9

EVICTED, BUT NOT WITHOUT A FIGHT

Voting 'No' on Stimulus

Republicans get ready for an Obamanomics meltdown.

JAMES FREEMAN

President Obama's $825 billion (and counting) "stimulus" is steamrolling through Congress. One group of conservative Republicans is betting that it will only worsen the country's economic plight.

That's where the House Republican Study Committee comes in. "No Trillion Dollar Spending Spree" is the message from this conservative caucus. Led by its new chairman, Rep. Tom Price of Georgia, the RSC now counts more than 100 House Republicans among its members. Mr. Price calls the Democrats' proposal "the non-stimulus plan" and says it "simply won't work" because it offers no market incentives to create jobs. What the plan does offer are multibillion-dollar gifts to state governments, teachers unions, and the environmental lobby, with such gems as a $6 billion program to "weatherize modest-income homes."

In contrast, Mr. Price and company have drawn up their own plan, the "Economic Recovery and Middle-Class Relief Act," which aims to stimulate the economy without new government spending. It calls for a permanent five-percentage point income tax cut across all brackets and also would lock in today's low capital gains and dividend tax rates at 15%, instead of allowing rates to climb after 2010. Their plan would also index capital gains for inflation and slash America's corporate tax rate to 25% from 35%. The bill offers a modest cut in nondefense discretionary spending.

The bill has zero chance of becoming law, of course, but that's not the point right now for House conservatives. Mr. Price says Republicans "have a responsibility to provide a coherent and positive contrast" to Democrat plans for bigger government. His plan isn't merely an "alternative," but a "solution" to the country's gathering economic crisis. When voters discover that the Obama approach is a turkey, he says, a responsible opposition party has to have a better approach ready to go. Says Rep. Price: "It's important to hold folks accountable, and over time Americans will do that."

Detroit Takes One (More) for the Team

Obama offers another costly, destructive gesture.

By HOLMAN W. JENKINS, JR.

Why kick the auto industry when it's down?

Because it's down.

Veer

President Obama rolled out his first big gesture on energy and the environment this week. It consisted of a cunning, even brutal judgment -- we're tempted to liken it to the besieged submarine commander in the movies who fills his torpedo tubes with his dead comrades and jettisons them overboard to fool the enemy destroyer circling overhead.

In this case, the circling destroyer is Mr. Obama's green constituency, hungry for a gesture on climate change and energy independence. The dead crewmen are the Detroit auto makers. They've already been blown to pieces by last year's runup in gas prices and then the credit meltdown. They'll hardly notice an additional blow in Mr. Obama's EPA likely granting a California request to regulate vehicular emissions of carbon dioxide, which means effectively stepped-up fuel mileage mandates stiffer than the federal government's.

Never mind the absurdity of the issue. California has received waivers to set its own Clean Air Act rules since the very beginning because California suffered unique air pollution problems. California does not suffer unique global warming problems. In no way is the state uniquely affected by the climate risks posed by tailpipe emissions of carbon dioxide. California politicians were acting purely in a grandstanding capacity to seek such a waiver. Mr. Obama would be acting from purely a least-cost political calculation in granting it.

On Monday, Mr. Obama also ran out a plan for newly hiked-up federal mileage standards, giving the greenies one bite of the apple and making it sound like two.

How the Detroit auto industry set itself up to become a safe political target for such costly, destructive gestures is a subject we've covered before. But let us grant the political system a certain adaptive wisdom. The car industry must die a thousand deaths so the rest of the economy may live -- especially since we've already committed to using taxpayer dollars to make it up to Detroit and buy the acquiescence of its lobbyists.

What must Mr. Obama's incoming regulatory czar, Cass Sunstein, an expert on cost-benefit analysis, make of this regulatory excursion? His accession has hardly delighted the greenies, not least because of papers he's written suggesting the U.S. has relatively little to fear from climate change compared to other nations, as well as entertaining the possibility that the costs of fighting global warming might be greater than the benefits.

Is there room in Prof. Sunstein's cost-benefit models for a policy that makes no sense on its own terms, but is meant to stave off something worse?

On Monday, like every politician since Nixon (practically), Mr. Obama invoked "every president since Nixon" on the subject of the need urgently to pursue energy independence. He actually channels John Kerry's 2004 evasion, however, promising to reduce America's oil consumption decades hence by a tiddly two million barrels a day or "nearly the amount we import from the Persian Gulf."

Big whoop. We and the rest of the world would end up more dependent on Middle East oil, not less so. Low-cost oil is consumed before high-cost oil. The lowest-cost production is in the Mideast, so any reduction in our consumption would result in non-Mideast oil being squeezed out of the market.

But suppose we stopped burning oil altogether. Would the U.S. be any less alarmed if Osama bin Laden took over Saudi Arabia? Would we become indifferent to Iran's nukes? Would we be any less committed to Israel's survival?

The idea that oil drives our foreign policy is a Hollywoodization that Mr. Obama will find quickly disappears in the situation room.

FDR ran on balanced budgets and austerity, the political correctnesses of his time. Mr. Obama is making mock delivery on various energy and environmental promises that likewise will end up having nothing -- zilch, nada -- to do with the real agenda of his presidency.

One final irony is that the global depression Mr. Obama will spend his administration fighting likely will produce decreases in CO2 output and energy consumption beyond the wildest dreams of the interns who drew up his campaign promises. Mr. Obama will devoutly wish it wasn't so.

Faith in Free Markets – According to Mr. Bernanke

by Matthew J. Novak

Federal Reserve Chairman Ben Bernanke considers it to be time for more fund transfers to the coffers of struggling financial institutions here in the United States. The details seem to be basically more of the same proposed solutions from the fall of 2008. If you are interested in reading some of his thoughts as portrayed in the common news media, see his comments quoted in this recent CNN.com article.

In short, while speaking in London recently, he cautioned that the proposed funds for the economic stimulus plan — supported by the robbing of American citizens— are "unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system." This means he is priming for a request for more government funds in exchange for government equity positions in the banks.

There is no mention of the fact that no lasting recovery can possibly come from (1) misallocation of the factors of production, (2) inflation of the money stock in massive proportions, and (3) the squeezing out of capital (in addition to the already-misallocated production factors) from more appropriate, entrepreneurial lines demanded by the free market.

It is interesting to see the psychology at play here: give the banks more money or else the massive stimulus will fail due to "instability."

It is unclear whether this type of scare tactic will ever stop working, but if the recent past is any indicator, Mr. Bernanke will get his wish for more funds. Additionally, Bernanke is calling for global central-bank cooperation. This can be construed to mean global inflation in concert, the bank controllers reaping the benefits while the dollar and other centrally planned currencies are inexorably plundered of purchasing power.

Anyone who has studied free-market economic principles even briefly will have strong concerns regarding these statements. At a deeper level, one hopes that common sense would make it clear to even those who have not been fortunate enough to learn about sound-money principles that these ideas propose a dangerous path.

Perhaps an even bigger problem, however, is that Mr. Bernanke conveys these ideas while professing to be a strong believer in the free markets! It is unclear how this should be taken: is it an outright lie, or does he expect that the average citizen is not capable of understanding the difference between a free market and what we have instead? Indeed, is it Bernanke's wish that the average citizen not understand? This confusion on the citizens' part is, after all, what gives those in power the ability to stay there.

It is hard to imagine a more blatant push towards nationalization of the banks (already a legalized cartel). Further guarantee of the debt of financial institutions — already overburdened with high-risk debt in exchange for the government taking equity positions — is preposterous. The notion of privatized profits combined with losses guaranteed by the taxpayers is usually not what comes to mind when someone touts their strong beliefs in a free-market economy.

Yet these ideas are openly set forth as a solution to the economic problems currently faced in America and around the world. Paul Krugman has commented that President-elect Obama's proposed stimulus plan will not go far enough, i.e., the level of expropriation is not deemed to be high enough to succeed. These ideas, dominated by Keynesian economic thought, are openly discussed — and proposed by the most recent laureate of the Prize in Economic Sciences in Memory of Alfred Nobel, no less — and it seems that the vast majority of the American citizenry pay no attention as the man behind the curtain steers our nation ever more rapidly along the road to socialism.

When thinking through the current situation, the average citizen would do well to consider the teachings of F.A. Hayek, economics Nobel laureate in 1974. An exposition in the mainstream media presenting the competing ideas side by side would be a great start. The hope, ultimately, is that the ideas of liberty and prosperity would be too hard to resist.

Unfortunately, the general idea portrayed by the mainstream media is that the free market has failed and, as Mr. Bush remarked recently, must be abandoned in order to be saved.

