Obama Can't Win
Against Palin

By KARL ROVE

Of all the advantages Gov. Sarah Palin has brought to the GOP ticket, the most important may be that she has gotten into Barack Obama's head. How else to explain Sen. Obama's decision to go one-on-one against "Sarah Barracuda," captain of the Wasilla High state basketball champs?

It's a matchup he'll lose. If Mr. Obama wants to win, he needs to remember he's running against John McCain for president, not Mrs. Palin for vice president.

AP

Michael Dukakis spent the last months of the 1988 campaign calling his opponent's running mate, Dan Quayle, a risky choice and even ran a TV ad blasting Mr. Quayle. The Bush/Quayle ticket carried 40 states.

Adlai Stevenson spent the fall of 1952 bashing Dwight Eisenhower's running mate, Richard Nixon, calling him "the kind of politician who would cut down a redwood tree, and then mount the stump and make a speech for conservation." The Republican ticket carried 39 of 48 states.

If Mr. Obama keeps attacking Mrs. Palin, he could suffer the fate of his Democratic predecessors. These assaults highlight his own tissue-thin résumé, waste precious time better spent reassuring voters he is up for the job, and diminish him -- not her.

Consider Mr. Obama's response to CNN's Anderson Cooper, who asked him about Republican claims that Mrs. Palin beats him on executive experience. Mr. Obama responded by comparing Wasilla's 50 city workers with his campaign's 2,500 employees and dismissed its budget of about $12 million a year by saying "we have a budget of about three times that just for the month." He claimed his campaign "made clear" his "ability to manage large systems and to execute."

Of course, this ignores the fact that Mrs. Palin is now governor. She manages an $11 billion operating budget, a $1.7 billion capital expenditure budget, and nearly 29,000 full- and part-time state employees. In two years as governor, she's vetoed over $499 million from Alaska's capital budget -- more money than Mr. Obama is likely to spend on his entire campaign.

And Mr. Obama is not running his campaign's day-to-day operation. His manager, David Plouffe, assisted by others, makes the decisions about the $335 million the campaign has spent. Even if Mr. Obama is his own campaign manager, does that qualify him for president?

A debate between Mr. Obama and Mrs. Palin over executive experience also isn't smart politics for Democrats. As Mr. Obama talks down Mrs. Palin's record, voters may start comparing backgrounds. He won't come off well.

Then there was Mr. Obama's blast Saturday about Mrs. Palin's record on earmarks. He went at her personally, saying, "you been taking all these earmarks when it is convenient and then suddenly you are the champion anti-earmark person."

It's true. Mrs. Palin did seek earmarks as Wasilla's mayor. But as governor, she ratcheted down the state's requests for federal dollars, telling the legislature last year Alaska "cannot and must not rely so heavily on federal government earmarks." Her budget chief directed state agencies to reduce earmark requests to only "the most compelling needs" with "a strong national purpose," explaining to reporters "we really want to skinny it down."

Mr. Obama has again started a debate he can't win. As senator, he has requested nearly $936 million in earmarks, ratcheting up his requests each year he's been in the Senate. If voters dislike earmarks -- and they do -- they may conclude Mrs. Palin cut them, while Mr. Obama grabs for more each year.

Mr. Obama may also pay a price for his "lipstick on a pig" comment. The last time the word "lipstick" showed up in this campaign was during Mrs. Palin's memorable ad-lib in her acceptance speech. Mr. Obama says he didn't mean to aim the comment at Mrs. Palin, but he deserves all the negative flashback he gets from the snarky aside.

Sen. Joe Biden has now joined the attack on Mrs. Palin, saying this week that her views on issues show she's "obviously a backwards step for women." This is a mistake. Mr. Obama is already finding it difficult to win over independent women and Hillary Clinton voters. If it looks like he's going out of his way to attack Mrs. Palin, these voters may conclude it's because he has a problem with strong women.

In Denver two weeks ago, Mr. Obama said, "If you don't have a record to run on, then you paint your opponent as someone people should run from." That's what he's trying to do, only the object of his painting is Sarah Palin, not John McCain.

