Tuesday, February 17, 2009

Obama plots huge railroad expansion

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Railroads made Chicago, and now a Chicago-rich White House wants to return the favor: remaking rail with a huge new federal investment in high-speed passenger trains.

The $787.2 billion economic recovery bill — to be signed by President Barack Obama on Tuesday — dedicates $8 billion to high-speed rail, most of which was added in the final closed-door bargaining at the instigation of White House chief of staff Rahm Emanuel.

It’s a sum that far surpasses anything before attempted in the United States — and more is coming. Administration officials told Politico that when Obama outlines his 2010 budget next week, it will ask for $1 billion more for high-speed rail in each of the next five years.

Yet for all the high stakes, the pieces didn’t fall into place until the end of deliberations on the recovery bill. And the way in which they did is revealing of the often late-breaking decisions — and politics — that shaped the final package.

As a candidate for president, Obama spoke of high-speed rail as part of his vision of “rebuilding America.” Campaigning in Indiana, he talked of revitalizing the Midwest by connecting cities with faster rail service to relieve congestion and improve energy conservation.

“The time is right now for us to start thinking about high-speed rail as an alternative to air transportation connecting all these cities,” he said. “And think about what a great project that would be in terms of rebuilding America.”

But the administration never emphasized high-speed rail when the House Appropriations Committee was writing its bill in January, so no money was included. The first real request came only days before the Senate Appropriations panel marked up, and the committee had to scramble to find room for $2 billion — in part by cutting other Obama priorities.

Last week, Emanuel greatly upped the ante, asking House-Senate negotiators for $10 billion for high-speed rail — far more than either bill provided.

“I put it in there for the president,” Emanuel said in an interview. “The president wanted to have a signature issue in the bill, his commitment for the future.”

Emanuel himself was excited by the idea, but the decision to wager so much on high-speed rail reflected the fact that other candidates for a signature Obama issue were fading.

Moderate Senate Republicans, whose votes were needed, were resisting the president’s school construction initiative. Modernizing the nation’s electric grid, another White House favorite, seemed to have lost some of its cachet.

High-speed rail sailed through with surprisingly little attention paid to the president’s role.

The same Maine and Pennsylvania Republican moderates who had criticized Obama’s school construction initiative were more accepting of the rail funds, since the Northeast corridor has a major stake in more improvements. To help pay for the added cost, a business tax break — providing a five-year carry back for net operating losses — was narrowed to keep the focus more on smaller firms with receipts of less than $15 million.

At the same time, conservative Republicans seemed almost blind to Obama’s role. Instead, in their campaign to find pork barrel projects in the stimulus bill, they painted the whole funding as a scheme by Senate Majority Leader Harry Reid on behalf of Las Vegas interests seeking a rail link to Los Angeles. “Sin City to Tomorrow Land” was one description.

Here is Rep. Candice S. Miller (R-Mich.) explaining her vote against the bill Friday despite the benefits to her home state: “Michigan is a state of about 10 million people, and we are the hardest hit, as I said, by this economy. And yet we are expected to get approximately $7 billion from this bill. And apparently the Senate majority leader has earmarked $8 billion for a rail system from Las Vegas to Los Angeles? You have got to be kidding. You have got to be kidding.”

In fact, there’s little evidence that Reid had a decisive role, although he was happy to see his name mentioned for the sake of voters at home.

“It’s amazing. I’m stunned,” he said in an interview Friday, hours before the bill passed Congress. “I’m glad I get the credit in Nevada, but this is Obama’s No. 1 priority. This is his legacy issue out of this bill, because we need these high-speed corridors. ... I’ll take credit but frankly didn’t have much to do with it other than carry forward with what Obama wanted.”

Big hurdles remain. Critics already argue that the money is misplaced in a stimulus bill since it will be hard to spend quickly. Much depends on winning the cooperation of Class 1 freight lines that control many of the rights of way outside the Northeast.

But it is a landmark transportation investment with regional effects in almost every corner of the nation. Just last October, former President George W. Bush signed a bill authorizing up to $1.5 billion for high-speed rail through 2013. Obama’s commitment in the same period will be eight times that.

Transportation Secretary Ray LaHood is given 60 days to come up with a strategic plan for the funds. The combination of large capital upfront — followed by annual appropriations — fits the prototype for the infrastructure bank once considered for, but never included in, the recovery bill.

“High-speed rail is the infrastructure bank,” said Emanuel, and the legislation gives LaHood discretion to assign “priority to projects that support the development of intercity high-speed rail service.”

There is some precedent. At the height of the New Deal, FDR’s Public Works Administration played a role in persuading the Pennsylvania Railroad to complete the electrification of its Washington-New York line and finish Philadelphia’s 30th Street Station. Today, the government could make capital investments that both benefit freight operations and facilitate high-speed passenger service. With the drop in freight traffic, the railroads might be more cooperative, although they are sure to want some liability protection for accidents.

This is a Presidency on Steroids

This is a Presidency on Steroids

By Eugene Robinson

WASHINGTON -- This is a presidency on steroids. Barack Obama's executive orders alone would be enough for any new administration's first month: decreeing an end to torture and Guantanamo, extending health insurance to more children, reversing Bush-era policies on family planning. That the White House also managed to push through Congress a spending bill of unprecedented size and scope -- designed both to provide an economic stimulus and reorder the nation's priorities -- is little short of astonishing.

Now it's time for the administration to get to work. For his next act, Obama must set the parameters of a new presidential role that he did not seek but cannot avoid: managing the big chunks of the private-sector economy that are now more accurately described as semi-private at best.

This week, executives from General Motors and Chrysler are reporting on their progress in transforming themselves into lean, mean car-making machines, capable of leading American industry into a new golden age. They will also explain that they need some more money, and fast, or they'll crash and burn. GM, which got a $9.4 billion cash infusion from the government just two months ago, wants the remaining $4 billion that the Bush administration approved; Chrysler, which got $4 billion in December, needs another $3 billion urgently.

