How It Went Wrong--and How to Make It Right

Steve Forbes

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Alan Greenspan is actively defending his record as Federal Reserve chairman, especially for the years between 2000 and 2005. He has given several in-depth interviews to the Wall Street Journal and penned a piece for the Financial Times, "The Fed is Blameless on the Property Bubble." That a man once dubbed "the Maestro" would be so astir is understandable--Greenspan's reputation has been falling almost as fast as the value of subprime mortgages.

The chief rap against Greenspan is that he loosened money too much after the high-tech bubble burst in 2000--01 and kept it loose even when the economy began to recover vigorously in 2003. The former chairman has also been criticized for the Fed's failure to crack down on growing abuses in the mortgage lending market. But, Greenspan asserts, much of the world experienced a housing bubble between 2001 and 2006 and, therefore, he and the Fed are largely blameless. The cause of the housing frenzy, he says, was an excess in global savings.

While the Maestro's protestations won't eradicate the bear market from his legacy, they might--just might--trigger a badly needed debate on the proper role of the Federal Reserve and what guideposts it should use in conducting monetary policy.

Since World War II most countries have regarded monetary policy as a critical instrument (the other biggies being government spending and taxation) in regulating the economy. If economic activity is slowing, so the thinking has gone, the central bank should rev up the printing presses: The extra money will stimulate growth. Conversely, if the economy is growing too quickly, the central bank should tighten up on money creation, slowing things down to avoid the economy's careening off the road in the equivalent of a car wreck. The longest-serving Federal Reserve Chairman, William McChesney Martin Jr., liked to say that it was the Fed's job to take away the punch bowl just when the party really gets going.

This is a misbegotten view of what central banking's main mission should be. The Federal Reserve should have two key tasks--and only two: preserving the integrity of the dollar and dealing vigorously with financial panics to limit unnecessary damage.

It is a colossal conceit for the Fed to think it could guide something as mammoth, sprawling and diverse as the U.S. economy. Yet even Greenspan, who for much of his life was something of a libertarian, fell prey to this form of governmental narcissism. The Wall Street Journal's long article about Greenspan contains these revealing sentences: "Mr. Greenspan expected his [easy money] policy to boost housing because the rest of the economy was relatively unresponsive to lower interest rates. Based on decades of his own research, he believed a buoyant housing market would spur consumers to borrow against home values and spend more," thus boosting the economy. (The real stimulus to our recovery from the 2000--01 recession was the 2003 Bush tax cuts. The lower rates on personal income, capital gains and dividends, as well as some incentives for business to invest, quickly put the sluggish U.S. economy back on a growth trajectory. Real growth rates soared from almost nothing to between 3% and 4% right through the third quarter of last year.)

The consequences of central banks' trying to guide their economies are routinely disruptive, if not destructive. Inflation is almost always the result. From the 1950s through the 1970s, for example, Britain was burdened with onerous taxes--the top personal tax rate hit 98%. It never occurred to the authorities in London to lower the rates, until Margaret Thatcher came along. Instead, both Conservative and Labour governments relied on boosting government spending and on printing more pounds to get the economy moving. Inflation would then erupt, the Bank of England would have to tighten up, and the economy would go into a slump. This process was dubbed "stop-go," and left Britain the sick man of Europe.

Greenspan's woes came about precisely because he lost sight of the Fed's prime job: ensuring a stable dollar. In the late 1990s Greenspan inadvertently tightened up. The most sensitive barometer of market mistakes is gold. During that time the yellow metal plunged to a low of $250 an ounce. Other commodities crashed, with oil dropping to nearly $10 a barrel. For a time the dollar became too dear, which contributed to the 2000--01 recession. When it became clear--just before George W. Bush was sworn in as President on Jan. 20, 2001--that the economy was skidding, Greenspan realized his mistake and started to reverse gears. But he stayed too easy, even when the economy was back on track. In 2004 gold began to surge well above its 12-year average, and oil began its long, rapid ascent, as did all other commodities. The dollar weakened not only against gold but also against other currencies, such as the yen, the Swiss franc and the pound. With money easy, the already buoyant U.S. housing market began to go berserk as lending standards started to decline precipitously.

