Monetarists warn of crunch across Atlantic economies
By Ambrose Evans-PritchardThe lifeblood of countries' economies is draining away - with grim consequences for us all, writes Ambrose Evans-Pritchard
The money supply data from the US, Britain, and now Europe, has begun to flash warning signals of a potential crunch. Monetarists are increasingly worried that the entire economic system of the North Atlantic could tip into debt deflation over the next two years if the authorities misjudge the risk.
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The key measures of US cash, checking accounts, and time deposits - M1 and M2 - have been contracting in real terms for several months. A dramatic slowdown in Britain's broader M4 aggregates is setting off alarm bells here.
Money data - a leading indicator - is telling a very different story from the daily headlines on inflation, now 4.1pc in the US, 3.7pc in Europe, and 3.3pc in Britain.
Paul Kasriel, chief economist at Northern Trust, says lending by US commercial banks contracted at an annual rate of 9.14pc in the 13 weeks to June 18, the most violent reversal since the data series began in 1973. M2 money fell at a rate of 0.37pc.
"The money supply is crumbling in the US. There was a very sharp lending contraction in the second quarter lending. If the Federal Reserve is forced to raise rates now to defend the dollar, it would be checkmate for the US economy," he said.
Leigh Skene from Lombard Street Research said the lending conditions in the US were now the worst since the Great Depression. "Credit liquidation has begun," he said.
The Fed's awful predicament does indeed have echoes of the early 1930s when the bank felt constrained to tighten into the Slump in order to halt bullion loss under the Gold Standard. Investors - notably foreigners - dictated a perverse policy. Over 4,000 US banks collapsed. This time a de facto "Oil Standard" is boxing in Ben Bernanke. Benign neglect of the dollar has started to backfire. It is pushing up crude, with multiple leverage.
The monetary picture is highly complex. The different measures - M1, M2, M3, M4 - have all given false signals in the past. Each tells a different tale, and monetarists fight like alley cats among themselves.
The Federal Reserve stopped paying much attention to the data a long time ago. It has abolished M3 altogether. The US economic consensus is New-Keynesian (dynamic stochastic general equilibrium model). Delving into the money entrails is derided as little better than soothsaying.
That attitude, retort monetarists, is the root cause of the credit bubble. The money supply almost always gives advance warning of big economic shifts. Those who track the data are now calling on central banks to move with extreme caution. If the rate-setters overreact to an inflation spike caused by oil and food - or confuse today's climate with the early 1970s - they may set off an ugly chain of events.
"The data is pretty worrying," said Paul Ashworth, US economist at Capital Economics. "US lending is shrinking dramatically in real terms, and we know from the Fed's survey that banks want to tighten further. People are clamouring for higher rates but we think deflation is now the biggest threat. The idea that the Fed should tighten with unemployment soaring is preposterous," he said. The jobless rate jumped from 5pc to 5.5pc in May.
In Britain, the Shadow Monetary Policy Committee - hosted by the Institute for Economic Affairs, and a refuge for UK monetarists - issued its own alert this week. The focus is on "adjusted M4", which covers loans to "private non-financial corporations" and may offer the best insight into the health of British business.
The growth rate has dropped from 16.1pc a year ago to minus 0.5pc in April. It is the suddenness of the decline that matters most. The data reeks of recession. Professor Patrick Minford from Cardiff Business School called for an immediate rate cut, arguing that the credit crunch is a more powerful and long-lasting force than the oil inflation.
Professor Tim Congdon from the London School of Economics said the UK was lurching from boom to bust. "Real money growth is virtually nil. The British economy is taking a thrashing and it is going to get worse. Corporate money balances have contracted 3pc over the last three months, which is double digits on an annualised basis. This is a serious squeeze for companies," he said.
Mr Congdon warned three years ago that surging M4 would lead to a "dangerous" bubble, which is what occurred. He now fears the MPC will react too late as the process goes into reverse.