Maybe it's just baby boomer nostalgia for the car culture of my youth, but I think it's a good idea for the United States to have a domestic automobile industry. Is there a man or woman alive who believes these will be automakers' last requests for bailout money from Washington? GM, at least, has done a decent job of capturing market share overseas, so maybe that's a framework for the company to reinvent itself. Chrysler is so diminished that I wonder if there's any alternative except getting what's left of the company ready for sale.

Obama has abandoned plans to appoint a "car czar" to oversee government aid to the auto companies, giving the job instead to a high-level task force. So far, the president has declined to look a central question in the eye: Can GM and Chrysler ever thrive under present management? If the Big Three are not to shrink to the Big One -- Ford is managing to survive on its own -- Obama and Congress are going to have to oversee GM and Chrysler almost like a board of directors. Go ahead and laugh, but explain to me how even Washington could do a worse job with these two companies than Detroit is doing.

The auto industry problem is cheap and simple compared to what Obama faces with the financial sector. Thanks to an amendment that Sen. Christopher Dodd, D-Conn., inserted in the stimulus bill, Washington now has control over bonuses and severance packages at financial companies that have taken funds from the Bush administration's $700 billion TARP bailout program: no more eight-figure bonuses for Wall Street "geniuses" whose cleverness helped drive their companies, and a good deal of the economy, into the ground.

Dodd added a measure that makes it easier for firms that chafe at Washington-imposed restrictions -- on compensation, for example -- to pull out of TARP. The details are complicated, but what's important is that banks and other financial institutions that are relatively healthy may well begin to leave the program. The impression would be that the firms remaining in the program are relatively sick -- and people tend to be uncomfortable keeping their money in a bank that can be described as relatively sick.

Treasury Secretary Timothy Geithner has fought against transparency in the bailout program that would let everyone see which banks have pneumonia and which merely have a cold. My belief is that the pneumonia-versus-cold distinction was bound to become evident, with or without the Dodd amendment. In any event, if one of our big banks were seen to be in danger of failing -- becoming, in effect, a Dead Bank Walking -- the Obama administration would have few choices other than to nationalize it.

Then there's the housing problem, which may be the most difficult of all. Foreclosures and plummeting home values are at the heart of the economic crisis. Either millions of Americans are going to lose their homes, or millions of mortgage contracts are somehow going to be modified. That's not an attractive choice.

All Barack Obama wanted was to be president. He may have to become an auto executive, a banker, a mortgage broker and who knows what else before this crisis is done.

Obama's Tainted Win

Obama's Tainted Win

By Rich Lowry

By his own standards, President Barack Obama's first major legislative victory was a tainted win.

At the outset of the stimulus debate, Obama said his package would set a "new higher standard of accountability, transparency and oversight." He wanted a bill free of earmarked spending for parochial projects, and talked of incorporating good Republican ideas. His team floated the goal of winning some 20 Republican votes in the Senate for legislation that -- if Obama's campaign pledges were met -- would have been posted for comment on the White House Web site for five days prior to passage.

As if deliberately setting out to make Obama look naïve, Senate Majority Leader Harry Reid secured, at the last minute, $8 billion for high-speed rail, with an eye to building a magnetic-levitation line that he supports between Las Vegas and Los Angeles. Representatives from Wisconsin and Indiana got a tax break benefiting motorcycle and RV manufacturers in their states. On it went. New York Sen. Chuck Schumer's defense was to say, sure the bill had "porky amendments," but no one really cares about such picayune matters.

The House wrote the bill with no Republican input, and when the House and Senate met in a conference committee to hammer out differences in the bills that had passed the different chambers, Republicans were shut out except for those lone three Republican senators who (out of 219 total Republicans in Congress) supported the legislation. Obama himself attacked Republicans for wanting to pass nothing, a blatant straw man.

When the House and Senate reached a deal, the 1,073-page bill was rushed toward passage in roughly 24 hours, with little opportunity for lawmakers, let alone the public, to review it. For sheer heedlessness, the process rivaled that of Franklin Roosevelt's Emergency Banking Relief Act. When FDR's team arrived at a legislative package in the middle of the night in March 1933, the chairman of the House Banking Committee took it onto the House floor, exclaiming: "Here's the bill. Let's pass it." Only three or four copies existed, Jonathan Alter writes in his history of the 100 days, The Defining Moment, and no one read it before passing it on a voice vote.

In short, the stimulus bill was sausage-making worthy of Upton Sinclair's The Jungle. Obama the good-government noodge should have been appalled that his earnest assurances of a new way of doing business were so quickly crushed underneath Nancy Pelosi's high (and highhanded) heel. If, that is, these were Obama's first-order concerns, and they aren't.

To govern is to choose, and Obama has chosen effectively to abandon his commitment to a different, more open process. It's more important to get the substantive achievement than to worry much over how it is achieved, even if it means tolerating legislative strong-arming reminiscent of Tom DeLay in his glory days. "My bottom line is not how pretty the process was," Obama told reporters last week, in complete reversal from three weeks ago.

At the heart of Obama's much-discussed pragmatism is a willingness to shift the means by which he attains his enduring ends -- namely, his political ambition and his policy goals. If his pledge to take public financing stands athwart his ability to bury John McCain under an avalanche of private donations -- well, out with the pledge. When the Rev. Jeremiah Wright can give him an entree into Chicago politics, he's a spiritual mentor; when he obstructs Obama's presidential ambitions, he's under the bus. Given the choice between -- as Ron Brownstein of the National Journal has described it -- passing more public investments in three weeks than Bill Clinton passed in eight years, or honoring the spirit of bipartisanship, it's not even close.