"Faith in free markets can only be established after showing the world what can be accomplished by having true freedom in the marketplace to begin with."

In this light, Mr. Bernanke's conclusion to his recent remarks, reaffirming his strong belief in the free markets, is ludicrous. His actions — supported by the current administration and sure to be supported by the following administration — speak so much louder than his words. But it seems the vast majority do not hear or understand — believing, as they've been told, that our economy is failing because of insufficient regulation. This open attack on capitalism and the corresponding lack of understanding of the truth is a great hindrance to the struggle for liberty.

It is long past time for this to change. As sound economic policies are fundamental to the ideals of freedom, the fallacies inherent in the doctrine preached by Mr. Krugman and Mr. Bernanke, and perpetuated by President Bush, must be brought to light and dispelled. For real change to come to America, this is imperative.

Faith in free markets can only be established after showing the world what can be accomplished by having true freedom in the marketplace to begin with. Mr. Bernanke would do well to keep this in mind as he proposes ever more socialistic measures to correct problems induced by the very organization he is charged to lead.

False Hopes for Tax Relief and Fiscal Stimulus

by D.W. MacKenzie

Public opinion is behind tax cuts. In a recent poll, 58% of Americans said they would oppose a new fiscal stimulus program if it did not include tax cuts. While it is natural that Americans should want tax cuts, we should be careful about the methods we choose to achieve that goal.

Tax cuts have been proposed as a part of the fiscal stimulus program for the Obama administration. Obama has proposed that 40% of his $775 billion "fiscal stimulus" be devoted to so-called tax cuts. Democratic senators, like Diane Feinstein, oppose such large tax cuts.

Perhaps the most disturbing part of this discussion is the failure of so many people to recognize the illusory nature of the Obama tax cuts, which would reduce the immediate tax burden for some Americans by increasing the federal deficit. A switch from tax-financed spending to deficit-financed spending does little to change the existing division of resources between the private and public sector.

Obama's tax cut does not shift resources into the private sector, as a true tax cut would. What Obama is proposing is deferred taxation. He wants to spend now and tax later. The Obama deficits will increase the interest payments by the federal government, draw money in capital markets away from private investment, and ultimately result in higher future tax rates.

Of course, the government could just refinance this debt over many years. So we might not see higher tax rates to pay this debt for a long time. But this just means that we will be crowding out private investment for a longer period of time. The more the government borrows, the less private investors can borrow. Obama wants to "jump start the economy" by deferring some of the taxes we pay to some indefinite future time period. This will stimulate some parts of the economy. The people who get these tax deferments will spend at least some of the money on things that they want now. Some businesses will get more revenue. But this will just draw money from other business investments.

Overall, the Obama plan to borrow now and tax later does not stimulate the economy; it just keeps a large part of the economy in the public sector. There is no real tax cut in his proposal. In real economic terms, the alleged tax cuts in Obama's plan keep tax rates the same.

The real cost here stems from government waste. No reasonable person would claim that the federal government operates at 100% economic efficiency. Some examples of waste include redundancy in federal Medicare spending and misuse of federal employee credit cards (Riedl 2005).

Government waste is a drain on future economic growth. Lower economic growth is a hidden tax that we all pay. That is, it is a tax that is completely unseen by people who accept the rhetoric of economically illiterate politicians like Barack Obama. Unfortunately, many Americans are ready to be fooled by Obama's mythical tax cuts and fiscal stimulus. While Obama promised change, he is changing nothing with his tax policy.

Obama has proposed some legitimate change. Obama and other Democrats also plan to increase the deficit further through increased spending on infrastructure and environmental projects. Increased spending will move more of the American economy into the public sector. This move by the Obama administration would simply raise the burden of government on the private sector. This is effectively a tax increase. The cost of this tax will only be completely obvious at such a time as actual income-tax rates rise to pay down the debt that Obama plans to accumulate. In the meantime, we will pay largely unseen taxes based on the difference between what we get from new federal spending and what we could have had through private spending.

Obama's plan for increased spending constitutes a form of change, but not for the better.

Of course, some economists claim that private spending has to be supplemented with public spending during this time of crisis. This is the idea behind fiscal stimulus. But even these economists admit that Obama's plan has little chance of success. In a recent speech, Paul Krugman declared a need for fiscal stimulus but also admitted that there were few shovel-ready programs available.

Months will pass before Obama and the Democrat-controlled Congress pass their plan and put it into action. Years will pass before their projects are fully implemented. The economy can easily recover on its own by then. Markets adjust to slow conditions through price reductions. As prices fall, consumers buy more and economic conditions improve.

The media has reported much about how consumers are finding better deals this winter. Price cuts by businesses are a sign that markets are working and the economy will turn around without this fiscal stimulus.

Krugman himself admits that the Obama "fiscal stimulus" would have only a weak effect on the economy. One dollar of deficit spending will, by Krugman's estimation, multiply into only one and a half dollars of increased GDP. Given the weakness of government fiscal stimulus (according to Krugman), Obama should spend even more that he has proposed. So even leading proponents of fiscal stimulus admit that Obama's plan will be too little too late. This, of course, assumes that Professor Krugman is correct about there being any fiscal stimulus at all.

"Obama is right about one thing: America needs change."

While many Americans expect the Obama administration to improve economic conditions, this belief is based on hope and economic illiteracy rather than sound reasoning. The Obama plan should be seen as a "fiscal depressant" that will impose additional economic burdens on the American public. Obama's so-called tax cuts are really just a shell game.

Perhaps the most hypocritical part of Obama's rhetoric is that he has also frozen the pay of senior White House staff because, "During this time of economic emergency, families are tightening their belts and so should Washington" (Wall Street Journal, January 22, 2009). This pay freeze is obviously a token gesture by a president who seems likely to end up as the most profligate spender in US history.

People might believe that they have something to gain by shifting from tax-financed government spending to deficit-financed spending, but there is nothing really behind these tax cuts. The entire fiscal-stimulus plan is itself a fraud. The federal government has a proven track record of waste; the enlargement of the public sector will not improve economic conditions. Obama is right about one thing: America needs change. Americans need a change in the fiscal plans of the Obama administration to avoid further waste. What we need are real lasting tax cuts and a corresponding movement of spending out of government and into the private sector.

Tuesday, January 27, 2009

A $545 Billion Private Stimulus Plan

Let's bring home foreign earnings without tax penalty.

ALLEN SINAI

The U.S. economy has entered the second year of a deepening recession -- a downward spiral fueled significantly by severe limits on liquidity and credit.

Sales and earnings of businesses large and small are falling sharply, and companies desperately need cash to operate. For many, access to capital and credit is either nonexistent or prohibitively expensive. This is why the Federal Reserve has become a lender-of-last-resort for the private sector, rather than just performing its traditional role of lender-of-last-resort to banks. It's also why Congress is considering a stimulus package that will cost taxpayers more than $800 billion, in addition to the $700 billion Troubled Asset Relief Program established this past fall. And, with a cyclical downturn in tax receipts and substantial rises in federal government entitlements, the federal budget deficit will likely exceed $1 trillion this year.

In light of this, the Obama team should implement a private-sector funded stimulus and allow a temporary reduction in the 35% tax rate that U.S. companies pay to repatriate foreign subsidiary earnings. Doing so could inject more than $545 billion into the U.S. economy without expanding the deficit.

Driven by previously strong foreign economies and a low dollar, the foreign subsidiaries of many successful U.S.-based companies have generated substantial earnings that could be invested in the U.S. economy at virtually no cost to the federal government. These earnings reside overseas, however, because of U.S. tax laws that many foreign competitors do not face.

Under the current system, U.S. corporations are charged 35 cents for each foreign-earned dollar they bring back home to the U.S. If they keep that income overseas, it is taxed at lower rates. As a result, those dollars tend to stay overseas permanently, since companies know they will automatically lose more money by bringing that income home than they can reasonably expect to make by reinvesting it once it is here.

Indeed, these investments would have to yield more than 50% to make the venture profitable. This puts U.S. companies at a disadvantage vis-à-vis their foreign competitors, which are free to bring U.S.-generated income back into their home economies without facing such penalties.

In order to motivate businesses to bring this money back to the U.S., the new administration and Congress should consider legislation similar to a bipartisan 2004 law, The American Jobs Creation Act. This law incentivized U.S. businesses to bring $360 billion of foreign subsidiary earnings back into the U.S. at a reduced corporate tax rate of 5.25% for one year. A survey of several hundred of these companies found that they used, on average, 25% of those funds for U.S. capital investment, 23% for hiring and training of U.S. employees, 14% for U.S.-based R&D, and 13% for U.S. debt reduction.

