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ACORN's Man in the White House
Newly discovered evidence shows the radical advocacy group ACORN has a man in the Obama White House.
This power behind the throne is longtime ACORN operative Patrick Gaspard. He holds the title of White House political affairs director, the same title Karl Rove held in President Bush's White House.
Evidence shows that years before he joined the Obama administration, Gaspard was ACORN boss Bertha Lewis's political director in New York.
Lewis, the current "chief organizer" or CEO of ACORN, was head of New York ACORN from at least 1994 through 2008, when she took over as national leader of ACORN. With Gaspard at work in the White House, Lewis might as well be speaking to President Obama through an earpiece as he goes about his daily business ruining the country.
Erick Erickson of the website RedState recently did an excellent job explaining the relationship of Gaspard to Lewis and President Obama so I won't take up space here recalling all his valuable insights. Suffice it to say Erickson reported that Gaspard figures prominently in Lewis's rolodex, which Erickson has in his possession.
Skeptics among you may ask, How do we actually know the low-profile Gaspard, who prefers to work outside the public spotlight and who can hardly be found in Nexis searches at all, was Lewis's right hand man?
Because Gaspard's employment with the Association of Community Organizations for Reform Now is acknowledged by no less an authority than ACORN founder Wade Rathke himself. Rathke writes at his blog:
Tell me that 1199's former political director, Patrick Gaspard (who was ACORN New York's political director before that) didn't reach out from the White House and help make that happen, and I'll tell you to take some remedial classes in "politics 101."
The "before that" time period Rathke is referring to is 2003 when Gaspard was executive vice president for political and legislative affairs for 1199SEIU United Healthcare Workers East. According to publicly available disclosure documents, Gaspard registered as a federal lobbyist for SEIU on Oct. 22, 2007. The registration and subsequent disclosures indicate he lobbied Congress on SCHIP, the State Children's Health Insurance Program.
Incidentally, the lines between ACORN and radical left-wing SEIU, whose acronym stands for Service Employees International Union, become fuzzy in places.
SEIU Locals 100 and 880 are part of the ACORN network of organizations. Local 100 in New Orleans is headed by Rathke. SEIU Local 880 in Chicago is headed by longtime ACORN insider Keith Kelleher.
You'd never know about the SEIU connection from visiting ACORN's website, www.acorn.org. That's because the website has been receiving a thorough scrubbing in recent months. On ACORN's affiliated organizations page, references to the two SEIU locals mysteriously disappeared.
It's worth noting that Gaspard's ties to ACORN, SEIU, and Lewis go way back.
According to the Complete Marquis Who's Who, Gaspard has a long history of political involvement stretching back to at least 1989 when he volunteered for the David Dinkins mayoral campaign in New York City. In 2003 he became acting field director for Howard Dean's presidential bid. He was national field director in 2004 for America Coming Together, a now-defunct get-out-the-vote operation that received a $775,000 fine for campaign finance abuses. In 2006 Gaspard was acting political director for SEIU International.
Gaspard also worked for New York's Working Families Party, which is an appendage of ACORN. Lewis is a co-founder of that party -- which endorsed Obama last year -- and has close ties to Rep. Jerrold Nadler (D-New York) who has been most reluctant to have the House Judiciary subcommittee he chairs investigate ACORN.
Nadler invented the incredibly creative argument that recent legislative language aimed at depriving ACORN of federal funding constitutes an unconstitutional "bill of attainder." Perhaps singling out the mafia for a federal funds cutoff would be unconstitutional too in his eyes.
Meanwhile, the American public is beginning to realize that ACORN is a vast criminal conspiracy whose reach extends to the highest levels of the U.S. government.
Obama's statement that he's barely aware of ACORN's problems is nothing short of ridiculous, especially so because Patrick Gaspard was a political director for ACORN New York.
Last year he worked as national political director for the Obama campaign followed by a stint as associate personnel director for the Obama-Biden transition team.
As the old Washington saying goes, politics is personnel. Who knows how many administration officials were put in place by Gaspard with direct input from ACORN's Bertha Lewis. It boggles the mind.
We also now know the Obama administration was lying about ACORN's high level involvement in the 2010 Census. The coordination between ACORN and the Census was revealed as a result of a Freedom of Information Act request filed by the relentless investigator Tegan Millspaw of Judicial Watch. The Census and other government agencies have cut ties with ACORN as the ACORN scandal widens.
We have to wonder: when it comes to ACORN, what else is the Obama administration lying about?
Labor Standards or Liberty?
Why are rich people rich while poor people are poor? Is it because governments fail to protect the poor with stringent standards on wages and workplace safety, or is it because of something else? In spite of the hue and cry of international organizations clamoring for more stringent labor standards, the real solution to global poverty is to increase economic freedom. Instead of limiting the choices available to the global poor, we should be looking to expand them.
The International Labor Organization and other groups argue that the absence of international labor standards are barriers to the escape from poverty for the world's poor. Further, they argue that strict standards should be part of international aid efforts. The problem, though, is that labor standards seek to address the effects of poverty rather than its causes. They are also based on bad economics.
International labor standards are going to make things worse, rather than better, for the world's poor. If you want to help poor people, restricting their options and opportunities is not the answer.
In the internationally competitive global labor market, people earn wages equal to the value of their marginal products. In other words, a unit of labor is worth what it can produce. The proximate cause of low wages is low productivity. The ultimate causes of low wages are institutional environments that stifle entrepreneurship and investment and in turn reduce productivity.
Sweatshop opponents criticize the use of child labor in developing countries and argue that these children should be in school rather than the labor market. At current income levels, this simply is not feasible for many people. In subsistence economies, many people do not have the luxury of diverting their attention away from manual agricultural labor and toward education. The best way to fix this is not to mandate more stringent labor standards but to encourage economic growth.
This helps us reframe the question of global poverty. Instead of looking for ways to make the labor market less efficient, which international standards would certainly do, we have to look for the specific institutional mechanisms by which opportunities are restricted. A growing body of evidence suggests that economic freedom is essential to growth.
Critics of the working conditions in poor countries argue that the wages offered in so-called sweatshops are unacceptably low, and the working conditions wretched. They likely are when we compare them to Western standards.