Obama is making the shrewd choice. No one cares about process as much as the impressionable young people and journalists he already has firmly in his hip pocket. All that matters is the state of the economy, and whether the stimulus bill ultimately lives up to its name -- tainted passage or no.

Banks need more capital

Economics focus

Banks need more capital

In a guest article, Alan Greenspan says banks will need much thicker capital cushions than they had before the bust

 Alan Greenspan was the chairman of the Federal Reserve Board from 1987 to 2006. He is now president of Greenspan Associates

GLOBAL financial intermediation is broken. That intricate and interdependent system directing the world’s saving into productive capital investment was severely weakened in August 2007. The disclosure that highly leveraged financial institutions were holding toxic securitised American subprime mortgages shocked market participants. For a year, banks struggled to respond to investor demands for larger capital cushions. But the effort fell short and in the wake of the Lehman Brothers default on September 15th 2008, the system cracked. Banks, fearful of their own solvency, all but stopped lending. Issuance of corporate bonds, commercial paper and a wide variety of other financial products largely ceased. Credit-financed economic activity was brought to a virtual standstill. The world faced a major financial crisis.

For decades, holders of the liabilities of banks in the United States had felt secure with the protection of a modest equity-capital cushion, allowing banks to lend freely. As recently as the summer of 2006, with average book capital at 10%, a federal agency noted that “more than 99% of all insured institutions met or exceeded the requirements of the highest regulatory capital standards.”

Today, fearful investors clearly require a far larger capital cushion to lend, unsecured, to any financial intermediary. When bank book capital finally adjusts to current market imperatives, it may well reach its highest levels in 75 years, at least temporarily (see chart). It is not a stretch to infer that these heightened levels will be the basis of a new regulatory system.

The three-month LIBOR/Overnight Index Swap (OIS) spread, a measure of market perceptions of potential bank insolvency and thus of extra capital needs, rose from a long-standing ten basis points in the summer of 2007 to 90 points by that autumn. Though elevated, the LIBOR/OIS spread appeared range-bound for about a year up to mid-September 2008. The Lehman default, however, drove LIBOR/OIS up markedly. It reached a riveting 364 basis points on October 10th.

The passage by Congress of the $700 billion Troubled Assets Relief Programme (TARP) on October 3rd eased, but did not erase, the post-Lehman surge in LIBOR/OIS. The spread apparently stalled in mid-November and remains worryingly high.

How much extra capital, both private and sovereign, will investors require of banks and other intermediaries to conclude that they are not at significant risk in holding financial institutions’ deposits or debt, a precondition to solving the crisis?

The insertion, last month, of $250 billion of equity into American banks through TARP (a two-percentage-point addition to capital-asset ratios) halved the post-Lehman surge of the LIBOR/OIS spread. Assuming modest further write-offs, simple linear extrapolation would suggest that another $250 billion would bring the spread back to near its pre-crisis norm. This arithmetic would imply that investors now require 14% capital rather than the 10% of mid-2006. Such linear calculations, of course, can only be very rough approximations. But recent data do suggest that, while helpful, the Treasury’s $250 billion goes only partway towards the levels required to support renewed lending.

Government credit has in effect acted as counterparty to a large segment of the financial intermediary system. But for reasons that go beyond the scope of this note, I strongly believe that the use of government credit must be temporary. What, then, will be the source of the new private capital that allows sovereign lending to be withdrawn? Eventually, the most credible source is a partial restoration of the $30 trillion of global stockmarket value wiped out this year, which would enable banks to raise the needed equity. Markets are being suppressed by a degree of fear not experienced since the early 20th century (1907 and 1932 come to mind). Human nature being what it is, we can count on a market reversal, hopefully, within six months to a year.

Though capital gains cannot finance physical investment, they can replenish balance-sheets. This can best be seen in the context of the consolidated balance-sheet of the world economy. All debt and derivative claims are offset in global accounting consolidation, but capital is not. This leaves the market value of the world’s real physical and intellectual assets reflected as capital. Obviously, higher global stock prices will enlarge the pool of equity that can facilitate the recapitalisation of financial institutions. Lower stock prices can impede the process. A higher level of equity, of course, makes it easier to issue debt.

Another critical price for the return of global financial stability is that of American homes. Those prices are likely to stabilise next year and with them the levels of home equity—the ultimate collateral for global holdings of American mortgage-backed securities, some toxic. Home-price stabilisation will help clarify the market value of financial institutions’ assets and therefore more closely equate the size of their book capital with the realities of market pricing. That should help stabilise their stock prices. The eventual partial recovery of global equities, as fear inevitably dissipates, should do the rest. Temporary public capital injections into banks would facilitate this process and arguably provide far more benefit per dollar than conventional fiscal stimulus.

Even before the market linkages among banks, other financial institutions and non-financial businesses are fully re-established, we will need to start unwinding the massive sovereign credit and guarantees put in place during the crisis, now estimated at $7 trillion. The economics of such a course are fairly clear. The politics of draining off that much credit support in a timely way is quite another matter.

Looking good by doing good

Economics focus

Looking good by doing good

Rewarding people for their generosity may be counterproductive

A LARGE plaque in the foyer of Boston’s Institute for Contemporary Art (ICA), a museum housed in a dramatic glass and metal building on the harbour’s edge, identifies its most generous patrons. Visitors who stop to look will notice that some donors—including two who gave the ICA over $2.5m—have chosen not to reveal their names. Such reticence is unusual: less than 1% of private gifts to charity are anonymous. Most people (including the vast majority of the ICA’s patrons) want their good deeds to be talked about. In “Richistan”, a book on America’s new rich, Robert Frank writes of the several society publications in Florida’s Palm Beach which exist largely to publicise the charity of its well-heeled residents (at least before Bernard Madoff’s alleged Ponzi scheme left some of them with little left to give).