A similar opportunity exists now as then, with an even greater need today. A new study by Decision Economics Inc., concludes that lowering the tax on repatriating foreign-earned income would inject $545 billion into our economy.

The injection of these funds into this credit-constrained environment could supplement, or substitute for, credit. In turn, this would alleviate companies' reliance on commercial paper, bonds, stock and the federal government.

This measure would also stimulate real economic activity (an additional $110 billion in real GDP in 2010); increase capital expenditures including R improve business financial conditions; and, with lags, produce more jobs (net increase of 614,000 in 2011).

The study also indicates that the U.S. Treasury would receive tax revenue it would not otherwise get: an average of $28 billion per year for five years. The resulting increase in aggregate economic activity -- higher personal income, corporate profits, capital gains, Social Security and excise taxes paid -- would generate even more tax receipts. State governments would also see some increase in revenues.

A private-sector stimulus could be a win-win for government and U.S. businesses, without further straining an already overextended Federal Reserve balance sheet.

Mr. Sinai is chief global economist, strategist and president of Decision Economics, Inc., a global economics and financial markets information firm.

Unreal Expectations? Obama Asked For Them

By Victor Davis Hanson

For nearly three months since the election, we have been warned by President Obama, his staff and the media not to burden him with unreal expectations that no mere mortal could meet.

But why then consciously borrow from Abraham Lincoln's speeches? And why re-create Lincoln's historic train ride to his inauguration -- especially by flying back from Washington to Illinois to then return to D.C. by slow-moving railcar? Lincoln took the train because it was the only feasible way to get to Washington in 1861, not to copy the grand arrival of some earlier American savior.

Candidate Obama once adopted a presidential-like seal. He held a mass rally at Berlin's Victory Column (after his request for the more dramatic Brandenburg Gate was refused).

He adopted Greek temple sets at the Democratic convention. And like Zeus on Mt. Olympus, he talked about making the planet cool and the oceans recede.

And now he's capped all that by warning us to lower our expectations!

But if Obama deliberately takes on the trappings of a messiah, why shouldn't we expect messianic solutions?

The alterations in positions during Obama's pre-presidency were praised as "flexible" and "bipartisan." Perhaps. But Obama did not adjust on just an issue or two. Instead, he went whole hog.

It would be difficult to find a single major policy position that he hasn't backtracked somewhat on, especially on matters of foreign policy and the war against terror. Yet throughout the campaign, Obama and the media argued that the manner in which Bush waged the war against terror was harmful to the republic. So, were Bush's polices wrong then, but suddenly right now?

Successfully having it both ways has been evident again on matters of his appointments. Obama defeated Hillary Clinton by running as a Washington outsider who promised new hope and radical change -- and anything other than more Bush or Clinton.

Then he imported much of the old Clinton team for governance -- Rahm Emanuel, Leon Panetta, John Podesta, Larry Summers, Hillary herself and a score of others -- to put a far more articulate and hip veneer on George Bush's current foreign policy. The Obama team has drafted more old-style former congressional insiders than any administration in memory.

What is going on here? Apparently, Obama accepts that the country is both still center-right and yet eager for a nontraditional national spokesman -- glib, young, cool and able to charm a hostile world that is often hypocritical toward and envious of America.

In times of economic uncertainty and war, once Obama moved toward the center voters could see him as a trans-racial healer who offered vague change, made them feel good about themselves and, unlike John McCain, was the antithesis of the stodgy old white guy George Bush.

But Obama's hard-left base had promoted Obama the liberal activist for different reasons. They want much more of a state role in the economy, while making American society, at home and abroad, look a lot more European.

So to satisfy both left and center constituencies, Obama seems to stick with the status quo on major issues while offering symbolic gestures and low-profile appointments to radical environmentalists, gay and minority activists, open-borders reformers and labor unionists.

In return, progressives will stick with Obama for a while, on the assumption that he alone can carefully prep and hypnotize the country to soon accept a more left-wing agenda.

And when anyone seems to object to this off-putting balancing act, Obama returns to soaring rhetoric to soothe away the acrimony the way he once did with the Rev. Wright mess last spring.

This triangulation may or may not work at home. Yet abroad it is a different story, where one cannot vote present or charm tough guys and thugs who do not always appreciate flexibility -- and may interpret it as weakness to be exploited.

The Iranians prefer to talk, talk, and talk -- while they get the bomb. Vladimir Putin wants consensus and dialogue -- about re-establishing a right-wing version of the Soviet Empire. China loans us trillions to buy its goods -- with the idea that it will soon leverage our financial policy. Europe wants to be courted while expecting America to both lead and be criticized for leading. The Palestinians for now want Israel gone from the West Bank and Gaza -- and, at a not-so-future date, gone, period.

The much-maligned George Bush handled all these characters with often unambiguous, if inelegant, talk, and a no-nonsense toughness. If Obama, in contrast, feels he can offer them vague hope-and-change great-expectations rhetoric, and make himself agreeable to the world abroad in the manner he did so to us at home -- well, then, lots of luck!

Victor Davis Hanson is a classicist and historian at the Hoover Institution, Stanford University, and author, most recently, of "A War Like No Other: How the Athenians and Spartans Fought the Peloponnesian War." You can reach him by e-mailing author@victorhanson.com.

Davos: calm before the storm

Posted By: Edmund Conway

So I'm here! Just getting myself organised ahead of a busy first day tomorrow. Having dinner in my hotel and who should be in the hotel restaurant having a fondue but the entire Murdoch clan inc Rupert and James. Cliched, but goes to show this kind of thing really does happen in Davos. Here, in the meantime are a couple of pictures from outside the hotel. Taken with my new Nikon camera which I can't stop playing with...

Almost all delegates are here now. The show begins tomorrow and we'll have all the news from a busy day, including appearances by Vladimir Putin and China's Premier Wen Jiabao, in a matter of hours. Stay tuned to this and our various twitter feeds. I am on @edmundo and @telegraph_davos depending on how official I am feeling.

$646,214 Per Government Job

Spending where unemployment is already low.

ALAN REYNOLDS

House Democrats propose to spend $550 billion of their two-year, $825 billion "stimulus bill" (the rest of it being tax cuts). Most of the spending is unlikely to be timely or temporary. Strangely, most of it is targeted toward sectors of the economy where unemployment is the lowest.

The December unemployment rate was only 2.3% for government workers and 3.8% in education and health. Unemployment rates in manufacturing and construction, by contrast, were 8.3% and 15.2% respectively. Yet 39% of the $550 billion in the bill would go to state and local governments. Another 17.3% would go to health and education -- sectors where relatively secure government jobs are also prevalent.

If the intent of the plan is to alleviate unemployment, why spend over half of the money on sectors where unemployment is lowest? Another 22.5% of the $550 billion would go to social programs, such as expanding food stamps and extending benefits for the unemployed and subsidizing their health insurance.

After subtracting what House Democrats hope to spend on government payrolls, health, education and welfare, only a fifth of the original $550 billion is left for notoriously slow infrastructure projects, such as rebuilding highways and the electricity grid.

The Obama administration claims the stimulus bill will "create or save three or four million jobs over the next two years . . . with over 90% [of those jobs] in the private sector." To prove it, they issued a report from Christina Romer, chairman of the Council of Economic Advisers, and Jared Bernstein, chief economic adviser to Vice President Joe Biden. Its key estimates, however, were simply lifted from an outdated paper by Mark Zandi of Moody's economy.com.

Mr. Zandi's current estimates have government employment growing by 330,400 over two years as a result of the House bill (compared with 244,000 in Bernstein-Romer paper). Yet even that updated figure still amounts to only 8.3% of total jobs added, even though state and local governments are to receive 39% of the funds ($214.5 billion). Spending $214.5 billion to create or save 330,400 government jobs implies that taxpayers are being asked to spend $646,214 per job.

Does that make sense?

Simulations with his macroeconomic model, according to Mr. Zandi, reveal that "every dollar spent on unemployment benefits generates an estimated $1.63 in near-term GDP." By contrast, such "multipliers" simulate that tax cuts for business or investors would add only 30-38 cents on the dollar.

Background Reading

Government Spending Is No Free Lunch 01/22/09
– Robert J. Barro

But econometric models are parables, not facts. The big multipliers for transfer payments and tiny multipliers for capital taxes in Mr. Zandi's model reveal more about the way the model was constructed than about the way the economy works. If model builders make Keynesian assumptions, their model will generate Keynesian results. Yet as Harvard economist Robert Barro recently pointed out on this page, contemporary academic economic research does not support the multipliers used to justify the House stimulus bill.