Roger Bootle from Capital Economics said Britain could be facing a "real economic crisis and a financial collapse. The MPC does not have the luxury of waiting until all is absolutely crystal clear. By that time the bird will have flown."
The eurozone is at a later stage of the credit cycle. Even so, house prices are collapsing in Spain, and falling in Germany and France. German industrial orders have dropped for the last six months in a row. A joint IFO-INSEE survey said eurozone growth had stalled to zero in the second quarter.
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"Consumer lending has fallen off a cliff. It is contracting in real terms," said Hans Redeker, currency chief at BNP Paribas. Core inflation has fallen from 1.9pc to 1.7pc over the last year.
Unlike the Fed, the European Central Bank keeps a close eye on money data (though not on real M1, now shrinking). It looks at the broader M3 figures. There is a raging debate in Europe over the signals now being sent by this indicator.
The M3 growth is still 10.5pc, down from 11.5pc in January. However, the data has been badly distorted by the closure of the capital markets. Firms have been forced to draw down existing credit lines from banks, which shows up as M3 growth. (It is the same story with America's M3 since the collapse of the Commercial Paper market).
"The credit lines are expiring. Companies cannot roll over loans. We are going to see the entire private credit multiplier go into a slowdown," said Mr Redeker.
Jean-Claude Trichet, the ECB's president, said last week that the M3 data "overstates the underlying pace of monetary expansion". The ECB nevertheless pressed ahead with a rate rise to 4.25pc, setting off a storm of protest. This may go down as one of the most unwise monetary decisions of modern times.
The strain on eurozone banks is growing by the day. They bid a record $85bn (£43bn) at the ECB's last auction for dollars. Only $25bn was available. The spreads on Euribor interbank lending are still at extreme stress levels.
Few disputes that "global inflation" is taking off. Over 50 countries now face double-digit price rises. Ukraine (29pc), Vietnam (27pc), and the Gulf states are out of control, with Russia (15pc), and India (11pc) close behind. China (7.1pc) is on the cusp. Interest rates are still below inflation across much of the emerging world. This is the driving force behind spiralling commodity prices.
The oil spike is already squeezing real wages in the Atlantic region. The debate is whether the Fed, Bank of England, and ECB should squeeze them further, trying to off-set energy rises with a deflationary bust in the rest of the economy. If and when oil peaks in this cycle, they may find inflation crashing faster than they dare to imagine.
The 9th Circle in Dante's Inferno - starring Judas and Brutus - is a frozen lake. Cold can be more frightful than heat. "Blue pinch'd and shrined in ice the spirits stood," (Canto XXXIII). Such awaits the victims of debt deflation.
Commentary by Caroline Baum
July 11 (Bloomberg) -- It's been a challenge to keep current on the U.S. government's efforts to help homeowners facing foreclosure.
Between official testimony and speeches, between politicians' promises and legislative compromises, some of the details, I'm embarrassed to say, slipped through the cracks.
For example, I missed the April announcement of an expansion to FHASecure, the Federal Housing Administration's program to help creditworthy borrowers refinance adjustable-rate mortgages when the teaser rates reset.
Under the expanded program, borrowers with adjustable-rate mortgages who missed up to three interest payments in the last year -- and who receive a voluntary mortgage principal writedown from their lender -- would qualify for an FHA-insured mortgage. The new terms go into effect July 14.
``The resets were always overblown as an issue,'' says Andy Laperriere, a managing director with the ISI Group in Washington. ``The overwhelming majority of delinquencies by subprime borrowers were on loans that did not reset.''
In other words, these borrowers couldn't afford the homes they ``bought,'' often with no money down, in the first place, even under the most favorable, low-teaser-rate circumstances.
Now the government wants to help them out by expanding FHASecure, which may turn out to be a misnomer.
``The risk under normal circumstances would be highly objectionable,'' says Michael Carliner, an independent economist in Potomac, Maryland, who used to be with the National Association of Homebuilders. ``The government is going to take a hit one way or the other.''
We, the People
The government? That would be we, the people; we, the taxpayers.