As economists have pointed out time and again, however, Western working conditions are not the relevant benchmark when we are talking about the quality of working conditions in the developed world. The relevant comparison is the worker's next best opportunity, which is always worse. As economist David Henderson has argued, we do a worker no favors when we remove the best of a lot of very bad possible choices.
Opponents of sweatshops would make more headway by looking for ways to expand the options of sweatshop workers, especially by increasing mobility across national borders. Relaxing restrictions on international labor mobility would substantially increase standards of living for the poor.
Progressives are enthusiastic about microfinance programs, and while these are probably a step in the right direction they are unlikely to fully alleviate poverty. In a book available for free download, economist Lant Pritchett argues that the increase in earnings associated with a lifetime of access to microfinance programs is roughly equal to the increase in income associated with working in the United States for eight weeks. This suggests that the appropriate policy is not to strengthen labor standards but to open borders and allow people to cross them freely.
Gold vs Paper
[July 13, 1953]
Most people take it for granted that the world will never return to the gold standard. The gold standard, they say, is as obsolete as the horse and buggy. The system of government-issued fiat money provides the treasury with the funds required for an open-handed spending policy that benefits everybody; it forces prices and wages up and the rate of interest down and thereby creates prosperity. It is a system that is here to stay.
Now whatever virtues one may ascribe — undeservedly — to the modern variety of the greenback standard, there is one thing that it certainly cannot achieve. It can never become a permanent, lasting system of monetary management. It can work only as long as people are not aware of the fact that the government plans to keep it.
The Alleged Blessings of Inflation
The alleged advantages that the champions of fiat money expect from the operation of the system they advocate are temporary only. An injection of a definite quantity of new money into the nation's economy starts a boom as it enhances prices. But once this new money has exhausted all its price-raising potentialities and all prices and wages are adjusted to the increased quantity of money in circulation, the stimulation it provided to business ceases.
Thus even if we neglect dealing with the undesired and undesirable consequences and social costs of such inflationary measures and, for the sake of argument, even if we accept all that the harbingers of "expansionism" advance in favor of inflation, we must realize that the alleged blessings of these policies are shortlived. If one wants to perpetuate them, it is necessary to go on and on increasing the quantity of money in circulation and expanding credit at an ever-accelerated pace. But even then the ideal of the expansionists and inflationists, viz., an everlasting boom not upset by any reverse, could not materialize.
A fiat-money inflation can be carried on only as long as the masses do not become aware of the fact that the government is committed to such a policy. Once the common man finds out that the quantity of circulating money will be increased more and more, and that consequently its purchasing power will continually drop and prices will rise to ever higher peaks, he begins to realize that the money in his pocket is melting away.
Then he adopts the conduct previously practiced only by those smeared as profiteers; he "flees into real values." He buys commodities, not for the sake of enjoying them, but in order to avoid the losses involved in holding cash. The knell of the inflated monetary system sounds. We have only to recall the many historical precedents beginning with the Continental currency of the War of Independence.
Why Perpetual Inflation Is Impossible
The fiat-money system, as it operates today in this country and in some others, could avoid disaster only because a keen critique on the part of a few economists alerted public opinion and forced upon the government cautious restraint in their inflationary ventures. If it had not been for the opposition of these authors, usually labeled orthodox and reactionary, the dollar would long since have gone the way of the German mark of 1923. The catastrophe of the Reich's currency was brought about precisely because no such opposition was vocal in Weimar Germany.
Champions of the continuation of the easy money scheme are mistaken when they think that the policies they advocate could prevent altogether the adversities they complain about. It is certainly possible to go on for a while in the expansionist routine of deficit spending by borrowing from the commercial banks and supporting the government bond market.
But after some time it will be imperative to stop. Otherwise the public will become alarmed about the future of the dollar's purchasing power and a panic will follow. As soon as one stops, however, all the unwelcome consequences of the aftermath of inflation will be experienced. The longer the preceding period of expansion has lasted, the more unpleasant those consequences will be.
The attitude of a great many people with regard to inflation is ambivalent. They are aware, on the one hand, of the dangers inherent in a continuation of the policy of pumping more and more money into the economic system. But as soon as anything substantial is done to stop increasing the amount of money, they begin to cry out about high interest rates and bearish conditions on the stock and commodity exchanges. They are loath to relinquish the cherished illusion which ascribes to government and central banks the magic power to make people happy by endless spending and inflation.
Full Employment and the Gold Standard
The main argument advanced today against the return to the gold standard is crystallized in the slogan "full-employment policy." It is said that the gold standard paralyzes efforts to make unemployment disappear.
On a free labor market the tendency prevails to fix wage rates for every kind of work at such a height that all employers ready to pay these wages find all the employees they want to hire, and all job-seekers ready to work for these wages find employment. But if compulsion or coercion on the part of the government or the labor unions is used to keep wage rates above the height of these market rates, unemployment of a part of the potential labor force inevitably results.
Neither governments nor labor unions have the power to raise wage rates for all those eager to find jobs. All they can achieve is to raise wage rates for the workers employed, while an increasing number of people who would like to work cannot get employment. A rise in the market wage rate — i.e., the rate at which all job seekers finally find employment — can be brought about only by raising the marginal productivity of labor. Practically, this means by raising the per-capita quota of capital invested.
Wage rates and standards of living are much higher today than they were in the past because under capitalism the increase in capital invested by far exceeds the increase in population. Wage rates in the United States are many times higher than in India because the American per-capita quota of capital invested is many times higher than the Indian per-capita quota of capital invested.
There is only one method for a successful "full-employment policy" — let the market determine the height of wage rates. The method that Lord Keynes has baptized "full-employment policy" also aimed at reestablishment of the rate which the free labor market tends to fix. The peculiarity of Keynes's proposal consisted in the fact that it proposed to eradicate the discrepancy between the decreed and enforced official wage rate and the potential rate of the free labor market by lowering the purchasing power of the monetary unit. It aimed at holding nominal wage rates, i.e., wage rates expressed in terms of the national fiat money, at the height fixed by the government's decree or by labor union pressure.