In the March 2006 IMF Research Bulletin, economist Giovanni Ganelli summarized recent International Monetary Fund research on fiscal policy. Several studies find that reductions in government spending "can have expansionary effects, since they can contribute to a consumption and investment boom owing to altered expectations regarding future taxation."

A 2002 study of U.S. data by Roberto Perotti of Università Bocconi did find that the effect of debt-financed spending increases was somewhat positive, but the multiplier effect was much less than one. A 2004 IMF study of recessions in advanced economies likewise found that "multipliers are unlikely to exceed unity." A 2006 study of U.S. data by IMF economist Magda Kandil found the effect of "fiscal expansion appears insignificant on aggregate demand and economic activity."

In December 2008, the National Bureau of Economic Research published "What are the Effects of Fiscal Policy Shocks?" by Andrew Mountford of the University of London and Harald Uhlig of the University of Chicago. "The best fiscal policy to stimulate the economy," they report, "is a deficit-financed tax cut," and "the long term costs of fiscal expansion through government spending are probably greater than the short term gains."

That's because "government spending shocks crowd out both residential and non-residential investment," while "the [positive] response of consumption is small and only significantly different from zero on impact" (i.e., temporarily). But suppose all of these recent studies were mistaken, and the House Democrats' spending spree worked as advertised. We're still left with three million jobs added or saved at a cost of $825 billion -- $275,000 per job.

In short, a growing body of evidence suggests that a dollar of extra spending is likely to lift nominal income by less than a dollar, arguably much less. Several studies suggest the multiplier may be less than zero after a couple of years, because private investment (including housing) eventually falls by more than government spending rises. Another $550 billion of deficit spending on top of a deficit already above $1 trillion is likely to prove more dangerous than helpful to an economy already overloaded with risky debt.

Mr. Reynolds is a senior fellow with the Cato Institute and the author of "Income and Wealth" (Greenwood Press, 2006).

Obama Tells Arabia's Despots They're Safe

America's diplomacy of freedom is officially over.

FOUAD AJAMI

"To the Muslim world, we seek a new way forward, based on mutual interest and mutual respect," President Barack Obama said in his inaugural. But in truth, the new way forward is a return to realpolitik and business as usual in America's encounter with that Greater Middle East. As the president told Al-Arabiya television Monday, he wants a return to "the same respect and partnership that America had with the Muslim world as recently as 20 or 30 years ago."

Associated Press/Al-Arabiya

Barack Obama is interviewed by Al-Arabiya television on Monday.

Say what you will about the style -- and practice -- of the Bush years, the autocracies were on notice for the first five or six years of George. W. Bush's presidency. America had toppled Taliban rule and the tyranny of Saddam Hussein; it had frightened the Libyan ruler that a similar fate lay in store for him. It was not sweet persuasion that drove Syria out of Lebanon in 2005. That dominion of plunder and terror was given up under duress.

True, Mr. Bush's diplomacy of freedom fizzled out in the last two years of his presidency, and the autocracies in the Greater Middle East came to a conviction that the storm had passed them by and that they had been spared. But we are still too close to this history to see how the demonstration effect works its way through Arab political culture.

The argument that liberty springs from within and can't be given to distant peoples is more flawed than meets the eye. In the sweep of modern history, the fortunes of liberty have been dependent on the will of the dominant power -- or powers -- in the order of states. The late Samuel P. Huntington made this point with telling detail. In 15 of the 29 democratic countries in 1970, democratic regimes were midwifed by foreign rule or had come into being right after independence from foreign occupation.

In the ebb and flow of liberty, power always mattered, and liberty needed the protection of great powers. The appeal of the pamphlets of Mill and Locke and Paine relied on the guns of Pax Britannica, and on the might of America when British power gave way. In this vein, the assertive diplomacy of George W. Bush had given heart to Muslims long in the grip of tyrannies.

Take that image of Saddam Hussein, flushed out of his spider hole some five years ago: Americans may have edited it out of their memory, but it shall endure for a long time in Arab consciousness. Rulers can be toppled and brought to account. No wonder the neighboring dictatorships bristled at the sight of that capture, and at his execution three years later.

The irony now is obvious: George W. Bush as a force for emancipation in Muslim lands, and Barack Hussein Obama as a messenger of the old, settled ways. Thus the "parochial" man takes abroad a message that Muslims and Arabs did not have tyranny in their DNA, and the man with Muslim and Kenyan and Indonesian fragments in his very life and identity is signaling an acceptance of the established order. Mr. Obama could still acknowledge the revolutionary impact of his predecessor's diplomacy, but so far he has chosen not to do so.

The brief reference to Iraq in the inaugural could not have been icier or more clipped. "We will begin to responsibly leave Iraq to its people," Mr. Obama said. Granted, Iraq was not his cause, but a project that has taken so much American toil and sacrifice, that has laid the foundations of a binational (Arab and Kurdish) state in the very heart of an Arab world otherwise given to a despotic political tradition, surely could have elicited a word or two of praise. In his desire to be the "un-Bush," the new president fell back on an austere view of freedom's possibilities. The foreign world would be kept at an emotional and cultural distance. Even Afghanistan -- the good war that the new administration has accepted as its burden -- evoked no soaring poetry, just the promise of forging "a hard-earned peace." The nation had cast a vote for a new way, and had gotten the foreign policy of Brent Scowcroft.

Where Mr. Bush had seen the connection between the autocratic ways in Muslim lands and the culture of terror that infected the young foot soldiers of radicalism, Mr. Obama seems ready to split the difference with their rulers. His embrace of the "peace process" is a return to the sterile diplomacy of the Clinton years, with its belief that the terror is rooted in the grievances of the Palestinians. Mr. Obama and his advisers have refrained from asserting that terrorism has passed from the scene, but there is an unmistakable message conveyed by them that we can return to our own affairs, that Wall Street is more deadly and dangerous than that fabled "Arab-Muslim Street."

Thus far the political genius of Mr. Obama has been his intuitive feel for the mood of this country. He bet that the country was ready for his brand of postracial politics, and he was vindicated. More timid souls counseled that he should wait and bide his time, but the electorate responded to him. I suspect that he is on the mark in his reading of America's fatigue and disillusionment with foreign causes and foreign places. That is why Osama bin Laden's recent call for a "financial jihad" against America seemed so beside the point; the work of destruction has been done by our own investment wizards and politicians.

But foreign challengers and rogue regimes are under no obligation to accommodate our mood and our needs. They are not hanging onto news of our financial crisis, they are not mesmerized by the fluctuations of the Dow. I know it is a cliché, but sooner or later, we shall be hearing from them. They will strip us of our illusions and our (new) parochialism.

A dispatch from the Arabian Peninsula bears this out. It was learned, right in the midst of the news cycle announcing that Mr. Obama has ordered that Guantanamo be shut down in a year's time, that a Saudi by the name of Said Ali al-Shihri -- who had been released from that prison in 2007 to his homeland -- had made his way to Yemen and had risen in the terror world of that anarchic country. It had been a brief stop in Saudi Arabia for Guantanamo detainee No. 372: He had gone through a "rehabilitation" program there, then slipped across the border to Yemen, where he may have been involved in a terror attack on the U.S. Embassy in the Yemeni capital in September of last year.

This war was never a unilateral American war to be called off by an American calendar. The enemy, too, has a vote in how this struggle between American power and radical Islamism plays out in the years to come.

In another time, the fabled era of Bill Clinton's peace and prosperity, we were mesmerized by the Nasdaq. In the watering hole of Davos, in the heights of the Alps, gurus confident of a new age of commerce pronounced the end of ideology and politics. But in the forbidding mountains of the Afghan-Pakistan frontier, a breed of jihadists that paid no heed to that mood of economic triumphalism was plotting for us an entirely different future.

Here we are again, this time led by our economic distress, demanding that the world abide by our own reading of historical challenges. We have not discovered that "sweet spot" where our economic fortunes intersect with the demands and challenges of an uncertain world.

Mr. Ajami is professor of Middle East Studies at The Johns Hopkins University, School of Advanced International Studies. He is also an adjunct research fellow at Stanford University's Hoover Institution.

A 40-Year Wish List

You won't believe what's in that stimulus bill.

"Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before."

So said White House Chief of Staff Rahm Emanuel in November, and Democrats in Congress are certainly taking his advice to heart. The 647-page, $825 billion House legislation is being sold as an economic "stimulus," but now that Democrats have finally released the details we understand Rahm's point much better. This is a political wonder that manages to spend money on just about every pent-up Democratic proposal of the last 40 years.

