The Revolt Against Cronyism
Just when we think we have a handle on the Tea Party, it immediately slips out of our grasp. Up until quite recently, the Tea Party was widely accepted as a racist movement made up of grumpy old white men only interested in keeping their pockets well-lined. Then, only this week, the Tea Party pulls the tea tray right from under us by helping Nikki Haley, a woman of Sikh descent, and Tim Scott, a black man, to win Republican primaries in South Carolina—South Carolina, of all the states in the Union! This kind of unconventional, wisdom-defying behavior just won’t do. It produces consternation in the minds of those who prefer never to change theirs. Some, of course, will still not change their opinions. Many will no doubt deride Haley and Scott as mere tokens supported by the Tea Party in order to conceal their true racist motives. Or perhaps Haley and Scott will be dubbed the unwitting stooges of the Tea Party, and of the sinister corporate interests which ultimately pull all the strings behind the scenes—in short, as stooges that other stooges were conned into voting for.
In the immediate aftermath of the South Carolina primary, however, two more charitable interpretations of the outcome were prominent in the media. The first is offered by those who seem to be stuck in the sixties. The victories of Haley and Scott indicate the depth of voter anger at “the establishment.” Now, back in the ’60s, I used to ask those who opposed the establishment what exactly it was they were opposing, and the answers I received ranged from “The Man” to “Monopoly Capitalism.” But today’s Tea Party opposes none of the things that riled people up back then. So why keep using the word?
Cronyism is the antithesis of a genuine meritocracy, in which outsiders have an equal chance to become insiders, based not on whom they know but what they know.
The second interpretation stresses the anti-incumbency rancor among American voters. Yet this, too, doesn’t explain why anti-incumbency sentiment is running so strongly in America today. Indeed, the desire to vote against candidates merely for the crime of having held office seems a bit bizarre, if not utterly irrational. If you want politicians elected from your state to have clout and power in Congress or in the state capital, then your operating maxim should always be: Keep voting for those who already have their seats, since the longer they have held power, the more they can do for your state in terms of offering it generous chunks of pork from the pork barrel. Why, then, would you want to replace candidates with seniority with neophytes such as Haley and Scott?
This question that can be easily answered by those who have argued all along that the Tea Partiers are just a collection of crackpots and dodos, incapable of seeing where their true self-interest lies. What else would you expect from such idiots? But there is another way of interpreting the South Carolina primaries. The real target of Tea Party wrath is not the establishment or incumbency, but cronyism.
Cronyism is when individuals are promoted and rewarded because they are the buddies and pals of those who already hold position and power within any organization. Instead of appointing to an important position the individual with the best qualifications, those in charge will select their longtime friends, often regardless of their lack of fitness to do the job assigned them. Cronyism is a pathology to which all organizations, large and small, are prone. It is the antithesis of a genuine meritocracy, where outsiders have an equal chance to become insiders, based not on whom they know but what they know.
And even where there are no ‘yes men,’ the very fact that those in charge are hiring their pals automatically promotes a dangerous tendency to uncritical consensus among those at the top.
There are three obvious problems with cronyism. First, it is simply unfair. Second, it stirs up resentment, because individuals with the right qualifications for a job are passed over in favor of those with the right connections. Third, and even more importantly, it invariably creates organizations where those at the top are surrounded by “yes men,” who will agree with their bosses in order to curry favor and promote their own advancement. And even where there are no “yes men,” the very fact that those in charge are hiring their pals automatically promotes a dangerous tendency to uncritical consensus among those at the top. Because our friends so often see eye-to-eye with us, any organization based on cronyism will succumb to the phenomenon of groupthink: “We all agree on this, don’t we?” And, yes, of course we all do, because we are all pals, and agree on everything. This may be fine when we are in fact all right about something, but it is fatal when we are all wrong.
The primary victories of Haley and Scott are triumphs over the cronyism that runs rampant through both political parties. Neither candidate was the choice of political insiders. Indeed, both were extreme outsiders. No insider would have taken either seriously, precisely because neither fit the insider’s stereotype of a viable candidate for a Republican race in South Carolina. But the Republican voters of that state had different ideas—and their message was clear: “We are fed up with cronyism.”
This message resonates with many Americans today, including those who currently dismiss or deride the Tea Party movement: “We are angry about the blatant cronyism that has come to dominate so much of American life, in business, at the university, and in the government. We want a real meritocracy, not a fake one. We will vote for individuals, like Haley and Scott, on the basis of their individual merits, and not their skin color or their ethnic background. But we will fight tooth and nail against a deeply entrenched system of universal cronyism that masquerades as a genuine meritocracy, but which invariably keeps appointing and promoting the same insiders to the positions of power, authority, and influence over and over again. Our argument is not with government, but with a government that is contaminated with cronyism through and through. And we mean to change it.”
Lee Harris is the author of the forthcoming book, The Next American Civil War, as well as Civilization and Its Enemies and The Suicide of Reason.
Should We Raise Taxes on the Middle Class?
Should We Raise Taxes on the Middle Class? We Already Are
I have a lot of respect for House Majority Leader Steny Hoyer, who stands practically alone as a leading Democrat willing to give fiscal responsibility the time of day. Several months ago, I took part in a forum with Hoyer and other speakers from across the political spectrum, and I think he deserves great credit for speaking up on fiscal issues when every other Democratic leader—be it President Obama, House Speaker Nancy Pelosi, or Senate Majority Leader Harry Reid—is nowhere to be seen.
And yet, Hoyer’s call for what the TaxVox blog calls “a ‘serious discussion’ about whether to permanently extend the Bush tax cuts for those making less than $250,000 as President Obama wants” deserves greater attention.
Here’s why: taxes are already rising to record levels, with or without legislative changes. It’s not clear why they should rise further, as Hoyer urges.
If tax increases of this magnitude were proposed explicitly, there’s little chance they could pass Congress.
As I argued in the Wall Street Journal in 2008, the income tax code is inadequately indexed for the growth of incomes. The income tax brackets—the dollar amounts that designate the tax rates that apply to an individual’s income—are indexed only for inflation, while incomes tend to rise about 1 percent faster than inflation each year. The result is that a greater and greater share of individuals’ incomes will fall into higher tax brackets, increasing taxes even if the formal tax rates remain the same.
The effects of this are larger than you’d think. According to Congressional Budget Office (CBO) data, individual income tax receipts averaged 8.15 percent of Gross Domestic Product from 1953 through 2008. Due to the recession, this year they’re projected to equal around 8 percent of GDP.
But by 2020, income tax receipts are projected to rise to 9.5 percent of GDP, even if all of President Bush’s tax cuts are made permanent. By 2030, income tax receipts will rise to 10 percent of GDP, 22 percent higher than the historical level.