But as the quantity of money in circulation was increased and consequently a trend toward a drop in the monetary unit's purchasing power developed, real wage rates, i.e., wage rates expressed in terms of commodities, would fall. Full employment would be reached when the difference between the official rate and the market rate of real wages disappeared.
There is no need to examine anew the question whether the Keynesian scheme could really work. Even if, for the sake of argument, we were to admit this, there would be no reason to adopt it. Its final effect upon the conditions of the labor market would not differ from that achieved by the operation of the market factors when left alone. But it attains this end only at the cost of a very serious disturbance in the whole price structure and thereby the entire economic system.
The Keynesians refuse to call "inflation" any increase in the quantity of money in circulation that is designed to fight unemployment. But this is merely playing with words. For they themselves emphasize that the success of their plan depends on the emergence of a general rise in commodity prices.
It is, therefore, a fable that the Keynesian full-employment recipe could achieve anything for the benefit of the wage earners that could not be achieved under the gold standard. The full-employment argument is as illusory as all the other arguments advanced in favor of increasing the quantity of money in circulation.
The Specter of an Unfavorable International Balance
A popular doctrine maintains that the gold standard cannot be preserved by a country with what is called an "unfavorable balance of payments." It is obvious that this argument is of no use to the American opponents of the gold standard. The United States [1953] has a very considerable surplus of exports over imports. This is neither an act of God nor an effect of wicked isolationism. It is the consequence of the fact that this country, under various titles and pretexts, gives financial aid to many foreign nations. These grants alone enable the foreign recipients to buy more in this country than they are selling in its markets.
In the absence of such subsidies it would be impossible for any country to buy anything abroad that it could not pay for, either by exporting commodities or by rendering some other service such as carrying foreign goods in its ships or entertaining foreign tourists. No artifices of monetary policy, however sophisticated and however ruthlessly enforced by the police, can in any way alter this fact.
It is not true that the so-called have-not countries have derived any advantage from their abandonment of the gold standard. The virtual repudiation of their foreign debts, and the virtual expropriation of foreign investments that it involved, brought them no more than a momentary respite. The main and lasting effect of abandoning the gold standard, the disintegration of the international capital market, hit these debtor countries much harder than it hit the creditor countries. The falling off of foreign investments is one of the main causes of the calamities they are suffering today.
The gold standard did not collapse. Governments, anxious to spend, even if this meant spending their countries into bankruptcy, intentionally aimed at destroying it. They are committed to an antigold policy, but they have lamentably failed in their endeavors to discredit gold. Although officially banned, gold in the eyes of the people is still money, even the only genuine money.
The more prestige the legal tender notes produced by the various government printing offices enjoy, the more stable their exchange ratio is against gold. But people do not hoard paper; they hoard gold. The citizens of this country, of course, are not free to hold, to buy, or to sell gold.[1] If they were allowed to do so, they certainly would.
No international agreements, no diplomats, and no supernational bureaucracies are needed in order to restore sound monetary conditions. If a country adopts a noninflationary policy and clings to it, then the condition required for the return to gold is already present. The return to gold does not depend on the fulfillment of some material condition. It is an ideological problem. It presupposes only one thing: the abandonment of the illusion that increasing the quantity of money creates prosperity.
The excellence of the gold standard is to be seen in the fact that it makes the monetary unit's purchasing power independent of the arbitrary and vacillating policies of governments, political parties, and pressure groups. Historical experience, especially in the last decades, has clearly shown the evils inherent in a national currency system that lacks this independence.
Rothbard and the Post–High-Tech Meltdown
Scholars well versed in the theories of the Austrian School of economics were able to present a unique and credible perspective of the dot-com bust and high-tech meltdown. The maestro at the Federal Reserve had created mechanisms whereby easy credit became available to players in high-tech and information-sector enterprises. Almost any business idea that could be classified as being in the high-tech or information sectors became eligible for such loans.
During the 1980s, there were several innovations in the telecommunications sector that supplied small business and the home market. These innovations enhanced productivity on the individual and commercial levels and gained the attention of government bureaucrats who saw an opportunity to "stimulate" the economy. The result was a malinvestment boom, as hordes of marginal entrepreneurs gained access to easy credit.
These high-tech and information-sector businesses were deeply interconnected. The same suppliers provided services or hardware to multiple players.
Easy credit given to marginal entrepreneurs directly bid up prices and indirectly affected multiple players in the industry, to their collective detriment. When the high-tech meltdown and dot-com bust began, the ramifications spread through the entire sector, resulting in a crash akin to that of 1929.
In his treatise on the Great Depression, Murray Rothbard showed that, unlike the laissez-faire approach, which led to a rapid recovery from the stock-market plunge of 1920 and 1921, the Hoover administration's interventionist approach worsened a bad economic situation by keeping wages high. Many of the survivors of the high-tech meltdown and dot-com bust took advice from the pages of Rothbard's treatise when they moved operations offshore to India and China.
India and China not only had large workforces with comprehensive technical educations, they also had the kind of economic foundation that many high-tech and information-sector companies needed: one with an absence of North American-style political participation. Entrepreneurs were free to go about their business and were not beholden to government officials who had generously opened the public purse to provide "investment revenue" or "a safety net."
Some Indian government officials have been accused of doing the opposite, that is, receiving money from technology companies. Whether or not some private revenue in fact has flowed in such a direction is a domestic matter in India. At least such behavior did not create price distortions and misleading market signals that caused entrepreneurs to malinvest on a massive scale.
The Sequel
In North America, there will likely be a sequel to the high-tech meltdown, this time in the green-tech sector. Several governments around the world are investing public funds into developing and implementing various forms of renewable-energy technology. Multiple companies have already received state funding and developed competing green energy technologies, mostly for generating electricity.
However, the economic downturn of 2008 has already caused one jurisdiction to revise electric-power projections. Several years ago, the public utility of Ontario, Canada, ran up a debt of $32 billion, forecast a shortfall of several thousand megawatts of electric power, and encouraged development of green technology. Then, on June 28, 2009, in a radio news brief of the Canadian Broadcasting Corporation, the Minister of Energy for Ontario announced the cancellation of two nuclear reactors due to high bid prices. The same news report also announced that the agency that oversees electric-power generation had discovered that they had excess generating capacity. It forecasted — perhaps more accurately this time — that "the situation would likely remain unchanged for the next five years." Ontario has since announced its intention to close several coal-fired power stations.