We've looked it over, and even we can't quite believe it. There's $1 billion for Amtrak, the federal railroad that hasn't turned a profit in 40 years; $2 billion for child-care subsidies; $50 million for that great engine of job creation, the National Endowment for the Arts; $400 million for global-warming research and another $2.4 billion for carbon-capture demonstration projects. There's even $650 million on top of the billions already doled out to pay for digital TV conversion coupons.

In selling the plan, President Obama has said this bill will make "dramatic investments to revive our flagging economy." Well, you be the judge. Some $30 billion, or less than 5% of the spending in the bill, is for fixing bridges or other highway projects. There's another $40 billion for broadband and electric grid development, airports and clean water projects that are arguably worthwhile priorities.

Add the roughly $20 billion for business tax cuts, and by our estimate only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus. And even many of these projects aren't likely to help the economy immediately. As Peter Orszag, the President's new budget director, told Congress a year ago, "even those [public works] that are 'on the shelf' generally cannot be undertaken quickly enough to provide timely stimulus to the economy."

Most of the rest of this project spending will go to such things as renewable energy funding ($8 billion) or mass transit ($6 billion) that have a low or negative return on investment. Most urban transit systems are so badly managed that their fares cover less than half of their costs. However, the people who operate these systems belong to public-employee unions that are campaign contributors to . . . guess which party?

Here's another lu-lu: Congress wants to spend $600 million more for the federal government to buy new cars. Uncle Sam already spends $3 billion a year on its fleet of 600,000 vehicles. Congress also wants to spend $7 billion for modernizing federal buildings and facilities. The Smithsonian is targeted to receive $150 million; we love the Smithsonian, too, but this is a job creator?

Another "stimulus" secret is that some $252 billion is for income-transfer payments -- that is, not investments that arguably help everyone, but cash or benefits to individuals for doing nothing at all. There's $81 billion for Medicaid, $36 billion for expanded unemployment benefits, $20 billion for food stamps, and $83 billion for the earned income credit for people who don't pay income tax. While some of that may be justified to help poorer Americans ride out the recession, they aren't job creators.

As for the promise of accountability, some $54 billion will go to federal programs that the Office of Management and Budget or the Government Accountability Office have already criticized as "ineffective" or unable to pass basic financial audits. These include the Economic Development Administration, the Small Business Administration, the 10 federal job training programs, and many more.

Oh, and don't forget education, which would get $66 billion more. That's more than the entire Education Department spent a mere 10 years ago and is on top of the doubling under President Bush. Some $6 billion of this will subsidize university building projects. If you think the intention here is to help kids learn, the House declares on page 257 that "No recipient . . . shall use such funds to provide financial assistance to students to attend private elementary or secondary schools." Horrors: Some money might go to nonunion teachers.

The larger fiscal issue here is whether this spending bonanza will become part of the annual "budget baseline" that Congress uses as the new floor when calculating how much to increase spending the following year, and into the future. Democrats insist that it will not. But it's hard -- no, impossible -- to believe that Congress will cut spending next year on any of these programs from their new, higher levels. The likelihood is that this allegedly emergency spending will become a permanent addition to federal outlays -- increasing pressure for tax increases in the bargain. Any Blue Dog Democrat who votes for this ought to turn in his "deficit hawk" credentials.

This is supposed to be a new era of bipartisanship, but this bill was written based on the wish list of every living -- or dead -- Democratic interest group. As Speaker Nancy Pelosi put it, "We won the election. We wrote the bill." So they did. Republicans should let them take all of the credit.

Subject: The Return of Carterism?

The bill of particulars is by now drearily familiar. In the Middle East, Bush’s war in Iraq not only overstretched our military but radically alienated the UN and our European allies and undermined our position as an honest broker elsewhere, particularly on the issue of Palestinian statehood. Further damage to the American image was wrought by Bush’s refusal to abide by the Kyoto protocols on global warming, by the scandals over Abu Ghraib and the detainees at Guantanamo Bay, by the recklessness of our handling of Iran and its pursuit of nuclear weapons, by our needless provocations of Russia over missile defense in Eastern Europe and our encouragement of Georgian adventurism. All in all, to listen to Bush’s myriad critics, Russian President Dmitry Medvedev had it just about right in assailing “the arrogant course of [an] administration which hates criticism and prefers unilateral decisions.”

Hence the air of expectancy hovering around the Obama presidency, the sense of a new era dawning and a more hopeful direction taking shape. Obama’s own formulation of that hopeful new direction appeared last summer in an essay in Foreign Affairs. “The American moment is not over,” wrote the then-candidate, “but [it] needs a new burst of visionary leadership.” Promising a definitive end to the Bush doctrine, whose serial abuses had made the world lose “trust in our purposes and principles,” Obama foresaw an era of “sustained, direct, and aggressive diplomacy” that would rebuild America’s alliances and deal successfully with global threats ranging from terrorism to climate change.

America’s other important foreign-policy goal, Obama wrote, was reducing global poverty: the root cause, in his view, of terrorism and political extremism around the world. By “sharing more of our riches to help those most in need,” by building up the social and economic “pillars of a just society” both at home and abroad, America could bring security and stability to the entire world—if, he added, the task were undertaken “not in the spirit of a patron but in the spirit of a partner—a partner mindful of his own imperfections.”

In short, instead of being the world’s swaggering policeman, America would become the world’s self-effacing social worker. The sentiment is hardly unique to Obama; it was a point of virtually unanimous agreement among those competing with him for the Democratic nomination. Specifically, it was the view of Hillary Clinton, his arch-rival and now his nominee as Secretary of State. In her own Foreign Affairs article (November-December 2007), she, too, blasted the Bush administration for its “unprecedented course of unilateralism,” which had “squandered the respect, trust, and confidence of even our closest allies and friends.” And she, too, promised a new start, focusing on international cooperation and multilateralism, exhausting every avenue of diplomacy before resorting to military action, “avoiding false choices driven by ideology,” and devoting our resources to problems like global warming and third-world poverty. If pursued sincerely and consistently, such a course, she was confident, would keep us safe, restore America’s image, and win the respect of the planet.

_____________

Or would it? For a little historical perspective, it might be useful to look at the last President who embraced exactly the same analysis of America’s foreign-policy problems and enacted exactly the same strategy for resolving them.

“The result of the 1976 election,” Michael Barone writes, “was Democratic government as far as the eye could see.” After the debacle of Vietnam, Jimmy Carter entered office determined to clean up America’s image abroad. Abetting him in his endeavor was the fact that Democrats controlled both houses of Congress by a substantial majority, while Republicans were broken and dispirited. Much as with Obama and his team today, the basic operating assumption of the Carter team was that U.S. assertiveness abroad, or what Senator William Fulbright called America’s “arrogance of power,” had become the primary source of international tension. It was time for a humbler, gentler posture: the post-World War II Pax Americana was over, discredited by Vietnam, and so were the cold-war assumptions on which it was based.

From Carter’s point of view, the United States could win the world’s trust again by helping to shape a more equitable international order. The polarities dictated by the U.S.-Soviet conflict had grown stale; the cold war itself had become increasingly irrelevant to the future of the planet, to what the Thomas Friedmans of that day were beginning to call “the global village.” Instead, the emerging division was between rich and poor, between the developed and the developing worlds.

In words eerily foreshadowing those of Barack Obama decades later, Zbigniew Brzezinski, who would become Carter’s national security adviser, wrote in Between Two Ages that the future tasks of foreign policy lay not with the “political” issues of war and peace but with the “human issues” of poverty and development. Washington’s “preoccupation” with “national supremacy,” Brzezinski declared, would have to yield to a global perspective—a perspective that, in another parallel with today’s arguments, many then thought peculiarly well suited to America’s lowered status in a world featuring such exciting phenomena as the rise of the “non-aligned movement” and the Third World. Above all, in Brzezinski’s view, Americans had to understand that using military force to shape the course of events, as we were disastrously trying to do in Vietnam, was not the cure but rather the cause of international crises; an America that hoped to be on the right side of history would have to learn to be less assertive.

As for the Soviet Union (concerning which Brzezinski happened to be a hawk), Carter himself intended to dispel what he would famously describe as our “inordinate fear of Communism.” Toward that end, he would proffer a hand of trust to a Moscow understandably suspicious of American imperial designs. This would eventuate in his proposing and signing a far more comprehensive arms-control agreement than Richard Nixon’s SALT I. It would also entail decreasing America’s military footprint around the globe, as in South Korea, where Carter felt that the presence of American troops hindered a peaceful unification of the peninsula. He even contemplated giving direct aid to the victorious Communist government in Vietnam.