A greater and greater share of individuals’ incomes will fall into higher tax brackets, increasing taxes even if the formal tax rates remain the same.
Put another way, the CBO reports that in 2007 the average household paid 9.3 percent of its income in taxes. Obviously, this average masks a tremendous variation between income levels, and households pay payroll and other taxes as well. Nevertheless, we can roughly estimate that the average household income tax rate will rise to 10.4 percent by 2020 and 10.9 percent by 2030. Average marginal rates—the rate paid on an additional dollar of earnings—will also rise.
In other words, we don’t have to talk about tax increases, we’ve already legislated them. If tax increases of this magnitude were proposed explicitly, there’s little chance they could pass Congress. But such a proposal would be helpful, since it would focus the public’s mind on the size and responsibility of government relative to individuals.
Yet, over time taxes will rise through simple inertia. And if the Bush tax cuts for high earners are allowed to expire, then tax revenues will rise further.
By 2030, income tax receipts will rise to 10 percent of GDP, 22 percent higher than the historical level.
If someone recommended that income tax revenues needed to increase by 15 or 20 percent over the next several decades in order to partially accommodate rising entitlement costs, I’d probably be willing to go along. I wouldn’t be happy with it, but the fiscal pressures gathering are so large that it’s hard to think of closing that gap without some additional revenues, particularly given the conflicted nature of most Americans on these questions.
But it’s a different thing to say that we need additional tax increases on top of a built-in increase of more than 20 percent. Notwithstanding the economic costs of higher taxes, there is the simple question of how much the government is truly justified in taking from its citizens. I already think we’re on the high end of that range.
Andrew G. Biggs is a resident scholar at the American Enterprise Institute. From 2008 to 2009 he served as principal deputy commissioner of the Social Security Administration and as secretary of the Social Security Board of Trustees.
The Phantom Recovery
The Phantom Recovery
The swelling ranks of the government payroll, and the shrinking number of private taxpayers footing the bill, will guarantee larger deficits and a weaker economy for years to come.
In recent months, GDP numbers have rebounded - primarily as a result of record low interest rates reliquifying the credit market and government stimulus jolting consumer spending. Although the "positive growth" has delighted Obama's economic brain trust, it has done little to boost the fortunes of Main Street. As I have said many times, GDP largely measures spending, and spending is not growth.
Last Friday we received the latest indication that the real economy is not recovering in the slightest. The Labor Department reported that non-farm payrolls increased by 431,000 jobs in May. In a press statement, the President himself crowed at the news, noting that the official employment rate fell to 9.7% from 9.9%. However, just inches below the headline, red flags were everywhere. Only 41,000 of those jobs were generated in the private sector - far below the median forecast of 180,000. Even more troubling was the fact that the Census Bureau alone accounted for 411,000 new jobs, which were almost exclusively temporary positions.
Rather than a recovery, the jobs data seems to indicate that we are still mired in the first economic depression since the 1930s. Back in 1931, two full years after the Crash of 1929, there were still very few people who thought that the recession then underway would one day be called the Great Depression. (See my commentary from March 1st "Don't Bet on a Recovery)
Increased spending, financed by unprecedented borrowing, will prove to be just as temporary as a US census job (unless, in the name of stimulus, Obama decides to make "people counting" a permanent function of the US government.). When the bills come due, the next leg down will be even more severe than the last.
The swelling ranks of the government payroll, and the shrinking number of private taxpayers footing the bill, will guarantee larger deficits and a weaker economy for years to come. In addition, the artificial spending has prevented a much-needed restructuring from taking place, leaving our economy far less efficient than before the crisis began. In other words, we have dug ourselves into a much deeper hole while failing utterly to build any means to climb out.
One reason that we have thus far been spared the full wrath of Washington's poor decisions is that we are still benefiting from problems abroad, particularly in the eurozone. As sovereign debt issues have temporarily caused a flight to the dollar, our economy has benefited from lower interest rates and restrained consumer prices.
However, EU member-states have shown some willingness to confront their problems by cutting government spending -- correctly ignoring US government suggestions that they do the opposite.
Just today, newly elected UK Prime Minister David Cameron prepared his constituents for austerity. Citing a budget deficit that is currently running at 11 percent of GDP, Cameron indicated that government spending would have to fall in order to maintain solvency and a high standard of living.
Cameron went on to say, "Greece stands as a warning of what happens to countries that lose their credibility, or whose governments pretend that difficult decisions can somehow be avoided." This type of realistic sentiment is completely absent in our current leadership in Washington, even though the US deficit is 9.9 percent of GDP and mounting. Meanwhile, the tough decisions being made by European governments will start to rebuild investor confidence in the euro.
Once the euro finally stabilizes against the dollar, I expect commodity prices to resume their rise, especially oil. Normally, the uncertainty created by the disastrous oil spill in the gulf, and the resulting moratorium on deep-water drilling, would have sent crude oil prices skyrocketing. However, fears of a global slowdown, euro weakness, and general risk aversion have held prices in check. As Asia continues its growth and Europe regains its footing, I expect a delayed surge in oil prices, which will put yet another obstacle on the road to US recovery.
Our last remaining leg of support has been the activity of Asian central banks, who have continued in their herculean efforts to prop up the dollar and bail out Americans with low interest rates and cheap imports. However, when sovereign credit risk eventually rears its head in America, look for Asian policymakers to finally wise up. Once that prop is removed, there will be no questions about the gravity of our situation - and little dispute that it amounts to a depression.
The real danger will be if we follow our own foolish advice that Europe appears to have rejected. Treasury Secretary Timothy Geithner has bluntly suggested that European governments should print and spend money in order to keep their economies out of recession. In reality, cutting government spending is a far better stimulus. Maintaining lavish budgets through the use of the printing press will only result in disaster. Not only will such action fail to avert a double-dip recession, but it will practically ensure an inflationary depression.
As I have said before, we can't simultaneously grow the economy and grow government. The latest jobs report shows that we are just growing government. If that trend doesn't soon reverse, investors will start betting on the collapse of the dollarzone.
Great Depression II
Great Depression II: Key Indicators of a New Depression
I believe the data shows that the US economy is badly damaged, and a modern-day depression has begun.
Unemployed and huts, West Houston -- Mercer St., Manhattan. / Abbott, Berenice / October 25, 1935 With the mainstream media focusing on the country's leveling unemployment rate, improving retail sales, and nascent housing recovery, one might think that the US government has successfully navigated the economy through recession and growth has returned. But I will argue that a look under the proverbial hood reveals a very different picture. I believe the data shows that the US economy is badly damaged, and a modern-day depression has begun. In fact, just as World War I was originally called The Great War (and was retroactively renamed after World War II), Peter Schiff has said that one day the world will refer to the 1929-41 era as Great Depression I, and the current period as Great Depression II.