Many jurisdictions across North America and in several developed countries may discover that the economic downturn could reduce the demand for electric power. What will remain of the market may not be sufficient to sustain all of the companies currently working on renewable-energy production. Therefore, a market shakeout in the form of a green-tech meltdown is likely.
However, just as the maestro tried to restimulate the postmeltdown high-tech and information sectors, one or more national governments will probably try to restimulate failing green-tech. This approach has already failed. But the theory of Dr. Rothbard has succeeded in sustaining what remains of the postmeltdown high-tech and information sectors, albeit in India and China.
Lochner and Liberty
Dissecting the Supreme Court case that unites the new regulatory czar and his conservative critics.
DAMON W. ROOT
From Reason Magazine
Last week, the Senate voted 57-40 to confirm Harvard and University of Chicago law professor Cass Sunstein as the new head of the Office of Information and Regulatory Affairs. This narrow vote brought an end to months of overheated and frequently misguided attacks on the would-be "regulatory czar," including a sensationalistic website operated by the American Conservative Union that falsely painted Sunstein as an out-of-control radical.
Too busy making outlandish claims about his positions on gun control and radio censorship, Sunstein's conservative critics have ignored one of the biggest problems that his ideas pose to limited constitutional government. Sunstein is one of the most influential modern critics of Lochner v. New York (1905), perhaps the Supreme Court's most famous decision defending economic liberty. So why aren't conservatives going after Sunstein for his opposition to this case? Because many of them don't like Lochner either.
At issue in the case was a provision capping working hours in New York's 1895 Bakeshop Act, which banned bakery employees from working more than 10 hours per day or 60 hours per week. In its 5-4 decision, the Court nullified this provision for violating the liberty of contract secured by the Due Process Clause of the 14th Amendment.
In his 1987 Columbia Law Review article "Lochner's Legacy," which is one of the most cited articles on the case from the last two decades, Sunstein criticized Lochner for preventing the state from using its lawful power "to help those unable to protect themselves in the marketplace." Similarly, in his 1998 book The Partial Constitution, Sunstein asserted that the Lochner Court "made the system of 'laissez faire' into a constitutional requirement."
But compare those claims with the actual text of the Lochner decision. As Justice Rufus Peckham wrote for the majority, while New York certainly possessed the power to enact valid health and safety regulations, the maximum hours provision of the Bakeshop Act "is not, within any fair meaning of the term, a health law." Not only was the baking trade "not dangerous in any degree to morals, or in any real and substantial degree to the health of the employee," the limit on working hours involved "neither the safety, the morals, nor the welfare, of the public." In other words, "clean and wholesome bread does not depend on whether the baker works but ten hours per day or only sixty hours a week."
Indeed, as Peckham carefully explained, those sections of the Bakeshop Act regulating "proper washrooms and closets," the height of ceilings, floor conditions, and "proper drainage, plumbing, and painting," remained perfectly valid health and safety regulations; only the hours provision was struck down. Moreover, just three years later, in Muller v. Oregon, the Supreme Court unanimously upheld a state law limiting female laundry employees from working more than 10 hours a day. So much for Lochner making "'laissez faire' into a constitutional requirement."
In fact, as George Mason University legal scholar David Bernstein has thoroughly documented, the mainstream version of the Lochner story, which pits evil bosses against viciously exploited workers, bears zero resemblance to the historical evidence. The real origins of the Bakeshop Act lie in an economic conflict between unionized New York bakers, who labored in large shops, and their non-unionized, mostly immigrant competitors, who tended to work longer hours in small, old-fashioned bakeries. As Bernstein observed, "a ten-hour day law would not only aid those unionized workers who had not successfully demanded that their hours be reduced, but would also help reduce competition from nonunionized workers."
To put it another way, Lochner v. New York secured a fundamental right against arbitrary government interference while undercutting an act of naked economic protectionism. Yet Sunstein's right-wing foes haven't mentioned the case in their opposition to his appointment. Why? Perhaps it's because prominent leaders of the conservative legal movement also dislike Lochner.
In his 1991 bestseller The Tempting of America, for example, former federal appeals court Judge Robert Bork denounced Lochner as "the symbol, indeed the quintessence, of judicial usurpation of power," linking it to the Court's later rulings securing privacy and abortion rights under the 14th Amendment. Supreme Court Justice Antonin Scalia routinely attacks the Court's abortion and gay rights rulings for their Lochnerian judicial activism. And during his 2005 Senate confirmation hearings, future Chief Justice John Roberts declared, "You go to a case like the Lochner case, you can read that opinion today and it's quite clear that they're not interpreting the law, they're making the law."
These judicial conservatives aren't necessarily worried about restricting state regulatory power, but they are very leery of the Court protecting unenumerated rights—be it liberty of contract or privacy. Which matches nicely with Sunstein's claim that part of the problem with the Lochner Court was its "aggressiveness" and "judicial intrusions into the democratic process."
Yet both sides ignore the Ninth Amendment, which reads, "the enumeration in the Constitution of certain rights shall not be construed to deny or disparage others retained by the people." Which means we possess more rights than any document could ever list, including the right to earn an honest living free from arbitrary and unnecessary regulation. They also both ignore the Privileges or Immunities Clause of the 14th Amendment, which was specifically designed to protect both civil rights and economic liberties against predatory state governments.
That's the real problem with Cass Sunstein—and with the conservatives who share his hostility towards Lochner. They don't give economic liberty its constitutional due.
Mr. Root is an associate editor at Reason magazine.
Health 'Reform' Is Income Redistribution
Let's have an honest debate before we transfer more money from young to old.
MICHAEL O. LEAVITT AL HUBBARD KEITH HENNESSEY
While many Americans are upset by ObamaCare’s $1 trillion price tag, Congress is contemplating other changes with little analysis or debate. These changes would create a massively unfair form of income redistribution and create incentives for many not to buy health insurance at all.
