by the need to fight the current downturn, leaving the current administration with a herculean task. But it is depressing to discover that we can no long even aspire to balance the budget once the recession is over.

The late Senator Moynihan used to talk about defining deviancy down by which he meant that new norms get established in response to bad behavior. The nation’s fiscal behavior is now so bad that I fear we will soon accept a degree of fiscal profligacy that would have been unthinkable in earlier times. Shame on all of our elected officials, past and present, who have allowed this to happen.

How to Make a Weak Economy Worse - FDR's war against business showed that a president must choose between retribution and recovery

How to Make a Weak Economy Worse. By AMITY SHLAES
FDR's war against business showed that a president must choose between retribution and recovery.
WSJ, Feb 02, 2010

You get the feeling President Obama is girding for battle with the financial sector. In last week's State of the Union address, he promised to regulate the industry. On Jan. 21, he was blunter, warning that he would not let companies that enjoyed "soaring profits and obscene bonuses" block his financial reforms. "If these folks want a fight," he said, "it's a fight I'm ready to have."

This declaration of war echoes that of Franklin Delano Roosevelt. In 1936, late in his campaign for a second presidential term, FDR spoke of the challenges of "business and financial monopoly, speculation, reckless banking." Wall Streeters and businessmen hated him, he said, adding that "I welcome their hatred."

Then Roosevelt escalated: "I should like to have it said of my first administration that in it the forces of selfishness and the lust for power met their match. I should like to have it said of my second administration that in it these forces met their master."

Mr. Obama might want to stick to a moderate approach. FDR's war against business played to the crowd, but it hurt the economy. While monetary policies impeded recovery in the late 1930s, it was the administration's assault on companies and capital that ensured the Depression's duration.

Roosevelt had initially opted for safety and picked relatively moderate advisers. His first Treasury Secretary, William Woodin, was a railroad executive. Roosevelt also kept over a Hoover-era official, Jesse Jones, at the TARP of the day, the Reconstruction Finance Corp. James Warburg, the son of Wall Street banker Paul Warburg, also joined the team.

In the crucial days before March 5, 1933, when FDR declared a "bank holiday" to halt the bank run, New Dealers worked with Republicans to resolve the financial crisis. When it came to reforming Wall Street, they were likewise measured. Yes, they created the Securities and Exchange Commission. But their regulation seemed designed to serve markets, not stamp them out. At least mostly.

Though there was nothing establishment about the centerpiece of the early New Deal, the National Recovery Administration, it was friendly to big business. Indeed, too much so. Under the NRA, the largest players in each industrial sector were judged too big to fail not because their failure would create systemic financial risk—the argument for banks today—but rather in the faith that firms of such scale could serve as engines of recovery.

And Roosevelt, like Presidents Obama and Bush, dumped billions in cash onto the country. There was, not surprisingly, a Roosevelt market rally, just as there has been an Obama rally.

But complete recovery proved elusive. The public spending programs had less effect than hoped. Smaller firms complained, accurately, that the NRA's minimum wages and limits on hours disadvantaged them. Unemployment was still high. FDR knew he could not keep asking Congress to authorize enormous outlays forever.

Frustrated, the president shifted to retribution. By 1935, FDR decided that firms, especially big firms, were impeding recovery. They must now redeem themselves and save the economy by sacrificing—or else.

The attacks started with taxes. In 1935, well before the "hatred" speech, FDR led Congress in passaging a law that replaced a flat rate on corporate income with a graduated rate—itself a penalty on larger firms. Personal income taxes went up, as did other rates. In 1936 FDR signed into law the undistributed profits tax, which aimed to force reluctant firms to disgorge cash as dividends or by paying higher wages. This levy too was graduated, with a top rate of 27%.

The 1935 Wagner Act was a tiger that makes today's union law look like a pussycat. It favored unions over companies in nearly every way, including institutionalizing the closed shop. And after Roosevelt's landslide victory in 1936, the closed shop and the sit-down strike stole thousands of productive workdays from companies, punishing earnings and limiting ability to hire.

Of particular relevance today was Roosevelt's switch on antitrust policy. The large companies once rewarded by the NRA now became targets.

The final front of the war was utilities, the country's most hopeful industry. FDR's 1935 law, the Public Utilities Holding Company Act, made it so difficult for private-sector firms in this industry to raise capital that it was called a death sentence.

The result of it all was the Depression within the Depression of 1937 and 1938, when industrial production plummeted and unemployment climbed back into the higher teens. Even John Maynard Keynes chided FDR for his attitude about businessmen: "It is a mistake to think they are more immoral than politicians."

Among themselves, the New Dealers acknowledged failure. FDR's second Treasury Secretary, Henry Morgenthau, eventually determined that the problem was lack of what he labeled "business confidence." Late in the decade, Morgenthau dared to call for tax cuts. He even placed a sign on his desk asking, "Does it contribute to recovery?" Roosevelt told him the sign was "very stupid."

Ultimately the war abroad required FDR to give up his war at home. Now the same industries that had been under prosecution were at the War Production Board, signing contracts. Scholars have argued that wartime spending ended the Depression. But the truce with business played an important role.

The 1930s story suggests not that any individual reform is wrong per se. It reminds us rather that frustrated presidents are inconsistent, that antibusiness policies are cumulative, and that hostility yields more damage than benefit. Presidents can choose between retribution and recovery. They cannot have both.