The FHA is the only government agency that is self-funded; the insurance premiums paid by borrowers have been sufficient to cover losses -- at least to date. Because borrowers put little or no money down, they are required to buy insurance, which reduces the risk to FHA-approved lenders if the homeowner defaults.
FHA loans are bundled into mortgage-backed securities by the Government National Mortgage Association. Ginnie Mae mortgages, unlike those securitized by Fannie Mae and Freddie Mac, carry the full faith and credit of the U.S. government.
So, while fears about the capital adequacy of Fannie Mae and Freddie Mac are dominating the marketplace, the expansion of FHA, either through administration diktat (FHASecure) or congressional legislation, poses a direct risk to us, the taxpayers.
Short-Term Solution
Why should responsible homeowners have to foot the bill for the irresponsible behavior of others in a capitalist system? (No, the folks buying homes they couldn't afford weren't all hoodwinked by mortgage lenders.)
The answer: A higher power has decided that the anticipated future cost -- the risky behavior it encourages tomorrow by rewarding it today -- is less than the more easily measured current cost.
The housing market is a mess. Sales and prices are still falling, competition from distressed sales (of foreclosed properties or short sales by the bank) is mounting, lenders are tightening credit standards and employment is falling. Policy makers have decided that short-term pain is intolerable, especially in an election year, with constituents badgering their representatives to ``do something'' about high gas prices and a lousy economy.
Reversing the Flow
On a more upbeat note, the FHA's business almost evaporated in recent years as the explosion in subprime loans, whose standards were about as low as they could go, supplanted its role of lending to less creditworthy borrowers.
One could argue that the flow will normalize itself. The subprime loans that the FHA giveth, it taketh away.
That said, the expansion in FHASecure, even with its new policy of basing premiums on the borrower's risk profile, raises the ante.
``It's not in keeping with the idea that the FHA program is supposed to be self-supporting,'' Carliner says. ``These are risky loans.''
``We want to be able to help families who are in the right house, but the wrong mortgage,'' Brian Montgomery, U.S. Housing and Urban Development assistant secretary, told the House Financial Services Committee in April.
What if it's the right mortgage for the right house at the wrong time? Under the new program, the FHA will require a 97 percent loan-to-value ratio for borrowers who were late on two consecutive monthly payments or any two payments in the last 12 months. For those folks hitting the trifecta (three missed monthly payments), the FHA requires a 90 percent LTV ratio.
House Gone Wrong
Suppose the value of the right house falls by another 15 percent.
Last month, Montgomery projected a loss for the agency of $4.6 billion this year, which the FHA covered from its capital reserve fund.
The FHA ``is not designed to become the federal lender of last resort,'' he said at the National Press Club on June 9, referring to a congressional measure that would insure up to $300 billion in refinanced mortgages. ``No insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, FHA will soon either have to shut down or rely on appropriations to operate.''
Appropriations? Right. We, the taxpayers, will get to foot that bill.
The China bubble fuelling record oil prices
Daniel Gros
What is behind the ever-increasing price of crude oil? Most economists and energy experts argue that even the current sky-high price is justified by fundamentals, namely the high growth in demand by emerging markets, in short “China”. The one important fact usually adduced to support this position is that supply and demand seem finely balanced as inventories are not increasing.
But this argument is wrong. The observation that inventories are not increasing is irrelevant since there is a very convenient way to store oil that is not measured by inventories data: just leave it in the ground!
Many experts also stress the observation that, in spite of very high prices, production has not really increased (last year, for example, saw an increase of only 1 per cent). However, this argument, like the one about inventories, is wrong because it does not take into account the nature of oil as an exhaustible resource.
The big choice for any owner of an exhaustible resource, such as King Abdullah of Saudi Arabia, is only inter-temporal: extract today or extract tomorrow. If the king extracts today, he gets today’s price (minus the extraction cost). If he extracts tomorrow, he will get tomorrow’s price (minus the same extraction costs), discounted at today’s interest rate. The supply of oil today will thus increase only if tomorrow’s price is low relative to the price today.
