Noah's Shark
Back in April, we noted an op-ed piece in the Los Angeles Times by one David K. Shipler, an expert on adjectival racism. In his view, pretty much any adjective is a few degrees of separation from a racial slur, and thus one should exercise extreme caution when modifying Barack Obama in a sentence.
Example: " 'Elitist' is another word for 'arrogant,' which is another word for 'uppity,' that old calumny applied to blacks who stood up for themselves." And:
Casting Obama as "out of touch" plays harmoniously with the traditional notion of blacks as "others" at the edge of the mainstream, separate from the whole. Despite his ability to articulate the frustration and yearning of broad segments of Americans, his "otherness" has been highlighted effectively by right-wingers who harp on his Kenyan father and spread false rumors that he's a clandestine Muslim.
Here's another example. Some people have said Obama has a "thin résumé." But "thin" is another word for "skinny," which is a slur for "black." Or so it is according to Slate's Timothy Noah, who has found invidious racism in the pages of the venerable Wall Street Journal.
This latest racial crisis began last Friday, when Journal reporter Amy Chozik published a piece titled "Too Fit to Be President?" Chozik speculated that Obama may be too far gaunt to lead a nation of lard butts. As political analyses go, it was more whimsical than weighty, which was signaled by its placement on the front page of the Weekend Journal section.
Yesterday Noah weighed in on the subject. "Any discussion of Obama's 'skinniness' and its impact on the typical American voter," he opined, "can't avoid being interpreted as a coded discussion of race." Here's his argument:
Barack Obama is the first African-American to win a major-party nomination for president of the United States. African-Americans are distinguishable from other Americans by their skin color. This physical attribute looms large in our nation's history as a source of prejudice. . . .
When white people are invited to think about Obama's physical appearance, the principal attribute they're likely to dwell on is his dark skin. Consequently, any reference to Obama's other physical attributes can't help coming off as a coy walk around the barn.
Chozik tells Noah that this is "ridiculous," to which Noah responds that she is "clueless." Proving that cluelessness comes in all colors, Noah calls his black friend "to ask whether she was offended. She was not."
But who cares? If you're trying to understand the intricacies of race in early-21st-century America, why ask someone in early-21st-century America? It makes much more sense to turn to a situation comedy set in the 1950s and produced in the '70s. Noah has the good sense to do just that:
A Slate colleague informs me that an episode of the TV sitcom Happy Days ("Fonzie's New Friend") had its 1950s-era characters nervously discussing the fact that a black man in their midst was so . . . skinny. Was it true that skinny people liked fried chicken? That they were good at basketball? And so on.
We have one quibble with Noah. It seems to us that the "Happy Days" episode that really is pertinent here is "Hollywood." That's the one in which the Fonz jumps the shark.
They Also Serve Who Only Stand and Inflate
On Thursday we noted that Barack Obama, shunning domestic production of oil, had proposed an alternative method for dealing with the energy problem: "We could save all the oil that they're talking about getting off drilling if everybody was just inflating their tires and getting regular tune-ups."
Talk about inflation! Yesterday Obama gave not just a speech but a "major speech" in which he declared:
Breaking our oil addiction is one of the greatest challenges our generation will ever face. It will take nothing less than a complete transformation of our economy.
In the space of a week Obama has gone from urging people to blow up their tires to threatening to blow up the entire economy--from trivially hortatory to totalitarian. Surely between now and November, Obama can find some happy medium.
Meanwhile, Jon Soltz, writing on the Puffington Host, is aghast that John McCain would make fun of Obama's tires rhetoric:
Why is John McCain treating our national security, literally, as a joke?
This week, Senator John McCain made clear that you shouldn't try to combat the rising cost of gas by checking your car's tire pressure, so your car gets more per gallon (something everyone from Al Gore to President Bush, from Joe Lieberman to Barack Obama, from NASCAR to environmental groups say you should do). He's even mocking the idea by handing out "joke" tire pressure gauges, and has a new childish web video out making a joke out of it.
But this is no joke.
In fact, it's so serious that I'd ask everyone to buy tire pressure gauges--available at sites like this--because ultimately this is about our national security and our troops. Maybe John McCain wants to mock those things, but I sure don't.
It reminds us of that incident in 2004 when some no-goodniks at the Republican National Convention were handing out "Purple Heart bandages." Supposedly they were making fun of John Kerry, but as Kerry pointed out, it was actually an insult to all veterans, or at least all veterans who got medals for combat injuries their fellow servicemen later said were dubious.
Similarly, where does John McCain--who after all spent the Vietnam War in some hotel--get off making fun of Barack Obama's distinguished military service?
Oh, Never Mind Then
"Obama Pitches Energy Plan in Lansing Event"--headline, Jackson (Mich.) Citizen Patriot, Aug. 5
Write Your Own Headline
It's time for another reader contest. We were trying to think of the perfect headline to go over this one from Denver's Rocky Mountain News:
With DNC in Mind, City Bans Carrying Urine, Feces
But somehow nothing flowed. It seems a shame to let a good headline go to waste, so we'd like you to take a crack at it. We'll use the best ones over the next few weeks. And remember, it has to be appropriate for a family newspaper.
Reliable Sources--I
"Several Democratic insiders say Barack Obama's campaign is as secretive as U.S. President George Bush's administration and isn't as inclusive as it could be," United Press International reports.
And who are the aggrieved "Democratic insiders"? UPI doesn't say:
Democrats privately said they were concerned that Obama, the party's presumptive candidate, is relying on his inner circle of advisers instead of a broader group that facilitated input from Washington and elsewhere, CBS News reported.