Miss Shlaes, a senior fellow in economic history at the Council on Foreign Relations, is author of "The Forgotten Man: A New History of the Great Depression" (HarperCollins, 2007).

Monday, February 1, 2010

Study finds focus on abstinence in sex-ed classes can delay sexual activity

Study finds focus on abstinence in sex-ed classes can delay sexual activity

By Rob Stein
Washington Post Staff Writer
Monday, February 1, 2010; 4:35 PM

Sex education classes that focus on encouraging children to remain abstinent can convince a significant proportion to delay sexual activity, researchers reported Monday in a landmark study that could have major implications for the nation's embattled efforts to protect young people against unwanted pregnancies and sexually transmitted diseases.

In the first carefully designed study to evaluate the controversial approach to sex ed, researchers found that only about a third of 6th and 7th graders who went through sessions focused on abstinence started having sex in the next two years. In contrast, nearly half of students who got other classes, including those that included information about contraception, became sexually active.

"I think we've written off abstinence-only education without looking closely at the nature of the evidence," said John B. Jemmott III, a professor at the University of Pennsylvania, who led the federally funded study. "Our study shows this could be one approach that could be used."

The research, published in the Archives of Pediatric & Adolescent Medicine, comes amid intense debate over how to reduce sexual activity, pregnancies, births and sexually transmitted diseases among children and teenagers. After declining for more than a decade, births, pregnancies and STDs among U.S. teens have begun increasing again.

The Obama administration eliminated more than $150 million in federal funding targeted at abstinence programs, which are relatively new and have little rigorous evidence supporting their effectiveness. Instead it is launching a new $114 million pregnancy prevention initiative that will fund only programs that have been shown scientifically to work. The administration Monday proposed expanding that program to $183 million next year. The move came after intensifying questions about the effectiveness of abstinence programs.

"This new study is game-changing," said Sarah Brown, who leads the National Campaign to Prevent Teen and Unplanned Pregnancy. "For the first time, there is strong evidence that an abstinence-only intervention can help very young teens delay sex and reduce their recent sexual activity as well."

The new study is the first to evaluate an abstinence program using a carefully "controlled" design that compared it directly to alternative strategies -- considered the highest level of scientific evidence.

"This takes away the main pillar of opposition to abstinence education," said Robert Rector, a senior research fellow at the Heritage Foundation who wrote the criteria for federal funding of abstinence programs. "I've always known that abstinence programs have gotten a bad rap."

Even long-time critics of the approach praised the new study, saying it provided strong evidence that such programs can work and may deserve taxpayer support.

"One of the things that's exciting about this study is that it says we have a new tool to add to our repertoire," said Monica Rodriguez, vice president for education and training at the Sexuality Information and Education Council of the United States.

Based on the findings, Obama administration officials said programs like the one evaluated in the study could be eligible for federal funding.

"No one study determines funding decisions, but the findings from the research paper suggest that this kind of project could be competitive for grants if there's promise that it achieves the goal of teen pregnancy prevention," said Health and Human Services Department spokesman Nicholas Pappas.

Several critics of abstinence-only approach argued that the curriculum tested was not representative of most abstinence programs. It did not take on a moralistic tone as many abstinence programs do. Most notably, the sessions encouraged children to delay sex until they are ready, not necessarily until they were married, did not portray sex outside of marriage as never appropriate or disparage condoms.

"There is no data in this study to support the 'abstain-until marriage' programs, which research proved ineffective during the Bush administration," said James Wagoner, president of Advocates for Youth.

But abstinence supporters disputed that, saying that the new program was essentially the same as other good abstinence programs.

"For our critics to use 'marriage' as the thing that sets the program in this study apart from federally funded programs is an exaggeration and smacks of an effort to dismiss abstinence education rather than understanding what it is," Valerie Huber of the National Abstinence Education Association.

The new study involved 662 African-American students who were randomly assigned to go through one of five programs: An eight-hour curriculum that encouraged them to delay having sex; an eight-hour program focused on teaching safe sex; an eight- or 12-hour program that did both; or an eight-hour program focused on teaching the youngsters other ways to be healthy, such as eating well and exercising.

Over the next two years, about 33 percent of the students who went through the abstinence program started having sex, compared to about 52 percent who were just taught safe sex. About 42 percent of the students who went through the comprehensive program started having sex, and about 47 percent of those who just learned about other ways to be healthy. The abstinence program had no negative effects on condom use, which has been a major criticism of the abstinence approach.

"The take-home message is that we need a variety of interventions to address an epidemic like HIV, sexually transmitted diseases and pregnancy," Jemmott said. "There are populations that really want an abstinence intervention. They are against telling children about condoms. This study suggests abstinence programs can be part of the mix of programs that we offer."

Financial Crisis and Responses to It: A Perfect Storm of Ignorance

A Perfect Storm of Ignorance. By Jeffrey Friedman

Jeffrey Friedman is the editor of Critical Review and of Causes of the Financial Crisis, forthcoming from the University of Pennsylvania Press.

You are familiar by now with the role of the Federal Reserve in stimulating the housing boom; the role of Fannie Mae and Freddie Mac in encouraging lowequity mortgages; and the role of the Community Reinvestment Act in mandating loans to "subprime" borrowers, meaning those who were poor credit risks. So you may think that the government caused the financial crisis. But you don't know the half of it. And neither does the government.

A full understanding of the crisis has to explain not just the housing and subprime bubbles, but why, when they popped, it should have had such disastrous worldwide effects on the financial system. The problem was that commercial banks had made a huge overinvestment in mortgage-backed bonds sold by investment banks such as Lehman Brothers.

Commercial banks are familiar to everyone with a checking or savings account. They accept our deposits, against which they issue commercial loans and mortgages. In 1933, the United States created the FDIC to insure commercial banks' depositors. The aim was to discourage bank runs by depositors who worried that if their bank had made too many risky loans, their accounts, too, might be at risk.

The question of whether deposit insurance was necessary is worth asking, and I will ask it later on. But for now, the key fact is that once deposit insurance took effect, the FDIC feared that it had created what economists call a "moral hazard": bankers, now insulated from bank runs, might be encouraged to make riskier loans than before. The moral-hazard theory took hold not only in the United States but in all of the countries in which deposit insurance was instituted. And both here and abroad, the regulators' solution to this (real or imagined) problem was to institute bank-capital regulations. According to an array of scholars from around the world — Viral Acharya, Juliusz Jablecki, Wladimir Kraus, Mateusz Machaj, and Matthew Richardson — these regulations helped turn an American housing crisis into the world's worst recession in 70 years.

WHAT REALLY WENT WRONG

The moral-hazard theory held that since the FDIC would now pick up the pieces if anything went wrong, bankers left to their own devices would make clearly risky loans and investments. The regulators' solution, across the entire developed world, was to require banks to hold a minimum capital cushion against a commercial bank's assets (loans and investments), but the precise level of the capital reserve, and other details, varied from country to country.

In 1988, financial regulators from the G-10 agreed on the Basel (I) Accords. Basel I was an attempt to standardize the world's bank-capital regulations, and it succeeded, spreading far beyond the G-10 countries. It differentiated among the risks presented by different types of assets. For instance, a commercial bank did not have to devote any capital to its holdings of government bonds, cash, or gold — the safest assets, in the regulators' judgment. But it had to allot 4 percent capital to each mortgage that it issued, and 8 percent to commercial loans and corporate bonds.

Each country implemented Basel I on its own schedule and with its own quirks. The United States implemented it in 1991, with several different capital cushions; a 10 percent cushion was required for "well-capitalized" commercial banks, a designation that carries privileges that most banks want. Ten years later, however, came what proved in retrospect to be the pivotal event. The FDIC, the Fed, the Comptroller of the Currency, and the Office of Thrift Supervision issued an amendment to Basel I, the Recourse Rule, that extended the accord's risk differentiations to asset-backed securities (ABS): bonds backed by credit card debt, or car loans — or mortgages — required a mere 2 percent capital cushion, as long as these bonds were rated AA or AAA or were issued by a government-sponsored enterprise (GSE), such as Fannie or Freddie. Thus, where a well-capitalized commercial bank needed to devote $10 of capital to $100 worth of commercial loans or corporate bonds, or $5 to $100 worth of mortgages, it needed to spend only $2 of capital on a mortgage-backed security (MBS) worth $100. A bank interested in reducing its capital cushion — also known as "leveraging up" — would gain a 60 percent benefit from trading its mortgages for MBSs and an 80 percent benefit for trading its commercial loans and corporate securities for MBSs.

Astute readers will smell a connection between the Recourse Rule and the financial crisis. By 2008 approximately 81 percent of all the rated MBSs held by American commercial banks were rated AAA, and 93 percent of all the MBSs that the banks held were either triple-A rated or were issued by a GSE, thus complying with the Recourse Rule. (Figures for the proportion of double-A bonds are not yet available.) According to the scholars I mentioned earlier, the lesson is clear: the commercial banks loaded up on MBSs because of the extremely favorable treatment that they received under the Recourse Rule, as long as they were issued by a GSE or were rated AA or AAA.

When subprime mortgages began to default in the summer of 2007, however, those high ratings were cast into doubt. A year later, the doubts turned into a panic. Federally mandated mark-to-market accounting — the requirement that assets be valued at the price for which they could be sold right now — translated temporary market sentiment into actual numbers on a bank's balance sheet, so when the market for MBSs dried up, Lehman Brothers went bankrupt — on paper. Mark-to-market accounting applied to commercial banks too. And it was the commercial banks' worry about their own and their counterparties' solvency, due to their MBS holdings, that caused the lending freeze and, thus, the Great Recession.

What about the rest of the world? The Recourse Rule did not apply to countries other than the United States, but Basel I included provisions for even more profitable forms of "capital arbitrage" through off-balance-sheet entities such as structured investment vehicles, which were heavily used in Europe. Then, in 2006, Basel II began to be implemented outside the United States. It took the Recourse Rule's approach, encouraging foreign banks to stock up on GSE-issued or highly rated MBSs.

THE PERFECT STORM?

Given the large number of contributory factors — the Fed's low interest rates, the Community Reinvestment Act, Fannie and Freddie's actions, Basel I, the Recourse Rule, and Basel II — it has been said that the financial crisis was a perfect storm of regulatory error. But the factors I have just named do not even begin to complete the list. First, Peter Wallison has noted the prevalence of "no-recourse" laws in many states, which relieved mortgagors of financial liability if they simply walked away from a house on which they defaulted. This reassured people in financial straits that they could take on a possibly unaffordable mortgage with virtually no risk. Second, Richard Rahn has pointed out that the tax code discourages partnerships in banking (and other industries). Partnerships encourage prudence because each partner has a lot at stake if the firm goes under. Rahn's point has wider implications, for scholars such as Amar Bhidé and Jonathan Macey have underscored aspects of tax and securities law that encourage publicly held corporations such as commercial banks — as opposed to partnerships or other privately held companies — to encourage their employees to generate the short-term profits adored by equities investors. One way to generate short-term profits is to buy into an asset bubble. Third, the Basel Accords treat monies set aside against unexpected loan losses as part of banks' "Tier 2" capital, which is capped in relation to "Tier 1" capital — equity capital raised by selling shares of stock. But Bert Ely has shown in the Cato Journal that the tax code makes equity capital unnecessarily expensive. Thus banks are doubly discouraged from maintaining the capital cushion that the Basel Accords are trying to make them maintain. This litany is not exhaustive. It is meant only to convey the welter of regulations that have grown up across different parts of the economy in such immense profusion that nobody can possibly predict how they will interact with each other. We are, all of us, ignorant of the vast bulk of what the government is doing for us, and what those actions might be doing to us. That is the best explanation for how this perfect regulatory storm happened, and for why it might well happen again.

By steering banks' leverage into mortgage-backed securities, Basel I, the Recourse Rule, and Basel II encouraged banks to overinvest in housing at a time when an unprecedented nationwide housing bubble was getting underway, due in part to the Recourse Rule itself — which took effect on January 1, 2002: not coincidentally, just at the start of the housing boom. The Rule created a huge artificial demand for mortgage-backed bonds, each of which required thousands of mortgages as collateral. Commercial banks duly met this demand by lowering their lending standards. When many of the same banks traded their mortgages for mortgage-backed bonds to gain "capital relief," they thought they were offloading the riskiest mortgages by buying only triple-A-rated slices of the resulting mortgage pools. The bankers appear to have been ignorant of yet another obscure regulation: a 1975 amendment to the SEC's Net Capital Rule, which turned the three existing rating companies — S&P, Moody's, and Fitch — into a legally protected oligopoly. The bankers' ignorance is suggested by e-mails unearthed during the recent trial of Ralph Cioffi and Matthew Tannin, who ran the two Bear Stearns hedge funds that invested heavily in highly rated subprime mortgage-backed bonds. The e-mails show that Tannin was a true believer in the soundness of those ratings; he and his partner were exonerated by the jury on the grounds that the two men were as surprised by the catastrophe as everyone else was. Like everyone else, they trusted S&P, Moody's, and Fitch. But as we would expect of corporations shielded from market competition, these three "rating agencies" had gotten sloppy. Moody's did not update its model of the residential mortgage market after 2002, when the boom was barely underway. And Moody's model, like those of its "competitors," determined how large they could make the AA and AAA slices of mortgage-backed securities.

THE REGULATORS' IGNORANCE OF THE REGULATIONS

The regulators seem to have been as ignorant of the implications of the relevant regulations as the bankers were. The SEC trusted the three rating agencies to continue their reliable performance even after its own 1975 ruling protected them from the market competition that had made their ratings reliable. Nearly everyone, from Alan Greenspan and Ben Bernanke on down, seemed to be ignorant of the various regulations that were pumping up house prices and pushing down lending standards. And the FDIC, the Fed, the Comptroller of the Currency, and the Office of Thrift Supervision, in promulgating one of those regulations, trusted the three rating companies when they decided that these companies' AA and AAA ratings would be the basis of the immense capital relief that the Recourse Rule conferred on investment-bank-issued mortgage-backed securities. Did the four regulatory bodies that issued the Recourse Rule know that the rating agencies on which they were placing such heavy reliance were an SEC-created oligopoly, with all that this implies? If you read the Recourse Rule, you will find that the answer is no. Like the Bank for International Settlements (BIS), which later studied whether to extend this American innovation to the rest of the world in the form of Basel II (which it did, in 2006), the Recourse Rule wrongly says that the rating agencies are subject to "market discipline."

Those who play the blame game can find plenty of targets here: the bankers and the regulators were equally clueless. But should anyone be blamed for not recognizing the implications of regulations that they don't even know exist?

Omniscience cannot be expected of human beings. One really would have had to be a god to master the millions of pages in the Federal Register — not to mention the pages of the Register's state, local, and now international counterparts — so one could pick out the specific group of regulations, issued in different fields over the course of decades, that would end up conspiring to create the greatest banking crisis since the Great Depression. This storm may have been perfect, therefore, but it may not prove to be rare. New regulations are bound to interact unexpectedly with old ones if the regulators, being human, are ignorant of the old ones and of their effects.

This is already happening. The SEC's response to the crisis has not been to repeal its 1975 regulation, but to promise closer regulation of the rating agencies. And instead of repealing Basel I or Basel II, the BIS is busily working on Basel III, which will even more finely tune capital requirements and, of course, increase capital cushions. Yet despite the barriers to equity capital and loan-loss reserves created by the conjunction of the IRS and the Basel Accords, the aggregate capital cushion of all American banks at the start of 2008 stood at 13 percent — one-third higher than the American minimum, which in turn was one-fifth higher than the Basel minimum. Contrary to the regulators' assumption that bankers need regulators to protect them from their own recklessness, the financial crisis was not caused by too much bank leverage but by the form it took: mortgage-backed securities. And that was the direct result of the fine tuning done by the Recourse Rule and Basel II.

HOW DID WE GET INTO THIS MESS?

The financial crisis was a convulsion in the corpulent body of social democracy. "Social democracy" is the modern mandate that government solve social problems as they arise. Its body is the mass of laws that grow up over time — seemingly in inverse proportion to the ability of its brain to comprehend the causes of the underlying problems.

When voters demand "action," and when legislators and regulators provide it, they are all naturally proceeding according to some theory of the cause of the problem they are trying to solve. If their theories are mistaken, the regulations may produce unintended consequences that, later on, in principle, could be recognized as mistakes and rectified. In practice, however, regulations are rarely repealed. Whatever made a mistaken regulation seem sensible to begin with will probably blind people to its unintended effects later on. Thus future regulators will tend to assume that the problem with which they are grappling is a new "excess of capitalism," not an unintended consequence of an old mistake in the regulation of capitalism.

Take bank-capital regulations. The theory was (and remains) that without them, bankers protected by deposit insurance would make wild, speculative investments. So deposit insurance begat bank-capital regulations. Initially these were blunderbuss rules that required banks to spend the same levels of capital on all their investments and loans, regardless of risk. In 1988 the Basel Accords took a more discriminating approach, distinguishing among different categories of asset according to their riskiness — riskiness as perceived by the regulators. The American regulators decided in 2001 that mortgage-backed bonds were among the least risky assets, so they required much lower levels of capital for these securities than for every alternative investment but Treasury's. And in 2006, Basel II applied that erroneous judgment to the capital regulations governing most of the rest of the world's banks. The whole sequence leading to the financial crisis began, in 1933, with deposit insurance. But was deposit insurance really necessary?

The theory behind deposit insurance was (and remains) that banking is inherently prone to bank runs, which had been common in 19th-century America and had swept the country at the start of the Depression.

But that theory is wrong, according to such economic historians as Kevin Dowd, George Selgin, and Kurt Schuler, who argue that bank panics were almost uniquely American events (there were none in Canada during the Depression — and Canada didn't have deposit insurance until 1967). According to these scholars, bank runs were caused by 19th-century regulations that impeded branch banking and bank "clearinghouses." Thus, deposit insurance, hence capital minima, hence the Basel rules, might all have been a mistake founded on the New Deal legislators' and regulators' ignorance of the fact that panics like the ones that had just gripped America were the unintended effects of previous regulations.

What I am calling social democracy is, in its form, very different from socialism. Under social democracy, laws and regulations are issued piecemeal, as flexible responses to the side effects of progress — social and economic problems — as they arise, one by one. (Thus the official name: progressivism.) The case-by-case approach is supposed to be the height of pragmatism. But in substance, there is a striking similarity between social democracy and the most utopian socialism. Whether through piecemeal regulation or central planning, both systems share the conceit that modern societies are so legible that the causes of their problems yield easily to inspection. Social democracy rests on the premise that when something goes wrong, somebody — whether the voter, the legislator, or the specialist regulator — will know what to do about it. This is less ambitious than the premise that central planners will know what to do about everything all at once, but it is no different in principle.

This premise would be questionable enough even if we started with a blank legal slate. But we don't. And there is no conceivable way that we, the people — or our agents in government — can know how to solve the problems of modern societies when our efforts have, in fact, been preceded by generations of previous efforts that have littered the ground with a tangle of rules so thick that we can't possibly know what they all say, let alone how they might interact to create another perfect storm.

This article originally appeared in the January/February 2010 edition of Cato Policy Report.

Head Start: A Tragic Waste of Money

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Federal President Admits CBO Cost Estimates of ObamaCare Are Incomplete

Obama Admits CBO Cost Estimates of ObamaCare Are Incomplete

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

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

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

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

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

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

Michael F. CannonJanuary 30, 2010 @ 8:07 am

Sunday, January 31, 2010

The Runaway Subsidy Train

The Runaway Subsidy Train. By WENDELL COX
In some corridors, 'high-speed' rail won't be much faster than trains in the 1930s.
WSJ, Feb 01, 2010

On Thursday the Obama administration awarded $8 billion in stimulus funds to plan and build high-speed rail projects in California and Florida, and for other routine passenger-rail projects masquerading as high-speed rail. This is a political plum to the states that will receive the money.

It is also a dream come true for fans of bullet trains in Japan and Europe and the faster, greenhouse gas-belching Mag-Lev (magnetic levitation) lines. But this is not money well spent.

Supporters say high-speed rail is a cost-effective, "green" solution to airport and highway congestion. In reality, it is costly to build and operate and has a negligible impact on highway and airport traffic. High-speed rail is driven by little more than a romantic notion to confer a European ambiance on American cities.

Proponents also claim that high-speed rail is profitable, but this too is off the mark. Internationally, only two segments have ever broken even: Tokyo to Osaka and Paris to Lyon.

Ridership in these markets has been bolstered by high gasoline prices and one-way highway tolls of $40 and $100, respectively. These and other foreign routes have attracted much of their ridership from a strong core of rail passengers that does not exist in the U.S.

The administration is giving California $2.25 billion for trains that are expected to reach 220 miles per hour between Los Angeles and San Francisco. The cost of building this rail line is now estimated by the California High Speed Rail Authority to be more than $40 billion and could be $60 billion or more.

Even after adjusting for inflation, the projected cost of the system has increased by half over the original cost in the past decade. Ridership projections have also fluctuated wildly, from as low as 32 million annually to nearly 100 million; now the rail authority estimates the train will carry 41 million passengers each year.

High-speed rail does little to unsnarl traffic jams because most highway congestion is within urban areas, not between them. It also has negligible impact on airport congestion. The world's strongest high-speed rail market, Tokyo to Osaka, is also one of the world's largest airline markets. Even with high-speed rail, there is still frequent air-shuttle service between Paris and Marseille.

Environmental claims are misleading. Using California High Speed Rail Authority's data, Joe Vranich and I estimated that the California system would reduce the emissions of greenhouse gases, such as CO2, at a cost of $2,000 per ton. The Intergovernmental Panel on Climate Change estimates that we should be able to meet its greenhouse gas targets by spending $50 or less per ton.

The administration is planning on giving Florida $1.25 billion to build a Tampa to Orlando high-speed rail line. The train on that route is expected to hit speeds of 160 mph and to make a trip between the two cities in about 45 minutes.

This will be helpful if you happen to live in the Orlando Station and have business in the Tampa Station. But most travelers will be better off driving.

It's about 90 minutes by car, though it can be less depending on your home and destination. Once you factor in the time it would take to travel to the station, park, walk to the platform, and wait for the train to depart and also pick up a rental car on the other end, driving would probably be faster.

Other rail projects aren't much better. One project involves a line connecting Portland, Ore., and Seattle, Wash. The administration wants to spend $600 million on the line to shave about 10 minutes off of a three-and-a-half hour trip (which it would do by raising average speeds to 51 mph, from 49 mph).

***

In the other corridors where the administration plans to spend money—such as Charlotte to Raleigh and Chicago to St. Louis—projected train speeds won't be much faster than what the fastest trains in the 1930s were able to do. Some trains then topped 80 mph. As a result, car trips will normally be as fast door to door, and they will be far less costly than taking the train and then renting a car.

There is no need to subsidize intercity travel. Flyers pay for virtually all of the costs of running the airline system, including airports and air traffic control. Gasoline taxes and highway tolls built and maintain intercity roadways, and they also support mass transit with $10 billion in subsidies annually. Intercity buses require no taxpayer funds.

Only rail requires heavy subsidies. At the end of the day, the great danger is that true high-speed rail could cost taxpayers even more than the tens of billions in subsidies that have been paid to Amtrak since the 1970s.

Mr. Obama said in Tampa last week that we are "falling behind" other countries in high-speed rail. With a record budget deficit, it makes sense to fall behind in spending on high-speed rail that we don't need with money we don't have.

Mr. Cox is principal of Demographia, a consulting firm based in St. Louis. He served on the Amtrak Reform Council from 1999-2002 and is co-author with Joseph Vranich of the 2008 Reason Foundation study. "The California High Speed Rail Proposal: A Due Diligence Report."

Friday, January 29, 2010

The president's anti-Wall Street rhetoric is not good for the economy, and may hurt his party politically

Bonfire of the Populists. By KIMBERLEY A. STRASSEL
The president's anti-Wall Street rhetoric is not good for the economy, and may hurt his party politically.
WSJ, Jan 29, 2010

The problem with fires is that they can blow in any direction. Consider the White House, which is seeing a backdraft from the anti-Wall-Street flame it has been dousing with gasoline.

His agenda on the ropes, President Obama made a calculated decision to pivot to populism. The Massachusetts Senate race highlighted a fed-up public. The White House strategy: Channel that anger away from itself and to easier targets. Its opening shots were a new tax on banks, new restrictions on banking activities, and Mr. Obama roaring, "We want our money back!"

The president fed the fire with his State of the Union address. Americans are angry at "bad behavior on Wall Street." It is time to "slash the tax breaks for companies that ship our jobs overseas." Lobbyists are trying to "kill" financial regulation. American "cynicism" is the result of "selfish" bankers, CEOs who "reward" themselves "for failure" and lobbyists who "game the system." (No mention of Cornhusker Kickbacks or backroom union deals, but never mind.)

For an administration that claims to know its political history, the White House appears to have misread at least one decade. FDR was re-elected in 1936 for many reasons, but among them was his fiery denunciations of "economic royalists," "economic tyranny," and "economic slavery." Business knew it was in the president's crosshairs and put its capital on strike. The economy didn't recover until the war.

Team Obama is already witnessing a repeat. The U.S. economy ought to be flying out of recession. Yet bank lending is sluggish. Companies refuse to hire. Business is going elsewhere to raise capital: China last year outstripped the U.S. as a center for initial public offerings. The market gyrates on Washington's latest political drama.

A venture capitalist recently remarked to me that the uncertainty the administration has created is "nothing short of paralyzing." Nobody will invest in an industry that might be the next to be overtaxed, overregulated, or publicly disemboweled.

Add to that uncertainty the administration's new populist bent, and it's a recipe for a continued capital freeze. "People in the economy are thinking about whether to invest or take risks when what they are seeing are early signs of Hugo Chávez economics," says Wisconsin GOP Rep. Paul Ryan. With the White House's political fortunes fundamentally tied to economic recovery, this populist fire is an act of self-immolation.

The blowback is already hobbling the White House's own economic team. Senate Democrats, following presidential example, have been newly eager to skewer their own "symbol" of Wall Street. The nearest to hand happened to be Mr. Obama's own Fed chief, Ben Bernanke. Majority Leader Harry Reid spent two weeks putting down a reconfirmation revolt, helping save Mr. Obama from his own antibank rhetoric.

In the House, Treasury Secretary Tim Geithner was meanwhile called to answer questions about AIG disclosure and counterparties. He left accused by Democrat Edolphus Towns of aiding Wall Street banks in "looting the corpse" of the insurer. Talk about a populist liability. The two men survive only as damaged goods, more susceptible to congressional pressure, less able to make tough decisions. And should Mr. Obama cut Mr. Geithner loose, the White House's tough talk narrows the pool of experienced hands it can nominate as replacements.

Policy-wise, too, the administration is boxing itself in. In keeping with the populist swerve, a feisty Mr. Obama this week upped the ante on financial regulation, warning Congress he'd veto anything less than "real reform." Yet it is precisely a stick-it-to-them bill that will have the most trouble passing a frayed Congress in an election year. And heaven help the administration if there is another financial meltdown, one that truly poses systemic risk. Could this White House dare write another bailout check to "Wall Street"?

And for what? The administration made the mistake of leaking that its new strategy was pure politics, designed to re-energize the public and put Republicans on defense. That somewhat robbed it of its authenticity. Americans have also watched this White House prop up moribund auto makers, float Fannie Mae and Freddie Mac, and cut deals with pharmaceutical companies. The bank war appears a bit disingenuous. The country's growing investor class is not impressed by the sort of business mau-mauing that pummels their 401(k)s.

As for those Republicans, they are hardly cowering in fear. They watched Scott Brown bat away the president's bank tax, explaining it would be passed on to consumers and hurt lending. His victory suggested the public is open to free-market explanations, and the GOP is feeling more emboldened to make them.

Not all populism is bad. There is indeed an anti-establishment anger in the nation. But the majority of it is directed at a Washington that is foisting an unpopular agenda on the country, and at the cavalier treatment of the free market that creates jobs. The president might try tapping into that.

Thursday, January 28, 2010

The Latest AIG Story - Regulators can't agree on what the real systemic threat was

The Latest AIG Story. WSJ Editorial
Regulators can't agree on what the real systemic threat was.
WSJ, Jan 28, 2010

Will regulators ever coherently explain why AIG could not be allowed to go bankrupt in September of 2008?

At yesterday's House hearing, Secretary of the Treasury Timothy Geithner and predecessor Hank Paulson said they didn't bail out AIG to save its derivatives counterparties. Instead, said Mr. Geithner, the now-famous 100-cents-on-the-dollar buyouts of credit default swap contracts were necessary to prevent a further downgrade of AIG by credit-ratings agencies.

This topic probably deserves another hearing on its own. Remember, the Federal Reserve Bank of New York, where Mr. Geithner was president, had by that time already seized AIG. We're guessing that a ratings agency is pretty comfortable with the creditworthiness of a firm 79.9%-owned by Uncle Sam. Yet Mr. Geithner is saying that the same credit raters that applied triple-A ratings to tranches of junk mortgages somehow got the yips when the world's most respected borrower was standing behind AIG.

If the agencies had applied to AIG the credit rating of its new owner, there wouldn't have been much need to send more collateral to such counterparties as Goldman Sachs. Instead, AIG could have demanded the return of some of the collateral it had already posted. Bad news for those counterparties.

More broadly, the hearing showed that the story of why AIG could not be allowed to fail continues to change, which inspires little confidence that Washington can be trusted with new powers to identify and address systemic risk. The original Beltway line was that the systemic risk was caused by AIG's inability to back up the credit default swap contracts it sold, thus endangering counterparties on the other end of these deals. In Washington's original telling, the company's insurance subsidiaries, heavily regulated by states, were safely segregated from the mess.

Yesterday, however, Messrs. Geithner and Paulson went further than ever in stating that the real systemic risk was to AIG's heavily regulated insurance businesses. Their testimony directly contradicts that offered to Congress by former New York Insurance Superintendent Eric Dinallo, who was AIG's principal insurance regulator at the time.

Last year Mr. Dinallo told the Senate that "The main reason why the federal government decided to rescue AIG was not because of its insurance companies." He was so confident in the health of the AIG subsidiaries that, before the federal bailout, he was working on a plan to transfer $20 billion of their excess reserves to the parent company.

Yesterday, Mr. Geithner said that the "people responsible" for overseeing the insurance subsidiaries "had no idea" about the risks facing AIG policyholders. He's talking about Mr. Dinallo here. Instead of being safely segregated, Mr. Geithner said the insurance businesses were "tightly connected" to the parent company. Mr. Paulson added that the healthy parts of AIG had been "infected" by the "toxic assets." He added, "One part of the company would have contaminated the other."

This raises some serious issues for financial reform. The Geithner and Paulson story now is essentially that the system of heavy state insurance regulation was a sham. When push came to shove, policyholders were not protected from a default by the parent company.

This also makes us wonder about all of the political and media chatter over the last year that derivatives were the doomsday machine that caused the meltdown. If this testimony is correct, then the systemic risk wasn't that if AIG collapsed it would infect Goldman and other financial companies like falling dominoes across the world.

The real risk was closer to an implosion of AIG that would have jeopardized millions of insurance policies. That's a big problem for insurance regulation. But if bad bets on derivatives would only have ruined AIG and its subsidiaries, that's not the same kind of danger to the entire financial system. And it suggests the need for different regulatory changes. We're not sure that policyholders were really in danger, but Mr. Dinallo and other state regulators deserve a chance to respond on the record, and under oath.

If yesterday's testimony is true, the real systemic risk was not in unregulated markets where the danger is obvious, but in markets where regulation created the illusion of safety.

Tuesday, January 26, 2010

Why Do the Chinese Save So Much? A skewed sex ratio is fueling a highly competitive marriage market, driving up China’s savings rate

Why Do the Chinese Save So Much? By Shang-Jin Wei

A skewed sex ratio is fueling a highly competitive marriage market, driving up China’s savings rate and with it the global trade imbalance.
Columbia Business School Ideas@Work, Jan 22 2010


Much attention has been directed toward China’s high savings rate. Not only is the savings rate disproportionately high compared to virtually any other country, but it directly impacts China’s current account surplus and the U.S. consumer deficit. When national savings exceeds investment, the excess savings shows up in China’s current account surplus.

The prolonged period of low global interest rates has been attributed in large part to this surplus, and with the surplus come pros and cons. “In the context of the current crisis, the long period of low interest rates was linked to excessive risk-taking behavior in U.S. markets, especially where regulation has been lax or inadequate,” Professor Shang-Jin Wei says. “The upside is that with low interest rates comes a lower cost of capital, which is good for investment.”

Given its far-reaching effects, both private sector analysts and policy makers have attempted to trace the causes of China’s high savings rate and to predict how long it will last. Some have attributed the savings primarily to Chinese corporations rather than households. Others point to a precautionary savings motive: because Chinese people are worried about costs of healthcare, education and old-age pensions and are unsure about how much these costs might change over time, they respond by saving more. Other explanations point to habit formation or financial development.

“But these explanations do not tell the whole story, and possibly are not the most important part of the story,” says Wei. Instead, Wei hypothesized that an important social phenomenon is the primary driver of the high savings rate: for the last few decades China has experienced a significant imbalance between the number of male and female children born to its citizens.

There are approximately 122 boys born for every 100 girls today, a ratio that translates into cutting about one in five Chinese men out of the marriage market when this generation of children grows up. Three factors conspire to produce the imbalance. First, Chinese parents often prefer sons. Second, it has become increasingly inexpensive for even a relatively poor farmer to afford the $12 Ultrasound B, the most common technology used for learning the gender of a fetus.

Third, and perhaps most importantly, China’s stringent family planning policy limits the number of children a couple can have. The policy allows most couples to have only one child. But in some regions, if a couple’s first child is a daughter, the state permits the couple to have another child. Families with one daughter that become pregnant with another daughter are more likely to terminate the second pregnancy in hopes of producing a son later on. (India, Korea, Vietnam and Singapore also have sex ratio imbalances that favor male children despite the absence of these stringent family planning policies. It might be that in these countries people voluntarily want to restrict the number of children they have, and still prefer sons and have access to inexpensive selective abortions. The sex ratio imbalance is high in these countries but not as extreme as in China.)

“The increased pressure on the marriage market in China might induce men and parents with sons to do things to make themselves more competitive,” Wei says. “Increasing savings is one logical way to do that, to the extent that wealth helps to increase a man’s competitive edge. Parents increase household savings mostly by cutting down their own consumption.”

Wei worked with Xiaobo Zhang of the International Food Policy Research Institute in Washington, D.C., to see if his hypothesis held up, comparing savings data across regions and in households with sons versus those with daughters. “We find not only that households with sons save more than households with daughters in all regions,” Wei says, “but that households with sons tend to raise their savings rate if they also happen to live in a region with a more skewed sex ratio.”

The effect is significant. The household savings rate in China rose from about 16 percent of disposable income in 1990 to over 30 percent today, which is much higher than most countries. About half of the increase in the savings rate of the last 25 years can be attributed to the rise in the sex ratio imbalance. “It’s a very high ratio of savings to income,” Wei says. “The comparable savings rate in the United States would be 2 or 3 percent before the crisis, and about 6 percent since the crisis.”

Even those not competing in the marriage market must compete to buy housing and make other significant purchases, pushing up the savings rate for all households.

“While the conventional explanations for the high savings rate all play a role, they are not as important as people previously thought,” Wei says. “People had noticed the sex ratio imbalance as a social problem. Sociologists and other social scientists had looked at the phenomenon but had not looked at it in relation to the high Chinese savings rate.”

As economists and policy makers have looked with concern to the large Chinese current account surplus and large U.S. current account deficit, or global imbalances, much of their discussion has focused on changing exchange rate policy.

There are global economic implications if China continues to save at such a high rate, and Wei’s research highlights a connection between social policy, saving behavior and current account balances.

“Exchange rates might be part of the solution, but our work suggests they might not be the most important part,” Wei says. Because sex ratio imbalances that skew toward males are viewed as evidence of a society’s tendency to discriminate against women, it calls attention to the status of women and women’s rights. And China is not the only country where the sex ratio dynamic needs attention. “The effect of sex ratio imbalance on savings is not unique to China,” he says. “Many other countries with significant sex ratio imbalances also have relatively high current account balances.

“None of the discussion about global imbalances has brought family planning policy or women’s rights to the table, because people do not see these issues as related to economic policy,” Wei says. “Our research suggests that this is a serious omission. You can only implement the right policy when you get the diagnosis correct, and fruitful policy dialogue has to include discussion on these issues.”

Shang-Jin Wei is the N.T. Wang Professor of Chinese Business and Economy in the Finance and Economics Division and director of the Jerome A. Chazen Institute of International Business at Columbia Business School.