As it turns out, the distinction between private and public generosity is helpful in understanding what motivates people to give money to charities or donate blood, acts which are costly to the doer and primarily benefit others. Such actions are widespread, and growing. The $306 billion that Americans gave to charity in 2007 was more than triple the amount donated in 1965. And though a big chunk of this comes from plutocrats like Bill Gates and Warren Buffett, whose philanthropy has attracted much attention, modest earners also give generously of their time and money. A 2001 survey found that 89% of American households gave to charity, and that 44% of adults volunteered the equivalent of 9m full-time jobs. Tax breaks explain some of the kindness of strangers. But by no means all.

Economists, who tend to think self-interest governs most actions of man, are intrigued, and have identified several reasons to explain good deeds of this kind. Tax breaks are, of course, one of the main ones, but donors are also sometimes paid directly for their pains, and the mere thought of a thank-you letter can be enough to persuade others to cough up. Some even act out of sheer altruism. But most interesting is another explanation, which is that people do good in part because it makes them look good to those whose opinions they care about. Economists call this “image motivation”.

Dan Ariely of Duke University, Anat Bracha of Tel Aviv University, and Stephan Meier of Columbia University sought, through experiments, to test the importance of image motivation, as well as to gain insights into how different motivating factors interact. Their results, which they report in a new paper*, suggest that image motivation matters a lot, at least in the laboratory. Even more intriguingly, they find evidence that monetary incentives can actually reduce charitable giving when people are driven in part by a desire to look good in others’ eyes.

The crucial thing about charity as a means of image building is, of course, that it can work only if others know about it and think positively of the charity in question. So, the academics argue, people should give more when their actions are public.

To test this, they conducted an experiment where the number of times participants clicked an awkward combination of computer keys determined how much money was donated on their behalf to the American Red Cross. Since 92% of participants thought highly of the Red Cross, giving to it could reasonably be assumed to make people look good to their peers. People were randomly assigned to either a private group, where only the participant knew the amount of the donation, or a public group, where the participant had to stand up at the end of the session and share this information with the group. Consistent with the hypothesis that image mattered, participants exerted much greater effort in the public case: the average number of clicks, at 900, was nearly double the average of 517 clicks in the private case.

However, the academics wanted to go a step further. In this, they were influenced by the theoretical model of two economists, Roland Benabou, of Princeton University, and Jean Tirole, of Toulouse University’s Institut d’Economie Industrielle, who formalised the idea that if people do good to look good, introducing monetary or other rewards into the mix might complicate matters. An observer who sees someone getting paid for donating blood, for example, would find it hard to differentiate between the donor’s intrinsic “goodness” and his greed.

Blood money

The idea that monetary incentives could be counterproductive has been around at least since 1970, when Richard Titmuss, a British social scientist, hypothesised that paying people to donate blood would reduce the amount of blood that they gave. But Mr Ariely and his colleagues demonstrate a mechanism through which such confounding effects could operate. They presumed that the addition of a monetary incentive should have much less of an impact in public (where it muddles the image signal of an action) than in private (where the image is not important). By adding a monetary reward for participants to their experiment, the academics were able to confirm their hypothesis. In private, being paid to click increased effort from 548 clicks to 740, but in public, there was next to no effect.

The trio also raise the possibility that cleverly designed rewards could actually draw out more generosity by exploiting image motivation. Suppose, for example, that rewards were used to encourage people to support a certain cause with a minimum donation. If that cause then publicised those who were generous well beyond the minimum required of them, it would show that they were not just “in it for the money”. Behavioural economics may yet provide charities with some creative new fund-raising techniques.

Profiting from happiness

Investing in happy workers

Profiting from happiness

Good companies to work for may also be good companies to invest in

ARE firms with cheery workers more likely to make investors smile? According to Alex Edmans of Wharton, a business school, choosing to invest in a portfolio comprising companies that have happy employees (as measured using Fortune's “100 best companies to work for”, most recently published in January this year) is likely to bring rewards. Mr Edmans suggests that such investors enjoy gains beyond what can be explained by the risks they take. From 1999 to 2008 the Fortune portfolio has provided a 4.1% annual return above that of the broader CRSP index (which includes all shares traded on Nasdaq, the New York Stock Exchange and American Stock Exchange). But advocates of corporate social responsibility should be cautious about inferring that employee satisfaction brings high returns. Other variables, such as good management, may be at work.

Shutterstock

Stepping forth

America and Asia

Stepping forth

Hillary Clinton tours Asia. What sort of secretary of state will she prove to be?

AMERICA’S new secretary of state is making a cautious start to an awkward job in unenviable circumstances. This week Hillary Clinton started her first official foreign tour in Asia, choosing to visit a region beset by severe economic and financial gloom. The downturn (in some Asian countries at least) is proving more painful even than in America or Europe. Japan, the first stop on Mrs Clinton’s itinerary, is the most battered. Its economy shrank at an annualised rate of nearly 13% in the last quarter of 2008, according to figures released on Monday February 16th. Its political system is also failing to deliver. The prime minister, Taro Aso, has an approval rating below 10%, according to a recent opinion poll. The finance minister, Shoichi Nakagawa, who was supposed to guide Japan out of its mess, has just resigned after he appeared drunk at a press conference in Rome.

Mrs Clinton’s visit, with its formal ceremonies and reassurances that Japan and America will remain as extremely close allies, is at least a welcome distraction from more dismal matters. She was quick to reassure her hosts that Japan is a “cornerstone” for American diplomacy in a region of growing importance. On ticklish issues, such as how to handle the unpredictable regime of Kim Jong Il, in North Korea, America and Japan will continue to work closely together. Mrs Clinton also visited families whose relatives were long ago kidnapped by agents of the North Korean regime—their fate, understandably, remains a sore point for Japan, as it takes part in six-country (the Koreas, China, America, Japan, Russia) talks with Pyongyang. Rumours abound that North Korea, which is desperately seeking attention from America’s new government, may soon test-launch a long-range missile.