For starters, look at unemployment. During Great Depression I, unemployment broke 25%. If government statistics are taken at face value, the current unemployment rate is 9.9%, but a closer look reveals that the broadest measure of unemployment is currently at 20% - and rising. So, today's numbers are in the same ballpark as the '30s even though the federal government is using unprecedented measures to keep the economy afloat. Remember, in Great Depression I, FDR never ran a deficit nearly as large as President Obama's. Moreover, the Federal Reserve of the 1930s still had a gold standard with which to contend, while today's Fed has increased the monetary base with impunity. Yet even with all that intervention, unemployment figures still indicate that we have entered depression territory.
What is demoralizing to an unemployed person is not simply being let go, it is being unable to find a new job for an extended period of time. And this is where Great Depression II really rears its ugly head. According to the US federal government's own data, the median duration of unemployment is now over five months - and rising. This is the highest it's been since the BLS started compiling this statistic in 1965. As workers start to go this long without jobs, they eat into their savings. Eventually - and especially in a country with a savings rate as low as ours and debt as high as ours - they run out of cushion and hit the street. Formerly middle-class people have to make decisions never thought possible: do I eat in a shelter or go hungry in my home?
It's no surprise, then, that about 40 million people - or one out of every eight Americans - are receiving food stamps in Great Depression II. During the height of Great Depression I, the rate was just one out of thirty-five Americans. Even with the stimulus programs, Great Depression II is actually worse on this measure than Great Depression I - and the USDA estimates that the program could grow by another 50%. Soon, out of ten people you know, one may depend on federal assistance for daily survival.
Despite tax credits that have created a rush of purchases this spring, housing is in just as bad shape. During Great Depression I, home prices dropped some 15% from their pre-depression peak (achieved in 1925). In Great Depression II, housing is down at least 30% from the pre-depression peak (achieved in 2005), with some markets down more than 50%.
So, many of the people expected to keep making mortgage payments as they eat tuna fish to stay alive will be paying double their home's resale value. This is a tremendous incentive to walk away, with disastrous consequences for the country's social fabric in these trying times. Empty homes breed crime and vandalism, encouraging more to flee in a negative feedback loop. Moreover, the many 'walkaways' may create a class of Americans with ruined credit - right when many employers have started checking credit scores before hiring.
Even more worrisome, the present drop in home prices is against a backdrop of price inflation. In Great Depression I, our grandparents may have lost value in their home, but everyday goods (milk, diapers, automobiles, etc.) got cheaper at the same time. That made their savings 'cushion' deeper when they needed it most. Today, as home equity (now our main store of savings) declines, prices for consumer goods are rising. It's a tight squeeze indeed.
From jobs to food to the roofs over our heads, the current period of economic turmoil is at least as bad as the First Great Depression, whether or not the financial media wishes to acknowledge it. The main difference is that unlike in the '30s, the US dollar is now the world's fiat reserve currency, so we are able to push our problems overseas for awhile. The plight of the rural Chinese is really our plight - we are living lavishly on the wealth they create. Were they to quit this dastardly arrangement, the full effects of Great Depression II would be felt in America.
By contrast, in Great Depression I, the US was on the gold standard like everyone else, which forced us to live within our means. This, in turn, made it easier to recognize that the economy was in decline and changes had to be made.
Unfortunately, because of the responses of the Administration and the Federal Reserve, which I believe to be deeply misguided, I remain concerned that Great Depression II could develop into something far more devastating than its predecessor, something that other countries in the world have experienced but was thought impossible in the United States: a hyperinflationary depression. As bad as the current downturn has been, inflation would make it immeasurably worse. It would require an honest accounting of the problems we face today to avert the disaster we see coming tomorrow.
Moratorium One of Many Obama Oil Spill Mistakes
Moratorium One of Many Obama Oil Spill Mistakes
The Obama administration has acted more like the Keystone Cops than a competent and effective government.
he order by a federal district court in Louisiana overturning President Obama’s six-month general moratorium on deepwater drilling in the Gulf of Mexico illustrates many of the mistakes the administration has made in handling this environmental disaster. From the unjustified 24-hour ban imposed by the Coast Guard on the barges that were pumping oil out of the water to check on whether they had fire extinguishers and life vests on board to the Army Corps of Engineers’ delays in allowing Louisiana to build berms and sand barriers to protect its wetlands, the administration has acted more like the Keystone Cops than a competent and effective government.
The order by Judge Martin Feldman paints quite a stark picture of both political over-reaction and a lack of sound judgment and expertise. The plaintiffs include several companies that provide services and equipment for deepwater explorations, everything from ships to shipyards, and they employ over 10,000 people. They sued Interior Department Secretary Ken Salazar under the federal Administrative Procedure Act, which authorizes a federal court to overturn the actions of a federal agency when they are “arbitrary, capricious, an abuse of discretion, or not otherwise in accordance with the law.” The court concluded that, in fact, the plaintiffs established a likelihood of successfully showing that “the Administration acted arbitrarily and capriciously in issuing the moratorium.”
The moratorium was based on a Report issued by Salazar on May 27 after a 30-day review that recommended immediate and long term reforms to improve drilling safety as well as a six-month moratorium on permits for new wells and an immediate halt to drilling operations on the existing wells in the Gulf. The court was struck by the fact that while the summary of the Report claimed that these recommendations had “been peer-reviewed by seven experts,” those experts had publicly stated that they did not recommend or agree with the six-month blanket moratorium. In fact, that recommendation was added after their final review of the report. At a minimum, this was highly misleading and “[a] factor that might cause some apprehension about the probity of the process that led to the Report” according to the court.
The court also noted that the Report made “no effort to explicitly justify the moratorium: it does not discuss any irreparable harm that would warrant a suspension of operations, it does not explain how long it would take to implement the recommended safety measures.” A subsequent order that Salazar sent to the director of the Minerals Management Service also failed entirely “to explain the reasons for the suspension of operations or the depth of operations to be affected.”
After reviewing all of the evidence submitted by the government, the court was “unable to divine or fathom a relationship between the finding and the immense scope of the moratorium.” The Report relied on by the government lacked any analysis of the asserted fear or threat of injury or safety hazards posed by the 33 permitted rigs; it was incident-specific and driven only by the Deepwater Horizon accident and no others. In other words, it completely failed to take into account the safety records of the other rigs in the Gulf. It assumed that because one rig failed and no one yet fully knows why, “all companies and rigs drilling new wells over 500 feet also universally present an imminent danger.” The court compared this to the government claiming that “all airplanes [are] a danger because one was” or all oil tankers because of the Exxon Valdez or all trains or all mines because of one accident. That kind of analysis is “heavy-handed, and rather overbearing.”