Let's start with basics: Insurance protects against the risk of something bad happening. When your house is on fire you no longer need protection against risk. You need a fireman and cash to rebuild your home. But suppose the government requires insurers to sell you fire "insurance" while your house is on fire and says you can pay the same premium as people whose houses are not on fire. The result would be that few homeowners would buy insurance until their houses were on fire.
The same could happen under health insurance reform. Here's how: President Obama proposes to require insurers to sell policies to everyone no matter what their health status. By itself this requirement, called "guaranteed issue," would just mean that insurers would charge predictably sick people the extremely high insurance premiums that reflect their future expected costs. But if Congress adds another requirement, called "community rating," insurers' ability to charge higher premiums for higher risks will be sharply limited.
Thus a healthy 25-year-old and a 55-year-old with cancer would pay nearly the same premium for a health policy. Mr. Obama and his allies emphasize the benefits for the 55-year old. But the 25-year-old, who may also have a lower income, would pay significantly more than needed to cover his expected costs.
Like the homeowner who waits until his house is on fire to buy insurance, younger, poorer, healthier workers will rationally choose to avoid paying high premiums now to subsidize insurance for someone else. After all, they can always get a policy if they get sick.
To avoid this outcome, most congressional Democrats and some Republicans would combine guaranteed issue and community rating with the requirement that all workers buy health insurance—that is, an "individual mandate." This solves the incentive problem, and guarantees that both the healthy poor 25-year-old and the sick higher-income 55-year-old have heath insurance.
But the combination of a guaranteed issue, community rating and an individual mandate means that younger, healthier, lower-income earners would be forced to subsidize older, sicker, higher-income earners. And because these subsidies are buried within health-insurance premiums, the massive income redistribution is hidden from public view and not debated.
If Congress goes down this road, health insurance premiums will increase dramatically for the overwhelming majority of people. Even if Congress mandates that everyone have health insurance, many will choose to go without and pay the tax penalty. If you think people are dissatisfied with health care now, wait until they understand that Congress voted to mandate hidden premium increases and lower wages.
There are wiser and more equitable ways to ensure that every American has access to affordable health insurance. Policy experts and state policy makers have experimented with different solutions, including high risk pools and taxpayer-funded vouchers subsidized for those who are both poor and sick. Medicaid, charity care, and uncompensated care provided by hospitals cover some of these costs today.
These solutions are imperfect, but so are the reforms being proposed in Congress. Congress should be explicit about who will pay more under its plans.
Mr. Leavitt, former secretary of Health and Human Services (2005-2009), has served as the administrator of the Environmental Protection Agency and a governor of Utah (1993-2003). Mr. Hubbard (2005-2007) and Mr. Hennessey (2008) served as directors of the White House National Economic Council.
Deals, Cisco Push Up Stocks
A burst of merger activity and an analyst upgrade of Cisco Systems perked up the stock market on Monday, helping major indexes to recoup some of last week's losses.
The Dow Jones Industrial Average, which is coming off a 1.6% drop that represented its worst weekly performance since early July, was recently up 1.2%, or 115 points, at 9780.
Its strongest component in percentage terms was Cisco, up 4.6%, after analysts at Barclays Capital upgraded the networking company to an "overweight" rating from "equal weight," citing an improved outlook for its business in both Europe and North America.
![[Markets Data]](http://s.wsj.net/public/resources/images/MDGpromo_D01222009151210.jpg)
The technology-focused Nasdaq Composite Index was up 1.7%, the best performance of any of the major indexes. The S&P 500 was up 1.4%, helped by gains in every category. Its information technology and telecommunications sectors were strong, as was its industrial sector. Most sectors rose 1% or more.
Elsewhere, investors responded to deal news at several bellwethers. A pickup in merger activity tends to boost the market because it sets off a guessing game among investors who begin to buy shares of companies they believe are likely acquisition targets.
Xerox dropped 15% after it agreed to pay $6.4 billion of cash and stock for outsourcing and information-services company Affiliated Computer Services. ACS surged 16%.
Abbott Laboratories climbed 4% after it said it will buy the pharmaceutical business of Belgium's Solvay for as much as $7 billion in a deal that would expand its presence in emerging markets.
Johnson & Johnson said it bought 18.1% of Crucell for $442.7 million and will pay development milestones and royalty payments if flu vaccines the two firms will develop make it to the market. Crucell shares sank 6%. Johnson & Johnson gained 0.5%.
Japan's Nikkei 225 Average fell 2.5% as exporters' shares were hurt by the strengthening of the yen against the dollar. In recent trading, the dollar was at 89.40 yen, down from 89.85 yen late Friday in New York. Elsewhere in Asia, China's Shanghai Composite declined 2.7% and Hong Kong's Hang Seng Index shed 2.1%.
But in Europe, stocks were climbing. London's FTSE 100 was higher by about 0.7% and Germany's DAX was up about 1.5% after Sunday's election in which incumbent Chancellor Angela Merkel's center-right coalition won that country's national elections, setting the stage for tax cuts and labor-market changes.
Front-month crude-oil futures were down 17 cents at $65.85 a barrel. Gold was higher by about $1 to $993 an ounce. Treasury prices were flat.
$35 Billion Slated for Local Housing
By DEBORAH SOLOMON
WASHINGTON -- The Obama administration is close to committing as much as $35 billion to help beleaguered state and local housing agencies continue to provide mortgages to low- and moderate-income families, according to administration officials.
The move would further cement the government's role in propping up the housing market even as some lawmakers push to curb spending at a time of rising debt.
The effort, which could be announced as early as this week, is aimed at relieving pressure on government-operated housing finance agencies, which have been struggling to find funding amid the downturn. These agencies, or HFAs, are a small part of the housing market but are critical to many first-time and low-income home buyers, who can get lower-rate mortgages through an HFA than they could through a private-sector lender. Rates are typically 0.5 to one percentage point lower than commercial lenders.
Administration officials are concerned that HFAs have largely stopped making new loans, exacerbating the housing market's woes.
Details are still being finalized. The plan requires formal approval from Treasury Secretary Timothy Geithner and the White House.
The program could be in place for as long as three years, and would involve the administration essentially buying the debt that these housing agencies rely on for financing.