In other words, the supply of oil will increase not when the price today is high, but only if suppliers expect that prices will be lower in future. This implies that China influences oil prices today not so much because Chinese demand is high today (China currently accounts for less than 10 per cent of global consumption of crude), but because demand in China is projected to increase so much in the future, fuelling expectations of higher prices and thus leading producers to lower their rate of extraction today. In this light, it is no mystery that oil supply has not reacted to higher prices. Rational oil producers are just waiting for even higher prices tomorrow.
Another factor limiting oil supply today (and thus driving up prices) is that the return to oil producers from the dollars they would earn from increasing production has over the past year been greatly reduced by the US Federal Reserve. American interest rates are now negative in real terms. It is thus rational for oil producers to limit their accumulation of rapidly depreciating dollars by limiting the rate at which they extract oil. High oil prices are therefore at least partially a consequence of an expansionary monetary policy in the US.
When it comes to oil prices, and how much oil is produced today, it might be best to listen less to traders on commodity markets and more to the suppliers. King Abdullah has recently been quoted as saying that if additional oil were to be found in his country, he would advise leaving it in the ground because “with the grace of God our children might have a better use of it”.
This suggests that suppliers have the impression that it is better for them to delay extraction.
The expectation that prices can only go up (and the fact that the return on capital remains low) is the real culprit, not the trading among speculators who are simply betting against each other so that one side’s gain is the other side’s loss. Regulating oil derivative markets might affect the amount of “speculative” trading, but it will not induce oil producers to increase extraction.
If speculators are not to blame, does it follow that there is no bubble in the oil market? Not necessarily. A bubble starts when past price increases lead to expectations of future price increases. It could very well be that prices will not increase as much as expected if China’s future demand for oil is lower than expected today, or if alternative energy supply sources become as cheap as some suggest.
Sky-high oil prices are likely to lead over time to a massive substitution away from oil, even in China. This is what happened after the first two oil shocks. But it will take years for this scenario to materialise.
In the meantime, the best explanation of oil prices is neither “bubble” nor “China”, but a “China bubble” – in the sense that speculators and oil producers are gambling on China’s sustaining high prices for ever.
Who Will Be President?
An obscure government agency will soon decide whether citizens can get hold of information essential to modern democratic decision making. On Monday, the Commodity Futures Trading Commission began to analyze whether to create a safe harbor for prediction markets in the U.S., as these markets would otherwise be hamstrung by the strictures of financial trading laws. The CFTC should create the safe harbor.
Prediction markets allow traders to buy shares that pay off on the occurrence of a particular event, such as an Obama victory in November. The CFTC has already given permission for the operation of a small-stakes academic version, called the Iowa Electronic Market. Its market in the last presidential election was more accurate than opinion polls in predicting the vote percentages of George W. Bush and John Kerry.
The Internet facilitates prediction markets for a huge number of potential outcomes. For example Tradesports, an online commercial operation based abroad, already makes markets in scores of political events. One may even place a bet on the economic growth rate in the U.S. conditional on Barack Obama or John McCain being elected.
These prediction markets in conditional events can also aid democratic deliberation, by being used to test politicians' constant but contestable claims that their policies will have beneficial effects. People with different bits of relevant information can put their money where their mouths are and evaluate the policies even before they are implemented. If these markets were allowed to grow in size and scope, they would be widely reported, like stock markets.
For instance, Mr. Obama wants to increase the capital-gains tax rate. A market could be made on the effects of the policy. Individuals could be invited to bet on the growth rate conditional on various rises in the tax rate on capital gains, and conditional on capital-gains taxes remaining the same.
The resulting information would be more objective and persuasive than those of pundits or even economists, because those with money at stake would have incentives to use the best information available, including that from experts.
Of course, many factors influence economic growth. But the difference is that conditional markets would isolate the likely influence of capital-gains rates. We may learn, for example, that economic growth is likely to expand at least 3% with the capital-gains rate unchanged, but only 2.8% with a capital-gains tax hike.