The UPI dispatch quotes only two sources by name: David Axelrod and Dan Pfeiffer, both from the Obama campaign. It sounds as if the unidentified kitchen utensil is calling the kettle black.
Comedy Is Not Pretty
ABC's Jake Tapper reports that the Obama campaign is getting a boost from the comedy stylings of John Kerry, who appeared yesterday at a Boston fund-raiser:
"I asked Barack what he wanted for his birthday and he said, just three things: 'Indiana, Colorado, and Virginia.' "
Big laughs.
Kerry also said, "John McCain is looking for someone for vice president who has more economic expertise than he does. So congratulations to all of you, you're on the short list."
Sorry our column is late today; we've been busy cleaning the coffee from our keyboard. Which reminds us, did ya hear the one about the guy who didn't make the most of his education, study hard or do his homework?
He got stuck in Iraq!
Ba-dum-bum!
Another erstwhile Democratic nominee, though, is proving less helpful to the Obama effort, as New York's Daily News reports:
Bill Clinton regrets some things he said--and didn't say--on the campaign trail. But there's one thing he still can't utter: Barack Obama is ready to be President.
"You can argue that nobody is ready to be President," the former President told ABC News.
"You can argue that even if you've been vice president for eight years, that no one can be fully ready for the pressures of the office," Clinton said Monday.
Whew, we're lucky Gore lost.
Reliable Source--II
President Bush stopped in South Korea on his way to the Olympics in Red China, and the Associated Press reports that he encountered some protesters, including Uhm Ki-woong, 36, a businessman:
"I don't have anti-U.S. sentiment. I'm just anti-Bush and anti-Lee Myung-bak," said Uhm Ki-woong, 36, a businessman who was wearing a mask and hat like other demonstrators in an apparent attempt to conceal his identity.
It's a good thing Uhm Ki-woong wore that mask and hat like other demonstrators. Otherwise people might have been able to ascertain his identity: Uhm Ki-woong, 36, a businessman.
Unfortunately, No One Can Hear Them
"Anti-Obama Bloggers Say They Were Silenced"--headline, New York Sun, Aug. 5
Wannabe Pundits
From our colleagues at the New York Post's Page Six:
Eva Mendes is so naked and so sexy in an ad for Secret Obsession, the new fragrance from Calvin Klein Inc., that TV networks rejected the spot until it was cleaned up, and still won't air it until after 9 p.m. The commercial "taps into the secrecy of a private moment--where it's clear that Eva is having illicit thoughts," marketer Lori Singer told WWD. The spot's creative director, Fabien Baron, angrily blamed President Bush for the censorship: "This country really needs a new president. This country is so messed up . . . I really can't believe this is happening."
Naked ladies in TV commercials? Now there's change we can believe in!
Wannabe Pundits--III
The FBI finally has a suspect in the post-9/11 anthrax attacks, as The Wall Street Journal notes in an editorial:
Americans will be relieved if the attacker was Bruce Ivins, who killed himself with an overdose of pills as prosecutors reportedly planned to charge him with killing five people by sending finely milled anthrax spores through the mail. The unsolved case has left large doubts about public safety and bioterrorism. If a domestic scientist is the source, it would mean that foreign terrorists don't yet have the means or the will to weaponize anthrax.
However, we use the word "reportedly" here because everything we know about the case against Ivins has been leaked to reporters without official attribution. This is the way the Justice Department has behaved for nearly seven years, and much of what it previously leaked has turned out to be false.
The Associated Press reports that the FBI says Ivins had a "decades-long obsession with a college sorority" which had a facility not far from the mailbox from which the anthrax letters were sent:
Multiple U.S. officials told The Associated Press that Ivins was obsessed with Kappa Kappa Gamma, going back as far as his own college days at the University of Cincinnati when he apparently was rebuffed by a woman in the sorority. The officials all spoke on condition of anonymity because they were not authorized to discuss the case publicly.
There is nothing to indicate Ivins was focused on any one sorority member or other Princeton student, the officials said. Instead, officials said, Ivins' e-mails and other documents detail his long-standing fixation on the organization.
An adviser to the Kappa Kappa Gamma chapter at Princeton, Katherine Breckinridge Graham, said Monday she was interviewed by FBI agents "over the last couple of years" about the case. She said she could not provide any details about the interview because she signed an FBI nondisclosure form.
Maybe the FBI would be better at keeping secrets if it hired only sorority gals.
Life Imitates the Onion--I
• "Man Calls 911 After Subway Left Sauce Off Sandwich"--headline, Associated Press, Aug. 4, 2008
Life Imitates the Onion--II
• "Suspect in Bus Beheading Described as Hard Working"--headline, Associated Press, Aug. 4, 2008
That's What Happens When You Raise the Drinking Age to 41
"Over 40 Underage Revelers Cited at Party"--headline, El Paso (Texas) Times, Aug. 4
He Should Go to Confession and Do Penance Too
"Dad Charged in Girl Abduction Going Back to Mass."--headline, Associated Press, Aug. 4
It's an Unpaid Intership
"Cemetery Needs Volunteers"--headline, WQAD-TV Web site (Moline, Ill.), Aug. 4
That's a Spacious Car!
"Stolen Flint School Bus Found in Pontiac"--headline, Flint (Mich.) Journal, Aug. 5
Wouldn't Online Dating Have Been Easier?
"Police: Wife Set Epsom Fire to Get Husband"--headline, New Hampshire Union Leader (Manchester), Aug. 5
Or Was He Just Happy to See Mae West?
"Police: Pants May Have Caused Bailiff's Gun to Fire"--headline, WMUR-TV Web site (Manchester, N.H.), Aug. 5
In the Beginning, There Was Salt . . .