The court did what the administration very pointedly failed to do: consider alternatives to a complete ban on deep-water drilling. As the court concluded, there is no question that the Deepwater Horizon spill “is an unprecedented, sad, ugly and inhuman disaster.” But the issuance of a blanket moratorium was arbitrary and capricious and “cannot justify the immeasurable effect on the plaintiffs, the local economy, the Gulf region, and the critical present-day aspect of the availability of domestic energy in this country.” As the court pointed out, there are 150,000 jobs directly related to offshore operations; there are currently 3,600 structures in the Gulf, and oil and gas production from these structures “accounts for 31% of total domestic oil production and 11% of total domestic, marketed natural gas production.” Sixty-four percent of active leases are in deepwater over 1,000 feet and at least 19 companies besides BP are operating deepwater frilling rigs.
So far there is no announcement from Salazar that he intends to put his boot on the throat of the federal judge who issued this decision, although the White House has already announced that it plans to try to plug this legal hole in its case by appealing the decision.
“reSTART” the “Reset”
Why the United States Should “reSTART” the “Reset”
The goal of the Obama administration, made clear from almost day one, was to hit a “reset” button on US-Russian relations. The question of what we are re-setting, however, is something that has been all but ignored.
In the mindset of the Russians, they have to change nothing. Russian Ambassador to the U.S. Sergei Kislyak stated in an interview to The Rossiyskaya Gazeta, “I do not think that our [Russia’s] attitude toward America changed greatly. I’d say that the Americans finally saw the error of their ways and began working on amelioration of our relations.”
This was a dead giveaway. During the START negotiations the Russians pushed for concession and after concession from the U.S. while giving nothing in return. As described by Stephen Rademaker, Senior Counsel, BGR Government Affairs, “This negotiation was essentially Christmas Day over and over again [for the Russians].”
In a vital argument regarding U.S. national security policy this past Wednesday at a Foreign Policy Initiative event, Senator Jim DeMint (R-SC) stated that Russia “is a country that is a threat to many but a protector of none.”
In contrast, the United States today provides security guarantees for more than 30 countries all over the world. As a result of this commitment, the United States must have a credible and reliable nuclear deterrent. This ensures that our allies do not have to develop their own nuclear capabilities, thus preventing nuclear proliferation. In this sense, the strategic commitment is clearly different than that of the Russian Federation. Nevertheless, the new START treaty codifies strategic parity and practically limits U.S. ballistic missile defenses.
Senator DeMint’s remarks were misunderstood by some of the participants. Given the history of decades of dealing with Russia, it becomes clear that Senator DeMint is right in pointing out that this treaty does nothing more than re-create the Cold War mentality of the doctrine previously known as Mutually Assured Destruction (MAD). In this doctrine, one side launches a nuclear attack leading the other nation to respond in-kind leaving both countries utterly devastated.
Instead of focusing on what else we can give to the Russians to placate them, the Obama administration needs to focus more on how an unfettered strategic missile defense program will further the cause of re-setting US-Russian relations. What is likely to happen if we decide to lower numbers of nuclear weapons, commit to de-alerting them, commit to develop no new weapon designs unless absolutely necessary, and undermine the policy of constructive ambiguity? Allies will question our commitment to their security. They are more likely to develop their own nuclear capabilities. Ironically, Obama’s naïve goal of a nuclear-free world will be turned upside down.
Overall, missile defense is about much more than defending against a missile attack. In conjunction with our nuclear umbrella, both systems will be vital in preventing global weapons proliferation.
Missile defense plays a central role, therefore, in decreasing the role of nuclear weapons in overall strategic thinking. While Obama’s “road to zero” is a road to nowhere, a comprehensive missile defense system will render the logic of a nuclear attack with ballistic weapons obsolete and ultimately may make the acquisition of such weapons irrelevant.
President’s Obama lack of leadership on vital issues of national security is incomprehensible. The only hope we have of resetting the relations with Russia at this point is if the Senate rejects the New START Treaty and start from the scratch.
Michaela Bendikova and Ricky Trotman are members of the Young Leaders Program at the Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/about/departments/ylp.cfm
Owen Graham is a research assistant at the Katherine and Shelby Cullom Davis Institute for International Policy at the Heritage Foundation
The Cheeseburger Summit
Medvedev-Obama: The Cheeseburger Summit
Following months of intense diplomacy between the United States and Russia focusing on “resetting” bilateral relations, Russian President Dmitri Medvedev visited the United States for two days. The tour included stops in San Francisco, Silicon Valley, Stanford University, and a Washington, D. C summit with President Obama.
In trying to move the focus of US-Russian ties beyond security and geopolitical issues such as arms control and Iran, the trip was intended to take the relationship to the next level—greater economic engagement. It was also intended to show the smiling face of Russia for the U.S. Senate, which will soon consider ratification of the New START strategic nuclear treaty, signed by both Presidents in April.
Overall, the summit was arguably mostly about optics and perceptions—intended to trumpet success and make both leaders look good. This was exemplified when both leaders took a limo to Ray’s Hell Burger in Arlington, Virginia. The two ate cheeseburgers and even shared a plate of fries, eating amongst the regular crowd.
While this event created a feel-good atmosphere, it was misleading. Why? No matter how delicious were burgers and fries, this exercise will not resolve the imbalances and strategic rivalries that Obama is creating in the U.S. relationship with Russia.
Cheeseburger diplomacy and rhetoric of “partnership” with the Kremlin will not address the deficiencies of the New START Treaty and self-imposed limitations on missile defense. Nor will it make our friends in the former Soviet Union safer.
Presidential smiles and handshakes will not improve the rule of law within Russia and the state of political and economic freedoms—both long-term interests of the United States and the Russian people.
At a U.S.- Russian Civil Society Summit, Secretary of State Hillary Clinton spoke about the benefits to Russia already accruing from the “reset:”
…following the U.S.-Russian Innovation Dialogue last February, Russian and American NGOs signed an MOU to promote the Text4Baby bottle, which uses mobile service technology to provide health information to pregnant women and new mothers.
While talk of baby formula bottle labels and Iphones abound, there was no mention of human rights violations, beating of demonstrators who support the Russian Constitution, increasing control of media, and the rollback of political and economic freedom by the Russian Government.
Medvedev promised that Russia will be committed to a predictable investment environment and will battle to curb corruption. However, these words rang hollow as the TV channels are under rigorous state control; murderers of the lawyer Sergey Magnitsky, who was allowed to die in custody, and of prominent journalists and human rights activists are at large, the Mikhail Khodorkovsky second trial is continuing unabated, and liberal opposition is hounded.
Moreover, state management of innovation, even if coupled with technology from Silicon Valley, is unlikely to make Russia a high tech superpower. The extractive industries is where Russia’s comparative advantage lies, while the Soviet-era science and technology base is deteriorating. After all, its source of support was the Soviet military-industrial complex.