The Treasury Department, along with government-controlled mortgage giants Fannie Mae and Freddie Mac, is expected to buy as much as $20 billion of new housing bonds issued by the state agencies. It will also provide $15 billion in additional funding, as needed, to help the agencies continue to use a type of cheap, short-term financing.
If the housing agencies default on their debt obligations, taxpayers could lose out. The Treasury plans to charge fees to agencies that want to sell new long-term bonds to the government based on their individual risk factors, to help reduce the risk of default and protect taxpayers.
Money for the programs will come from Fannie Mae and Freddie Mac and from the Treasury, using its authority under the 2008 Housing and Economic Recovery Act.
While policymakers are beginning to unwind some of the other emergency programs extended to financial markets during the financial crisis, housing remains a weak spot that some view as too fragile to survive without significant government backing.
President Barack Obama said in February his administration would find a way to help support state housing finance agencies. Such a move has been pressed by state and local politicians and by housing advocates. House Financial Services Chairman Barney Frank, a vocal supporter of such housing initiatives, was the author of legislation earlier this year that closely mirrors the administration's plan.
The effort could trigger criticism, particularly from Republicans, for aiming federal funds at low- and moderate-income homeowners instead of other troubled areas, such as small businesses or commercial real estate.
The move also comes as some lawmakers are advocating less spending. Already, 40 senators are pushing to allow the Treasury's $700 billion bailout fund to expire and direct any remaining funds to pay down the nation's ballooning debt.
Rep. Scott Garrett (R., N.J.) said while he hadn't seen exact details of the plan, he questioned whether the government should be aiming more money at the housing market.
"I don't know that we can continue this pattern of having the federal government being the lender of last resort," he said. "Most people are calling on the government to lay out an exit strategy. This just gets us further into the quagmire."
More broadly, the move is an attempt to bolster the role of government in encouraging homeownership, especially among low-income Americans. Considered well-meaning by many, the principle has been blamed by others for fueling the housing boom that led to last year's financial meltdown.
Some state HFAs guarantee loans while others originate mortgages. The agencies also develop affordable multifamily housing or provide financing to developers of such housing.
To qualify for an HFA loan, borrowers must have certain income levels -- generally a percentage of a state's median income -- good credit scores and verifiable income. The criteria differ by state.
The agencies typically fund about 100,000 mortgages a year. In 2007, state HFAs issued $17 billion in bonds that funded 126,611 mortgages and some agencies were on track to exceed that level in 2008 before credit markets froze.
In total, HFAs have funded mortgages for about 2.6 million families, according to the National Council of State Housing Agencies. That's about 4.6% of the 56 million first-lien mortgages outstanding.
The agencies aren't in trouble because of subprime lending or bad loans. Rather, they have found it increasingly hard to find investors willing to buy the mix of tax-exempt and taxable bonds that HFAs sell to fund mortgages.
Interest rates have surged on municipal bonds, making it harder for the agencies to offer their less-expensive mortgage rates to borrowers. As a result, most HFA lending has come to a halt. California and Texas have suspended their lending activities altogether.
Ken Giebel, marketing director for California's state housing finance agency, CalHFA, said federal support is critical if agencies like his are to continue funding low-rate mortgages. "Our basic mission is to give moderate- to low-income people low interest rates, but that can't happen," when borrowing costs are so high, Mr. Giebel said.
To help these agencies continue lending, the administration will commit to purchasing up to $35 billion of new long-term bonds and shorter-term securities.
The Treasury will try to jump-start new mortgage originations by purchasing up to $20 billion of new, fixed-rate bonds issued by housing agencies. Under the program being discussed, Fannie Mae and Freddie Mac would purchase the bonds and securitize them, then sell them to the Treasury.
The effort is expected to help lower borrowing costs since the government would buy the bonds at interest rates more favorable than housing finance agencies can get in the private market.
A second effort will set aside $15 billion to target an inexpensive type of financing used by many housing agencies to lower borrowing costs. Variable-rate demand obligations, or VRDOs, are a type of debt used to fund long-term bonds and typically carry interest rates several percentage points lower than regular housing bonds. Housing agencies sell them to investors who resell them daily, weekly or monthly at low short-term rates. About 38 HFAs have $30 billion in such debt outstanding.
The likely buyers have vanished, however, in part because many of the intermediaries that used to resell the bonds have been downgraded by credit-ratings firms and so investors are unwilling to do business with them. When an investor that's bought VRDOs thinks they can't be resold, it can demand that agencies pay off the debt under accelerated schedules and at high interest rates.
To ease the strain, Fannie Mae and Freddie Mac will temporarily act as a buyer of last resort for this debt. The administration hopes this will encourage debt holders to hold onto the debt, forestalling the need to pay it back quickly.
Germany Goes for Growth
The center-right gets a governing majority.
In the midst of its deepest postwar recession, Germany elected a conservative-free market government Sunday. Maybe the reports of capitalism's demise have been premature.
As we went to press, Chancellor Angela Merkel's Christian Democratic Union and its Bavarian sister party seemed poised to garner 33.7% of the votes, the second-worst result in their history. But this would still put them some 10 percentage points ahead of the Social Democrats, who had their worst election night in 60 years.
The big winner was the pro-business Free Democratic Party, with a record 14.6% of the vote. This will be enough to end what has been an unnatural alliance between the country's two main political rivals and secure a majority for the center-right coalition. It also gives Mrs. Merkel the opportunity to do the tax-cutting and deregulating that she campaigned on four years ago, assuming she still has the courage of those convictions.
The Free Democrats campaigned on a €35 billion tax cut combined with a radical simplification of one of the most complex tax codes in the world. The current rates, which rise gradually from 14% to 45%, would be replaced with three brackets of 15%, 25% and 35%. The proposal has come to be known as the "beer-coaster reform"—as in, you could fit the whole tax return on a beer coaster. The reform would make Germany's tax code among the most competitive and transparent in the industrialized world.
But that depends on Mrs. Merkel promoting it. The CDU's own reform proposal is much more modest and less economically helpful. It has suggested cutting the bottom bracket to 12% from 14% and raising the income threshold at which the top rate kicks in to €60,000 from €52,552. This would do little to tackle the system's complexity or to change the fundamental incentives to work, save and invest.