Focused on trying to steer the economy, Greenspan ignored the flashing red lights, as did his successor, Ben Bernanke. In 2006 gold soared above $600 an ounce. After the credit crisis hit last August, the price kept moving up, breaching the $1,000 barrier in mid-March, before settling down to its current $900 range.

The Fed has clearly been too loose, but so have other central banks. Hence, we have the beginnings of a global inflation, just as we did in the early 1970s.

Greenspan claims the Federal Reserve can't prevent bubbles, that these excesses of ebullience are part of the natural order of a free economy. He is right--as far as it goes. But Greenspan/Bernanke fed steroids to the already booming housing market.

U.S. housing prices started growing above the normal 4% per annum in 1998, a result of a change in U.S. tax law that virtually eliminated capital gains taxes on the gains realized on most people's primary residences. This shouldn't surprise anyone--lower the tax on an asset and the value of that asset will go up. But in 2004 Greenspan's easy money overheated housing. Bubbles do happen, but this one was grossly inflated by the Fed's errors.

A more normal bubble occurred in the personal computer industry in the early 1980s. Everyone suddenly discovered the value of these small machines, and numerous companies jumped in to produce them. Most ended up failing--remember Atari, Commodore and others? But the excess there pales in comparison to what happened in housing. The difference: In the early 1980s we were reducing inflation, while during this decade Greenspan and Bernanke have been fanning it.

The housing markets in other countries? These booms were partly the result of prosperity and lower inflation, which have meant lower interest rates. Banks in numerous countries made mortgages more easily available. Ireland, for example, went from an economic backwater to becoming the Celtic Tiger. Immigrants poured into the country. Locals wanted to trade up on their homes. Mortgages were available. Housing surged. All this is normal and healthy.

Again, the magnitude of what has happened is a result of fundamental errors made by the Federal Reserve and its overly easy monetary policy. These errors were compounded by the Bush Administration's weak-dollar policy (pursued in the hope of improving the U.S. trade balance). The Treasury Department was applauding, instead of fighting, the mistakes of the Fed.

Bottom line: Money should be a fixed measure of value, just as an hour has 60 minutes, a foot has 12 inches and a pound has 16 ounces. Fine-tuning and guiding the economy is a harmful undertaking for a central bank. If policymakers learn that lesson from Greenspan's era and its aftermath, then, perversely, Alan Greenspan's legacy will be a positive one.

Chart taken from the book Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve, by William A. Fleckenstein with Frederick Sheehan. Other sources: Robert Campbell; Inside Mortgage Finance.

Parlez-Vous Money?

For as long as anyone can remember, France has been ferocious about making sure that the appellation "Champagne" is given only to particular wines grown in its province of Champagne. Other European states have also been prickly--think Parma ham--about products marketed under a particular geographic name that are not produced in that specific region.

Well, it turns out money can trump principle. The global economic boom, particularly in China and India, has led to explosive growth in the demand for Champagne. Voilà! The French government has announced that it is expanding the region in which Champagne can be produced and still bear the name. Such stooping for money, however, has its limits. As the Institute for Policy Innovation wryly notes: "But don't look for France to agree to allow California producers to use the same 'Champagne' label anytime soon."

This Democratic Guv Gets It

While New York's new governor's past peccadilloes initially dominated the headlines, David Paterson's first major position as governor couldn't be better for the Empire State's future growth: He is against raising taxes and instead wants to put the brakes on runaway spending. Governor Paterson's fellow Democrats in the legislature had been pushing the idea of enormously increasing the income tax on the state's top earners. In New York City a high-income maker would have faced a combined state and local tax levy of 11.3%, easily one of the highest in the country.

Said the Empire State's fiscally commonsensical chief executive: "We should be thinking about how we got our economy in the place that it is. I think the foremost area that we want to address is to tighten our belts, not to drive up taxes for a constituency that has been just battered over the past number of years. And compared to other states, I don't think this is where we should be going."

Fortunately, Paterson is joined here by New York City's mayor, Michael Bloomberg, who also came out vigorously against the idea after State Assembly Democrats endorsed a massive tax increase. Paralleling what the governor said, the mayor noted: "We're in competition with other cities around the world for entrepreneurs and the best and the brightest; it's not the time to be raising taxes."