Thus these prediction markets have substantial benefits for the rest of us. Increasingly accurate predictions about the effects of public policy are needed more than ever. In this age of accelerating technological change, democracies need to be more nimble in responding to the potential benefits and dangers of these changes.
In its upcoming proceedings, therefore, the CFTC should exempt prediction markets from regulations that would prevent them from flourishing, like requiring that such shares be traded on designated commodity exchanges. And yet, even action by the CFTC may not be enough. In late 2006, Congress passed the Unlawful Internet Gambling Enforcement Act, which banned financial institutions from transferring funds for the purposes of online gambling. The chilling effect on commercial prediction markets has already been huge.
As a direct result of the law, the two leading online payment operations, Neteller and Paypal, have refused to allow deposits to gambling Web-site accounts. Such refusals undermine the viability of prediction markets, because financial intermediaries lower transaction costs for players and commercial operators.
Federal and most state laws do not generally prohibit gambling, even when the events themselves, like the outcomes of horse races, have no public benefits. Congress should therefore take the additional action of exempting prediction markets from online gambling prohibitions.
It's too bad we do not yet have the prediction market to tell us whether it is likely that the CFTC and Congress will do the right thing.
Mr. McGinnis teaches law at Northwestern University.
Restricting Speculators Will Not Reduce Oil Prices
Commodity price shocks, like those currently rocking the oil market, inevitably lead to witch hunts. And speculators are typically among the first to be hunted down.
Many in Congress -- including Sen. Joseph Lieberman (D., Conn.) and Rep. Bart Stupak (D., Mich.) -- assert that oil market trading by financial institutions and investment funds has added as much to $70 per barrel to the price of oil. These charges are echoed by myriad others, including financier George Soros and Fox News personality Bill O'Reilly.
Mr. Lieberman wants to ban any pension fund or financial institution with more than $500 million in assets from participating in the futures markets. He also proposes limiting investment banks' positions in futures-like swap contracts traded in the over-the-counter market.
Mr. Stupak, for his part, has introduced "The Prevent Unfair Manipulation of Prices Act." He reportedly accused Goldman Sachs and Morgan Stanley of manipulating the markets -- though he disclaimed knowledge of evidence of illegal behavior, and subsequently complained that he was misquoted.
But the wild assertions about speculation and manipulation are defective, and completely unsupported by reliable evidence. The proposals by Messrs. Stupak and Lieberman, not to mention others ricocheting around Capitol Hill, would not reduce prices. They would harm consumers and producers.
First, consider the charge that commodity prices are being "manipulated." There are of course certain well-known forms of market manipulation -- notably the "corner" or "squeeze." Here a trader buys more futures contracts than there is commodity to deliver, and forces those that have sold to him -- but who cannot deliver -- to buy back their contacts at an exorbitant price. None of this has been observed in the oil markets in recent months. Even more to the point, manipulations of this sort typically have short-lived effects on prices. They cannot account for the extended run of high oil prices.
What about the impact of speculation more generally? The assertion here is that noncommercial market participants have increased their positions in these markets both absolutely, and as a fraction of the total number of contracts outstanding; that these speculators are buyers on net; that this speculative buying has increased by about as much as the increase in Chinese oil demand over the past five years; and therefore, that speculators have driven up demand for oil, and its price.
This argument represents a complete misunderstanding of futures markets.
For the most part, speculators do not demand physical oil the way thirsty Chinese refiners do. There is no evidence that speculators are accumulating large and rising inventories of physical oil. But to cause prices to be above their competitive level, speculators would have to take physical oil off the market -- the way that governments have done in the past with agricultural products, amassing mountains of grain and cheese to prop up their prices.
What some speculators do instead is trade futures contracts that entitle them to take delivery of physical oil at a future date (say next August) at a price negotiated in the marketplace. But they almost never exercise the right to take delivery when the contract matures.