In Mrs. Palin, Mr. Obama faces a political phenomenon who has altered the election's dynamics. Americans have rarely seen someone who immediately connects with large numbers of voters at such a visceral level. Mrs. Palin may be the first vice presidential candidate since Lyndon B. Johnson to change an election's outcome. If Mr. Obama keeps attacking her, the odds of Gov. Palin becoming Vice President Palin increase significantly.

Mr. Rove is a former senior adviser and deputy chief of staff to President George W. Bush.

The Election and September 11

On this, the seventh time the United States has observed the events of September 11, 2001, one may say with confidence: Forget national unity.

AP

That John McCain and Barack Obama had to set aside their differences over the war on terror to stand together this morning at the grim hole that was the Twin Towers testifies to the political divide that emerged after September 11.

While the government has broken up several terrorist plots in Buffalo, Los Angeles, New Jersey and Miami, these real-world events have been overwhelmed by the political battles over the Bush antiterror policies -- the Patriot Act, Guantanamo, warrantless wiretaps, military commissions, CIA interrogations of terror suspects.

Lest we forget, as someone said, let's revisit the bare details of that day. This presumably is the reason for anyone's post-9/11 antiterror policies.

On that morning, 19 Islamic terrorists took control of four U.S. airliners. They flew two of them, with their passengers, into the upper floors of the World Trade Center towers. A third plane flew into the side of the Pentagon. Passengers on a fourth plane, United 93, fought the terrorists, and it crashed in a field in Shanksville, Pa.

The first plane disappeared entirely inside the WTC's north tower and began to burn. The second airliner slammed into the east side of the other tower. Some workers jumped off the top floors of the 110-story buildings.

About 10 a.m., the south tower collapsed. Then, 28 minutes later, the north tower collapsed. The second building's fall created the rolling storm of debris and dust often shown on television. For weeks, New York City was a half-closed city of human ruin. Terror killed some 2,974 people that day.

Americans must pay attention to the candidates' strategies against Islamic terror, says Wonder Land columnist Daniel Henninger. (Sept. 11)

On Sept. 20, President Bush delivered a speech before Congress, whose recurring theme was, "We will come together." That coming together would include giving law enforcement "additional tools . . . to track down terror here at home."

The first tool, the Patriot Act, passed the Senate in late October 2001 by a vote of 98 to 1. After that, the unity of September 11 started to fall apart.

Many Democrats, Barack Obama among them, break this subject into what they say are distinct issues -- the war in Iraq, which they oppose, and the war on terror, which "everyone" supports. Democrats also said the partisan divide was about civil liberties and "who we are."

However, this blurs the timeline and nature of their opposition. To be sure, the unpopularity of the Bush presidency and much Democratic opposition rhetoric grew out of the war's worst years from 2004 into 2007. But the war didn't start until March 2003. The most substantive political opposition started earlier, with the war on terror, not Iraq.

In November 2002, after judges on the Foreign Intelligence Surveillance Court of Review ruled in support of the Justice department's policy on wiretapping suspected terrorists, the dams of anti-Bush opposition burst. Soon-to-be House Judiciary Chairman John Conyers said, "Piece by piece, this Administration is dismantling the basic rights afforded to every American under the Constitution." The ACLU railed against "intrusive surveillance warrants."

The story and fury of this fight are familiar, but bear in mind that in 2002 Barack Obama was off in Springfield, Ill., chairing the state's Senate Health and Human Services Committee. He arrived to the Beltway terror battles in early 2005. Two years later, he announced for president.

Freshman Sen. Obama's role in the opposition to the Bush antiterror policies is hard to pin down. In his Feb. 2006 floor statement on reauthorizing the Patriot Act, he said, "This is a complex issue." Indeed. It would take a grammarian three blackboards to diagram the senator's qualifying statements to vote for the bill. Indeed, after staging a massive bonfire of Bush-centric opposition the previous year, most Democrats voted in February to reauthorize the Patriot Act. For all senators, this was a self-defining vote.