_____________

How did all this work out in practice? It would be a gross understatement to say that reality proved a more complex and obdurate substance than was dreamed of in Carter’s philosophy. A few examples may suffice, starting with Latin and Central America—an area high on Carter’s list for healing the supposed split between the developed and developing world.

One priority for Carter was giving up control of the Panama Canal—a symbol of the bad old days of homegrown Yanqui interventionism. In April 1978, he scored his first (and only) foreign-policy success when the Senate ratified the Panama Canal treaty. The agreement, it was said, would inaugurate a bright new future for the tiny Central American country and, by extension, for Latin American relations in general. Unfortunately, with the Americans gone, Panama descended into a twilight world of corruption and violence and became a hub of the international drug trade. Successive dictators skimmed the proceeds of Canal traffic to entrench their power and oppress the Panamanian people. Eventually, under George Bush, Sr., American soldiers would have to be sent to topple Panama’s last and worst dictator, Manuel Noriega, thus providing a bitterly ironic ending to the era of non-interventionism.

But Panama was in some ways a side show, if a symptomatic one. Underlying Carter’s entire approach to Latin America was his new stress on human rights as a touchstone of American foreign policy. “We can no longer separate the traditional issues of war and peace,” he declared at Notre Dame University in 1978, “from the new global questions of peace, justice, and human rights.” This was a bold statement, and on the face of it there was everything to recommend it—assuming, that is, that the yardstick of human rights was to be applied universally. But it turned out that Carter meant to apply it with extreme selectivity, and less as a yardstick than as a stick with which to beat our friends.

The argument went like this. In thrall to our cold-war mentality, we had been in the habit of reflexively backing right-wing dictators whose only virtue was that they were anti-Communist and pro-U.S. In so doing, we had betrayed our own democratic principles, in full view of a shocked and disgusted world. The time had come to reverse gears. Henceforth, Carter proclaimed, governments that violated their own citizens’ human rights would no longer receive American support but would instead incur our opposition. A foreign policy so constructed would, theoretically, encourage the growth of democracy in third-world countries and reduce the appeal of more radical or revolutionary ideologies.

_____________

In the event, the opposite happened. As Jeane Kirkpatrick pointed out at the time, instead of paving the way to democracy, the withdrawal of support from petty dictators in Latin America paved the way for a surrender of American interests—at the expense of our hopes for democratization.¹ The only countries on which the U.S. could bring significant pressure to bear were those ruled by authoritarians who restricted certain freedoms while leaving others intact; by contrast, we enjoyed little or no leverage at all with totalitarian regimes that systematically destroyed all freedoms and treated us as their ideological enemy.

Thus the fallacy turned out to be not the old cold-war mentality but the new Carter human-rights policy. When we ceased supporting our bad allies, they were replaced by far worse antagonists. It had happened before in Cuba, where Batista was overthrown by Castro, and it was happening again in Nicaragua, where in the spring of 1977 the Carter administration, displeased with the corrupt, small-minded, and frequently brutal Somoza regime, cut off all aid to the Nicaraguan military in its war against the Sandinista insurgency.

In Carter’s view, allowing Anastasio Somoza to fall would demonstrate what Stephen Rosenfeld of the Washington Post called America’s “post-Vietnam intent,” and that intent would be further confirmed by our accepting the legitimacy of “progressive” movements like the Sandinistas. In July, when the latter triumphantly seized power, American representatives met with their leadership; in December, Deputy Secretary of State Warren Christopher stated that the “driving consensus among Nicaraguans” was “to build a new Nicaragua through popular participation.”

Christopher was mistaken. Somoza’s fall resulted in a bloody and drawn-out civil war that would cost the lives of some 50,000 Nicaraguans. The Sandinistas exploited the fact of an indigenous resistance movement, led by the contras, as reason to solidify their Castroite regime—precisely what Carter had assured Americans would not happen. In time, Nicaragua would become a key conduit for exporting Cuban influence and support to Communist insurgencies in El Salvador and Guatemala.

Thus did the supposedly outdated “domino theory,” an artifact of the cold war, emerge as a highly accurate predictor of what would happen in Latin America after the fall of Nicaragua. And not only in Latin America: by focusing obsessively on the presumptive split between developed and developing nations, Carter had turned the United States into a passive spectator while a global shift of power was taking place to the advantage of the Soviet Union and its proxies. Cam Rahn Bay in Vietnam became the Soviet Union’s most important forward Pacific base. Pro-Soviet regimes consolidated their power in Africa, instituting Marxist economic policies that, in Ethiopia alone, brought about a massive famine and the death of hundreds of thousands. Over Christmas 1979, Soviet tanks and troops rolled into Afghanistan—just six months after Carter had embraced and kissed Soviet president Leonid Brezhnev and publicly praised his cooperativeness in the conduct of world affairs.

_____________

The one area where Carter seemed fitfully to grasp the nature of reality was in relation to Iran. Having inherited the Nixon-Ford commitment to the authoritarian Shah Mohammed Reza as a key American “proxy” in the Middle East, the administration found itself squeezed between its need for an ally in a strategically sensitive region and its selectively defined human-rights agenda. In 1977, tilting in one direction, Carter received the shah in the White House. The following January, the President paid a visit to Tehran and at a banquet toasted the shah’s regime as “an island of stability in a turbulent corner of the world.”

Having made it appear that Washington approved of the regime’s brutal practices, which included jailing and torturing thousands of Iranians, and having compounded the error by making the shah appear to be America’s puppet, Carter then tilted all the way in the other direction by backing America out of Iran even as the shah’s grip on power tottered and collapsed in the face both of genuine popular protest and of the Islamist campaign waged against him by the exiled Ayatollah Khomeini. By December 1978, Carter announced that the United States “would not get directly involved” in keeping the shah in power. “That,” he said, “is a decision for the Iranian people to make.” What few knew at the time was that Carter and his principal advisers, including Brzezinski, were urging the shah to crack down, something he refused to do unless he could announce to the world that the United States had ordered him to kill Iranian protesters.

In the end, the shah chose to run rather than fight, abdicating his throne and fleeing the country on January 16, 1979. The ironies were cruel. One was that a President publicly committed to supporting human rights and ending support for dictators had wound up urging a dictator to shoot his own citizens in the streets. Another was that the United States had lost its “island of stability” in the Middle East—and lost it, moreover, to Khomeini, who would soon present to the world an exceptionally vicious demonstration of the distinction between authoritarianism and outright totalitarianism.

The fall of the shah, the possibility that a Khomeini-dominated Iran might end up in the Soviet orbit, and, finally, the Soviet invasion of Afghanistan finally forced Carter to deal with the geopolitical realities of the cold war, the very conflict that he and his advisers had insisted was irrelevant to the world’s future. After three years of watching his utopian hopes for the world dissolve, Carter had belatedly discovered the virtues of a robust and assertive American foreign policy. It was in this new mood that he declared an increase in American defense spending, the first since the end of the Vietnam war. It was in the same mood that in April 1980 he finally authorized an attempt by the U.S. military to rescue 52 Americans held hostage since the seizure of the American embassy five and a half months earlier. But the effort was doomed almost from the start. Badly conceived, insufficiently manned or supported, and obsessively micromanaged from the White House, the rescue attempt ended in death and disaster, the administration’s final foreign-policy fiasco and a low point for American prestige.

Through it all, Carter still refused to consider any decisive use of military force. He refused to send aid to anti-Communist rebels in Afghanistan; he refused to use the U.S. military to prevent the Nicaraguan Sandinistas from supporting Marxist guerrillas in neighboring countries; he refused to consider any stronger action against the Iranian hostage-takers; and he expressed disgust when Ronald Reagan, his opponent in the November 1980 election, called them “barbarians” and “criminals.”

_____________

In sum, Carter’s attempt to soften America’s profile in the world had left the United States in the most perilous position it had known since the Korean war. Soaring oil prices, especially after the fall of the shah, had made a shambles of the global economic order. New Soviet proxies held power in nearly a dozen states in East Asia, Africa, the Middle East (including Afghanistan and South Yemen), and Latin America. More than 85,000 Soviet troops occupied Afghanistan; 35,000 Cuban troops were in Africa. Russian and Cuban military advisers operated in countries like Ethiopia, South Yemen, Mozambique, and Angola with impunity. Soviet SS-20 missiles had been installed specifically to threaten Western Europe and intimidate the NATO alliance.