"Saline's History to Be Celebrated"--headline, Ann Arbor (Mich.) News, Aug. 5
Everything Seemingly Is Spinning Out of Control
• "Man Hurt by Dead Cow Falling at Slaughterhouse"--headline, Associated Press, Aug. 4
• "NASA Lander May Have Found Toxic Substance on Mars"--headline, Reuters, Aug. 4
• "Milk Protests Rage On"--headline, Baltic Times (Riga, Latvia), Aug. 5
• "Ventura County Forecast: 800 Degrees"--headline, Los Angeles Times Web site, Aug. 4
• "Killer Herpes Decimates Young French Oysters"--headline, Reuters, Aug. 4
News of the Tautological
"Fees Add to Costs at Clemson"--headline, Greenville (S.C.) News, Aug. 4
News You Can Use
• "Study: Restaurant Kids' Meals Loaded With Calories"--headline, Associated Press, Aug. 4
• "Pets Can Be Unpredictable"--headline, Muskogee (Okla.) Phoenix, Aug. 4
• "Psssst--Have I Got a Cheap Red Wine for You!"--headline, Reuters, Aug. 5
Bottom Stories of the Day
• "Many Tweens Watching 'R' Films Despite Restriction"--headline, USA Today, Aug. 5
• "World Court Objects to Texas Execution"--headline, Chicago Sun-Times, Aug. 4
• "Utah Gas Pumps Working Correctly"--headline, Daily Herald (Provo), Aug. 5
• "Cop Wins Doughnut-Eating Contest"--headline, Mankato (Minn.) Free Press, Aug. 3
Too Big to Fail
Richard Cooey raped and murdered two women in 1986, landing him on Ohio's death row. Now he is so fat, his lawyers argue he shouldn't be executed. As the Associated Press reports:
Lawyers for Richard Cooey argue in a federal lawsuit that Cooey had poor veins when he faced execution five years ago and that the problem has been worsened by weight gain. . . .
The lawsuit, filed Friday in federal court in Columbus, also says prison officials have had difficulty drawing blood from Cooey for medical procedures. Cooey is 5 feet 7 inches tall and weighs 267 pounds, according to the lawsuit. . . .
Cooey's use of the drug Topamax, a type of seizure medication, may have created a resistance to thiopental, the drug used to put inmates to sleep before two other lethal drugs are administered, Dr. Mark Heath, a physician hired by the Ohio Public Defender's Office, said in documents filed with the court.
Heath also says Cooey's weight, combined with the potential drug resistance, increases the risk he would not be properly anesthetized.
That's a real concern for Cooey, his public defender, Kelly Culshaw Schneider, said Monday.
"All of the experts agree if the first drug doesn't work, the execution is going to be excruciating," she said.
Ironically, the ACLU has called for a capital-punishment moratorium on the ground that a disproportionate number of death-row inmates are "skinny."
All Fear, No Hope
FROM TODAY'S WALL STREET JOURNAL EUROPA
MILAN
Thirty years after the last stagflation, the world may again relive a period of low growth coupled with high inflation. Thanks to the euro's appreciation, which mitigates the oil-price hike, Europe is generally in a slightly better position than the U.S. But of all the economies of the Old Continent, Italy is by far the most vulnerable. That's because the country has already suffered stagnation for the last 15 years.
![[All Fear, No Hope]](http://s.wsj.net/public/resources/images/OB-BZ413_oj_boe_20080805182018.jpg) |
| Barbara Kelley |
As a result, Italy's income per capita has fallen below the euro-zone average and is even below the EU-19 average, which includes some of the still relatively poor economies of the former communist countries. Real incomes of Italians have been flat like the Dutch lands over the last decade. Net wages of Italian workers are now 30%-40% lower than those of their colleagues in France and even Germany, which has also seen a period of relative wage restraint.
And Italy has no safety net protecting those hit by a recession. Unlike most countries in the EU, it has no minimum-income guarantee. Two-thirds of Italy's social spending goes to pensions, leaving little for the unemployed.
Due to Italy's high debt (about 105% of GDP), there is not much room for countercyclical fiscal policies. Tax revenues, though, have been exceptionally buoyant in the last three years thanks to Rome's successful fight against tax evasion. In addition, Italy's strongly progressive tax system has led to large windfall profits for the government as inflation is pushing individuals to higher income tax brackets even though their real incomes did not go up. According to estimates by the economic Web site Lavoce, this fiscal drag could bring more than an extra €4 billion into the state coffers this year.
The most sensible thing to do would be to use this money to reduce income taxes, as even average workers pay a marginal tax rate of 60%. This would boost demand -- consumption has been declining in real terms lately -- as well as supply. At the same time, tax cuts would help employers in the coming wage negotiations to argue for wage restraint. Keeping labor costs under control would in turn fuel job creation. Italy has the lowest employment rate in the EU, with about only half of the country's working-age population actually working.
But Rome's budget plan for 2009-2013, approved on Monday by Parliament, envisions no tax cuts for the next five years. Tax revenues as a share of GDP are even supposed to increase mildly, to 43.2% in 2010 from 43% now. Besides betraying voters -- who during this spring's electoral campaign were promised a reduction of the tax pressure to below 40% of GDP -- this policy is unlikely to help avoid a recession. It will only worsen the country's economic situation.
The budget plan also says nothing about cutting public spending and waste. For example, Italy ranks fourth in the OECD in terms of spending per pupil. And yet its students regularly score significantly lower than the EU average in international tests such as the OECD's Program for International Students Assessment, or PISA. Moreover, the Italian regions with the lowest PISA scores are precisely those where expenditure per student is the largest, and where teachers are paid more in real terms than in regions with better test results. This means that it is possible to cut spending without reducing the quality of education. As a matter of fact, by learning from the more successful regions and EU countries, Italy could improve its quality of education at the same time as it cuts spending.