Lastly, the US-Russian bilateral strategic agenda is far from being all sunshine. The New START treaty, signed by U.S. President Barack Obama and Russian President Dmitry Medvedev on April 8, clearly does not serve U.S. strategic interests. Problems include limitations on U.S. nuclear modernization, on ballistic missile defense and conventionally armed ICBM capabilities, as well as ambiguities surrounding verification. There are serious concerns about START in the Senate. Russian Foreign Minister Sergey Lavrov recent objections to US and EU unilateral sanctions on Iran.
There may be a rocky road ahead, where it really matters – in geopolitics and arms control. And no amount of burgers and fries is going to change that.
Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Policy at the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation. The author thanks Owen Graham, Research Assistant at the Davis Institute.
The Kagan Rush to Judgment
The Kagan Rush to Judgment
The Senate hearing for Supreme Court nominee Elena Kagan starts on Monday, June 28. Senator Patrick Leahy (D-VT), the Chairman of the Senate Judiciary Committee, has refused Republican requests to delay the hearing. The Republicans have a very good and justified reason for that request – the huge number of documents that they have just been inundated with, a volume of material so large that it will be virtually impossible for the Senators and their staff to give them any meaningful review prior to the hearing. But then, that may be the very reason that Senator Leahy has refused to reschedule Kagan’s hearing.
As we all know, Elena Kagan has never been a judge, so she has not written any judicial opinions that can be reviewed. Elena Kagan’s academic writings are extremely sparse, so there is not a lot there that would give a comprehensive picture of her legal views and ideology, although what little there is seems disturbing. She barely practiced law as a private lawyer. She never appeared in any appellate courtroom prior to her first argument before the Supreme Court last year as the Solicitor General of the United States, so there are almost no briefs, including amicus briefs, that she wrote that can be reviewed.
But there is one very significant source of Kagan legal memoranda and opinions – her time as a deputy counsel in the White House and on the domestic policy staff during the Clinton administration. On June 4, only a little more than three weeks before the June 28 hearing, the Clinton Presidential Library produced 46,000 pages of documents, including 260 pages produced under the Judiciary Committee’s “Confidential” designation, which means they are withheld from the public. The Library refused to produce 20 pages based on personal privacy considerations.
On June 11, only two weeks before the hearing, the Clinton Library produced 44,000 pages, including 1,300 with the “Confidential” designation. The Library withheld 600 pages. In its third production on June 18, only ten days before the hearing, the Library produced another 79,000 pages (approximately 77,000 emails and attachments and 1,700 additional documents from a preservation file). Not surprisingly, 860 pages were designated as “Confidential” and 1,000 pages were withheld entirely from the Committee. The Department of Defense also produced 850 pages on June 18. However, the Clinton Library has failed to turn over tens of thousands of emails that referenced Kagan, providing only emails that were sent or received by Kagan.
No independent party has reviewed the withheld documents to examine the validity of the privileges being asserted by the Clinton Library. So we are just supposed to trust that they are being withheld based on a real privilege and not because they are embarrassing to Kagan or reveal something that could jeopardize her confirmation. Of course, Democrats successfully filibustered Miguel Estrada over the Bush administration’s refusal to release internal Solicitor General memoranda that the administration claimed were privileged. They made the same demands over Chief Justice Robert’s nomination, arguing that the refusal of the Justice Department to turn over some internal memoranda “creates the impression that there is something to hide,” at least according to Nan Aron of the Alliance for Justice. A lawyer for the Sierra Club speculated that the refusal raised the possibility that Roberts made statements in them that were “so outrageous that they’d persuade even a Republican-dominated Senate to reject him.”
Was it a coincidence that almost 170,000 pages were all produced on Fridays, when Senators and their staff would lose another two days of review unless they worked all weekend? That is very hard to believe – it seems like a deliberate attempt to make it as difficult as possible for Kagan’s internal legal memoranda to be reviewed in any depth. In fact, the late production of these documents, the withholding of over 1,600 pages, and the refusal of Leahy and his Democratic cohorts to put off Kagan’s hearing seems intended to prevent the Republicans from being able to look at, review, and read in depth all of the legal opinions and other documents and communications that Kagan produced when she worked as a political lawyer for President Clinton.
The director of the Clinton Library, Terry Garner, admitted that it would be “very difficult” to review Kagan’s documents prior to the hearing date because “There are just too many things here…These are legal documents and they are presidential records, and they have to be read by an archivist and… read line by line.” As Debbie O’Malley of the Heritage Foundation previously said [http://nlt.ashbrook.org/2010/05/maybe-sandy-burger-can-help.php], if the Clinton Library is saying that even five weeks is not enough time to go through all of these documents, then senators need “adequate time to actually review them, before they go forward with a hearing or votes.”
There is a clear express train rush to judgment going on here with Patrick Leahy in the role of the locomotive engineer, one that the Democrats, as they proved in prior Republican nominations, would be extremely upset over if the roles were reversed. If Senator Leahy was the ranking minority member of the Senate Judiciary Committee, he would be objecting very loudly (with good reason) about the unfairness and the injustice of this situation. But he does not seem to mind imposing such a schedule on his minority colleagues, a true sign of the partisan hypocrisy that all too often is displayed in Congress to the detriment of the interests of the public.
At the age of 50, Elena Kagan could be on the Supreme Court for the next three to four decades if she is confirmed. The determination of whether she has the right temperament, legal background, character, and experience to be confirmed by the Senate, and whether she adheres to the judicial philosophy that a judge’s role is to adhere to the rule of law and the Constitution, is not a determination that should be rushed. Yet that is exactly what is happening. It is a disservice to the American people and a betrayal of the “Advice and Consent” role of the U.S. Senate.
The DISCLOSE Act
Obama Klan's Attempt at a Modern-Day Alien and Sedition Acts: The DISCLOSE Act
The DISCLOSE Act, a law purportedly intended to blunt the effects of the Supreme Court’s Citizens United v. FEC decision. That case restored the First Amendment right of political speech by throwing out a federal ban on independent political advocacy by unions and corporations, including both for-profit and non-profit associations.
You’d think that members of Congress would have a keen knowledge of and appreciation for congressional history; you’d think they would know better than to repeat the mistakes made by their legislative body in the past. But if partisanship guides your actions and winning elections at all costs is your objective, then repeating unconstitutional behavior is apparently not beyond the pale.
That is exactly what is about to happen: The House of Representatives is expected to vote in the next day or two on the DISCLOSE Act, a law purportedly intended to blunt the effects of the Supreme Court’s Citizens United v. FEC decision. That case restored the First Amendment right of political speech by throwing out a federal ban on independent political advocacy by unions and corporations, including both for-profit and non-profit associations.