Even worse, the Soviet Union had become a major military power in the Western hemisphere. At Cienfuegos in Cuba, Soviet warships, submarines, and Backfire bombers enjoyed access to air strips and naval facilities, much as they did at Cam Rahn Bay in Vietnam. A Soviet combat brigade was training Cuban soldiers in the art of anti-tank warfare—admittedly, not very helpful for fighting in the jungles of Central America, but very useful for future operations in places like Ethiopia, the Horn of Africa, or the Arabian peninsula. Russian reconnaissance flights off the east coast of North America were becoming frequent, and so was electronic surveillance of American telephone and cable traffic. Meanwhile, the Cubans and Sandinistas were continuing to supply insurgencies in Guatemala and El Salvador. In 1979, the tiny island country of Grenada had become a full-fledged Cuban ally and a staging ground for expanding Communist influence in the Caribbean.

The one place where Carter and his defenders could point to success was with the Camp David accord between Egypt and Israel in September 1978. But the exception was only apparent, and in any case proved the rule. For a bilateral Israel-Egypt agreement was not something Carter had sought or welcomed. Quite the contrary: his Middle East policy rested on achieving a “comprehensive” settlement with all parties to the Arab-Israel conflict, and with the active participation of the same Soviet Union whose forces had only recently been kicked out of Egypt by President Anwar Sadat. The visit of Sadat to Israel in November 1977 thus came as an unpleasant surprise.

For nearly a year, the White House fought against a separate peace deal between the two countries, and it was only out of a kind of desperation that Carter finally decided to call the Camp David meeting. By then, both Sadat and Begin were more than ready for a final agreement; for both men, the chief virtue of an American commitment lay in the hope that it would prevent the USSR and its Arab allies, including the PLO, from derailing the peace they had struck between themselves.² So much for multilateralism.

_____________

In January 1981, Ronald Reagan and his foreign-policy team came into office determined to reverse the post-Vietnam trend of declining American power and the Carterite assumptions that rationalized and justified it. For them, the world’s dividing line ran not between the rich and the poor but between the enslaved and the free.

Reagan believed that by promoting American interests and defending America’s friends, we would benefit both ourselves and millions of others all around the world. Some, like our NATO allies in Europe, would benefit directly, under the umbrella of collective security. Others, like the emerging nations of Latin America, Africa, and Asia, would benefit indirectly, as a resurgence of American confidence revved the engines of global economic growth and protected peoples from subjugation by others.

Far from seeing American military supremacy as a provocation, Reagan proudly defended America’s record as “the greatest force for peace in the world” precisely because America was free as well as strong. His policy would consist of an unashamed, unapologetic assertion of American exceptionalism and an application of, in his words, “the timeless truths and values Americans have always cherished to the realities of today’s world.” In the process, Reagan would establish a new paradigm for American foreign policy, or, rather, he would reestablish, under a conservative Republican banner, the liberal foundations of the post-World War II Pax Americana stretching back through Presidents Johnson and Kennedy to Truman.

This is hardly to say that Reagan’s conduct of foreign policy was without flaws, or that his successor, George Bush, Sr., who presided over the collapse of the Soviet Union and the breaking-up of its empire, did not commit his own blunders, both major and minor. But Reagan and Bush’s re-assertion of the Pax Americana, instead of wrecking our international image or alienating our allies, not only helped build a series of highly successful international coalitions and united fronts but also freed up the forces of globalization, making possible an unprecedented future growth of international trade and thereby undergirding the prosperity of the Clinton years.

We need not linger over those years or over Bill Clinton’s own foreign policy, which vacillated wildly from Carter-style multilateralism, accompanied by deep cuts in the U.S. defense budget, to a post-Rwanda, post-Bosnia activism applied in an often incoherent and ad-hoc fashion. Nor need we rehearse the story of George W. Bush’s tenure in office—an eight-year period marked at the beginning by a deep wariness toward international commitments and “nation-building” and then, after, 9/11, by a dramatic return to the basics of American exceptionalism and a resounding commitment to the expansion of freedom and democracy. The point is that between the two of them, Clinton hesitantly and Bush wholeheartedly, post-World War II American foreign policy turned away from the humbler, gentler multilateralist model of the Carter years and, in so doing, reverted to form.

Now Barack Obama comes into office, trailing clouds of Carterite rhetoric and Carteresque ideas about the inutility of military force, the sovereign worth of “aggressive diplomacy” (an incoherent and meaningless phrase), and the need to accommodate ourselves to a world in which we are no longer even an economic superpower, let alone an example to mankind. Of Carter himself, it might be said in mitigation that he assumed the presidency at an exceptionally bad moment, in the wake of a humiliating withdrawal from Vietnam and in an atmosphere of defeatism among many prominent figures in the political establishment and, among others, a feeling of positive revulsion toward both the ends and the means of American power. Carter was wrong to think that the way forward was to adopt, wholesale, the arguments of the anti-Vietnam-war movement—wrong in theory, and dangerously wrong in practice. Still, one can understand why, in the circumstances, someone of his bent might have come to the position he did.

But today? When Iraq, the most egregious example of Bush’s supposedly reckless zeal to go it alone, is turning out to be a success, reaffirming the rightness of America’s cause and the soundness of the postwar vision? Why adopt, today, the arguments and proposals of those who still pretend that Iraq has been nothing but a sordid failure, or who hold that the fact of its success proves nothing whatsoever about who we are and what we stand for?

Some of Obama’s early choices for high-level foreign-policy positions—particularly General James Jones as National Security Adviser and the incumbent Robert Gates as Secretary of Defense—suggest that the President-elect may be reconsidering his priorities. One can only hope so. In his book Diplomacy, Henry Kissinger writes that the experience of history is a statesman’s one sure guide. As the historical experience of the last 30 years has demonstrated over and over again, and as the historical experience of the last eight years underlines once more with blinding clarity, Carterism is not the way.

Glenn Beck ('In-Your-Face' Conservative) vs. Rod Blagojevich (Typical Obama Liberal)

Baboon’s Blood Offers Davos Leaders Shakespearian Market Magic

-- That old black magic has even the World Economic Forum in its spell.

“Double, double, toil and trouble, fire burn and caldron bubble,” says WEF delegate Richard Olivier, one of the 2,500 global business and political leaders starring at the forum’s 39th annual meeting this week in Davos, Switzerland.

The son of Shakespearian actor Laurence Olivier isn’t conjuring up Wall Street’s Triple Witching Hour before its next scheduled appearance in March. He’s hosting a seminar titled “Leadership Lessons From Macbeth” for WEF delegates who include Russian Prime Minister Vladimir Putin, News Corp. Chief Executive Officer Rupert Murdoch and Chinese Premier Wen Jiabao.

“Cool it with a baboon’s blood,” the 47-year-old Olivier advises, reciting the witches’ recommendation to the troubled Thane of Cawdor in Shakespeare’s play.

The WEF’s theme this season is “Shaping the Post-Crisis World.” Yet Olivier reckons the kettle of fiscal crises currently heating up WEF delegates from JPMorgan Chase & Co. CEO James Dimon to American International Group Inc. Vice Chairman Jacob Frenkel makes the Davosian stage an ideal venue for the princes of Wall Street to delve into the magic of “Macbeth” and discuss how they persuaded people, including themselves, to believe in things that were not real.

Disappearing Funds

When magic involves money, some call it economics, a sometimes illusory undertaking that 2008 showed to be big on vanishing acts. U.S. mutual funds declined by $2.4 trillion, according to the Investment Company Institute, losing a fifth of their value from a year earlier. Last year, the value of global stock markets shrank by almost half to around $30 trillion. A recent study by Morgan Stanley foretells of hedge- fund assets valued at some $1.8 trillion in early 2008 dematerializing into $900 billion by the end of this year.

As for the prestidigitators of profit, more than 200,000 of them dissolved into thin air in 2008, including 52,000 layoffs at Citigroup Inc. Foremost among the sleight-of-hand experts is Bernard Madoff, shaman-in-chief of a New York-based investment securities firm federal prosecutors have charged with running a Ponzi scheme, charming clients out of some $50 billion.

“The dark black magic of Macbeth has a particular resonance this year at Davos,” says Olivier, artistic director of Olivier Mythodrama in London, a corporate-leadership- training outfit that has coached executives at Nokia Oyj and Royal Dutch Shell Plc. “It’s about ambition, about how people who have bloody, murderous or greedy thoughts attract bloody, murderous or greedy spirits.”

Master Sorcerer

Whenever hobgoblins get in on the act, Greg Frewin takes note. The 44-year-old Canadian from Niagara Falls is the International Grand Champion of Magic, a title awarded by his peers in the $250-million-a-year illusion industry to the professional sorcerer who wins first prize in the world’s top three magic competitions.

Frewin, who manages his own $2 million theater and a staff of 50 assistants, has played the Tropicana and Caesar’s Palace in Las Vegas, and staged command performances for Toronto- Dominion Bank and the Canadian Imperial Bank of Commerce. Right now, he’s turning $100 bills into $1 bills.