Another area where large savings are possible while actually increasing the quality of public services is fiscal federalism. About one-fourth of Italy's state budget goes to regions and local administrations. While the decisions over tax levels are centralized, much of the spending is therefore at the local level. This is a recipe for waste. If a local administration has to raise taxes to match its rising expenditure, it risks being punished by voters. But in Italy it is the central government that raises taxes to cover the deficits of local administrations. The latter are therefore not held politically accountable for their poor handling of the budget.
The depressing message of the government's budget plans for the next five years is that fiscal consolidation -- the reduction of the country's mountain of debt and regular deficits -- will not occur by cutting spending but by raising revenues instead.
Meanwhile, as if Italians weren't frightened enough about the country's economic outlook, Finance Minister Giulio Tremonti is spreading only more gloom. "We are falling into a new Great Depression," he likes to claim whenever he gives a public speech or television interview. According to Mr. Tremonti, the poor state of Italy's economy is not so much the result of poor domestic policies but instead caused by the devils of globalization and China's presence in the World Trade Organization.
Just ahead of this spring's electoral campaign, Mr. Tremonti wrote down his abstruse theories about the alleged pitfalls of free trade in a book titled "The Fear and the Hope." Unfortunately, once in power, he forgot about the hope. Cutting taxes and wasteful spending would go a long way to fighting the fear many Italians feel about the economy.
Mr. Boeri is a professor of economics at Bocconi University, Milan.
China's Democratic Acceleration
FROM TODAY'S WALL STREET JOURNAL ASIA
Commentators are lining up to declare that Beijing's repressive handling of the upcoming Olympics is setting democracy in China back by a decade or more. But it's important to recall a simple lesson of history: Democracy rarely results from dictators deciding to become democrats. Rather, it results from a confluence of regime weakness, declining perceived legitimacy, and citizen demands that force dictators to change. From that perspective, the democratizing impact of the Beijing Olympics is proving to be a strong one, vindicating those who wanted the Olympics to go to Beijing to accelerate China's domestic transformation.
![[China's Democratic Acceleration]](http://s.wsj.net/public/resources/images/OB-BZ344_oj_gil_20080805142446.jpg) |
| David G. Klein |
Talk of the democratic effects of the Olympics often harks back to South Korea in 1988. But that is an inapt comparison for Beijing. South Korea then was well on its way to a democratic transition, and the Seoul Games at best accelerated the movement.
A better comparison for Beijing is Moscow in 1980. Fifty-six countries (including China) joined a U.S.-led boycott of those games to protest the Soviet invasion of Afghanistan. Athletes from others -- including Britain, France and Italy -- attended. But in doing so they sparked a wide debate about whether they were condoning a repressive Soviet regime, one that had so patently violated the spirit of the Helsinki human-rights accords signed in 1975. Two months before the Moscow Games were to open, Amnesty International issued a 217-page report on ongoing human-rights abuses in the USSR, including naming more than 10,000 known political prisoners. Ukrainian nationalists used the games to highlight rights abuses in their land and to voice their demands for genuine national autonomy. Soviet nationalists jeered medal-winners who declined to have their national flags or anthems used in medal ceremonies in solidarity with the boycott. But fears that "we're just helping the regime" proved baseless. The Moscow Games were one of several factors that fatally weakened the legitimacy of the Soviet regime. Mikhail Gorbachev was the result.
The best argument for awarding the games to Beijing followed the same logic. Boycott or no, by holding the regime up to scrutiny and mobilizing domestic society, the games would accelerate political change in China. Given that the Chinese Communist Party is now much healthier than the Communist Party of the Soviet Union was, no one expects the games to lead to regime collapse in China, especially not immediately. But change? Yes, and there is every reason to believe it's already coming to pass.
In recent months, petitioners have swarmed the capital to air their grievances, defying attempts by the central government to redirect their complaints to local governments. These are often work-a-day poor Chinese peasants, not part of some grand democracy movement, who travel to Beijing simply to demand their government work better. They're voicing gripes ranging from land seizures by corrupt local officials to the pollution of farmland by politically connected factories. The overseas democracy and rights movement, meanwhile, has been acting with unusual unity in the lead-up to the games, offering support for one another's campaigns.
And on and on. Some Western leaders like British Prime Minister Gordon Brown and Czech Prime Minister Mirek Topolánek are boycotting the opening ceremony to highlight repression in China. Local environmental and academic criticism has reshaped the construction of many venues and redevelopment projects in Beijing. Tibetan protestors, neatly echoing the Ukrainian nationalists in 1979 and 1980, have put the Tibet issue back at center stage. A group of 40 prominent democracy supporters in China issued a daring open letter in 2007 denouncing the Games.
During the Games we can expect more. President Bush is expected to make a gesture of solidarity with China's democracy and rights activists. Tibetan flags and pro-democracy campaigns are likely to make their appearance at the equestrian events being held in Hong Kong, even though they are technically banned from Games venues. Three officially sanctioned protest sites in Beijing will become a magnet for debate on the freedom of expression in China. There may be some unexpected drama too -- athletes unveiling shirts with protest slogans, protests in Tiananmen Square caught on live TV, dispossessed families gathering before the cameras, and visiting officials detouring to meet with dissidents. Having the international press corps in town will be an irresistible opportunity for local activists to mount new campaigns, as it was in 1989 when they arrived to cover Mr. Gorbachev's visit to China and stayed to cover the Tiananmen Movement.