Those following Mrs Clinton will seek signs of how she conducts her policy, but also look for any indication of how she relates to the president, Barack Obama. Her immediate predecessors, Colin Powell and then Condoleezza Rice, were badly hamstrung by the forceful approach to foreign affairs taken by the White House, in particular by the former vice-president, Dick Cheney. Mr Powell had been known for supporting only wars where America entered with overwhelming force and a clear exit strategy. He will instead be remembered for making the case for the invasion of Iraq. Ms Rice, an academic favouring balance-of-power “realism”, found herself supporting a far-reaching democratisation project in the Middle East. Yet Mrs Clinton’s history of political rivalry with Mr Obama, and the latter’s necessary preoccupation with the state of America’s economy, could mean that she has more freedom of manouevre.

If so, how would she use it? So far she has kept her cards relatively close to her chest. But by choosing to tour Asia—rather than, for example, the more traditional first tours of the Middle East or Europe—Mrs Clinton sends a message that allies in that continent will be increasingly important. And she must manage relationships between old allies (Japan and South Korea) while also engaging closely with an emerging great power in China. Last year, during the election campaign, she suggested that America’s most important bilateral relationship in this century would be with China. To make progress in North Korea, for example, will require the close involvement of Beijing. As the preoccupation with Iraq declines, too, concern about the increasingly intense war in Afghanistan, and the need to tackle militants in Pakistan, will shift America’s attention eastwards.

More generally she spoke, during her run for the presidency, of her experience and the many friends she had around the world. The implication was that she would move quickly to repair America’s standing, through multilateralism and with a responsible withdrawal from Iraq. Her confirmation hearings were surprisingly quiet for a figure long hated by the right. Speaker after speaker praised her, including Republicans. Only a couple of senators voted against her, and then only because of worries about how her husband, Bill Clinton, could possibly eliminate conflicts of interest between his global charity fundraising and her diplomacy.

For her part, she took pragmatic, mainstream Democratic positions: getting out of Iraq cautiously, a willingness to talk to Iran while raising concerns about its nuclear programme; hard words for the Sudanese government, but no promise of action on the humanitarian nightmare in Darfur. Such statements may say little about how Mrs Clinton will perform as secretary of state. After this trip, a little more light may be shed.

KEYNESIAN STIMULUS

President for Life?

President for Life?

Venezuela's Hugo Chávez, unfettered by term limits.

Venezuela's Hugo Chávez celebrated a decade in power on February 2, and on Sunday he won a national referendum that will let him run for a third six-year term in 2012, and beyond. Like his idol, Fidel Castro, who reigned in Cuba for a half-century, Mr. Chávez can now move toward his goal of becoming President for life.

Sunday's 54%-46% win comes as little surprise, given that Mr. Chávez controlled all aspects of the electoral process, ordered up favorable TV coverage and mobilized government institutions to get out the vote. In 2007, Mr. Chávez lost a similar bid to remove term limits on the presidency, and this time he pulled out all the stops. The victory is a blow to the fragmented democratic opposition, which had hoped that the country's economic hardships -- including inflation at 35% and rising -- would turn more voters against Mr. Chávez's "revolution." In November, the opposition won elections in several regional governments and also took control of Caracas City Hall.

Despite his victory, Mr. Chávez faces growing troubles as the bills from his socialist program come due. Falling oil revenues have caused his government to raid central bank reserves, investment has fled as he's seized private property, student protests are growing as job prospects vanish, and the country's murder rate is among the world's highest. The only certainty is more political turmoil in the months ahead.

Mr. Chávez used the Bush Administration as a populist foil, but he now seems to be courting President Obama. On the eve of Sunday's referendum, the strongman called for "reconciliation" with Washington and expressed the hope that "Obama doesn't start to resemble Bush."

The Obama Administration has been notably quiet before and after the referendum. Mr. Chávez covets regional and global legitimacy even as he consolidates his authoritarian rule and seeks to undermine neighboring U.S. ally Colombia. With his difficulties at home, Mr. Chávez needs Mr. Obama's public approval far more than the U.S. needs Mr. Chávez's diplomatic cooperation.

Geert Wilders Is a Test for Western Civilization

Geert Wilders Is a Test for Western Civilization

If Rushdie should be defended, why not the Dutch pol?

Twenty years ago, Andres Serrano put a plastic crucifix in a glass of urine, photographed it and called it art. Conservatives in particular weren't pleased: not with Mr. Serrano, not with his picture, and not with the National Endowment for the Arts, which had forked over $15,000 in taxpayer money to support this uretic gesture.

Also 20 years ago: On Valentine's Day, 1989, the Ayatollah Khomeini issued a fatwa against Salman Rushdie, condemning him to death for supposedly blaspheming Islam in his novel, "The Satanic Verses." Iran later upped the ante by severing diplomatic ties with Britain and putting a bounty on Mr. Rushdie's head. The fatwa remains in effect today by order of Iran's Supreme Leader, Ali Khamenei.

[Global View] AP

Geert Wilders.

These twin anniversaries come to mind following the British government's decision last week to ban Dutch lawmaker Geert Wilders from British soil as an "undesirable person." Mr. Wilders is also being prosecuted for hate speech in his native Holland, where he faces up to 16 months in prison if convicted. His alleged crime involves making a short film called "Fitna," which draws a straight line between Quranic verses and acts of Islamist terror. Mr. Wilders has also called for banning the Quran, which he labels a "fascist book" on a par with Hitler's "Mein Kampf."