The real effects of the DISCLOSE Act will be to deter political speech (including criticism of incumbents, such as its chief sponsors, Sen. Chuck Schumer (D-NY) and Rep. Chris Van Hollen (D-MD)) and political advocacy by corporations and associations that Democrats don’t want participating in the American political process. It includes both absolute bans on independent political advocacy and new, burdensome disclosure requirements. Schumer admitted when he introduced the bill that “the deterrent effect should not be underestimated.” During a House Administration Committee hearing, Rep. Michael Capuano (D-MA) made no bones about the fact that he hoped this Act “chills out all . . . I have no problem whatsoever keeping everybody out [of elections]. If I could keep all outside entities out, I would.”
Of course, the “deterrent” and “chilling” effect is meant to hit corporations — including nonprofit associations like Citizens United, the conservative advocacy organization that brought the original lawsuit — but not unions, which are exempted from most of the provisions of the bill. No surprise there, since unions support Democrats almost exclusively, with huge amounts of money. And the majority party is moving this bill at a breakneck pace through Congress to have it in place for the November elections, because Democrats fear November will be their election Waterloo.
The DISCLOSE Act would ban certain government contractors from engaging in any political speech, yet unions that represent government employees, and organizations like Planned Parenthood that receive large amounts of federal grants, would not be affected. American companies with American workers and American officers could be banned from speaking if a small minority of their shareholders are foreigners, yet unions with foreign officers and foreign members could spend as much money on political advocacy as they want. And many of the new disclosure provisions imposed by the act were made onerous and burdensome for the specific purpose of deterring political speech.
If all of this sounds depressingly familiar, it should. The DISCLOSE Act is the modern-day version of the Alien and Sedition Acts, which were passed by the Federalists in 1798 to quell political opposition from the Republicans, led by Thomas Jefferson. These acts were one of the worst (and most noxious) violations of the FirstAmendment ever passed by Congress. Under their terms, Federalist judges jailed or fined 25 people, mostly Republicans newspaper editors, and many of their newspapers were forced to shut down.
One of the men arrested was Benjamin Franklin’s grandson, Benjamin Franklin Bache. Another was Rep. Matthew Lyon, who was jailed while a Republican congressman from Vermont and won reelection behind bars. The first man arrested was Luther Baldwin, of New Jersey, who was convicted and fined $100 for wishing that a blast from the presidential saluting-cannon would hit Pres. John Adams in “his arse.” Under the DISCLOSE Act, if a corporate association met the qualifications for the government-contractor ban on independent expenditures and ran an ad saying the same thing about President Obama in 2012, it could also be fined and its corporate officers sent to jail
As always, there are those willing to sacrifice liberty in order to gain a personal or political advantage for themselves. The National Rifle Association, which previously called the Citizens United decision a “defeat for arrogant elitists who wanted to carve out free speech as a privilege for themselves and deny it to the rest of us,” has apparently agreed to withdraw its opposition to the DISCLOSE Act in exchange for a narrowly drawn exemption. Instead of applying to all nonprofit advocacy groups, including the smaller, less powerful ones with limited budgets that will be particularly affected and burdened by these new regulations, the exemption will apply only to 501(c)(4) organizations with members in all 50 states, numbering more than one million overall, that have been in existence for ten years and receive 15 percent or less of their funds from corporations. The NRA, a well-funded, powerful organization, coincidentally fits within this exemption. So the NRA has received its 30 pieces of silver in return for forsaking the political speech rights of the rest of us.
Public opposition to the Alien and Sedition Acts was so great that it was major factor in the election of Thomas Jefferson as president in 1800. Although Adams neither vetoed nor protested these Acts, he was apparently embarrassed enough about their passage that he later denied any responsibility for them. Unfortunately, neither the members of Congress pushing the DISCLOSE Act nor the president seem at all embarrassed about this pending abrogation of basic FirstAmendment free-speech and associational rights. If the unconstitutional, partisan, and pernicious DISCLOSE Act is passed and signed into law by President Obama, it will be interesting to see if the American public has the same reaction to this noxious bill in 2010 and 2012 that the public had in 1800.Private Property is the Solution
How a Capitalist Government Would Handle the BP Oil Spill: Private Property is the Solution
Like financial institutions before the housing crisis, BP apparently counted on the government to bail it out in case of disaster.
Coast Guard Photo / John Masson - Cburn of spilled oil from in the Deepwater Horizon/BP oil spill in the Gulf of Mexico For this article, let me be brief about the following facts, which are oil and water under the bridge.
BP’s off-shore oil leases, like all off-shore oil leases, are leases to use federal property. (Hat tip to this article in The Freeman.) The land and water are owned by the government. Federal bureaucrats—that is, mediocrities and incompetents with no ownership stake in protecting property that they have not earned, could never earn, do not understand, and have no market-based means to value objectively—decide what to lease, to whom, and under what terms. No regime, Obama or otherwise, could teach anyone—let alone the power-lusting, incompetent scoundrels who become regulators for the government—to do this job well. (For background on the evil of regulation and regulators, read Capitalism: The Unknown Ideal by Ayn Rand. If you’ve already read that book, also see here and here.)
Federal law—see Clean Water Act Section 311 and the Oil Pollution Act of 1990—makes it the U.S. President’s responsibility to stop an oil spill and clean up the mess, and also limits a company’s liability for an oil ‘spill’ such as BP’s to $75 million plus cleanup costs. (Hat tip, via Flopping Aces, to Mike’s America, which has much useful information about the disaster.)
BP’s campaign to plug the oil leak has been a fiasco. (By the way, the only thing I knew about BP before the oil spill was from its incessant environmentalist commercials, which had persuaded me to avoid BP gas stations if I ever would encounter them.) BP, evidently performing economic calculations and making business decisions based on the above-mentioned laws, clearly was unprepared for such a disaster. In its attempts to plug the leak, BP spent weeks—while more oil gushed— building needed equipment that could have been in inventory before the blow-out occurred. Like financial institutions before the housing crisis, BP apparently counted on the government to bail it out in case of disaster.
As it bailed out AIG and other financial institutions in the housing crisis, the government stepped in to manage the cleanup of the oil spill. But, as with AIG and other financial institutions, the government changed the rules after the fact, and punished the company it had promised all along to bail out. The legal limit of $75 million on liability notwithstanding, the government has shaken down BP (video here) into putting up a $20-billion escrow account for future claims.
Meanwhile, though it blames BP in particular for the oil spill, the government has declared a moratorium on all deep-water drilling.
The government’s management, with BP, of the oil spill has been a fiasco. As of Thursday, June 19, sixty days after the blow-out, the government reports (“more than”) 6,100 “active response vessels.” The size of the oil slick is now roughly (by my estimate from the map I link to) 20,000 square miles, so the government has roughly one vessel for every three square miles of oil slick. As of May 20, thirty days after the blow-out, the government reported that “more than 1,000 vessels are responding on site.” That is, more than 5,000 of the 6,100 vessels now on site did not show up until the second month. Of the more than 6,100 vessels now deployed, “more than 440” are skimmers; that’s less than one skimmer for each 40 square miles of oil slick. The government—probably from loyalty and subservience to labor unions—has declined to suspend the Jones Act, thereby declining assistance from much-needed specialized vessels owned by foreign companies.