Chinese nationalists, like Soviet nationalists in 1980, have come forward to declare their indignation at these assaults on the Party order and to pledge undying support for the regime. Kalamazoo College historian Xu Guoqi, for instance, who has written a book on China's engagement with the Olympic movement, wrote in a commentary published on the Harvard University Press website of the "misuse" of the torch relay by "ill-informed Westerners" and "arrogant" Western politicians which had led to an "outpouring of patriotism and nationalism" that would "strengthen . . . the Communist regime's power and support base among its own people."
This does not wash among most Chinese. Even among the young and educated, the "democracy and rights" story of the Olympics is challenging this "China's renaissance" story. Grace Wang, the brave Duke University student who faced down the hypernationalists on the Tibet question, could not have arisen apart from the dynamics of the Olympic year because it was the Olympics that set the protest-counterprotest (and then counter-counterprotest) into motion. On the People's Daily's popular Strong Country Forum chat room, the democracy question has come up frequently in recent months. In March a discussion erupted on whether authoritarian regimes that hold the Olympics tend to collapse shortly thereafter, examples cited being Berlin in 1936 and Moscow in 1980. In early July one post said that holding the Olympics is not in the interests of China and that in a democratic country the bid would have been rejected by the people.
And the cumulative results? By denying the Communist Party its moment of glory, the dissonance created by the Olympic year will accelerate the ongoing values transformation in China needed to erode the regime's popular support. At the same time, the mobilization of social actors and the creation of new venues of protest and expression will leave behind new levers for positive change. Beijing vice mayor Liu Jingmin's pledge in 2001 that the games will be "an opportunity to foster democracy, improve human rights, and integrate China with the rest of the world" will prove true.
University of Pennsylvania law professor Jacques DeLisle writes in a new collection of essays, "Owning the Olympics," that "the Games will have been a step in a journey of a thousand li toward a more liberal and open environment in China, or one slice among the thousand cuts that will bring the end of a closed and repressive order." Let the games begin.
Mr. Gilley is assistant professor of political science in the Hatfield School of Government at Portland State University and author of "China's Democratic Future" (Columbia University Press, 2004). This is the second in a two-part series.
The oil price
Nothing to smile about
The oil price is dropping. Reasons not to cheer
CUSHING is a small town and a trading hub in Oklahoma, home to about 8,400 people and a latticework of oil pipelines. On Monday August 4th, someone agreed to deliver 1,000 barrels of light, sweet crude at Cushing next month for less than $120 a barrel. Only last month, the same deal was made for over $147. This steep drop in the oil price will raise many people’s hopes for the world economy. But, inasmuch as the falling price of oil (and that of other commodities) is a symptom of worsening economic troubles in America and beyond, it may be merely a confirmation of their fears.
Optimists will argue that the extortionate oil prices of July were an aberration, the result of unwholesome speculation divorced from the reality of supply and demand. Traders, after all, now hold over 286,000 contracts for delivery of oil next month in Cushing, but only a tiny fraction of them, about 2%, have any intention of getting their hands on any crude. Most would struggle to locate Cushing on a map. The aim of many of them is simply to sell their contract, before it expires, at a higher price than they paid for it.
Those looking on the bright side will also hope that a fall in the oil price will untie the hands of central bankers, allowing them to postpone the rate rises they may be contemplating to fight inflation. In his testimony to Congress last month, the Federal Reserve's chairman, Ben Bernanke, said it was the central bank’s “critical responsibility” to stop high energy costs triggering a ruinous race between prices and wages. Similar warnings were voiced by the president of the European Central Bank when it raised interest rates in July.
But the problem with the optimists’ case is that these two arguments are in tension with each other. If speculation is to blame for the high oil price, then higher interest rates, not lower ones, may be warranted, at least in the medium term. Cheap money, after all, results in expensive assets, as the bubble in stocks then houses showed. In a research note published last month, Marco Annunziata of UniCredit argued that once the current crisis is over, central banks may return to the “unfinished job” of restoring interest rates to a less bubble-blowing level.
That the oil price may be so high because interest rates are so low is also an argument long pursued by Jeffrey Frankel of Harvard University. He points out that rates now fail to compensate savers for inflation: real interest rates are negative. As a result, the return to pumping a barrel of oil, selling it and investing the proceeds is often less than can be gained by leaving the oil in the ground and waiting for its price to rise further. Although there is no sign that producers are actually sitting on their hands, the theory suggests that they might do so until the oil price is so high—so far above its long-run value—that they begin to suspect it might fall. Then, and only then, will they feel motivated to pump, preventing the price rising any further.
Rather than paving the way for lower interest rates, the oil price may have dropped in anticipation of higher ones. The same day as the price breached $120 a barrel, America’s Department of Commerce showed that inflation, as measured by the price index for personal consumption expenditures, rose by 4.1% in the year to June and by 0.8% compared with just a month ago. Only in the aftermath of Hurricane Katrina have prices jumped so much in a single month.
These price pressures may prevent the Federal Reserve doing much more to stimulate the slowing American economy. And it is that slowdown, echoed in the euro area, that surely underlies the fall in the price of oil in recent weeks. According to one recent study a 10% increase in the price of oil reduces American demand for the stuff by only about 0.3-0.8%. But a decline in American income has a bigger effect. The United States will guzzle 430,000 fewer barrels a day this year, according to analysts at Lehman Brothers. Signs of this new temperance are already visible. Luxury pick-up trucks and SUVs now account for 12-13% of car sales (seasonally adjusted) compared with 18% last year, they point out. And on July 28th, the Department of Transportation reported that Americans drove 9.6 billion fewer miles (15.5 billion km) in May than they had a year before. Speculation does not drive the oil price. Driving does.