A speculator who anticipates rising prices buys a futures contract at the prevailing market price. If he is right, and the futures price rises, he can sell the contract at the higher price before contract maturity and pocket a profit; if he is wrong, and prices fall, he sells the contract at a loss. Buyers and sellers of these futures contracts almost never take delivery of the oil to implement their trading strategies.
Restricting these speculators won't reduce the price of oil -- but they are likely to make consumers and investors worse off. Futures and swap markets facilitate the efficient management of price risks, and speculators are an important part of that process. For instance, a producer of oil may want to lock in the price at which he sells his oil in the coming months in order to hedge against fluctuations in its price. He can do so by selling a futures contract at the prevailing market price. Similarly, an airline can protect itself against price increases next summer by buying today a futures contract that locks in a purchase price for next July.
Producers and consumers who want to "hedge" in this fashion cannot wave a magic wand to make the price risks they face disappear. The oil producer has to find somebody to sell to, and the airline must find somebody to buy from -- and that somebody is often a speculator. Restricting speculation would increase the costs that producers, consumers (such as airlines), and marketers (such as heating-oil dealers) pay to manage their price risks by reducing the number of traders able to absorb the risks they want to shed.
These higher risk management costs would result in higher prices at the pump or the airline ticket counter for consumers, and less investment in new productive capacity -- which would keep prices high into the future.
Participation in these oil markets by pension funds and other investors (a la Mr. Lieberman) is also not a problem. By adding commodity futures to their portfolios, i.e., by diversifying, these investors can reduce their risks without sacrificing returns, and without impacting physical inventories (or prices). Consumers are the ultimate winners when risks are borne as efficiently as possible in these markets.
The unprecedented run-up in oil prices is painful for consumers around the world. But the focus on speculation is misguided, and represents a convenient distraction from an understanding of the real, underlying causes of high oil prices -- most notably continuing demand growth in the face of stagnant production, supply disruptions and the weakening dollar.
More restrictions and regulations of energy markets, in the vain belief that such actions will bring price relief, are counterproductive. They will make the energy markets less efficient, rather than more so.
Obama Doesn't Have to Run as a Liberal
Some liberals fret that Barack Obama is tacking to the center after his acquiescence to the Supreme Court's repeal of Washington's handgun law, his shift on telephone company immunity for cooperating with wiretaps, and his call for more faith-based social programs. But this is just the beginning. The logic of the race will shortly lead Sen. Obama to buck bigger liberal pieties on core priorities like schools, taxes and health care in order to win.
In a sense this is overdue. For all the talk about reaching out to Republicans and independents, Mr. Obama's proposals have been far less challenging to conventional liberal thinking than were Bill Clinton's in 1992 -- when Mr. Clinton forced Democrats to overhaul their approach to such central issues as welfare, trade and crime. Mr. Obama's true audacity (and accomplishment) thus far has been to rebrand liberal goals on health care and economic security as "common sense" reforms behind which all Americans can unite.
You can't criticize Mr. Obama for not taking on antique Democratic thinking when it turned out he could win his party's nod without having to. That's just smart politics. But it won't work any longer.
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As the general election takes shape, Mr. Obama now faces the one line of attack he didn't have to deal with in his long battle with Hillary Clinton: the charge that he is an extreme liberal whose tax-and-spend instincts will put America on the road to socialism. This drumbeat is already being sounded by conservative commentators who note the gap between the candidate's post-partisan rhetoric and what they dub his "redistributionist" agenda. It will become a roar from the McCain camp that Mr. Obama must silence if he's to sustain his broad appeal.
If the "too liberal" label sticks, Mr. Obama won't win. And if he doesn't demonstrate his openness to more ideologically androgynous means to achieve his goals, he won't be able to govern.