Governor Paterson may also halt another movement--the use of eminent domain in aiding private developers. It's one thing for government to force private-property owners to sell their property for a public use, such as a highway; it's quite another to aid developers in their building projects. Before his election as lieutenant governor, David Paterson had called for a statewide moratorium on the use of eminent domain for this purpose. Like many others, he was disturbed by the Supreme Court's misbegotten decision in 2005 to allow governments to seize private property for private purposes.

Paterson is one Democrat who understands some basic issues even better than many Republicans do.

The War for the Web

Microsoft was smart to walk away (for now) from its $44 billion bid for Yahoo. It's never good to overpay. But the software giant – whose stock has flatlined for eight years – was onto the right strategy in looking to the Web for growth.

Can't Microsoft build something on its own? Why the rush to pay billions for Yahoo? The simple (and wrong) answer was that adding Yahoo's 20% Web search market share to Microsoft's 10% meant that it could compete against Google's 60% share. Technology changes too fast for that to make sense except on paper. Programs run anywhere these days – on your desktop computer, on servers in data centers, on your iPod, cellphone, GPS, video game console, digital camera and on and on. It's not just about beating Google at search, it's about tying all these devices together in a new end-to-end computing framework.

With the Microsoft/Yahoo deal breakdown, everyone assumes Google walks away with the prize. Not so fast. This contest is just starting. For Microsoft or Google or anyone else to win, they need four key elements of an end-to-end strategy:

- The Cloud. The desktop computer isn't going away. But as bandwidth speeds increase, more and more computing can be done in the network of computers sitting in data centers – aka the "cloud."

There, search results can be calculated, companies' payrolls processed, even the complex graphics for video games can be drawn. But it's not cheap. These clouds are multibillion-dollar investments. Google spent $842 million in the last three months on servers, data centers and fiber optics.

Today, there are several major clouds: Google, Yahoo, Microsoft, Amazon and smaller players IBM and Sun. Can there be more? Sure, but it would require a business model that could not only pay for it, but could rip it out every few years and modernize it. Google's $20 billion Web advertising business gives it the cash flow to do so. Advantage Google.

- The Edge. The cloud is nothing without devices, browsers and users to feed it. Book buyers are basically paying for Amazon's data centers. Yahoo is a favorite for finance and sports enthusiasts, who pay for its data centers. Google worked its way into the toolbars of Firefox, and even Microsoft's browser.

And Microsoft? It was stripped of its ability to control Windows desktop real estate during the late '90s Netscape feud. Accused of using its overwhelmingly popular Windows operating system to unfairly dominate other new markets, Microsoft settled the dispute with the Justice Department in 2001.

Now Microsoft scrambles for other advantages. One lies in smart mobile devices, which is the fastest-growing location to launch search requests. Microsoft software runs on about 20% of smart phones in the U.S.

Don't underestimate the value of Microsoft's other market stronghold, its X-Box video game platform. Now you know why Google is scrambling to plant a flag in the cellphone business with its Android technology and bids for wireless spectrum. So far, advantage Microsoft.

- Speed. Once you build the cloud, it's all about network operations. Whoever can deliver search results faster, wins. Users only realize this subconsciously, but it's true: Google's dominant share is as much about speed as it is for relevant results. Compare it to Microsoft or Yahoo and you'll see. Google built data centers next to waterfalls so electricity could be cheap enough to help it win the speed war.

New cloud applications appear every day – backing up files, managing your money, editing photos, running the back end of multiplayer games like World of Warcraft. Now corporate America is evaluating moving its accounting, scheduling, order management and the like into the cloud, and speed will be a top priority. Advantage Google.

- Platform. Yahoo's mistake was relying on expensive workers to update Web pages and sell ads, and especially to run Yahoo Finance, Sports, HotJobs and Travel. Google hates using people for these tasks. The company may love programmers and probably customers as well, but it tries to put absolutely no one in between them. Google's genius was to automate all its Web page creation and to have a market set prices for ads.

But even though Google has more than 10,000 employees, the company doesn't have a lock on brain power – especially since its stock is not climbing as fast as it once did, and with young coders setting their eyes on the next big startup.

Having a fast cloud is nothing if you keep it closed. The trick is to open it up as a platform for every new business idea to run on, charging appropriate fees as necessary.