Which side was Sen. Obama on? Early this year, amid the primaries, he was among 31 senators who voted to deny telecom companies immunity for lawsuits against them for allowing taps on overseas terrorists. In July, he voted for a failed amendment to strip telecom immunity, then voted for the final bill, which included immunity.

A cynic would argue that the Democratic opposition was mainly about jamming the Bush presidency into a hole, and that they'd let a pragmatic President Obama run an antiterror policy reasonably close to George Bush's. Really? It could as easily go the other way, toward increasing the margin of national risk. The Democratic case against presidential authority over combating terror was intense.

We will listen closely in the debates to what Sens. Obama and McCain say about Islamic terror. To vote for Sen. Obama is to also vote for a Democratic Party that consumed most of the political system's available oxygen for seven years fighting a U.S. president harder than they did the perpetrators of September 11.

Political struggle is ever with us, but given the realities that 9/11 revealed (as did the terror bombings in Europe), the relentless scale of the Democratic opposition to the Bush administration's antiterror policies is hard to square.

Bailout for Billionaires

Although Congress created the moral hazard that has become the taxpayer rescue of Fannie Mae and Freddie Mac, the Members plan to hold hearings to opine about it anyway. They should put themselves at the witness table. But since they won't, the least they can do is ask Treasury to explain its bailout for billionaire subordinated debt holders.

We're referring to the holders of some $11 billion in Fannie and $4 billion in Freddie subordinated debentures. In structuring his rescue, Treasury Secretary Henry Paulson gave a haircut to holders of both common and preferred stock. In the process, he socked it to many small banks that had much of their capital in Fan or Fred shares. He was right to do so, and he should have wiped them out given how much those holders had profited over the years from a government guarantee. But, strangely, Mr. Paulson also decided to give Fan and Fred's subordinated debt holders an entirely free pass. Why? And who are these guys?

Treasury's explanation is that it had to do this to reassure the world's holders of Fan and Fred senior debt. The argument seems to be that if subordinated debt holders took a loss, then senior debt holders might panic and run. And reassuring the Chinese and other holders of Fannie senior debt is the main point of this bailout.

This strikes us as more than a little odd, and a rotten precedent to boot. To adapt Mark Twain, the difference between senior and subordinated debt is the difference between lightning and a lightning bug. Even amateur investors know that sub-debt holders get paid back after senior debt holders, and the Chinese know it too. Fan and Fred sub debt amounts to only about 1% of senior debt outstanding. So it's also hard to believe that letting holders take a loss would have posed any systemic risk.

The fact is that, under Mr. Paulson's plan, Fan and Fred subordinated debt investors are getting treatment they have no right to expect. Sub debt has some of the same characteristics as equity, and it is often used in bank capital structures because it's a little cheaper on an after-tax basis, since interest expense is tax deductible. But this debt also carries a higher risk, which is why it's often held by deep-pocketed investors who can more easily absorb potential losses. In return for a weaker claims position than senior debt, these investors require a higher rate of return.

With respect to Fan and Fred, sub debt had an added purpose -- to allay fears that the government's implicit (now explicit) backing of Fan and Fred's obligations was distorting market signals. So in 2001 the mortgage behemoths decided to issue sub debt as a way to appease then-Congressman Richard Baker, who was worried the companies were taking on too much risk. (Man, was he ever right.)

The hope was that subordinated debt would add to Fan and Fred capital and better reflect the risks the companies were taking. And indeed, as investor anxiety grew this summer over the fate of the two companies, the spread between the price of Fannie subordinated debt and U.S. Treasurys widened enormously. Investors feared a sub-debt wipeout.

With the weekend bailout, however, those investors can buy another vacation home, or three. On Monday, yield spread premiums on Fannie Mae subordinated debt maturing in 2011 plunged by three full percentage points to a bid of 3.50 points. Investing rarely gets better than this: Buy paper you know carries a higher risk but also a higher return, and then have Uncle Sugar eliminate that risk so you also make a windfall profit.

At the very least Mr. Paulson could have gone to these investors with a restructuring proposal, asked for some cash and given them a new piece of paper. Instead, the Treasury Secretary has set a terrible precedent, leaving subordinated debt holders at other large financial institutions to calculate that they too will receive a government bailout if they stumble.