Whatever else might be said about Mr. Wilders's travel ban and prosecution, it helps put into context the events of 1989. In the case of Mr. Serrano, liberal Americans went into a lather about defending his rights to artistic expression and freedom of speech against the parochial leaders of the religious right, men like Jesse Helms and Pat Robertson. Never mind that the worst of their threats involved withholding public funding; fundamental things were said to be at stake.

As for the Rushdie affair, after some initial hesitation most of the liberal intelligentsia on both sides of the Atlantic rallied to his cause. True, there were some dissenters: Jimmy Carter called "The Satanic Verses" a "direct insult to those millions of Muslims whose sacred beliefs have been violated" while feminist Germaine Greer declared that she "[refused] to sign petitions for that book, which was about his own troubles."

On the whole, however, the West held firm. A joint statement issued by the foreign ministers of the European Community insisted that "fundamental principles are at stake," adding that they "remain fully committed to the principles of freedom of thought and expression within their territories."

Fast forward to Mr. Wilders's situation and what's remarkable is that his most serious detractors -- those that aren't themselves Islamists or spokesmen for supposedly mainstream Muslim organizations -- tend to fall to the political left. In Holland, leaders of both the Socialist and Labor parties support the prosecution. In Britain, it's the Labour government of Gordon Brown that has enforced the travel ban. In Germany, the leftish Der Spiegel calls Mr. Wilders "pushy" and accuses him of making "hate-filled tirades." Elsewhere he is described as a "racist," an "Islamophobe," and so on.

For his part, Mr. Wilders says he hates Islam as an ideology, not Muslims as individuals, and categorically parts company with the neo-fascist European right typified by the late Jörg Haider. He has also traveled extensively in the Middle East; even Der Spiegel admits "he is not a dull racist and xenophobe."

But irrespective of Mr. Wilders's politics -- and I wouldn't be the first to point out that his calls to ban the Quran square oddly with his sense of himself as a champion of free speech -- his travails are no less significant than Mr. Rushdie's. And they present a test for both liberals and conservatives.

For liberals, the issue is straightforward. If routine mockery of Christianity and abuse of its symbols, both in the U.S. and Europe, is protected speech, why shouldn't the same standard apply to the mockery of Islam? And if the difference in these cases is that mockery of Islam has the tendency to lead to riots, death threats and murder, should committed Christians now seek a kind of parity with Islamists by resorting to violent tactics to express their sense of religious injury?

The notion that liberals can have it both ways -- champions of free speech on the one hand; defenders of multiculturalism's assorted sensitivities on the other -- was always intellectually flimsy. If liberals now want to speak for the "right" of this or that group not to be offended, the least they can do is stop calling themselves "liberals."

For conservatives, especially of the cultural kind -- the kind of people who talk about defending Western Civ. -- Mr. Wilders's case should also provoke some reconsiderations. It may not be impossible to denounce the likes of Mr. Serrano while defending the likes of Mr. Wilders. But a defense of Mr. Wilders is made a lot easier if one can point to the vivid difference between a civilization that protects, even celebrates (and funds!), its cultural provocateurs and a civilization that seeks their murder.

This is no small point. Western civilization is not simply the "Judeo-Christian tradition." It is also the civilization of Socrates and Aristophanes, Hume and Voltaire, Copernicus and Darwin; of religious schismatics and nonbelievers. This is the civilization that is now required to define itself, oddly enough, by the case of a flamboyant Dutch politician with inconsistent ideas and a bouffant hairdo. If he can't be defended, neither can Mr. Rushdie. Or Mr. Serrano. Liberals and conservatives alike, take note.

Japan's Downturn Is Bad News for the World

Japan's Downturn Is Bad News for the World

The U.S. can't count on Japanese savers.

As Hillary Clinton visits Tokyo for her first trip as secretary of state, she will find a country in the midst of its worst recession in 50 years. Japan's economy is contracting across the board: Exports have cratered, industrial production is on track to plummet 30% from a year ago, and the Japanese government projects that GDP will drop 12% from last year. The world's second largest economy, Japan is also the largest holder of U.S. Treasury bonds.

Recently, many economists and scholars in the U.S. have been looking backward to Japan's banking disaster of the 1990s, hoping to learn lessons for America's current crisis. Instead, they should be looking ahead to what might occur if Japan goes into a full-fledged depression.

If Japan's economy collapses, supply chains across the globe will be affected and numerous economies will face severe disruptions, most notably China's. China is currently Japan's largest import provider, and the Japanese slowdown is creating tremendous pressure on Chinese factories. Just last week, the Chinese government announced that 20 million rural migrants had lost their jobs.

Closer to home, Japan may also start running out of surplus cash, which it has used to purchase U.S. securities for years. For the first time in a generation, Tokyo is running trade deficits -- five months in a row so far.

The political and social fallout from a Japanese depression also would be devastating. In the face of economic instability, other Asian nations may feel forced to turn to more centralized -- even authoritarian -- control to try to limit the damage. Free-trade agreements may be rolled back and political freedom curtailed. Social stability in emerging, middle-class societies will be severely tested, and newly democratized states may find it impossible to maintain power. Progress toward a more open, integrated Asia is at risk, with the potential for increased political tension in the world's most heavily armed region.

This is the backdrop upon which the U.S. government is set to expand the national debt by a trillion dollars or more. Without massive debt purchases by Japan and China, the U.S. may not be able to finance the cost of the stimulus package, creating a trapdoor under the U.S. economy.

So far, Japan's politicians have been unable to find a way out of this mess. While another $53 billion stimulus package works its way through parliament, fully one-third of Japan's prefectures have instituted emergency economic stabilization measures.