The FDP also wants to loosen the "Kündigungsschutz"—the country's strict dismissal rules, which make it so costly to lay off employees that it hinders hiring them in the first place. Mrs. Merkel has said she would have none of that. "The 'C' in CDU stands for Christian politics, which always included a respect for workers' rights," the Chancellor recently said. FDP proposals to cut the size of government and reform the government health-care system would also be difficult to reconcile with the CDU's current program.
Apart from the Free Democratic surge, this was a dull, cautious German election that some called the "valium campaign." The two main candidates, Mrs. Merkel and Social Democratic Foreign Minister Frank-Walter Steinmeier, avoided nearly all confrontation. This gave an opening to smaller parties to drive the debate and gain support. The Greens and the Left Party gained at the expense of the Social Democrats.
Sunday's results suggest that irresolute moderation isn't a winning formula in today's Germany. Germans did not simply re-elect Mrs. Merkel. They also gave her new marching orders for economic revival. For the sake of Germany and European prosperity, we hope she heeds them.
Honduras Just Wants an Election
The U.S. demand that Mr. Zelaya be returned to power before a vote is destructive.
At a luncheon reception for Brazilian President Lula da Silva earlier this year, a Brazilian official explained to me that the reason Brazil does not raise its voice for human rights in the dictatorship of Cuba is that it does not wish to intervene in the island's domestic affairs. Apparently the policy of nonintervention does not apply to democratic Honduras.
Last Monday former Honduran President Manuel Zelaya, who was arrested, deported and legally deposed from office on June 28, made a stealth return to Tegucigalpa and sought shelter at the Brazilian Embassy. Mr. Zelaya told a Honduran radio station that his plan to return was hatched in consultation with Mr. da Silva and Foreign Minister Celso Amorim. Brazil says it had nothing to do with smuggling Mr. Zelaya into the country, which is tantamount to calling the former Honduran president a liar. On that point, many Hondurans would agree.
Former Honduran President Manuel Zelaya inside the Brazilian Embassy in Tegucigalpa.
Mr. Zelaya has corruption charges pending against him in Honduras but "noninterventionist" Brazil refuses to hand him over to authorities. Instead it is allowing him to use the embassy as a command center from which he has been calling his violent supporters into the streets.
Mr. da Silva's sympathies with the extreme left and his friendship with Fidel Castro are legendary. At home he doesn't engage in the leftist militancy of the 1970s because Brazilians won't have it. He is constrained by institutions, economic reality and public pressure. His admiration for communism even waned a bit when Venezuela and Bolivia tried to nationalize Brazilian investments. Yet he has to feed crumbs to his notoriously left-wing foreign ministry and that's where Honduras comes in handy.
This practice of moderation at home and extremism abroad is not unique to Brazil. Many Latin American presidents do the same thing. What is frightening is that the U.S. seems to be adopting a similar policy.
Last week Tegucigalpa was under attack by zelayistas. They burned tires in the streets, vandalized property, looted businesses and blocked roads. But the U.S. repeated its support for Mr. Zelaya. Without producing any legal review, Washington decreed once again that a president who tried to trash the constitution must be reinstated or it will not recognize the November presidential election.
Why does the U.S. threaten to undermine a free election that would very likely restore peace and security? Venezuela's Hugo Chávez may have answered that in his speech to the United Nations General Assembly last Thursday. Taking the podium, Mr. Chávez told his audience that he didn't smell "sulfur" the way he did last year. This was a reference to his last U.N. tirade, when he called George W. Bush a devil who had left behind a sulfuric odor. This year, Mr. Chávez said, there was a smell of "hope."
Mr. Obama clearly has won acceptance from the Latin American tyrant and the U.S.'s Honduras policy has been helpful. But will this great honor last longer than a hiccup and yield any return? Probably not. Beyond sparing Mr. Obama the verbal barbs he delivered to Mr. Bush, Mr. Chávez shows no inclination toward being a good neighbor. He's engaged in a massive military buildup and he's even talking about his own nuclear ambitions.
The Obama administration's position on the Honduran election is embarrassing. Can anyone imagine that if Fidel Castro declared tomorrow that he would hold free elections and invite the whole world to come as observers, the U.S. would reject the idea because Cuba is a military dictatorship? It would be absurd.
The Americas in the News
Get the latest information in Spanish from The Wall Street Journal's Americas page.
Panamanian President Ricardo Martinelli told me last week in New York that he believes that "the only way and the best way to get out of the Honduran problem is to allow the Honduran people to have a free, participative election where they select whoever they think is the best candidate to run their government." Mr. Martinelli notes that the candidates in this race were chosen while Mr. Zelaya was still president. Honduran President Micheletti ran in a primary but lost to Elvin Santos, who is now the candidate for Mr. Zelaya's party and who also wants the elections to go forward. Panama once had the problem of democracy interrupted, Mr. Martinelli says, and it was elections that restored it.
Mr. Martinelli says—as many in the Honduran government do—that it was wrong to deport Mr. Zelaya. He also says that he was hoping that negotiations in San José, Costa Rica, would produce an agreement to resolve the dispute. But he adds that what Mr. Zelaya is demanding "is not within the laws and regulations of Honduras." So now the election is the answer.
A transparent election is the path to political stability endorsed by the Free World. It is unseemly and churlish for the U.S. to threaten that process. Does Mr. Obama treasure kind words from Hugo Chávez that much? If so, we're all in trouble.
The Blob That Ate Monetary Policy
Banks that are 'too big to fail' have prevented low interest rates from doing their job.
RICHARD W. FISHER HARVEY ROSENBLUM
Fans of campy science fiction films know all too well that outsized monsters can wreak havoc on an otherwise peaceful and orderly society.
But what B-movie writer could have conjured up this scary scenario—Too Big To Fail (TBTF) banks as the Blob that ate monetary policy and crippled the global economy? That's just about what we've seen in the financial crisis that began in 2007.
While the list of competitive advantages TBTF institutions have over their smaller rivals is long, it is also well-known. We focus instead on an unrecognized macroeconomic threat: The very existence of these banks has blocked, or seriously undermined, the mechanisms through which monetary policy influences the economy.