Microsoft knows this. I sat through a keynote speech by Bill Gates maybe 15 years ago. Asked why Microsoft makes all the money in the software business, he snapped: We don't make all the money. Actually, we only make money because we are a platform for others to use our software to make money themselves.

Only by opening up system internals to thousands of hungry developers can anyone truly create an operating system in the cloud. Google has made open announcements but is still quite closed. Advantage Microsoft.

So with the failure of the Yahoo bid, where does that leave Microsoft? The answer is found in Microsoft's mantra: embrace, extend and innovate. Made famous in a 1994 Microsoft executive memo, this mantra has worked again and again: Windows dominated Apple for decades, the Excel spreadsheet bypassed Lotus 1-2-3, and the Internet Explorer browser destroyed Netscape.

Of course, Microsoft could come back and bid again for Yahoo at $25. But there is a go-it-alone strategy: Embrace the Web search and advertising business. Maybe even do what Craigslist did to newspaper want ads, devaluing search advertising by offering the same thing for free, or really cheap.

The trick is to then extend and innovate. Run code that figures out what users are looking for, not just on servers, but on X-Boxes, Zune music devices and even Apple iPhones. Some of the new markets aren't even twinkles in developers' eyes.

At the moment, neither Google nor Microsoft, or anyone else, has nailed down cloud, edge, speed and platform. All the loosely coupled electronic devices in our pockets need to work together seamlessly with Facebook applications in the cloud. Who will do it? Unclear.

The continuing battle between Microsoft and Google will mean fierce competition – adding features, building data centers, cutting deals and spending money on speed and customer convenience. That's the way to move technology forward. It's great to see Microsoft with some fight left in it. Not only hasn't the Internet yet matured, it's becoming an ever-more high stakes game.

Damsel of Distress
Peggy Noonan

This is an amazing story. The Democratic Party has a winner. It has a nominee. You know this because he has the most votes and the most elected delegates, and there's no way, mathematically, his opponent can get past him. Even after the worst two weeks of his campaign, he blew past her by 14 in North Carolina and came within two in Indiana.

Martin Kozlowski

He's got this thing. And the Democratic Party, after this long and brutal slog, should be dancing in the streets. Party elders should be coming out on the balcony in full array, in full regalia, and telling the crowd, "Habemus nominatum": "We have a nominee." And the crowd below should be cheering, "Viva Obamus! Viva nominatum!"

Instead, you know where they are, the party elders. They are in a Democratic club on Capitol Hill, slump-shouldered at the bar, having a drink and then two, in a state of what might be called depressed horror. "What are they doing to the party?" they wail. "Why are they doing this?"

You know who they are talking about.

The Democratic Party can't celebrate the triumph of Barack Obama because the Democratic Party is busy having a breakdown. You could call it a breakdown over the issues of race and gender, but its real source is simply Hillary Clinton. Whose entire campaign at this point is about exploiting race and gender.

Here's the first place an outsider could see the tensions that have taken hold: on CNN Tuesday night, in the famous Brazile-Begala smackdown. Paul Begala wore the smile of the 1990s, the one in which there is no connection between the shape of the mouth and what the mouth says. All is mask. Donna Brazile was having none of it.

Mr. Begala more or less accused the Obama people of not caring about white voters: "[If] there's a new Democratic Party that somehow doesn't need or want white working-class people and Latinos, well, count me out." And: "We cannot win with eggheads and African Americans." That, he said, was the old, losing, Dukakis coalition.

"Paul, baby," Ms. Brazile, who is undeclared, began her response, "we need to not divide and polarize the Democratic Party. . . . So stop the divisions. Stop trying to split us into these groups, Paul, because you and I know . . . how Democrats win, and to simply suggest that Hillary's coalition is better than Obama's, Obama's is better than Hillary's -- no. We have a big party, Paul." And: "Just don't divide me and tell me I cannot stand in Hillary's camp because I'm black, and I can't stand in Obama's camp because I'm female. Because I'm both. . . . Don't start with me, baby." Finally: "It's our party, Paul. Don't say my party. It's our party. Because it's time that we bring the party back together, Paul."