But the big issues elude short-term solutions. Though Japan's leaders are currently cutting back on military expenditures and domestic services, they're unable to agree on budgets or reform plans. They have no strategic road map for reining in the yen, opening up to international competition, or taking an economic leadership role in Asia that will promote growth and strengthen democratic, market-oriented societies.

Things don't have to turn out this way. If Japan's leaders can craft a monetary policy that ends Japan's deflationary spiral by carefully expanding the money supply, recommit to structural reform, and halt the yen's rise, they can jump-start economic growth. They should also ignore the powerful domestic agriculture lobby and embrace a robust free-trade agenda, which would help them as well as the rest of Asia.

Mrs. Clinton's visit cannot be a simple photo opportunity. This trip needs to result in a clear U.S.-Japan approach to restoring confidence and rebuilding a robust and open international system. Without action, Japan and America may go over the cliff together, dragging Asia and the world down with them.

Mr. Auslin is a resident scholar at the American Enterprise Institute.

president's own standard of bipartisanship, he has failed.

McCain's Vote Should Trouble Obama

By the president's own standard of bipartisanship, he has failed.

"John McCain Was Right."

That's one headline we ought to see when President Barack Obama puts his name to the stimulus bill in Denver later today. But we won't. And the reason points to a glaring double standard on bipartisanship.

[Main Street] AP

The Arizona senator is a bellwether of 'bipartisanship.'

When Mr. McCain accepted the Republican nomination for president, he noted that while he and his opponent both spoke about moving beyond partisan divisions, only one of them had a history of working with members of both parties to get things done. "I have that record and the scars to prove it," he said. "Senator Obama does not."

Only a month ago, with Mr. Obama holding a dinner in Mr. McCain's honor, it wasn't hard to imagine the two coming together on the big challenges facing our nation. But now Mr. McCain has come out strongly against the stimulus in a spirited dissent suggesting that the whole process was a "bad beginning" for someone who promised a new spirit of bipartisanship. That ought to give White House Chief of Staff Rahm Emanuel pause, if only because it wasn't all that long ago that Barack Obama was speaking the same way.

In a passage from his 2006 book, "The Audacity of Hope," he sounds like a Republican complaining about the stimulus. "Genuine bipartisanship," he wrote, "assumes an honest process of give-and-take, and that the quality of the compromise is measured by how well it serves some agreed-upon goal, whether better schools or lower deficits. This in turn assumes that the majority will be constrained -- by an exacting press corps and ultimately an informed electorate -- to negotiate in good faith.

"If these conditions do not hold -- if nobody outside Washington is really paying attention to the substance of the bill, if the true costs . . . are buried in phony accounting and understated by a trillion dollars or so -- the majority party can begin every negotiation by asking for 100% of what it wants, go on to concede 10%, and then accuse any member of the minority party who fails to support this 'compromise' of being 'obstructionist.'

"For the minority party in such circumstances, 'bipartisanship' comes to mean getting chronically steamrolled, although individual senators may enjoy certain political rewards by consistently going along with the majority and hence gaining a reputation for being 'moderate' or 'centrist.'"

As a rule, complaints about the "lack of bipartisanship" generally represent the whine of the losing side. With regard to Mr. Obama's handling of the stimulus, however -- his first big test as president -- they have a more interesting subtext. For one thing, his promises of a postpartisan future in some ways became the substance of a campaign built on lofty but largely undefined invocations of "hope" and "change."

For another, a stimulus package with strong bipartisan support was well within his reach. Even at full strength, the Republicans didn't have the votes to obstruct the stimulus if they had wanted to. And with a little imagination, a White House in search of bipartisan support might have easily picked off Republicans by exploiting differences within the party.

Michigan Rep. Thaddeus McCotter suggests, for example, infrastructure as one area popular with some of his fellow Republicans. Had Democrats added, say, a few more infrastructure projects, perhaps a half-dozen Republicans in the Senate and as many as 30 or 40 in the House might have signed on. But the White House went the other way.

"President Obama has never been able to say 'No' to the left of his party," he says. "So instead of having Rahm Emanuel keeping Congressional Democrats in line, they left this bill to the most partisan members of Congress, starting with Nancy Pelosi."

Mr. McCotter has a point. For all of Mr. Obama's eloquence on the need for Democrats to be more respectful of religion, more willing to confront the teachers' unions, and more open to the opportunities of the market, when it comes time for action it's a different story. On issues from abortion to free trade, Mr. Obama's votes suggest a man careful not to do anything to offend the Democratic Party's most entrenched interest groups.

What does this mean for the next four years? We are told that when LBJ learned of Walter Cronkite's famous broadcast questioning U.S. policy in Vietnam, he said, "If I've lost Cronkite, I've lost middle America." In a similar way, it might be worth asking what John McCain's strong dissent says about this president's commitment to lead us into a postpartisan future.

That was the standard Mr. Obama promised during his campaign. Now that he's got his bill, it will be instructive to see if he will be held to that standard by an "exacting" press corps he says is essential to ensuring that a ruling party negotiates in good faith.

Barack of Afpakia

Barack of Afpakia

The left is already doubting Obama's Afghan surge.

The regents are on the ground and commanders are crafting new battle plans: President Obama is girding for a war surge in Afghanistan. Let's hope he's willing to see it through when his most stalwart supporters start to doubt the effort and rue the cost.

[Review & Outlook] AP

As a statement of principle, the new Administration's preoccupation with Afghanistan signals a welcome commitment to what has been known by that out-of-favor phrase "global war on terror." The Taliban claimed responsibility last week for coordinated suicide attacks in Kabul, which killed 28 people and reinforced perceptions that security is eroding. America's recent success in Iraq showed that the key to victory lies in shifting those perceptions. That means improving security.