Economics textbooks tell us that when the Federal Reserve encounters rising unemployment and slowing growth, it purchases short-term Treasury bonds, thus lowering interest rates and inducing banks to lend more and borrowers to spend more. The banking system, and the capital markets that respond to these same signals, are critical to transmitting Fed policy actions into changes in economic activity.
These links normally function smoothly. Numerous academic studies have concluded that monetary policy before the financial crisis was working better, faster and more predictably than it did a few decades ago. Monetary policy's increased effectiveness helped usher in a quarter century of unprecedented macroeconomic stability often called The Great Moderation—infrequent and mild recessions accompanied by low inflation.
Then the Blob struck. With financial markets in trouble and the economy wobbling, the Fed began lowering its target interest rate two years ago, bringing it close to zero by December 2008. Other central banks followed suit. Based on recent experience, such aggressive policies should have fairly quickly restored stability and growth. Unfortunately, the Blob was already blocking the channels monetary policy uses to influence the real economy.
Many TBTF banks grew lax about risk as they chased higher returns through complex, exotic investments—the ones now classified as "toxic assets." As the financial crisis erupted, these banks saw their capital bases erode and wary financial markets made them pay dearly for new capital to shore up their balance sheets.
In this environment, monetary policy's interest-rate channel operated perversely. The rates that matter most for the economy's recovery—those paid by businesses and households—rose rather than fell. Those banks with the greatest toxic asset losses were the quickest to freeze or reduce their lending activity. Their borrowers faced higher interest rates and restricted access to funding when these banks raised their margins to ration the limited loans available or to reflect their own higher cost of funds as markets began to recognize the higher risk that TBTF banks represented.
The credit channel also narrowed because undercapitalized banks, especially those writing off or recognizing massive losses, must shrink, not grow, their private-sector loans. TBTF institutions account for more than half of the U.S. banking sector, and the industry is even more highly concentrated in the European Union. Small banks, most of them well capitalized, simply don't have the capacity to offset the TBTF banks' shrinking lending activity.
The balance-sheet channel depends on falling interest rates to push up the value of homes, stocks, bonds and other assets, creating a positive wealth effect that stimulates spending. When the financial crisis pushed interest rates perversely high, balance-sheet deleveraging took place instead, with households and businesses cutting their debt at the worst possible time.
Falling interest rates usually drive down the dollar's value against other currencies, opening an exchange-rate channel for monetary policy that boosts exports. In the financial crisis, the dollar rose for about a year relative to the euro and pound (but not the yen). This unusual behavior partly reflected higher interest rates, but probably had more to do with the perception that financial conditions at TBTF banks were worse in the EU than in the U.S.
Finally, the troubles of TBTF institutions gummed up the capital-market channel. In past crises, large companies had the alternative of issuing bonds when troubled banks raised rates or curtailed lending. In the past decade, however, deregulation allowed TBTF banks to become major players in capital markets. The dead weight of their toxic assets diminished the capacity of markets to keep debt and equity capital flowing to businesses and scared investors away.
Obstructions in the monetary-policy channels worsened a recession that has proven to be longer and, by many measures, more painful than any post-World War II slump. With its conventional policy tools blocked, the Fed has resorted to unprecedented measures over the past two years, opening new channels to bypass the blocked ones and restore the economy's credit flows.
Guarding against a resurgence of the omnivorous TBTF Blob will be among the goals of financial reform. Our analysis underscores the urgency of quickly implementing reforms in order to restore the ability of central banks to manage an effective monetary policy. Most observers agree on the need to implement and enforce rules that require more capital and less leverage for TBTF financial institutions. Think of it like lower speed limits for the heavy trucks, the ones whose accidents cause the most damage.
Japan paid dearly for propping up its troubled banks in the 1990s. We need to develop supervision and resolution mechanisms that make it possible for even the biggest boys to fail—in an orderly way, of course. We want creative destruction to work its wonders in the financial sector, just as it does elsewhere in the economy, so we never again have a system held hostage to poor risk management.
Other useful ideas center on creating early warning systems and acting more quickly to resolve problems at large financial enterprises with overwhelming problems. For example, we might require the largest institutions to issue debt with mandatory conversion to equity when certain triggers are reached. The existence of this contingency capital would induce debt holders to exert more market discipline on management and encourage increased transparency and reduced complexity, not to mention speed up the bankruptcy process.
Fueling the rapid growth of TBTF banks in this decade were convoluted arrangements now widely reduced to three-letter shorthand—CDSs, CDOs, SIVs and the rest, all brought to you by the same people who gave you TBTF.
Widespread use of these three-letter monsters had a lot to do with making financial institutions too complex to manage. How else can top management explain being blindsided by the wave of writedowns that began in February 2007? If a bank's true financial condition isn't understood by its highly paid leaders, how can bank supervisors, who rely on a bank's internal measurements as basic input, do their jobs?
Instead of attacking bigness per se, public policy should focus on encouraging transparency and simplicity. This is what markets are supposed to do but, for a variety of reasons, have failed to do.
The problem isn't just the riskiness of a big bank's assets, nor even the bank's size relative to the overall system. It's important to know whether the bank's asset holdings are highly correlated with those of other banks. Did they all make the same bad bets at the same time? Did they all bet that real-estate prices would rise forever? As we all know, the answer, in this decade, unfortunately, is "yes."
We hope that putting these basic principles into practice will encourage market forces to move in the direction of opportunistic deconsolidation—that is, the spinning off of parts of banking empires that have little or no economic basis for existing in the new environment.
Since the TBTF Blob reduces the effectiveness of monetary policy's transmission mechanisms, unorthodox policies become the only recourse. These measures carry great risks. Don't do enough and the economy may descend into a deflationary spiral. Doing too much for too long may ignite an inflationary burst.
Holding the TBTF Blob at bay will help keep the conventional channels operational. Monetary policy will stay in the ideal middle ground, navigating small changes in inflation rates running in the low one-to-two percent range, where central bankers are most comfortable and economies perform at maximum efficiency.
Mr. Fisher is president and chief executive officer of the Federal Reserve Bank of Dallas. Mr. Rosenblum is the bank's executive vice president and director of research.
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