That means Mr. Obama needs three biggish ideas he can punch back with as the charges crescendo. "John McCain would have you believe I'm practically a socialist," Mr. Obama needs to be able to say with a laugh. "Well, ask yourselves this: Is a typical liberal for x, y and z?" These three proposals need to be so self-evidently a break with conventional liberal thinking and interest groups that it will instantly trump the GOP charge in the press, as well as in the eyes of independent voters and open-minded Republicans. Think of them as the policy equivalents of what Bill Clinton did when he distanced himself from the ugly racial animus of hip-hop artist Sister Souljah in 1992.
So what should Obama's three "Sister Souljahs" on policy be? Here are my candidates:
- A new deal for teachers. Mr. Obama knows we need to attract a new generation of teachers to the nation's poorest schools, which today recruit from the bottom third of the college class. While money isn't the only answer (prestige and working conditions also matter greatly), even conservatives admit we'll never lure the talent we need unless the earnings trajectory for teachers in high poverty schools goes well beyond today's average starting wage of around $40,000, peaking after 20 years near $80,000. But we don't need to raise teacher salaries across the board -- it's the specialties (like math and science) and the toughest neighborhoods that face real crises.
Mr. Obama should therefore go beyond vague talk of modest pay reform and offer a bold new "grand bargain" to reshape the profession. He should make a $30 billion pot of federal money available to states and districts to boost salaries in poor schools, provided the teachers unions make two key concessions. First, they have to scrap their traditional "lockstep" pay scale. In this scheme, a physics grad has to be paid the same as a phys-ed major if both have the same tenure in the classroom, and a teacher whose students make remarkable gains each year gets rewarded no differently than one whose students languish. Second, it has to be easy to fire the awful teachers that are blighting the lives of a million poor children.
The unions will scream. But college students and younger teachers will crave the chance to earn, say, $150,000 if they excel. And smart union leaders know that something like this money-for-reform deal is the only way the public will ever invest to bolster teaching. Mr. Obama mentioned the idea of merit pay once a year ago. But the union blowback was so great that he didn't broach the subject again until a few days ago in an address to the National Education Association, when (to his credit) he stood his ground and faced some boos from his union audience as a result.
But now that he's dipped his toe in, he can capture the public's imagination by aiming much higher. He can explicitly endorse something like the breakthrough deal being pushed by Washington, D.C., schools chief Michelle Rhee, under which teachers could opt into a new pay schedule that gives them a chance to earn up to $130,000, but requires them to relinquish tenure and seniority rights as part of the bargain. A fresh Obama call for such "market-based pay" to elevate the status of teaching would be a common-sense, cost-effective way to get the teachers we need to the kids who need them most.
- Lower corporate taxes. Corporate tax rates in the U.S. are the second highest among developed countries. Democrats act as if these taxes are somehow a "freebie," paid by impersonal entities. But "corporations" don't pay taxes, people do. These taxes are ultimately borne by shareholders or employees. And corporate taxes help determine where multinational firms choose to locate, decisions that should be a major concern of policy makers who want to keep good jobs in the U.S. Mr. Obama has hinted he'd "consider" lowering corporate taxes at some point. Better now to say he'll make it a priority (tied to closing corporate loopholes and broadening the base) and parry liberal moans by explaining how high corporate taxes hurt American workers.
- Health savings accounts "done right." Liberals sensibly reject "consumer-directed health plans" loved by Republicans when these plans' high co-pays and deductibles put undue burdens on the sick and the poor. But there's a simple way to structure such plans to address these concerns while still bringing consumer incentives to bear on runaway health costs. The answer is to require such plans to limit the total medical costs a person can incur in a year to a reasonable percentage of income. By calling for annual out-of-pocket maximums to be tied explicitly to earnings, Mr. Obama would forge a new "third way" on health care, and cast himself as an innovator not beholden to the far left view that market forces should play no role in health care at all.
Mr. Obama likes to say, "We need a president who tells you what you need to hear, not what you want to hear." But as a candidate he's rarely made good on this pledge. By embracing this trio of common-sense ideas that will nonetheless raise hackles among his liberal supporters, Mr. Obama can go a long way toward slipping the lefty label that could sink him.
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