More U.S. troops will likely be needed, and Central Command General David Petraeus is undertaking a review of goals and the resources to meet them. Mr. Obama has talked about doubling forces by another 30,000, and we hope he's willing to give his Afghan commander, General David McKiernan, the number he needs to clear and hold areas and protect the population. However, size of force matters less than having the proper counterinsurgency strategy for a conflict that is different than Iraq.

Among other useful things, Mr. Obama's surge may help to educate his friends on the political left about Islamist terror. The National Security Network, an outfit that never missed an opportunity to bash President Bush, has quickly come into line behind the new President. The group says Mr. Obama's strategy must be focused "first and foremost on preventing the Afghanistan-Pakistan region from becoming a staging ground for terrorist attacks against the U.S. and other nations or a source for instability that could throw Pakistan into chaos."

Sounds good to us -- and sounds a lot like the Bush strategy. America's goal isn't to turn a backward Central Asian country into the next Switzerland, but to keep al Qaeda and its Taliban allies from using it as a safe haven. Toward that end, the U.S. and its allies can help build Afghanistan's institutions and army and help a weak Pakistan government flush out the terrorists in its wild west.

No doubt the strategy can be tweaked. That started well before Mr. Obama's election, as America took back ownership of the Afghan mission from an unwieldy NATO command. Though Britain and Canada pull their weight, Secretary of Defense Robert Gates has learned that Americans can't count on Europe to fill the troop and equipment gaps, so the U.S. did.

Also like the Bush Administration, Team Obama recognizes the Pakistan dimension to the Afghan problem -- even calling the place "Afpak." The Taliban came back in the past three years only after finding sanctuary around Quetta, in southern Pakistan, and in the country's northwest tribal regions. The U.S. has also won Islamabad's sotto voce cooperation to strike terror leaders, though more should be done around Quetta.

Mr. Obama's special envoy, Richard Holbrooke, has been in Afpak for a week's fact-finding. Before arriving, he said, "In my view it's going to be much tougher than Iraq." Even by Holbrookeian standards, that's hyperbole. The government in Kabul isn't in danger of collapsing, the Taliban isn't popular where it has ruled, and the insurgents are no match for the U.S.-led force on the battlefield.

Ultimately, as in Iraq, the Afghans will need to stand up more for themselves. That may take a while. But start with expanding the increasingly able Afghan army, a bright spot. The force of 80,000 is too small for a country the size of Texas and bordered by enemies. The police are a shambles, alas. Corruption, narco-trafficking, a weak central government: Afghanistan shares vices with other Western protectorates like Bosnia, and could improve on all counts.

However, notwithstanding President Obama's swipe last Monday that "the national government seems very detached from what's going on in the surrounding community," the rulers in Kabul are legitimate. Hamid Karzai has tolerated too much corruption, but any change of leadership should come from an Afghan challenge, not a U.S. desire to play kingmaker. Mr. Obama and Vice President Joe Biden -- who stormed out of a meeting with Mr. Karzai last year -- need to avoid JFK's mistake of toppling South Vietnam ally Ngo Dinh Diem.

The Obama team wants to play up Afghanistan's troubles so it can look good by comparison a year from now. But soon enough Mr. Obama will own those troubles, and talking down Afghanistan carries risks. Our allies and the American people may come to doubt that the conflict is winnable, or worth the cost.

Already, canaries on the left are asking a la columnist Richard Reeves, "Why are we in Afghanistan?" The President's friends at Newsweek are helpfully referring to "Obama's Vietnam." Mr. Obama may find himself relying on some surprising people for wartime support -- to wit, Bush Republicans and neocons.

Monday, February 16, 2009

High-Speed Stimulus

High-Speed Stimulus

Over the past two decades, U.S. cities have wasted close to $200 billion on high-cost, low-performance rail transit projects. But that will nothing compared to the plans rail nuts have for high-speed intercity rail.

Last November, 52 percent of California voters approved $9 billion in funding for a San Francisco-to-Los Angeles high-speed rail plan. The total cost of the plan is expected to exceed $45 billion, and California expects Uncle Sam to pick up at least half the tab. If it does, Florida, Illinois, Texas, and a few dozen other states will all want federal funding for their own high-speed rail plans.

The House version of the stimulus package included no money for high-speed rail. The senate version included $2 billion. Thanks to Senator Harry Reid (D-NV), who wants a Las Vegas-to-Los Angeles high-speed rail line, the final version of the bill included $8 billion. (Conservatives have attempted to portray this as an earmark, but Reid says the $8 billion will be distributed through competitive grants.)

Earmark or not, $8 billion won’t even cover the down payment on a high-speed rail network. Based on the projected costs of California’s system and the length of high-speed rail proposals in the rest of the U.S., I estimate that a national high-speed rail network will cost the U.S. well over $500 billion. By comparison, the Interstate Highway System, adjusted for inflation to today’s dollars, cost $450 billion.

What will high-speed rail do? As my Cato policy analysis reveals, studies in California and real-life examples in Europe shows that its main effect will be to put profitable airlines out of business. It will only take about 3 or 4 percent of cars of the roads in rail corridors. Though costing more than interstate highways, a national high-speed rail network will never carry even a fifth as many people as the interstates, and virtually 0 percent of the freight. High-speed rail operations might save a little energy, but the energy cost of construction will more than wipe out any long-term operational savings.

Adding $8 billion to the stimulus bill will do nothing to stimulate the economy, as there are no shovel-ready high-speed rail projects in the country. But it does put us one more step down the path of wasting another half trillion or so dollars on an obsolete form of transportation.

'Buy American' on 60 Minutes

Andrew Roth

This segment from 60 Minutes doesn't exactly have a strong free trade theme to it, but it does explain the debate fairly well.


Posted at 9:26 AM, February 16, 2009 | Trackback (0) | Print | Submit URL to Digg! Submit URL to Reddit! Submit URL to del.icio.us!

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