“This routine is so popular that they used it at Lehman Brothers,” Frewin jokes.

As he tells it, there’s no difference between him levitating a scantily clad showgirl on stage and a credit-rating company elevating a subprime security on Wall Street.

“In both cases, the audience is led to believe they’re seeing the impossible become true” he says. “Illusionists call it misdirection.”

Somber Forces

Adam Smith described it as a mysterious force.

“They are led by an invisible hand,” the Scottish economist and theoretician of capitalism wrote in “An Inquiry Into the Nature and Causes of the Wealth of Nations” (1776), referring to the supernatural power that would compel the market to disavow demons like the credit-default swap in favor of promoting trustworthy Treasury bills.

“Macbeth also allowed the darkness to overcome the light,” Olivier says. To do so, the tragic Scottish hero, fatally possessed by ambition, summoned the invisible hand for help.

“And with thy bloody and invisible hand cancel and tear to pieces that great bond which keeps me pale,” Macbeth says.

“Macbeth is asking evil spirits to cut the bond between his soul and his conscience, so that he can carry out his dark deeds,” Olivier explains. “Smith was a professor of morality at the University of Glasgow and certainly aware that the invisible hand represented a link between the natural and the supernatural.”

Rogues, Necromancers

Likening rogue capitalists to necromancers already has gained acceptance in legal circles. Consider the U.S. vs. Marc Dreier, founder of the New York law firm Dreier LLP and now in jail on criminal charges that allege he swindled hedge funds and investors out of $380 million. Dreier hasn’t responded to the charges.

“He is the Houdini of impersonation and false documents,” Assistant U.S. Attorney Jonathan Streeter said when Dreier’s lawyers in December tried to spring him for a $10 million bail.

The analogy holds for more tranquil money managers, too.

Ian MacDonald in Bristol, England, says legerdemain is a powerful investment tool. “My wife Sue is clairvoyant, the best I’ve ever come across,” MacDonald says.

Mickles and Muckles

Sue is so good that the 69-year-old Scotsman named his investment partnership after a hallucination and employs the ancient highland incantation “every mickle makes a muckle” -- the ability to turn nothing into something -- as the motto for Mirage Asset Management LLP.

George Magnus, senior economic adviser at UBS AG, Switzerland’s biggest bank, says all the hocus-pocus will be a “hard concept” for the WEF to quantify.

“But the invisible hand clearly came back and slapped the free market in the face, so we have a big audience ready to discuss it,” says Magnus, whose own institution in October rematerialized with a $5.3 billion Swiss government bailout package and permission to transfer as much as $60 billion of toxic assets to a fund supported by the country’s central bank.

Even Alan Greenspan found himself bewitched.

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself especially, are in a state of shocked disbelief,” the former U.S. Federal Reserve Board chairman, 82, said last October in Congressional testimony on the causes of the subprime crisis.

“The invisible hand pushes people into doing crazy things,” Magnus says.

Economic Exorcism

Gregory Berns says he can help with the exorcism. He holds the Distinguished Chair of Neuroeconomics at Emory University in Atlanta and he’s hosting a WEF seminar that explores the relationship between fiscal judgment and brain waves. “Most traditional economists believe this endeavor is a waste of time,” the professor says.

Berns and his colleagues at the 120-member Society for Neuroeconomics nonetheless study human perception and how the brain represents the value of any asset.

“Subprime was a collective illusion,” the 44-year-old Berns explains. “The market said subprime investments weren’t all that risky. A neural adaptation, what magicians call a cognitive illusion, took place. People stopped valuing the asset based on their own perceptions and reasonable assumptions.”

Back in Niagara Falls, the loudspeaker atop Screamers House of Horrors blares “This jittery journey is not for the squeamish.” Inside the theater across the road, Frewin is shoving fire-tipped spears into a box that contains a woman in a bikini. He removes the lances, opens the carton, and a Bengal tiger leaps out instead.

“Money illusions actually create the most powerful magic,” Frewin says. “Money always triggers an extremely personal and emotional response, but a magician or an investment banker must believe in the illusion or it won’t work.”

Frewin snaps his fingers and a $100 bill falls out.

“That was their illusion,” he says.

Gloom Deepens Among World’s Chief Executives, Davos Poll Shows

Jan. 28 (Bloomberg) -- Gloom is deepening among business leaders, casting a pall over this year’s World Economic Forum in Davos, Switzerland.

Just one in five of 1,124 chief executives in 50 nations said they were very confident about prospects for revenue growth in 2009, down from half last year, and more than a quarter said they were pessimistic, a survey by PricewaterhouseCoopers LLP showed. The sentiment was the worst since the accounting and consulting firm began tracking the CEO outlook in 2003.

“The speed and intensity of the recession has rocked the psyches of CEOs and created a global crisis of confidence,” Samuel DiPiazza, PricewaterhouseCoopers’s New York-based CEO, said in a statement.

Such concerns are virulent as executives from JPMorgan Chase & Co.’s Jamie Dimon to Stephen Green of HSBC Holdings Plc join more than 2,500 counterparts, academics and policy makers in the ski resort for five days of soul-searching and deal- making. They meet as the world economy hurtles deeper into recession, banks add to more than a $1 trillion in writedowns and governments tighten their grip over the financial system.

“The outlook is pretty grim,” said Howard Davies, director of the London School of Economics and a former Bank of England policy maker who will be in Davos. “Things are not good and business surveys are coming out showing they’re getting even worse.”

Financial Calamity

What began as a financial meltdown 17 months ago has morphed into an economic calamity unseen since the Great Depression.

In the past year, Lehman Brothers Holdings Inc. and Bear Stearns Cos. have collapsed and officials around the world have committed trillions to prevent more from toppling. The Standard & Poor’s 500 Index is still falling after its worst year since 1937 as the U.S., Japan and Europe sink into their first simultaneous recession since World War II.

The executives polled by PricewaterhouseCoopers survey don’t see a turnaround soon.

Only about a third were very confident about growth in the next three years, down from 42 percent last year. Almost seven in 10 said their companies will be affected by the credit crisis, and 70 percent of those said they will delay planned investments as a result.

‘Impaired’ for Years

“The global economy is impaired for some years to come,” said Stephen Roach, chairman of Morgan Stanley Asia, who raised the prospect of a worldwide recession at last year’s conference. “The recovery, when it does come, is going to be very, very anemic.”

Just 13 percent of U.S. executives said they were “very confident” about revenue growth in the next 12 months, compared with 36 percent last year, while 15 percent in Western Europe expressed the same sentiment, down from 44 percent. Among developed economies, French executives were the most skittish, with just 5 percent calling themselves very optimistic.

Business leaders in emerging markets were more confident. Seven in 10 Indian executives expressed optimism about their company’s growth, as did about three in 10 of those in Brazil, Russia and China.

Job Cuts

One further bright spot: Only about a quarter of the business chiefs said they plan to cut payrolls in the coming year, while 35 percent said they intended to maintain staffing levels. That would be welcome news to workers as unemployment accelerates around the world with Home Depot Inc., Caterpillar Inc. and ING Groep NV among those axing positions this week.

The economic malaise will have social repercussions, the survey indicated. By a margin of more than three to one, executives said political and religious tension will increase internationally. Seven in ten said the gap between rich and poor people will widen.

As governments around the world react with new regulations designed to avert future crises, 55 percent of executives said they’re concerned that overregulation could retard growth.

INTERMEX POWER

Wednesday, January 28, 2009

9

EVICTED, BUT NOT WITHOUT A FIGHT

Voting 'No' on Stimulus

Republicans get ready for an Obamanomics meltdown.

JAMES FREEMAN

Detroit Takes One (More) for the Team

Obama offers another costly, destructive gesture.

By HOLMAN W. JENKINS, JR.

Faith in Free Markets – According to Mr. Bernanke

False Hopes for Tax Relief and Fiscal Stimulus

Tuesday, January 27, 2009

A $545 Billion Private Stimulus Plan

Let's bring home foreign earnings without tax penalty.

ALLEN SINAI

Unreal Expectations? Obama Asked For Them

Davos: calm before the storm

$646,214 Per Government Job

Spending where unemployment is already low.

ALAN REYNOLDS

Background Reading

Obama Tells Arabia's Despots They're Safe

America's diplomacy of freedom is officially over.

FOUAD AJAMI

A 40-Year Wish List

You won't believe what's in that stimulus bill.

The Return of Carterism?

Glenn Beck ('In-Your-Face' Conservative) vs. Rod Blagojevich (Typical Obama Liberal)

No comments: