Redistributing Wealth vs. Creating Wealth

John McCain

Dayton, Ohio

It's great to be back in Ohio. We need to win Ohio on November 4th, and with your help we're going to win here, and bring real change to Washington, DC.

It's been a long campaign and we've heard a lot of words, and great campaign trail eloquence. The amazing thing is that we've learned more about Senator Obama's real goals for our country over the last two weeks than we learned over the past two years. It is amazing that even at this late hour, we are still learning more about Senator Obama and his agenda. He told Joe the plumber right here in Ohio he wants to quote "spread the wealth around." It's always more interesting to hear what people have to say in these unscripted moments, and today we heard another moment like this from Senator Obama.

In a radio interview revealed today, he said that one of the quote -- "tragedies" of the civil rights movement is that it didn't bring about a redistribution of wealth in our society. He said, and I quote, "One of the tragedies of the Civil Rights movement was because the Civil Rights movement became so court-focused I think that there was a tendency to lose track of the political and community organizing and activities on the ground that are able to put together the actual coalitions of power through which you bring about redistributive change."

That is what change means for Barack the Redistributor: It means taking your money and giving it to someone else. He believes in redistributing wealth, not in policies that grow our economy and create jobs. He is more interested in controlling wealth than in creating it, in redistributing money instead of spreading opportunity. I am going to create wealth for all Americans, by creating opportunity for all Americans.

We've all heard his campaign trail promise: he says he only wants to tax the rich. But these unscripted moments and his record tell a different story. He supported the Democratic budget plan passed just this year that called for raising taxes on people making just 42,000 dollars per year. And Senator Obama has voted 94 times for tax increases or against tax cuts.

Senator Obama may say he's trying to soak the rich, but it's the middle class who are going to get put through the wringer, because even the tax increase he admits to misses the target. To pay for nearly a trillion dollars in new government spending, his tax increase would impact 50 percent of small business income in this country, and the jobs of 16 million middle class Americans who work for those small businesses.

Whether it's Joe the Plumber here in Ohio or the working men and women across this country, we shouldn't be taxing our small businesses more as Senator Obama wants to do, we need to be helping them expand their businesses and create jobs. America didn't become the greatest nation on earth by giving our money to the government to "redistribute." In this country, we believe in spreading opportunity, for those who need jobs and those who create them. And that is exactly what I intend to do as President of the United States.

My opponent's massive new tax increase is exactly the wrong approach in an economic slowdown. The answer to a slowing economy is not higher taxes, but that is exactly what is going to happen when the Democrats have total control of Washington. We can't let that happen. We need pro-growth and pro-jobs economic policies, not pro-government spending programs paid for with higher taxes.

This is the fundamental difference between Senator Obama and me. We both disagree with President Bush on economic policy. The difference is that he thinks taxes have been too low, and I think that spending has been too high. Senator Obama's priority is not to get spending under control, it is to spend more, and if he has to tax you to do it, he's shown in the past that he doesn't have a problem with that.

We cannot spend the next four years as we have spent much of the last eight: spending ourselves into a ditch and hoping that the consequences don't come. We need to get our government under control, and we need to get our economy moving again. We have to act. We need a new direction, and we have to fight for it.

I've been fighting for this country since I was seventeen years old, and I have the scars to prove it. If I'm elected President, I will fight to shake up Washington and take America in a new direction from my first day in office until my last. I'm not afraid of the fight, I'm ready for it.

I'm not going to spend $750 billion dollars of your money just bailing out the Wall Street bankers and brokers who got us into this mess. I'm going to make sure we take care of the working people who were devastated by the excesses of Wall Street and Washington.

I have a plan to hold the line on taxes and cut them to make America more competitive and create jobs here at home. We're going to double the child deduction for working families. We will cut the capital gains tax. And we will cut business taxes to help create jobs, and keep American businesses in America. Raising taxes makes a bad economy much worse. Keeping taxes low creates jobs, keeps money in your hands and strengthens our economy.

If I'm elected President, I won't spend nearly a trillion dollars more of your money. Senator Obama will. And he can't do that without raising your taxes or digging us further into debt. I'm going to make government live on a budget just like you do.

I will freeze government spending on all but the most important programs like defense, veterans care, Social Security and health care until we scrub every single government program and get rid of the ones that aren't working for the American people. And I will veto every single pork barrel bill Congresses passes.

If I'm elected President, we're going to stop spending $700 billion to buy oil from countries that don't like us very much. Senator Obama will argue to delay drilling for more oil and gas and against building new nuclear power plants in America. If I am president, we will start new drilling now. We will invest in all energy alternatives -- nuclear, wind, solar, and tide. We will encourage the manufacture of hybrid, flex fuel and electric automobiles. We will invest in clean coal technology. We will lower the cost of energy within months, and we will create millions of new jobs.

Let me give you the state of the race today. There's eight days to go. We're a few points down. The pundits have written us off, just like they've done before. My opponent is working out the details with Speaker Pelosi and Senator Reid of their plans to raise your taxes, increase spending, and concede defeat in Iraq. He's measuring the drapes, and he's planned his first address to the nation for before the election. I guess I'm old fashioned about these things I prefer to let the voters weigh in before presuming the outcome.

What America needs now is someone who will finish the race before the starting the victory lap ... someone who will fight to the end, and not for himself but for his country.

I have fought for you most of my life, and in places where defeat meant more than returning to the Senate. There are other ways to love this country, but I've never been the kind to back down when the stakes are high.

I know you're worried. America is a great country, but we are at a moment of national crisis that will determine our future.

Will we continue to lead the world's economies or will we be overtaken? Will the world become safer or more dangerous? Will our military remain the strongest in the world? Will our children and grandchildren's future be brighter than ours?

My answer to you is yes. Yes, we will lead. Yes, we will prosper. Yes, we will be safer. Yes, we will pass on to our children a stronger, better country. But we must be prepared to act swiftly, boldly, with courage and wisdom.

I'm an American. And I choose to fight. Don't give up hope. Be strong. Have courage. And fight.

Fight for a new direction for our country. Fight for what's right for America.

Fight to clean up the mess of corruption, infighting and selfishness in Washington.

Fight to get our economy out of the ditch and back in the lead.

Fight for the ideals and character of a free people.

Fight for our children's future.

Fight for justice and opportunity for all.

Stand up to defend our country from its enemies.

Stand up, stand up, stand up and fight. America is worth fighting for. Nothing is inevitable here. We never give up. We never quit. We never hide from history. We make history.

Now, let's go win this election and get this country moving again.

The Europeanization of America

What's ahead if Obama becomes president.

PETE DU PONT

Barack Obama is likely to become the next president of the United States.

Six weeks ago John McCain was leading Mr. Obama. But according to RealClearPolitics, as of yesterday Mr. Obama led in the national polls by just under 8% and in the Electoral College by 306 to 157 (a majority is 270). Throughout his campaign Mr. Obama has successfully presented himself as a careful and sensible person and was recently endorsed by Christopher Buckley, son of the late William F. Buckley, as having a "first-class temperament and a first-class intellect."

But Mr. Obama will most likely be our most liberal public policy president since Franklin D. Roosevelt. Since President Bush is not popular (his approval rating is at 25%, with 71% disapproving), Mr. McCain has not run an inspiring campaign, and most people have declining confidence in our economic and financial system, voters have simply decided it is time for change. Gallup reports that just 7% of Americans are satisfied with the way things are going, so voters seem to have concluded that they will take a chance on Mr. Obama, whatever his policies may be.

The only organization with a worse rating than the Republican president is the Democratic Congress—14% approval, 75% disapproval. But there, too, the Democrats will gain strength. They are expected to increase their majority in the House, and current polling shows that in Senate races Democrats will increase their members from the current 51 (including two independents who caucus with the Democrats) to at least 57. They may even achieve the 60 votes needed to overcome a filibuster.

So where is the new Obama administration likely to take us? Seven things seem certain:

• The U.S. military will withdraw from Iraq quickly and substantially, regardless of conditions on the ground or the obvious consequence of emboldening terrorists there and around the globe.
• Protectionism will become our national trade policy; free trade agreements with other nations will be reduced and limited.
• Income taxes will rise on middle- and upper-income people and businesses, and individuals will pay much higher Social Security taxes, all to carry out the new president's goals of "spreading the wealth around."
• Federal government spending will substantially increase. The new Obama proposals come to more than $300 billion annually, for education, health care, energy, environmental and many other programs, in addition to whatever is needed to meet our economic challenges. Mr. Obama proposes more than a 10% annual spending growth increase, considerably higher than under the first President Bush (6.7%), Bill Clinton (3.3%) or George W. Bush (6.4%).
• Federal regulation of the economy will expand, on everything from financial management companies to electricity generation and personal energy use.
• The power of labor unions will substantially increase, beginning with repeal of secret ballot voting to decide on union representation.
• Free speech will be curtailed through the reimposition of the Fairness Doctrine to limit the conservative talk radio that so irritates the liberal establishment.

These policy changes will be the beginning of the Europeanization of America. There will be many more public policy changes with similar goals—nationalized health care, Kyoto-like global-warming policies, and increased education regulation and spending.

Additional tax advantages for lower and middle income people will be enacted: a 10% mortgage tax credit that would average about $500 per household per year, a $4,000 tax credit for college tuition, a tax credit covering half of child-care expenses up to $6,000 per year, and even a $7,000 credit for purchase of a clean car.

More important, all but the clean car credit would be "refundable," meaning people will get a check for them if they owe no taxes, which is simply a transfer of income from the government to individuals. In reality this is the beginning of a new series of entitlements for middle-class families, the longer-term effect of which will be to make those families more dependant on (and so more supportive of) larger government. The Tax Policy Center estimates that these refundable tax credits would cost the government $648 billion over 10 years.

These are Mr. Obama's plans. Meanwhile, congressional Democrats would increase spending for their own interests and favorite programs. More important, the Congress will consider itself more important than a freshman president who has never held an executive position, so they will do what they want and he will have to go along with most of it.

What can the Republicans in Washington to do to avoid the Europeanization of America? The obvious answer is to win some elections two years from now to reduce the congressional power of those who favor it. But in the meantime they need stronger, better leadership of their minority party.

Then they need to make the case against each of the issues noted above; why they would be a mistake, what their cost would be to the economy, jobs and people and their families, and what would be a better approach. They will not win all the fights, but on protectionism, higher taxes and broader government regulation they can win the support of a great many Americans. And that might keep America from becoming Europeanized and our people from losing their money, their jobs and the market freedom of our country.

Credit Panic: Stages of Grief

Uncertainty about Washington will slow the recovery.

• By L. GORDON CROVITZ

Wall Street is working its way through the cycle of grief that starts with shock and denial, progresses to accepting responsibility and eventually gets to the stage of learning from mistakes. In contrast, Washington remains stuck in the denial phase, with political leaders refusing to admit that their actions have any responsibility for the credit panic. This matters because regulatory denial is suppressing confidence in markets, especially now that the country's financial capital is in Washington, not in New York.

AP

Last week's congressional hearings included important mea culpas. Former Federal Reserve Chairman Alan Greenspan focused on the information gap in the banking industry that he, and others, failed to see. "The best insights of mathematicians and finance experts, supported by major advances in computer and communications technology" had a fatal flaw. "The whole intellectual edifice," he admitted, "collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria."

In another hearing, credit ratings agencies took their share of blame. An instant-message exchange from last year was disclosed in which one ratings-agency executive texted another, "We rate every deal. It could be structured by cows and we would rate it." Lesson learned.

On Wall Street, it pays to admit mistakes, then at least try to make different mistakes the next time around. The best news last week was the little-noticed success in settling the credit default swaps relating to Lehman Brothers debt, which had caused anxiety about the potential losses.

Traders called this bellwether for the opaque, $62-trillion market a "nonevent." Having learned the hard way that opaque markets are risky markets, the private sector is trying to bring transparency to credit derivatives, either by creating a clearinghouse to centralize information, or through an exchange with disclosure of prices and conditions. Derivatives would again reduce risk, not heighten it.

But Washington's culture is fundamentally different from Wall Street's culture. Politicians of all parties thrive by avoiding responsibility and shifting blame. Congress has not even held hearings yet in the area where it is most clearly responsible: social engineering through banking by pumping mortgages to unqualified borrowers via Fannie Mae, Freddie Mac and laws that required banks to make bad loans. Hearings are promised after the election.

Accepting responsibility for the folly of Fannie and Freddie is crucial. Markets expect even more politicized lending now that the government has direct stakes in banks. Treasury Secretary Henry Paulson offers assurances that banks will operate without political influence, but just last week a group of Democratic senators agitated for lending rules aimed at supporting their social goals.

We've learned that complex modern banking can barely cope with its core function of allocating capital efficiently, much less politically. Denial of this basic point is undermining the beginnings of a return to confidence.

Indeed, a relevant lesson from the Great Depression is that economic recovery was postponed for years by what economist Robert Higgs calls the "regime of uncertainty." Mr. Higgs traces the uncertainties caused by extreme government economic intervention in the 1930s through laws, regulations and confiscatory tax rates. He writes in The Independent Review that "businesspeople may be more or less 'uncertain about the regime,' by which I mean, distressed that investors' private property rights in their capital and the income it yields will be attenuated further by government action."

Or, as Amity Shlaes, author of the best seller on the causes of the Great Depression, "The Forgotten Man," puts it, our current economy is in a "recession of uncertainty." Until Washington accepts responsibility for its role in politicizing banking over the past several years, markets will not be confident about the rules of the road.

The lesson from both the Depression and Mr. Greenspan's apology last week is that reforms should address the underlying problem of missing information. Over the past few years, markets didn't have the information needed to price bad mortgages or overly complex securities. The securities laws of the 1930s are a model for today's solution. They required transparency about stocks and the other investment vehicles of the time. These reforms played perhaps the central role in restoring trust in financial markets.

The rules for disclosure need to be updated for modern financial instruments. Key data points about the frailties of the current system existed, but were not accessible. Silos within banks, ratings agencies and regulatory authorities had pieces of the story, but they were not subject to disclosure, and so the dots weren't shared or connected. We understood the risks too late.

A proper role for government is to require better disclosure of information. This would help balance risks and rewards. Just as in the 1930s, more transparent information would restore trust in financial markets, both in Washington and on Wall Street. If Washington can catch up to the private sector in admitting its mistakes, we can move beyond the credit crisis and forward to restore stability, with an end in sight to the current cycle of grief.

The Age of Prosperity Is Over

This administration and Congress will be remembered like Herbert Hoover.

ARTHUR B. LAFFER

About a year ago Stephen Moore, Peter Tanous and I set about writing a book about our vision for the future entitled "The End of Prosperity." Little did we know then how appropriate its release would be earlier this month.

Financial panics, if left alone, rarely cause much damage to the real economy, output, employment or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent. This process is the topic of Nassim Nicholas Taleb's book "Fooled by Randomness."

David Gothard

When markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.

No one likes to see people lose their homes when housing prices fall and they can't afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house's value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.

But here's the rub. Now enter the government and the prospects of a kinder and gentler economy. To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy. And the government doesn't create anything; it just redistributes. Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.

If you don't believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they'll do with Wall Street.

Some 14 months ago, the projected deficit for the 2008 fiscal year was about 0.6% of GDP. With the $170 billion stimulus package last March, the add-ons to housing and agriculture bills, and the slowdown in tax receipts, the deficit for 2008 actually came in at 3.2% of GDP, with the 2009 deficit projected at 3.8% of GDP. And this is just the beginning.

The net national debt in 2001 was at a 20-year low of about 35% of GDP, and today it stands at 50% of GDP. But this 50% number makes no allowance for anything resulting from the over $5.2 trillion guarantee of Fannie Mae and Freddie Mac assets, or the $700 billion Troubled Assets Relief Program (TARP). Nor does the 50% number include any of the asset swaps done by the Federal Reserve when they bailed out Bear Stearns, AIG and others.

But the government isn't finished. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid -- and yes, even Fed Chairman Ben Bernanke -- are preparing for a new $300 billion stimulus package in the next Congress. Each of these actions separately increases the tax burden on the economy and does nothing to encourage economic growth. Giving more money to people when they fail and taking more money away from people when they work doesn't increase work. And the stock market knows it.

The stock market is forward looking, reflecting the current value of future expected after-tax profits. An improving economy carries with it the prospects of enhanced profitability as well as higher employment, higher wages, more productivity and more output. Just look at the era beginning with President Reagan's tax cuts, Paul Volcker's sound money, and all the other pro-growth, supply-side policies.

Bill Clinton and Alan Greenspan added their efforts to strengthen what had begun under President Reagan. President Clinton signed into law welfare reform, so people actually have to look for a job before being eligible for welfare. He ended the "retirement test" for Social Security benefits (a huge tax cut for elderly workers), pushed the North American Free Trade Agreement through Congress against his union supporters and many of his own party members, signed the largest capital gains tax cut ever (which exempted owner-occupied homes from capital gains taxes), and finally reduced government spending as a share of GDP by an amazing three percentage points (more than the next four best presidents combined). The stock market loved Mr. Clinton as it had loved Reagan, and for good reasons.

The stock market is obviously no fan of second-term George W. Bush, Nancy Pelosi, Harry Reid, Ben Bernanke, Barack Obama or John McCain, and again for good reasons.

These issues aren't Republican or Democrat, left or right, liberal or conservative. They are simply economics, and wish as you might, bad economics will sink any economy no matter how much they believe this time things are different. They aren't.

I was on the White House staff as George Shultz's economist in the Office of Management and Budget when Richard Nixon imposed wage and price controls, the dollar was taken off gold, import surcharges were implemented, and other similar measures were enacted from a panicked decision made in August of 1971 at Camp David.

I witnessed, like everyone else, the consequences of another panicked decision to cover up the Watergate break-in. I saw up close and personal Presidents Gerald Ford and George H.W. Bush succumb to panicked decisions to raise taxes, as well as Jimmy Carter's emergency energy plan, which included wellhead price controls, excess profits taxes on oil companies, and gasoline price controls at the pump.

The consequences of these actions were disastrous. Just look at the stock market from the post-Kennedy high in early 1966 to the pre-Reagan low in August of 1982. The average annual real return for U.S. assets compounded annually was -6% per year for 16 years. That, ladies and gentlemen, is a bear market. And it is something that you may well experience again. Yikes!

Then we have this administration's panicked Sarbanes-Oxley legislation, and of course the deer-in-the-headlights Mr. Bernanke in his bungling of monetary policy.

There are many more examples, but none hold a candle to what's happening right now. Twenty-five years down the line, what this administration and Congress have done will be viewed in much the same light as what Herbert Hoover did in the years 1929 through 1932. Whenever people make decisions when they are panicked, the consequences are rarely pretty. We are now witnessing the end of prosperity.

Mr. Laffer is chairman of Laffer Associates and co-author of "The End of Prosperity: How Higher Taxes Will Doom the Economy -- If We Let it Happen," just out by Threshold.

Must We Obey Interior Design Regulations?

by Art Carden

Should "Joe the Plumber" be allowed to do plumbing work without all the requisite licenses and affiliations? What if he were calling himself an interior designer?

A recent article in Regulation magazine discusses how many states are passing regulations on interior design. I recently read Francis Schaeffer's compelling A Christian Manifesto, and it argues that there are situations in which we have not just the right but the moral duty to disobey the state. Let's go ahead and take Romans 13 as the standard by which the state's justice is measured, and assume for the sake of argument that states and state-like organizations are restricted to punishing evil and rewarding good. Now let's consider whether interior design regulations measure up.

Do regulations on interior design punish evil and reward good? Certainly not. One justification for these regulations is that they prevent unscrupulous unlicensed designers from committing crimes against their unwitting customers — say, by recommending venetian blinds that don't match the curtains — but this is similar to the punishment of "precrime" in the movie Minority Report. In an imperfect world there will always be unscrupulous people doing unscrupulous things, but fraud and deceit are best handled by a sound legal system (consisting of competing private courts!) than by entrenched bureaucracy.

So what is rewarded and punished in a regime where interior design is regulated? It's actually the perverse opposite of what the state is enjoined to do in the Bible. The state punishes those who do good (those who provide services that customers are willing to pay for at a price they are willing to pay) and rewards those who do evil (those who use the coercive power of the state to prevent people from entering the marketplace and earning a living). Schaeffer would argue that we do not only have a right but a moral duty to disobey such unjust laws.

And I'm going to do that right now by making a couple of recommendations as an unlicensed "interior designer." I'm a big fan of functionality in interior design, and my wife has a special gift for finding great, functional furniture at thrift stores and junk shops, which she can then paint to match the rest of our furniture. Hence, our living room furniture is an eclectic mix of stuff we bought new (our couch and our big comfy chair) and stuff we got at thrift stores. If you want to save money and live in a comfortable ambient environment, I recommend that you do the same.

We also have several paintings and prints hanging on the walls: one is a print that we won in a giveaway on a cruise ship; the other was a wedding gift from my sister-in-law (who studied art in college), and the other is an excellent painting that my wife (untrained in painting, and unlicensed!) did. All three match our decor and provide a nice balance in our living room and dining room.

Now let's move on to the office. We have a couple of pressed-wood desks from K-Mart (one might actually be from Wal-Mart, but I don't remember), a filing cabinet I picked up in grad school that Wash U would have thrown away (reduce, reuse, recycle!), a few bookcases (one that we got from my parents, one that we got from a thrift store, one that was a wedding gift from my wife, and one that we found next to a dumpster when we lived in St. Louis), my wife's sewing desk, and the most comfortable futon in the world (bought from a friend in grad school).

So here are my interior design recommendations for people who want to live like economics professors: scour thrift stores and junk shops, keep an eye open for stuff people are throwing away, and go for "functional" rather than "cute."

Suffice it to say that taking fashion or interior design advice from an economics professor is probably not a very good idea. As my wife can no doubt tell you emphatically, interior design is absolutely not my comparative advantage; ergo, it stands to reason that I would probably be smacked around by the invisible hand and then led to other employments if I tried to do this professionally. You follow my unregulated advice at your own peril, and no government has the right to deny you that choice.

This introduces all sorts of thorny issues. Once the regulatory ball gets rolling, when do we stop it? I'm a professor at a school in Tennessee and I wrote the first draft of this article from a friend's finished basement in West Virginia — well appointed with memorabilia celebrating the Florida State Seminoles, the West Virginia Mountaineers, and the Tampa Bay Buccaneers, I might add — for a research institute in Alabama. I don't want to open Pandora's Box, here, but isn't this interstate commerce? Shouldn't there be a federal agency charged with regulating interstate trade in interior design tips? Where does it all end?

There is no plausible economic justification for government regulation of interior design rather than private certification. The idea that the state has the legitimate authority to tell people whether they can or cannot recommend shades of paint without a license is a moral absurdity. Laws and regulations like these are not laws and regulations we have a duty to obey. If anything, as Schaeffer might argue, we have a moral duty to disobey them.

Sunday, October 26, 2008

The coming days

The week ahead

More economic fears, the last week of campaigning in America, and other news

• BARACK OBAMA and John McCain embark on a whirlwind of political rallies in the last full week before America's presidential election. Mr Obama, who holds a steady lead over Mr McCain in the opinion polls, is also due to appear in a half-hour campaign “infomercial” on primetime television on Wednesday October 29th, the anniversary of the 1929 Wall Street crash. His TV slot will delay the start of a World Series baseball game by 15 minutes.

For background, see article

• AN EMERGENCY summit to revive Zimbabwe’s faltering power-sharing deal should be held on Monday October 27th. The deal is deadlocked over the allocation of cabinet seats between Robert Mugabe’s Zanu-PF party and the Movement for Democratic Change led by Morgan Tsvangirai. Mr Tsvangirai, who is supposed to become prime minister under the terms of the deal, accuses Mr Mugabe of trying to install his followers in important cabinet seats. The chances of other African leaders loosening Mr Mugabe’s limpet-like grip on power look slim.

For background, see article

• THE ill-effects on the real economy caused by the financial crisis are likely to become more apparent. The Federal Reserve may decide to lower interest rates again. Then on Thursday October 30th preliminary estimates for America's third quarter GDP will be released. These are expected to show that the economy has contracted by half a percentage point at an annual rate. This will provide the first official indication that America is sliding into a recession that many pundits believe could be long and painful.

For background, see article

• FOLLOWING the untimely death of President Levy Mwanawasa in August, Zambians must vote for a new leader on Thursday October 30th, just two years after their previous presidential election. Four candidates are in the running. But the real contest is between Rupiah Banda, the vice-president who has acted as caretaker since Mr Mwanawasa’s death, and Michael Sata, a fiery populist who was defeated in 2006.

Obama-Pelosi-Reid Is Picture Markets Won't Like: Amity Shlaes

Commentary by Amity Shlaes

-- Obama, OK. Obama-Pelosi-Reid? A nightmare for markets. McCain-Pelosi-Reid? OK. McCain and Republican majorities in both House and Senate? Another nightmare.

That at least is the analysis of Eric Singer of Congressional Effect Fund, a new mutual fund. As noted in an earlier column, Singer got into the index business after he found that the Standard & Poor's 500 Index performs two or three times better when Congress is out of session than when at least one of the two chambers is at work.

That difference, Singer discovered, wasn't because of political party -- a laboring Republican Congress was also problematic. The poor performance, rather, reflects market anxiety that the House and Senate generate when they pass a new regulation or revise laws already on the books. Simple congressional workday chatter about possible changes is also negative, according to the Singer data.

``Even talk is not cheap,'' he says.

This past August, with Congress safely on holiday, markets were still weird. That set Singer to wondering anew.

He noted that there were years, such as 1998, in the middle of Congress's Republican reassertion, when markets did great even when lawmakers were at their posts.

Combing his data back to 1965, Singer found a second trend. A split Washington, in which at least one of the two chambers is led by a party other than the president's, points to a better total return for the S&P 500 than a unified Washington in which the presidency, House and Senate are controlled by one party.

Clinton Constrained

Having Democrat Bill Clinton in the White House in 1998 constrained congressional Republicans, or the other way around.

Singer found that the average annual total return for the S&P 500 when Washington is a one-party town is 9.4 percent. The average performance for the index when Washington is split is 10.6 percent.

The distinction becomes clearer when you adjust for inflation. Singer used the annual average of the daily gold price as a deflator rather than a year-over-year number because he wanted to screen for the volatility of commodities. Singer found that in periods of a unified Washington, the S&P 500 averages real losses of 7.8 percent. A split Washington, by contrast, racks up a real gain averaging 8.7 percent. That 16- plus point spread is the quantification of the peril of a powerful Washington.

These numbers also suggest that inflation tends to be worse in unified years. This makes sense -- when Washington is mightier, one fashion in which it uses its power is minting money, consequences be damned. A Federal Reserve chairman who must report to only one party, instead of two, has fewer rounds to make when he seeks support for the Fed's actions.

Drama Days

The Singer method also captures the drama of 1980. Washington was all Democratic, though it was clear even in the spring that Ronald Reagan might win the presidency.

The market reacted by rising in anticipation of a change. The price of gold reacted by falling late in the year. One might argue that this reflected the market's faith that Reagan would spend less than President Jimmy Carter. But the change in gold prices may also have been the result of political division within the Democratic Party.

The new Fed chairman, Paul Volcker -- a Democrat who today is advising Senator Barack Obama in the race for president against John McCain -- started applying the brakes at the Fed. By exercising monetary restraint, a trait identified at the time with the Republican Party, Volcker -- with backing from Carter - - provided a counterweight to free spenders of either party.

Hurting Returns

An all-Republican Washington can hurt real total returns, too. In 2005, the S&P gain of 4.9 percent was more than erased by the 8.5 percent increase in the price of gold. In 2006, gold was up about 36 percent but the S&P climbed only 16 percent, a net 20 percent loss.

The scholars who look at this sort of thing all have slightly different takes on it. Some quibble, for example, with Singer's choice of gold as a measure of inflation. But recent events confirm the validity of the gold meter. The consumer price index shows an increase of only 2.5 percent between December 2005 and December 2006 -- quite a contrast with that 36 percent increase in gold for the year. Today's markets suggest that gold did a better job than the CPI of predicting bubbles.

In Singer's data we see early discounting for this year's stock price collapse.

It's been said of numbers that if you torture them enough they will admit to anything. This year Congress and the White House were held by different parties, and we still managed to have our historic crash.

Getting Ready

Markets, which don't care whose campaign they ruin, may also be bracing for an all-Democratic Washington. Consumers may also be spending less not only because of the market turmoil but also because they believe a government dominated by Democrats may, in the future, allow them to keep less of their earnings.

This would fit in with the late Milton Friedman's permanent-income hypothesis. Singer is now studying market performance when a single party holds not only the White House and Congress, but also a filibuster-proof majority in the Senate. With each passing day that, too, looks like a number worth crunching.

Bank of Korea Cuts Key Rate a Record 75 Basis Points (Update2)

Oct. 27 (Bloomberg) -- The Bank of Korea slashed interest rates by a record at an emergency meeting in an attempt to restore confidence after stocks lost a fifth of their value and the won fell to a decade low last week.

Governor Lee Seong Tae lowered the seven-day repurchase rate by 75 basis points to 4.25 percent and cut rates on special loans for small and medium-sized companies to 2.5 percent from 3.25 percent, the central bank said in a statement in Seoul today. It will also accept bonds issued by commercial banks as collateral in its money-market operations, giving them access to more funds.

President Lee Myung Bak, who met Finance Minister Kang Man Soo and central bank Governor Lee yesterday, said today the country is far from experiencing a repeat of the 1997 financial crisis when it needed a $57 billion loan from the International Monetary Fund.

``The Korean authorities felt compelled to take dramatic action in the face of global turmoil,'' said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. ``The rate cut might provide a brief boost to the financial market but the general panic environment prevails.''

South Korea's Kospi stock index fell 0.8 percent at 10:55 a.m. in Seoul after earlier rising as much as 3 percent. The index plummeted 20 percent last week. The won sank to 1,441.60 against the dollar from 1,424, extending this year's drop to 35 percent.

Japan's Measures

Japan's government will compile a package of measures after stocks slumped last week, Finance Minister Shoichi Nakagawa said last night. The Nikkei 225 Stock Average fell today to the lowest since 1982 before rebounding.

``Emergency meetings by policy makers around the world reflect their fear and the severity of the financial turmoil,'' said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. ``They are on the right track and this excessive volatility in markets should calm soon.''

``A large cut in the base rate is called for in order to guard securely against the possibility of a sharp contraction of real economic activity,'' the bank said in a statement, adding it would attempt to ward off a slowdown in economic growth and keeping a watch on inflation.

Currency Rules

The bank said today it would also ease rules to make it easier for exporters to borrow dollars. Also, small businesses that borrowed mostly in Japanese yen can extend their foreign- currency loans for another year, it said. The won has fallen 45 percent against the yen this year.

``The Bank of Korea will likely cut rates again at their monthly rate-setting meeting next week,'' Chun Chong Woo, an economist at SC First Bank Korea Ltd. in Seoul. ``The Bank of Korea seems determined to stop the market panic from the U.S. financial crisis spreading.''

The Bank of Korea last week raised the limit on so-called total loans to 9 trillion won ($6.2 billion) from 6.5 trillion won. Total loans are offered to commercial banks at a special interest rate -- lower than the nation's benchmark rate of 4.25 percent -- with the funds earmarked for small and medium-sized businesses.

Federal Reserve policy makers, meeting this week, are forecast to lower interest rates for a second time this month to try to thaw frozen credit markets and prevent a deepening recession.