Aug. 5 (Bloomberg) -- U.S. stocks rallied the most since April as oil retreated to a three-month low and the Federal Reserve predicted inflation will ease through next year.
Sears Holdings Corp. jumped, sending the Standard & Poor's 500 Consumer Discretionary Index to its steepest advance in five years, as crude tumbled for a second day. JPMorgan Chase & Co. and Citigroup Inc. led financial shares to their best gain in a week. All 10 industries in the Standard & Poor's 500 Index rose as the Fed left its benchmark interest rate unchanged and said it ``expects inflation to moderate'' later this year and next.
``They implied that commodity price pressure would probably remain contained,'' said Frederic Dickson, who helps oversee $23 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. ``They didn't raise any new risk factors.''
The S&P 500 added 35.87, or 2.9 percent, to 1,284.88. The Dow Jones Industrial Average rallied 331.62, or 2.9 percent, to 11,615.77. The Nasdaq Composite Index jumped 64.27 to 2,349.83. Almost five stocks advanced for each that fell on the New York Stock Exchange.
Financial shares rallied 5.1 percent as traders increased bets that the central bank will hold borrowing costs steady at 2 percent in coming months. The Fed lowered its target rate for overnight loans between banks from 5.25 percent to 2 percent with seven cuts between September and April.
Treasuries fell, sending the yield on the benchmark 10-year note up 4 basis points. The dollar traded near a seven-week high against the euro.
Citigroup, the largest U.S. bank by assets, jumped 5.8 percent to $19.92. Bank of America, the second-biggest, rose 2.9 percent to $33.58.
Rate Bets
The odds policy makers will hold rates steady at their September meeting rose to 75 percent from 68 percent before the announcement, according to futures trading. The odds of no change at the October meeting rose to 54 percent from 48 percent.
Oil dropped $2.81 to $118.60 a barrel on speculation demand may be reduced by economic slowdowns in the U.S. and Europe. Corn and platinum led other commodities lower on concern demand from industry for raw materials is weakening.
Retailers in the S&P 500 rose 5.4 percent. Sears Holdings, the largest U.S. department store chain, rallied 11 percent to $91.56. Kohl's Corp. surged 7.2 percent to $44.56.
General Motors Corp. added 59 cents, or 5.8 percent, to $10.69. Carnival Corp., the largest cruise-line operator, jumped $2.85, or 7.6 percent, to $40.21.
`Reacting Favorably'
``The market is reacting favorably to the prospect of oil falling to a level that will not ignite inflation or crush global growth, nor force central banks to raise interest rates,'' said Brian Gendreau, investment strategist at ING Investment Management in New York. Gendreau is part of a group that makes asset-allocation decisions governing funds with $1 billion.
Procter & Gamble Co. added $2.15 to $67.97 after the company reported earnings excluding some items of 80 cents a share, more than the 78 cents estimated by analysts.
Commodity prices retreated from record highs since the Fed's June meeting. The Reuters Jefferies/CRB Index lost 10 percent in July, its steepest monthly decline in 29 years, as oil, copper and wheat prices tumbled.
Oil has lost almost $29 since touching a record of $147.27 a barrel in New York on July 11 as unprecedented fuel costs prompted U.S. consumers to limit spending.
Signs the global economy is slowing contributed to the drop in energy costs. Worldwide growth will slow to 4.1 percent this year and 3.9 percent in 2009 from 5 percent in 2007, the Washington-based International Monetary Fund said last month.
`Still in the Cards'
``With oil prices beginning to soften, there may be a chance for them to give a boost to the economy by lowering rates again,'' investor Mark Mobius, 71, who oversees about $40 billion in emerging-market stocks as executive chairman at Templeton Asset Management Ltd. in Singapore, said in an interview on Bloomberg Television. ``That's still in the cards, but no one really knows.''
By Craig Torres
Aug. 5 (Bloomberg) -- The Federal Reserve kept its benchmark interest rate at 2 percent and signaled that weak employment and financial instability will delay an increase in borrowing costs.
``Labor markets have softened further,'' the Federal Open Market Committee said in a statement today in Washington. ``Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth.''
Stocks extended gains on speculation that policy makers will leave the rate unchanged in coming months. Officials said they still expect inflation to slow, while acknowledging that the outlook for prices is ``highly uncertain.''
``This says the Fed is on the hold for the rest of the year,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, and a former chief economist at the Senate Banking Committee. ``The next move may be up, but it won't occur for a while.''
Dallas Fed President Richard Fisher dissented for a fifth time this year, preferring an increase.
``Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the committee,'' the statement said.
Bleaker Scenario
America's economic outlook has deteriorated since policy makers last met on June 25, when they paused after the most aggressive series of rate reductions in two decades.
Gross domestic product shrank in the fourth quarter, and grew at just an average 1.4 percent annual rate in the first six months of this year, aided by some $78 billion in tax rebates mailed between late April and June. The consumer price index rose 5 percent for the year ending June, and the unemployment rate climbed to 5.7 percent.
``They are sending the right signals,'' Martin Feldstein, an economics professor at Harvard University, said in a Bloomberg Television interview. While policy makers are concerned about inflation, ``they are also very worried about the weakness in the economy.''
The Fed is the first of three major central banks to set interest rates this week. The European Central Bank and Bank of England, also beset by faltering expansions and faster inflation, are forecast by economists to stand pat.
``Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities,'' the Fed said. ``The committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.''