In his speech from the Oval Office on June 15, Obama said, “We now have nearly 30,000 personnel who are working across four states to contain and clean up the oil.” Meanwhile, a half million people are deployed to take the census.
So much for the oil and water under the bridge. What should we do right now, at this moment, to deal with the disaster?
What we desperately need is capitalism—that is, private property.
We should take all of the federal land in the Gulf of Mexico—and all the water on top of that land—and declare it one large block of private property owned by one new corporation. The new corporation—let’s call it Gulflandia—would in turn be owned by the individuals and businesses that currently exploit the Gulf; such individuals and businesses would include oil companies, fisheries, and owners of beachfront property. Ownership of Gulflandia could be apportioned according to the amount in taxes paid by its owners over the past decade. (The precise rule for apportioning ownership is less important than that the property be owned privately instead of by government; those who value the property most highly would soon buy the shares of initial owners.)
As the owner of the property on which the oil spill exists, Gulflandia should be allowed to request a court injunction to remove the inept and obstructionist federal government from the clean-up effort, and to hold authority over BP in BP’s effort to stop the leak. (BP and the government are the two best organizations to blow up another oil rig, but not to solve the problem from the last blow-up.) Gulflandia’s assets would be worth hundreds of billions—perhaps trillions—of dollars, which means that it would have the financial means to entice greedy entrepreneurs from all over the world to devise ways to stop the leak, clean up the mess, and preserve the value of the property. (In contrast, the government currently relies mainly on government agencies and volunteers working for free or for daily wages.) Overnight, virtually all of the world’s entrepreneurial engineering firms would turn their attention to solving this problem.
At the same time, all of the individuals and businesses suffering from the loss of fishing, tourism, and oil drilling (because of the moratorium), would have immediate relief. Their share of the new multi-trillion dollar asset would be something they could sell or take to the bank.
For more depth and details on the reasoning behind such a capitalist solution, see my article on applying the capitalist principle of private property to the challenge of space exploration; that article, Mars: Who Should Own It, is in turn based on an idea by philosopher Harry Binswanger. Also see Ayn Rand’s essay, “The Property Status of the Airwaves,” in Capitalism: The Unknown Ideal.
That no one in government is discussing a solution remotely like mine illustrates how far from capitalism we are.Phony Choices From a Bogus Profession
Phony Choices From a Bogus Profession
06/25/10 Baltimore, Maryland – We got a look at how the world really works last week. Bloomberg ratted out Sophia Constantinidou:
“The 52-year-old gets 400 euros ($496) a month from the Greek government, part of her late mother’s state pension. Under the current system, Constantinidou qualifies to receive the payment for life as the only surviving child of a deceased civil servant, provided she doesn’t tie the knot.”
Ms. Constantinidou is on lifestyle support, thanks to the generosity of the Greek government, which is on lifestyle support itself, thanks to the generosity of the European government, which is only able to pay its own bills thanks to creditors who may or may not know what they are doing. The big debate among economists is when to pull the plug.
‘Austerity!’ insist the Germans and Canadians. ‘Growth!’ promise the English and Americans.
Several things have become obvious: first, a ‘recovery’ is not going to happen; second, after 60 years of credit expansion, the world has entered a long period of financial adjustment and debt destruction; third, most economists should be put to work picking up trash along national highways. Not that they would do a very good job of it, but at least they would be kept out of mischief.
Imagine poor Pharaoh… 7 lean years and only the advice of a slave to help him through. And think of how the Dark Ages might have been brightened up if Charlemagne had had an economist at his right arm. But now we have thousands of economists. And they offer us a stark choice: Austerity or growth?
Advocates of austerity say they have no choice. They have to cut public deficits. Besides, deficit cuts will lead to more private spending and investing.
Canadian Prime Minister Stephen Harper, in a letter to his G-20 counterparts, said world leaders should agree to reduce their deficits by half by 2013. “Nobody can seriously dispute that excessive public debts, not only in Europe, are one of the main causes of this crisis,” added German Finance Minister Wolfgang Schaeuble. “That’s why they have to be reduced.”
Not so says Martin Wolf howling at The Financial Times.
“What we are seeing is an epidemic of private sector frugality,” cries Wolf, warning that “cutting public spending will not automatically raise private spending.”
Both positions are claptrap.
Through no fault of her own, Ms. Constantinidou has become a leech. Resources are being diverted from savers, investors, and householders so that she can get something for nothing. Economists on the one side pretend that giving her the money increases ‘demand’ and helps the economy grow. On the other, they pretend that taking away her unearned income would impose a hardship on the whole economy.
As to the first proposition, if you could really make people better off by robbing Peter to pay Paul, Peter would already be penniless. There is no shortage of people willing to take away his money. As to the second, too bad for the leech. Paul will have to give up something he had no right to in the first place. But where is the austerity? Resources don’t disappear. Ms. Constantinidou may have to say goodbye to her unearned transfer payments. Someone else will say ‘welcome home’ to their long-lost money.
But in last Wednesday’s Financial Times, Mr. Wolf slipped another ace up his sleeve. Instead of larceny or usury, he suggests trickery: why rob Peter or borrow from him, in other words, when you can scam him with phony money? “Why it is right for central banks to keep printing,” is his headline.
Cut off from reality by their own conceits and fantasies, it is as if economists were describing the perfect woman: how pretty she is…how perfect her little nose turns up and how she never needs make-up…how she always does what she is told and never talks back. Then, you turn and you see the woman herself. She is no lady; she’s an inflatable doll! Like a simpleton’s economy, she resembles the real thing – except in the ways that really count.
A mannequin can be programmed to say what you want her to say. Raise government spending enough and you may be able to get her to say the GDP growth is positive. Pay enough people to do enough make-work jobs and she will tell you the employment rate has gone up. Get the software right and she will spend when you want her to spend, and save when you want her to save…and pretend that you are the smartest economist who ever lived.
But a real woman has her own ideas. Sometimes she is lighthearted and spendthrift. Other times she is anxious…such as when she sees too much debt or too much money-printing. There are times when she will look lovingly upon her husband and do as she is bid…and times when she sighs, realizing the economist she married is a hopeless jackass.
Bending to the Modern World
Bending to the Modern World
06/25/10 Baltimore, Maryland — J.P. Morgan rose to influence in an era when the accumulation of great wealth began to astound the ordinary man.