Both Treasury and the Federal Housing Finance Agency said they don't know who now holds Fan and Fred sub debt. But it's a fair guess it is mostly some of the world's richest people and largest financial institutions. Pimco's Bill Gross, who manages the world's biggest bond fund, had been agitating for weeks for a bailout. Asked about his Fannie and Freddie positions, a spokesman told us, "we don't discuss our holdings." Our guess is Mr. Gross is a lot richer after the bailout than he was last week. Ditto for Goldman Sachs, which also declined comment and where Mr. Paulson used to work.

We hope someone on Capitol Hill asks Mr. Paulson for a list of these big winners, so taxpayers can understand who is getting richer on their dime.

Competition, Discrimination, and Law--

Richard Posner's Comment

Becker points to India as an example of a society in which competition has been more effective than law in reducing discrimination in employment. As with most analyses of historical phenomena, determining causation is rife with uncertainty. Had the Indian government not abolished the caste system, would discrimination against untouchables have declined as much as it has?

The question is of more than academic interest from an American standpoint because we have laws against so many forms of employment discrimination--discrimination on racial grounds, of course, but also on grounds of ethnicity, religion, sex, disability, and age. We also had a caste system in the South until relatively recently. So do we need discrimination laws, or can competition be relied on to eliminate discrimination?

The answer I would give is that competition cannot be relied upon to eliminate discrimination (nor has Becker ever argued that it can be), but that, even so, laws against discrimination may not be desirable on balance, at least from the standpoint of economic efficiency, as distinct from making a political or moral statement. They may also not be very effective. I will confine my analysis largely to employment discrimination.

If an important class of customers does not want to be served by, say, black employees, or if an important class of workers does not want to work with black employees, then the tendency in the absence of a discrimination law, as Becker explains, will be segregation of the workforce: the market will be served by a combination of all-white and all-black firms. If, however, segregation raises employers' costs by more than the increase in wages that they would have to pay their white employees to induce them to work side by side with blacks, plus the loss of net revenues from white customers who do not want to be served by black employees, there will be competitive pressure on the employers to integrate their work forces. The pressure will depend in part on how strong the whites' aversion to working with or dealing with blacks is. There is no reason for competition to affect that aversion, other than by bringing the costs of it home to employers and through them to their white workers and customers.

Although law can try to eliminate employment discrimination, it is unlikely to be very effective and if it is effective it may not be efficient. Take the second point first. Suppose white employees have a strong aversion to working with blacks. Then forbidding discrimination will impose a heavy cost on the white employees. If there are more of them than there are blacks, the cost to the white employees may exceed the benefits to the black employees. Of course, an antidiscrimination law may rest on a political or moral judgment that costs imposed by thwarting a taste for discrimination should not count in the social calculus, but that is a judgment outside of economics.

Now as to the efficacy of such laws: it is bound to be limited unless enforced by savage penalties, which our discrimination laws are not. There are three reasons for their limited efficacy. The first is that an employer who wants to continue discriminating against blacks can (within limits) reconfigure his work force to reduce his demand for skills likely to be possessed by black applicants for employment, can substitute capital for labor, and can relocate to areas in which the applicant pool contains few blacks. Second, felt legal pressure to hire blacks results in "affirmative action," which both creates resentment among whites and casts some doubt on the average quality of black employees and so in effect stigmatizes the entire class. And third, because a discrimination law makes it more difficult to fire a member of the class protected by the law, it increases the cost of hiring members of the class and so increases the incentive to discriminate in hiring. There is some evidence that the passage of the Americans with Disabilities Act, forbidding discrimination against the disabled, led to an actual decline in the number of disabled persons employed.

Although an employment discrimination law is thus apt to be of limited (though not zero) efficacy, other bodies of law can play a large role—larger even than market forces—in reducing employment discrimination. Much employment is public, and public bodies can decide to incur the costs of eliminating discrimination in their work forces and hire many blacks. In addition, laws that reinforce a caste system, such as the Jim Crow laws in the southern states that persisted into the 1950s, can reduce employment opportunities for blacks beyond what private discrimination would do, for example by limiting their educational opportunities. The repeal or invalidation of such laws can thus indirectly increase black employment opportunities.