In case you didn't get what was behind that exchange, Mrs. Clinton spent this week making it clear. In a jaw-dropping interview in USA Today on Thursday, she said, "I have a much broader base to build a winning coalition on." As evidence she cited an Associated Press report that, she said, "found how Sen. Obama's support among working, hard-working Americans, white Americans, is weakening again, and how whites in both states who had not completed college were supporting me."

White Americans? Hard-working white Americans? "Even Richard Nixon didn't say white," an Obama supporter said, "even with the Southern strategy."

If John McCain said, "I got the white vote, baby!" his candidacy would be over. And rising in highest indignation against him would be the old Democratic Party.

To play the race card as Mrs. Clinton has, to highlight and encourage a sense that we are crudely divided as a nation, to make your argument a brute and cynical "the black guy can't win but the white girl can" is -- well, so vulgar, so cynical, so cold, that once again a Clinton is making us turn off the television in case the children walk by.

"She has unleashed the gates of hell," a longtime party leader told me. "She's saying, 'He's not one of us.'"

She is trying to take Obama down in a new way, but also within a new context. In the past he was just the competitor. She could say, "All's fair." But now he's the competitor who is going to be the nominee of his party. And she is still trying to do him in. And the party is watching.

Again: amazing.

Who can save the situation? The superdelegates.

You know them. They're the ones hiding under the rock, behind the boulder, and at the bar.

They are terrified, most of them. They want the problem to go away. They want it handled, but they don't want to do it. They don't want to tell Hillary to stop, because they would likely pay a price for it, and not just with her.

They are afraid of looking as if they're jumping on a train that's speeding down the tracks and is about to roll over the damsel in distress.

Which is how Hillary -- and her supporters -- will paint it. Even though she's no damsel, and she causes distress.

Some insight from a superdelegate I spoke to Thursday:

It's not math anymore, it's psychodrama. If she can't have it, no one can have it. If she has to tear the party apart, she will.

Nancy Pelosi can't make her drop out. The Clintons think the speaker is for Obama anyway, her San Francisco district went for him 70% to 30%; they'll dismiss her. Chuck Schumer can't do it, he'd offend women in New York. Harry Reid can't do it, he'll offend women, period. If black political figures go to the Clintons and make a plea, they'll be dismissed as Obama partisans.

So who, I asked, can do it?

White women have been Mrs. Clinton's most reliable base of support and readiest crutch, the superdelegate said. And maybe they're the only ones who can break through, both to Mrs. Clinton and to the country, and tell her to stop. "If it's a man, she goes back to gender: Men are always picking on me, you just don't want women in power. If it's a black, it's You betrayed us, how can you call on me to get out after what I've done for you?"

Sen. Dianne Feinstein made a feint in the direction of stopping Hillary this week. Mrs. Clinton should offer a rationale for her continuing the campaign at this point, Ms. Feinstein said.

The superdelegate mentioned Maryland's Barbara Mikulski. "I can assure you that Sen. Mikulski is 100% behind Clinton," her office told me. The superdelegate mentioned Kathleen Kennedy Townsend and Ellen Malcolm of Emily's List, the No. 1 political action committee in the country. "They can say, 'We've stood with you, you've got true grit, but now you have to go.'"

The question "Who will tell her, who can make her go?" is really the question "Who will save the Democratic Party in 2008?" It cannot be doubted at this point that real damage is being done to its standard-bearer and to all those who will be on the ticket with him.

Maybe the superdelegate is right, and maybe saving the party this year will be women's work. Maybe the Democratic Party establishment, such as it is, men and women, black and white and all other colors, will rise up together. Maybe that would be a perfect rebuke to race-baiting and gender-gaming.

It will be amazing if someone doesn't start up that train, someone doesn't get in the cab, someone doesn't shout, "All aboard!" But then it's been an amazing year.

The Clinton Divorce

No, we don't mean Bill and Hillary. We mean the separation now under way between the Clintons and the Democratic Party. Like all divorces after lengthy unions, this one is painful and has had its moments of reconciliation, but after Tuesday a split looks inevitable. The long co-dependency is over.

Truth be told, this was always a marriage more of convenience than love. The party's progressives never did like Bill Clinton's New Democrat ways, but after Walter Mondale and Michael Dukakis they needed his epic political gifts to win back the White House. They hated him for their loss of Congress in 1994, but they tolerated Dick Morris and welfare reform to keep the presidency in 1996.

AP

The price was that they had to put their ethics in a blind Clinton trust. Whitewater and the missing billing records, Webb Hubbell, cattle futures and "Red" Bone, the Lincoln Bedroom, Johnny Chung and the overseas fund-raising scandals, Paula Jones and lying under oath, Monica and the meaning of "is." Democrats, or all of them this side of Joe Lieberman and Pat Moynihan, defended the Clintons through it all. Everything was dismissed as a product of the "Republican attack machine," an invention of the "Clinton haters," or "just about sex."

Democrats and the media did make a fleeting attempt at liberation when Bill Clinton left office after 2000 amid the tawdry pardons. Barney Frank, the most fervent of the Clinton defenders throughout the 1990s, even called the pardons a "betrayal" and "contemptuous." More than a few Democrats also noticed that George W. Bush's main campaign theme in 2000 was restoring "dignity" and "honor" to the Oval Office, and that Al Gore had somehow lost despite two-thirds of voters saying the U.S. was moving in the right direction.

But Hillary Clinton had also won a Senate seat that year, and she had presidential ambitions of her own. So the trial separation was brief. Democrats acquiesced as the first couple put their own money man, Terry McAuliffe, in charge of the Democratic National Committee. As the Bush years rolled on and John Kerry lost, they watched Hillary build her machine and plot a Clinton restoration. They watched, too, as the New York Senator did her own triangulating on Iraq, first voting for it, then supporting it before turning against it as the election neared. Party regulars fell in line behind her, and her nomination was said to be "inevitable."

Then something astonishing happened. A new star emerged in Barack Obama, a man who had Bill Clinton's political talent but Hillary's liberal convictions. He had charisma, a flair for raising money, and he held out the chance of a 2008 Democratic landslide. Something more than a return to the trench warfare of the 1990s seemed possible – perhaps the revival of a liberal majority, circa 1965.

More remarkable still, Democrats supporting Mr. Obama had a revelation about Clintonian mores. David Geffen, channeling William Safire, declared that "everybody in politics lies," but the Clintons "do it with such ease, it's troubling." Ted Kennedy was shocked to see the Clintons play the race card in South Carolina. The media discovered their secrecy over tax records and Clinton Foundation donors, while columnists were appalled to hear her assail Mr. Obama for his associations with radical bomber William Ayers. Listen closely and you could almost hear Bob Dole asking, "Where's the outrage?"

By the time Mrs. Clinton made her famous claim about dodging Bosnian sniper fire, Democrats and their media friends no longer called it a mere gaffe, as they once might have. This time the remark was said to be emblematic of her entire political career. The same folks who had believed her about Whitewater and the rest now claimed she never tells the truth about anything.

As the scales suddenly fell from liberal eyes, the most striking statistic was the one in this week's North Carolina exit poll. Asked if they considered Mrs. Clinton "honest and trustworthy," no fewer than 50% of Democratic primary voters said she was not. In Indiana, the figure was merely 45%.

Slowly but surely, these Prisoners of Bill and Hill are now walking away, urging Mrs. Clinton to leave the race. Chuck Schumer damns her with faint support by saying any decision is up to her. Columnists from the New York Times, which endorsed her when she looked inevitable, now demand that she exit so as not to help John McCain. With Mr. Obama to ride, they no longer need the Arkansas interlopers.

If the Clintons play to their historic form, they will ignore all this for as long as they can. They will fight on, hoping that something else turns up about Mr. Obama before the convention. Or they'll try to play the Michigan and Florida cards. Or they'll unleash Harold Ickes on the superdelegates and suggest that if Mr. Obama loses in November she'll be back in 2012 and her revenge will be, well, Clintonian.

The difference between now and the 1990s, however, is that this time the Clinton foes aren't the "vast right-wing conspiracy." This time the conspirators are fellow Democrats. It took 10 years, but you might say Democrats have finally voted to impeach.

In Defense of RINO Hunting

By PAT TOOMEY

The Club for Growth Political Action Committee has long been attacked for intervening in Republican primaries and targeting the party's most economically liberal incumbents.

In 2000, Pennsylvania Rep. Jim Greenwood called the Club "cannibals." When the Club ran ads against Ohio Sen. George Voinovich and Maine Sen. Olympia Snowe for resisting President Bush's 2003 tax cut, Karl Rove deemed the ads "counterproductive."

And Newt Gingrich, the man who ushered in a conservative Republican majority in 1994, once denounced the Club. "Their strategy is explicitly wrong," he said. "The key is to elect more Republicans and have a bigger majority and be more inclusive."

Now comes Oklahoma Rep. Tom Cole, the man charged with rebuilding the GOP majority in the House. In a New York Times Magazine article, he denounced the Club for Growth's involvement in a special election in Ohio's fifth congressional district.

"The problem I have with the Club is I think they're stupid," Mr. Cole said. "They spend more money beating Republicans than Democrats."

Republicans would be better off, the argument goes, if the Club PAC spent its money targeting Democrats instead of liberal Republicans. This is the argument of politicians who care more about maintaining power than using that power to implement conservative policies.

Thus comes the demand for an uncompromising obeisance to the bottom line: Elect as many Republicans as possible, regardless of how they will vote once in office.

It is for this reason that challenges to incumbents are deemed sacrilegious, no matter how far the incumbent has strayed from conservative principles. And it is for this reason that party leaders defend some of the most liberal incumbents, also known as RINOs (Republicans in Name Only), and assail the Club PAC for helping to elect true conservatives.

In 2000, Rep. Tom Davis, then the chairman of the National Republican Campaign Committee, denounced the Club for supporting Scott Garrett's challenge to New Jersey Rep. Marge Roukema. Mr. Cole and the entire Oklahoma establishment backed Tom Coburn's primary opponent in the 2004 Senate race, Oklahoma City Mayor Kirk Humphreys, viewing Mr. Coburn as too conservative to be electable. Led by President Bush, the GOP cavalry rallied behind liberal Arlen Specter in 2004, and Lincoln Chafee of Rhode Island and Joe Schwarz of Michigan in 2006.

Mr. Chafee, you may recall, is the same senator who refused to vote for the president in 2004, and voted against the 2001 and 2003 tax cuts and Justice Sam Alito's nomination.

This year, Mr. Gingrich and conservative favorite former Maryland Lt. Gov. Michael Steele stumped for liberal incumbent Rep. Wayne Gilchrest against conservative state Sen. Andy Harris in a primary. Mr. Gilchrest was also defended by the Service Employees International Union. He lost by 10 points.

Let us take a moment to consider how these liberal Republicans are serving the GOP today. Mr. Specter, just in the past year, joined Democrats in voting for "card check" (which allows unions to organize without holding a secret ballot election), for increasing the minimum wage, for expanding the State Children's Health Insurance Program, and for the bloated farm bill.

Mr. Chafee, who was defeated, switched his party affiliation to Independent and has endorsed Barack Obama for president. Following his loss to conservative Tim Walberg in the 2006 primary, Rep. Schwarz of Michigan backed a state-level tax hike, and threatened to run against Mr. Walberg as a Democrat. Mr. Gilchrest has hinted recently that he will endorse the Democratic nominee for his seat. All four of these pols were heralded by the Republican establishment as genuine conservatives who would go to bat for the party when it mattered.

Conversely, many of the Republican candidates the Club for Growth's members have supported over the years are now leaders in the conservative movement and favorites among the party's grass roots. Sens. Coburn and Jim DeMint and Reps. Scott Garrett, Jeff Flake, John Campbell, Jeb Hensarling, Tim Walberg and Mike Pence are just some of the brave leaders who have led the fight for limited government and greater economic freedom.

Winning for the sake of winning is an excellent short-term tactic, but a lousy long-term strategy. Just look at the consequences of the 2006 congressional elections, when the GOP lost control of both houses of Congress.

A Republican majority is only as useful as the policies that majority produces. When those policies look a lot like Democratic ones, the base rightly questions why it should keep Republicans in power. As the party gears up for elections in the fall, it ought to look closely at the losses suffered under a political strategy devoid of principle. Otherwise, it can look forward to a bad case of déjà vu.

Mr. Toomey, a former Republican congressman from Pennsylvania, is president of the Club for Growth.