President Lee held the emergency meeting on returning from a Beijing gathering of Asian and European leaders at which they called for an overhaul of World War II-era banking rules. It was the first meeting of Asian and European Union chiefs since calls for coordinated action mounted amid bank failures and plunging stock prices that began in September.

South Korea last week pledged $130 billion to support lenders struggling to obtain foreign funds and said it will spend as much as 8 trillion won to rescue builders struggling with unsold homes. The central bank said Oct. 24 it will inject 2 trillion won into the financial system through repurchase- agreement operations.

Asian Stocks Drop for Fourth Day, Led by Mitsubishi UFJ, Elpida

Oct. 27 (Bloomberg) -- Asian stocks fell for a fourth day in volatile trade, led by banks and technology shares, as concern that a global economic slowdown is deepening outweighed government measures to stimulate growth.

Mitsubishi UFJ Financial Group Inc. slumped 11 percent after the Nikkei newspaper said the bank will have to raise funds to bolster capital. Their declines helped the Nikkei 225 Stock Average touch a 26-year low. Hyundai Department Store Co. plunged 15 percent in Seoul even after the Bank of Korea cut interest rates by an unprecedented 75 basis points. Elpida Memory Inc. tumbled 16 percent after Deutsche Bank AG advised investors to sell the stock.

``In this kind of market that's moving without sensible reasons, only God knows what's going to happen tomorrow,'' said Yoshinori Nagano, a Tokyo-based senior strategist at Daiwa Asset Management Co., which manages the equivalent of $96 billion. ``That's why people are so scared of what's ahead of them and sell whatever they have to avoid losses.''

The MSCI Asia Pacific Index declined 1.7 percent to 79.03 as of 11:10 a.m. in Tokyo, extending a three-day, 13 percent retreat. The Nikkei gained 0.6 percent to 7,691.30, after earlier falling to its lowest level since November 1982 and climbing as much as 3 percent. The measure

South Korea's Kospi Index dropped 0.6 percent, after jumping as much as 3 percent following the rate cut. Taiwan's Taiex Index tumbled 5.5 percent, led by Hon Hai Precision Industry Co. after regulators widened daily limits for stock declines.

New Zealand, Singapore and Malaysian markets are closed for holidays. Standard & Poor's 500 Index futures rose 0.9 percent.

Government Measures

Japan's government will compile a package of measures to support the country's stock market, Finance Minister Shoichi Nakagawa said yesterday without being specific. Traders also increased bets that U.S. Federal Reserve policy makers, meeting this week, will cut its target for overnight loans between banks in half to 0.75 percent this week.

``Emergency meetings by policy makers around the world reflect their fear and the severity of financial turmoil,'' said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. ``They are on the right track and this excessive volatility in markets should calm soon.''

More than $11 trillion has been erased from the market value of equities so far this month, accounting for almost one-third of the total value wiped off stocks this year. MSCI's index of developed and emerging stock markets plunged 47 percent in 2008, headed for its worst year on record, as credit-related losses topped $660 billion.

Mitsubishi UFJ fell 11 percent to 607 yen. Mizuho Financial Group Inc. declined 13 percent to 233,900 yen, the lowest since November 2003. Sumitomo Mitsui Financial Group Inc., Japan's third-largest bank, slid 11 percent to 385,000 yen.

Fundraising Reports

Mitsubishi UFJ may raise as much as 1 trillion yen ($10.6 billion) by selling new shares to improve its finances, the Nikkei newspaper said yesterday. Mizuho Financial and Sumitomo Mitsui may also raise capital, broadcaster NHK reported. The three banks said in separate statements today that nothing has been decided.

Hyundai Department tumbled 15 percent to 46,300 won, extending a 15 percent decline on Oct. 24. KT&G Corp., South Korea's biggest tobacco company, lost 6.6 percent to 72,200 won.

The Bank of Korea cut its seven-day repurchase rate by 75 basis points to 4.25 percent today at an emergency meeting of policy makers. The central bank also eased its rules on foreign- currency lending to allow exporters to borrow dollars to pay for their currency-related losses.

Hon Hai

Taiwan stocks fell after the island restored its daily stock trading limit to 7 percent starting today. The financial regulator halved the range to 3.5 percent from Oct. 13 to Oct. 24 to help stem a plunge in the stock market.

Hon Hai, the world's largest contract electronics manufacturer, sank 6.9 percent to NT$70.4. Quanta Computer Inc., the world's biggest notebook-computer maker, tumbled 7 percent to NT$29.35 in Taipei. Cathay Financial Holding Co., Taiwan's largest financial-services company, dropped 6.9 percent to NT$30.20.