Deregulation is a minor but interesting legal change that tends to reduce discrimination. A regulated monopoly is constrained in the amount of monetary profit that it can obtain, but unconstrained in nonmonetary perks, including indulging a taste for discrimination.

Neither legal nor market forces have brought employment parity between whites and blacks in the United States. Parallel with the struggle of blacks for parity, Jews, East Asians, and immigrants generally, have made rapid economic progress and indeed (at least in the case of Jews and East Asians) largely overcome discrimination, yet without significant help from the law. An open economy provides opportunities even to victims of discrimination, especially if the victim group is large enough to achieve economies of scale in trade within the group. As members of the group grow modestly affluent and thus achieve a standard of living that enables them to assimilate to the larger culture, as by consuming similar goods and services and sending their children to good schools, discrimination against them declines because they cease to seem “different” from the majority. When members of a minority group talk and think and act like the majority and have the same tastes and in short share the same culture, the fact that they may have a different physical appearance ceases to count greatly against them, as indicated by high rates of intermarriage in the groups I have mentioned. Assimilation to the dominant culture, as yet incomplete for a great many blacks, may thus be the major force in reducing discrimination, with competition and law playing lesser roles.

Competitive Markets and Discrimination Against Minorities-

Gary Becker

An eye-opening article in the New York Times on August 29th discusses the effects of India's economic reforms and subsequent economic growth on the poverty and progress of the untouchables. This is India's lowest and poorest caste whose members have been shunned by the other castes for centuries. They have been confined to the dirtiest and least desirables jobs. The article is built around the views of a successful untouchable, Chandra Bhan Prasad, a former Maoist revolutionary who is married to another untouchable. His observations and interpretation of the effects of India's economic liberalization that started in 1991 on progress of some untouchables converted him to the belief that competitive and open markets is the only hope for his caste.

The Indian government early after it became independent in 1947 officially abolished the caste system, and especially the horrible position of the 160 million untouchables. Nevertheless, this caste experienced limited progress during the 40 years of socialism and slow economic growth that followed independence. Prasad became an economic liberal after seeing what he interpreted as the dramatic effects of 15 years of economic reform on the economic opportunities of the untouchables.

The economic theory of discrimination adds analytical support to Prasad's observations (see my The Economics of Discrimination, 2nd. ed., 1973). An employer discriminates against untouchables, women, or other minority members when he refuses to hire them even though they are cheaper relative to their productivity than the persons he does hire. Discrimination in this way raises his costs and lowers his profits. This puts him at a competitive disadvantage relative to employers who maximize their profits, and hire only on the basis of productivity per dollar of cost. Strongly discriminating employers, therefore, tend to lose out to other employers in competitive industries that have easy entry of new firms.

This is why minorities typically do better in new industries with young and initially smaller firms. Both Jews and American blacks were accepted more readily in Hollywood in its early days than in other established industries, like steel making and banking, although blacks were limited primarily to entertainment roles. Contrast this with American baseball, where the major league owners had a virtual monopoly of the industry. They did not accept any black players until Branch Rickey broke the color bar in 1947 by promoting Jackie Robinson from the minor leagues to the Brooklyn Dodgers. This long delay in accepting blacks by the baseball monopoly occurred despite the fact that for decades many outstanding black players could be observed playing in segregated Negro leagues.

Employee discrimination against minority fellow workers-such as a male worker who does not want to work for a female boss- cannot be so easily competed away by non-discriminating employers. For they have to pay discriminating employees more, perhaps a lot more, to work with minority members. A similar argument applies to consumers who do not want to be served by particular minorities. Yet in these cases too, competition can blunt the impact of prejudice. For profit-maximizing employers will attempt to avoid the cost of discriminating employers by segregating minorities into separate companies. For example, women bosses may have mainly women employees, or untouchable foremen will supervise untouchable workers.