As Nassim Nicholas Taleb observed in his book, The Black Swan, life is unfair, a theme the economist Sherwin Rosen, author of studies about the economics of superstars, develops as credited by Taleb.
Rosen bemoans the high salaries of basketball stars and TV personalities, which he attributes to the “tournament effect,” wherein someone who is marginally better can win the whole pot, leaving others with nothing. Taleb reminds us how this is so: We would rather buy a recording featuring the renowned Vladimir Horowitz for $10.99 than pay $9.99 for one of a struggling pianist.
However, ordinary men through democracy can band together to not only ostracize the J.P. Morgans from the village, but to strip them of tournament winnings.
Just as important, they can redistribute them to those who struggle in the $9.99 bin. On the other hand, in the world of credit, democracy is a stranger. Should the rules be short circuited, wealth need not participate.
Share prices for implicitly government-backed mortgage agencies can plunge from $60 to less than $1 in months. The Soviet Union learned this the hard way.
Europe’s unemployment rate during the boom times prior to 2008 stood at its 1932 depression level, its countries having not created more than a few million jobs in the last three decades. Yet somehow many think its system is still functioning relatively well.
By 1913, when J.P. Morgan appeared in the Pujo hearings, the era of lending money based upon character was beginning to have this determinant completely removed from the process, and the pendulum would shift 100 years later toward the ordinary man collectively mandating loans for everyone, eventually without even documentation or down payment.
Or worse, smothering documentation would lend an air of legitimacy. Loans would be sliced and diced for general consumption, surrounded by the safety of telephone-book-sized prospectuses, overseen by thousands of regulations, and monitored by intricate risk models, none of which could put Humpty Dumpty back together.
In the era leading up to Morgan, when character was put foremost, America had seen small percentages of banks fail in great panics, only to have most of their assets recover in value when liquidity returned.
Now, thanks to modern practices, great numbers of giant-sized financial institutions have essentially failed. They must be kept on life support; because their assets are so tainted they may never recover in value.
U.S. pushes regulation to G20 forefront
U.S. pushes regulation to G20 forefront
Related Interactive
TORONTO (Reuters) - President Barack Obama urged world leaders to follow his lead on regulatory reform on Friday while other countries touted their swifter progress in tackling debt mountains that threaten the global recovery.
Fresh off of an early morning victory when U.S. lawmakers reached a deal on regulatory reform, Obama prodded his Group of 20 colleagues to make good on their own promises to clamp down on the risky behavior by banks blamed for unleashing the worst financial crisis in 80 years.
"This weekend in Toronto I hope we can build on this progress by coordinating our efforts to promote economic growth, pursue financial reform, and to strengthen the global economy," he said shortly before leaving Washington for Canada.
"We need to act in concert for a simple reason: this crisis proved and events continue to affirm that our national economies are inextricably linked."
The G20 club of rich and emerging economies banded together at the height of the financial crisis and committed trillions of dollars to fight a deep recession. Its united front is widely credited with averting an even deeper downturn.
But as economies slowly heal, disagreements are piling up over the next steps and G20 unity is fraying, unsettling investors who fear splintering could undermine the recovery.
"The cohesion generally evident among policymakers in dealing with the global crisis is in danger of giving way to a more divisive debate about how to manage the recovery," Credit Agricole analysts said in a note to clients.
While Obama can claim leadership on regulatory reform, the United States lags behind Germany, Britain and other countries in putting forward spending cuts to curb deficits. Other G20 conflict zones include trade and China's yuan currency.
British Prime Minister David Cameron downplayed the transatlantic divisions but said smoothing out imbalances between export-rich countries and debt-laden consumer economies would require belt-tightening by America, too.
"Part of dealing with the imbalances is for the worst deficit countries to roll up their sleeves, get on with the job and make sure they are living within their means," he said.
The G20 pledged last year to coordinate a string of reforms by the end of 2012 and Obama can boast he has met the bulk of those commitments with the United States a model to follow.
Europe has yet to come up with comprehensive rules.
"We are just not working in tandem and it's not good enough," said Peter Skinner, a British center-left member of the European Parliament which approves EU financial reforms. "This may ruffle a few feathers at the G20 this weekend."
Countries such as Canada and Japan, whose banks fared better during the financial crisis, have objected to some G20 reform proposals that they say unfairly punish banks that did not contribute to the upheaval.
Japanese Prime Minister Naoto Kan, in talks with German Chancellor Angela Merkel, said the reform debate should take into consideration each country's situation.
SECURING RECOVERY
The G20, which includes two-thirds of the world's population, meets in Toronto on Saturday and Sunday. The G8 -- Britain, Canada, France, Germany, Italy, Japan, Russia and the nited States -- meets on Friday and Saturday.
Brazilian President Luiz Inacio Lula da Silva was a last-minute G20 cancellation as he opted to stay home to deal with the aftermath of deadly flooding.
The G8 agenda focuses largely on development and aid for poor countries, although the overarching economic issues cannot be ignored.
As G20 delegations arrived, thousands of protesters organized daily marches tied to themes such as women's reproductive rights and poverty reduction.
A Canadian judge handed protesters a small victory on Friday, restricting the use of a controversial sound cannon used for crowd control.
Since the last G20 meeting in Pittsburgh last September, the global economy has strengthened but Greece's debt troubles have put a spotlight on the poor state of government finances among rich countries.
Germany and Britain have pushed ahead with plans to curb government spending. They argue that with fiscal health comes confidence, and that breeds growth.
The United States, whose own deficits have soared to the highest level since World War Two, has pushed for patience, warning that the recovery may not be robust enough to withstand a simultaneous drawdown in public support.
A U.S. official said Washington was not telling any country what to do, but wanted to make clear that the world can no longer rely on voracious U.S. consumers for their growth.
Recent economic data has cast doubt on the strength of the recovery. Figures released on Friday showed U.S. economic growth in the first three months of the year was more tepid than first thought.
The United States, Europe and Asia are all banking on exports to try to make up for sluggish demand at home, setting up conflicts over trade and currency exchange rates.
Washington wants countries with trade surpluses, like China, Germany and Japan, to buy more at home, but those countries are also counting on exports to lift growth.
China seemed to defuse some of the G20 trade tension last weekend when it unexpectedly said it would ease its grip on the tightly managed yuan currency. But some economists have questioned whether the move was anything more than symbolic.
"In short, they're playing games," Nobel-winning economist Paul Krugman wrote in the New York Times. "China needs to stop giving us the runaround and deliver real change. And if it refuses, it's time to talk about trade sanctions."
Should the G20 need a moment of levity, it may turn to the soccer World Cup in South Africa, although even that was laced with tension.
When asked on Friday who he is rooting for at the tournament, Canadian Finance Minister Jim Flaherty declined comment, saying he didn't want to offend any of his G20 colleagues. "It's sensitive enough," he said.
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