Housing and Credit
Fed policy makers have cut the benchmark rate by 3.25 percentage points since the global credit market began unraveling a year ago. The worst housing slump in a generation sparked a surge in defaults. That led to the collapse of the market for assets backed by subprime mortgages and more than $450 billion in asset writedowns and credit losses by the world's biggest banks and securities firms.
Residential investment has subtracted from GDP for 10 consecutive quarters, detracting 0.6 percentage point from the second quarter's 1.9 percent annualized growth rate. The S&P/Case-Shiller index of home prices in 20 metropolitan areas fell 15.8 percent in May.
The deterioration in housing produced a new bout of financial instability for policy makers in July. Shares of Fannie Mae, the largest U.S. mortgage-finance company, and Freddie Mac, the second largest, plunged in panicky trading, impairing their ability to raise new capital by selling stock.
At the request of the Treasury, the Fed's Board of Governors agreed July 13 to loan to the companies if the Treasury's own financial backstop was insufficient.
Wall Street Loans
Persistent stress and risk aversion in global financial markets also caused the Fed to extend some of its lending to investment banks until January.
President George W. Bush signed into law last week a rescue package for Fannie Mae and Freddie Mac that permits the U.S. Treasury to support the companies in an emergency with purchases of unspecified amounts of their securities. The Treasury's authority expires at the end of 2009.
Crude oil prices are up 68 percent in the last 12 months, and higher energy costs are cutting profits across industries, and eroding consumer purchasing power.
General Motors Corp. reported a second-quarter loss of $15.5 billion Aug. 1, the third biggest in its 100-year history, due to declining sales. Kimberly-Clark Corp. said July 24 that second-quarter profit fell 9.8 percent because of higher costs for pulp and oil to make products such as paper towels and kleenex tissues.
`Major Adjustments'
``Energy price increases are forcing major adjustments in many industries,'' former St. Louis Fed president William Poole said in a Bloomberg Television interview on Aug. 1. ``The economy is limping along right now around zero'' growth.
The rise in consumer spending for the year ending June was the smallest since the 12 months ending December 1991.
The personal consumption expenditures price index, a separate inflation measure tied to consumer purchases closely watched by Fed officials, rose 2.3 percent minus food and fuel for the 12 months ending June. Fed officials in June forecast the core inflation measure would rise 1.8 to 2 percent in 2010, an indication of their preference range.
Solzhenitsyn's truth
Nineteen years after the fall of the Berlin Wall and 17 years since the demise of the Soviet Union, it may be hard for younger Americans to believe there was a time when communism looked as though it might eventually triumph.In the 1960s, the Soviet Union was building a vast nuclear arsenal, keeping Eastern Europe enslaved, assisting "national liberation movements" in the Third World, and watching the United States being bled by Soviet-supported communist North Vietnam. Marxism was even attracting adherents in Europe, the American counterculture and the academy.
But amid the gloom, there was a small, piercing light that could not be darkened, in the form of Alexander Solzhenitsyn. He was just a soldier in the Red Army when, in 1945, he was sentenced to eight years in a Soviet labor camp—for referring to Josef Stalin, with a criminal lack of reverence, as "the man with the mustache."
After years of imprisonment and internal exile, he was allowed to publish a fictional but shocking account of life in a prison camp called "One Day in the Life of Ivan Denisovich." Before its publication, a friend read it and told him, "There are three atom bombs in the world: Kennedy has one, Khrushchev has another, and you have the third."
The book offered a look at the crushing brutality that was the essence of the Soviet state, became a worldwide sensation, and made it impossible for anyone to ignore the true nature of Marxism-Leninism in action.
It also brought retribution against Solzhenitsyn, who after 1963 was not allowed to publish in his native land until 1989. But he kept at work, at grave risk to himself, writing books that were smuggled out and published in the West, most notably his monumental history of Stalin's prison camps, "The Gulag Archipelago."
The Moscow regime faced a bitter dilemma. It could not tolerate his defiance, but his worldwide renown—he had won the Nobel Prize for Literature in 1970—made it inadvisable to imprison or kill him. So in 1974, he was arrested, stripped of his citizenship and put on a plane for what the government assumed would be permanent exile in the West—the first time it had banished an enemy since Leon Trotsky in 1929. Solzhenitsyn settled in Vermont, kept at work on books mercilessly exposing the reality of the Soviet Union, and dreamed of return.
In 1994, he did, and his own work deserves a significant share of the credit for making that possible. As The Times of London said in its review of the first "Gulag" volume, "The time may come when we date the beginning of the collapse of the Soviet system from the appearance of 'Gulag.' "
No one did more to reveal the crimes that sustained Soviet communism from its inception. No one did more to illustrate why the greatest threat to tyranny is the truth.
While Diplomats Dither,
Iran Builds Nukes
This weekend, yet another "deadline" passed for Iran to indicate it was seriously ready to discuss ending its pursuit of nuclear weapons. Like so many other deadlines during these five years of European-led negotiations, this one died quietly, with Brussels diplomats saying that no one seriously expected any real work on a Saturday.
The fact that the Europeans are right -- this latest deadline is not fundamentally big news -- is precisely the problem with their negotiations, and the Bush administration's acquiescence in that effort.
The rationality of continued Western negotiations with Iran depends critically on two assumptions: that Iran is far enough away from having deliverable nuclear weapons that we don't incur excessive risks by talking; and that by talking we don't materially impede the option to use military force. Implicit in the latter case is the further assumption that the military option is static -- that it remains equally viable a year from now as it is today.
Neither assumption is correct. Can we believe that if diplomacy fails we can still take military action "in time" to prevent Iranian nuclear weapons? "Just in time" nonproliferation assumes a level of intelligence certainty concerning Iran's nuclear program that recent history should manifestly caution us against.
Every day that goes by allows Iran to increase the threat it poses, and the viability of the military option steadily declines over time. There are a number of reasons why this is so.
First, while the European-led negotiations proceed, Iran continues both to convert uranium from a solid (uranium oxide, U3O8, also called yellowcake) to a gas (uranium hexafluoride, UF6) at its uranium conversion facility at Isfahan. Although it is a purely chemical procedure, conversion is technologically complex and poses health and safety risks.
As Isfahan's continuing operations increase both Iran's UF6 inventory and its technical expertise, however, the impact of destroying the facility diminishes. Iran is building a stockpile of UF6 that it can subsequently enrich even while it reconstructs Isfahan after an attack, or builds a new conversion facility elsewhere.
Second, delay permits Iran to increase its stock of low-enriched uranium (LEU) -- that is, UF6 gas in which the U235 isotope concentration (the form of uranium critical to nuclear reactions either in reactors or weapons) is raised from its natural level of 0.7% to between 3% and 5%.
As its LEU stockpile increases, so too does Tehran's capacity to take the next step, and enrich it to weapons-grade concentrations of over 90% U235 (highly-enriched uranium, or HEU). Some unfamiliar with nuclear matters characterize the difference in LEU-HEU concentration levels as huge. The truth is far different. Enriching natural uranium by centrifuges to LEU consumes approximately 70% of the work and time required to enrich it to HEU.
Accordingly, destroying Iran's enrichment facility at Natanz does not eliminate its existing enriched uranium (LEU), which the IAEA estimated in May 2008 to be approximately half what is needed for one nuclear weapon. Iran is thus more than two-thirds of the way to weapons-grade uranium with each kilogram of uranium it enriches to LEU levels. Moreover, as the LEU inventory grows, so too does the risk of a military strike hitting one or more UF6 storage tanks, releasing potentially substantial amounts of radioactive gas into the atmosphere.
Third, although we cannot know for sure, every indication is that Iran is dispersing its nuclear facilities to unknown locations, "hardening" against air strikes the ones we already know about, and preparing more deeply buried facilities in known locations for future operations. That means that the prospects for success against, say, the enrichment facilities at Natanz are being reduced.
Fourth, Iran is clearly increasing its defensive capabilities by purchasing Russian S-300 antiaircraft systems (also known as the SA-20) directly or through Belarus. In late July, Secretary of Defense Robert M. Gates and his spokesman contradicted Israeli contentions that the new antiaircraft systems would be operational this year. Assuming the Pentagon is correct, its own assessment on timing simply enhances the argument for Israel striking sooner rather than later.
Fifth, Iran continues to increase the offensive capabilities of surrogates like Syria and Hezbollah, both of which now have missile capabilities that can reach across Israel, as well as threaten U.S. troops and other U.S. friends and allies in the region. It may well be Syria and Hezbollah that retaliate initially after an Israeli strike on Iran's nuclear facilities, thus making further strikes against Iran more problematic, at least in the short run.
Iran is pursuing two goals simultaneously, both of which it is comfortably close to achieving. The first -- to possess all the capabilities necessary for a deliverable nuclear weapon -- is now almost certainly impossible to stop diplomatically. Thus, Iran's second objective becomes critical: to make the risks of a military strike against its program too high, and to make the likelihood of success in fracturing the program too low. Time favors Iran in achieving these goals. U.S. and European diplomats should consider this while waiting by the telephone for Iran to call.
Mr. Bolton, a senior fellow at the American Enterprise Institute, is the author of "Surrender Is Not an Option: Defending America at the United Nations" (Simon & Schuster, 2007).
Stuck on the windfall profit tax
Barack Obama has renewed his call for a windfall profits tax on oil companies. A couple of months ago I said I was about to write something about windfall profits taxes. Never did. Why not? Because windfall- profits-tax opinion pieces are hard.
Actually, that's not quite true. They're pretty easy if you just focus, to the exclusion of all else, on the arbitrary nature of such a tax, as the editorialists at the Wall Street Journal do today:
[W]hat constitutes an abnormal profit is entirely arbitrary. It is in the eye of the political beholder, who is usually looking to soak some unpopular business. In other words, a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.
I find a lot to agree with in this argument. But I'm afraid I can't focus on it to the exclusion of all else. These are oil companies we're talking about, and their business involves extracting a nonrenewable resource--part of our shared patrimony, thus--out of the ground and selling it. They have also acquired for themselves all manner of special incentives and tax breaks (politically motivated disbursements, you might call them) from Congress over the years. So this isn't exactly the same as Congress swooping in from a clear blue sky to steal your lunch money because the politicians think you have too much of it. Unless you think it's a case of, They came first for the oil companies, And I didn’t speak up because I wasn’t an oil company. ...
You could also argue (in fact, I have argued) that a windfall profits tax would discourage oil companies from exploring for oil. But given that big oil companies are already giving far more money back to shareholders than they're spending on exploration, it's hard to get too worked up about this.
Then there's the fact that the last windfall profits tax--in force from 1980 through 1988--was a flop, running up huge compliance costs and generating far less revenue than expected. But it was a flop mainly because oil prices began to plummet not long after the tax went into effect. The overwhelming impact of the oil glut--and the fact that nobody seems to be proposing reviving the unwieldy design of the 1980 tax (which was really an excise tax on oil, not a tax on oil company profits)--mean that there are few useful lessons to be drawn from that experience.
Like I said, this is hard. I still don't think the windfall profits tax is all that great an idea--it wouldn't generate huge amounts of money, and much of its cost would be passed on to consumers. But the case for it being an unmitigated disaster is full of holes.
No comments:
Post a Comment