Segregated minority workers in competitive markets may get paid just as much relative to their productivity as do majority workers in these markets. In a fundamental way, segregation can serve as a way to bypass the prejudices of other workers, consumers, and employers. When Jews could not get work in the banking industry at the turn of 20th century, they began to open their own banks that hired mainly other Jews. African -American doctors and dentists in the old South catered to other blacks as their patients.

Globalization and the growth of world trade have added another competitive force against discrimination, one that is surely helping Indian untouchables and other minorities. As I mentioned earlier, costs of production are raised when employers discriminate against various minorities in their country. Employers in other countries not burdened with costs of discrimination will be able to undersell discriminating employers in the international market for goods. This too acts as a force lowering the impact of discriminating employers, and reduces the international competitiveness of countries where discrimination in employment is dominant.

The slow growth of the old American South is a good illustration of the effects of international and interregional competition. Discrimination against former slaves was rampant in most parts of the South. Private desires to discriminate were supported and often enforced by discrimination by state and local governments. Blacks were denied access to schools of equal quality, and local governments sometimes retaliated against local companies that promoted blacks to higher-level positions. As a result, Southern manufacturing companies were at a disadvantage relative to companies from the North and West, and also to those from other countries. In good measure because of this systematic government discrimination, and private discrimination enforced often by government pressures, the South performed poorly for a century after the end of the Civil War.

The rapid growth of world trade during the past several decades, and the increasing market orientation of different economies, sometimes raise rather than lower income inequality, as least for a while. However, trade and competition has made this inequality more dependent on differences in human and other capital, and less directly on skin color, gender, religion, caste, and other roots of discrimination. This is an unsung but major consequence of greater trade and globalization.

The Economic Reform Wave

FROM TODAY'S WALL STREET JOURNAL ASIA
September 11, 2008

What do Azerbaijan, Albania and the Kyrgyz Republic have in common? They're all Eastern European or Central Asian states, and they all currently top the list of the world's most enthusiastic economic reformers.

So says "Doing Business 2009," the latest instalment in the World Bank and International Finance Corporation's series of annual reports on the state of pro-growth policies around the world. There's little change at the top of the league table in absolute terms -- Singapore still ranks No. 1, with the U.S., Hong Kong, U.K., Canada and Australia also in the top 10. But a look at the changes in other rankings shows a still-growing tide of liberalization just about everywhere.

This year the report's authors count 239 pro-growth reforms in 113 economies in the year from June 2007 to June 2008, compared to 200 reforms in 98 countries last year. Yet again, cutting the red tape on business start-ups is the most popular kind of reform and 49 countries took such steps. Top reformer Azerbaijan, for example, opened a one-stop shop to handle new business registrations and cut the number of regulatory steps to six from 13. For these and many other improvements, it now ranks 33rd, up from 97th last year.

Other countries are attracting investment by cutting tax rates or by making it easier and cheaper to file. Malaysia did both, simplifying and cutting corporate income taxes (now a 26% flat tax, which will drop to 25% next year) and introducing online filing. It moved up to 20th from 25th. Colombia, South America's top reformer, embraced trade by cutting export- and import processing times via a host of administrative reforms, helping to improve its ranking to 53rd from 66th.

One notable bright light here is in Africa. Sub-Saharan Africa still lags far behind other regions, and the average ranking for countries there is 138th, compared to an average of 111 for the next-worst region, South Asia. But Senegal, Burkina Faso and Botswana this year made the list of top 10 reformers. Senegal improved its ranking to 149th from 168th, in part by speeding customs clearance for trade. Burkina Faso slashed red tape on construction permits and it cut taxes, helping bump it to 148th from 164th.

A lot of work clearly remains to be done; and some countries, such as Indonesia, Bulgaria and Bolivia, slipped down in the rankings. Yet overall this report is a welcome sign that many countries are pushing ahead with reforms.

The timing couldn't be better: The IFC notes that countries with liberalized business regulations frequently grow faster than their peers and are more resilient when tough times hit. In today's uncertain economic climate, every competitive advantage helps.