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Capitalism at Work

Capitalism at Work

By Bill Bonner

05/11/09 London, England We made a brief trip back to France for a board meeting. Returning to London, people all seemed to be in mourning. Black is the color in London. Everyone wears black. Black pants, black skirts, black coats…

…the cabs are black…and so is the mood.

Last week, the Bank of England and European Central Bank announced new initiatives aimed at putting some brighter colors in the economy. Both banks are going to take up forms of QE – quantitative easing.

Whoa…don’t touch that dial! (A reminder for younger readers: TVs and radios used to have dials, which you turned to change the channel. Announcers would begin with ‘Don’t touch that dial’ when they had something important to say.)

We’re not going to discuss QE – promise!

On Friday, for the benefit of new readers, we were trying to explain The World According to The Daily Reckoning. Today, we continue our explanation – partly to bring new Dear Readers into the picture…and partly to remind ourselves what the hell we’re talking about.

On Friday, the Dow rose 164 points. The rally is still going on. Markets make opinions, say the old timers on Wall Street. After nine weeks of rising prices, people are beginning to see the world differently. To simplify: it doesn’t seem nearly as bad a place as it was a few months ago.

Oil has risen to $58 a barrel. The dollar has fallen to $1.35 per euro. And gold is at $914.

Even house prices – while not actually rising – are not falling as fast as they were before. And while people are still losing their jobs, not as many of them are losing their jobs each month as did earlier in the year.

This has led many commentators to believe that government’s expensive bailout/stimulus efforts are finally working.

Toward the end of last year, the days were getting shorter and shorter. Darkness covered the land – especially in Iceland where, even in the best of times, late December offers barely enough daylight to smoke a cigarette.

And then, the authorities got up to their usual antics. They bailed out some companies…lowered interest rates to zero…and shored up the financial sector – which just happened to have very good representation in the government and its central bank – and saved the bondholders from getting what they had coming. Meanwhile, the feds made sacrifices to the market gods too. Unable to find any virgins in the financial sector, they threw the taxpayers down the well. And then they went after the savers (admittedly, there weren’t many of them) and the next generation too.

At first, it seemed as if the feds had failed. Then, gradually, the light increased…the days grew longer.

And now, the mob screams: “The worst is over!” “We’ve seen the bottom.” “Hoorah for the feds!”

But it is not likely to be so…

Here we give you the first of four Daily Reckoning dicta:

People do not get what they want or what they expect from the markets; they get what they deserve.

Of course, people would like the downturn to be over. Many are counting on it. But Mr. Market doesn’t give a hoot. He’s got a “Capitalism at Work” t-shirt on and a sledgehammer in his hand.

What’s he up to? He’s demolishing a quarter century’s worth of mistakes. There are always mistakes made. Investments go bad. Businesses go under. People go broke. When many mistakes are corrected at once, it’s called a ‘recession.’ And when an entire economic model goes bad, it’s called a ‘depression.’

The economic model of the last quarter century caused more mistakes than usual. It encouraged people to spend, borrow, and speculate. And each time Mr. Market tried to make some corrections, the authorities came along with more money and easier credit. Businesses that should have gone under years ago kept digging themselves in deeper. Homeowners kept running up more debt. Speculators kept taking bigger and bigger gambles. Altogether, total debt – a measure of the bubble in the credit markets and all things associated with it – rose from only about 150% of GDP when the Pontiac GTO came out, to 370% during the Hummer and Prius years.

Fish gotta swim, birds gotta fly, and bubbles gotta blow. The bubble in the financial sector – including subprime debt, housing prices, bonuses on Wall Street and derivatives – hit the fan in 2007. And what a mess!

And why shouldn’t it be? Which brings us to the second of our dicta:

The force of a correction is equal and opposite to the deception that preceded it.

The delusions and absurdities of the Bubble Epoque were monstrous. Naturally, the correction must be huge too. World stock markets were nearly cut in half. Property prices too have been knocked down almost everywhere. The total loss of nominal wealth has been estimated as high as $50 trillion.

In today’s paper, we find that Buffett’s company, Berkshire Hathaway, made its first loss since 2001. Thirty-three banks have been shut down this year. America’s leading banks say they need another $75 billion to keep their doors open. And Fannie Mae said it lost $23 billion; it will need $19 billion more to continue jiving the housing market.

Could these losses have been prevented?

Ah…certainly many of them could. If the U.S. Congress had never created Fannie Mae, for example, it never would have distorted the mortgage market as much as it did. And if the feds hadn’t created the Federal Reserve Bank, it couldn’t have provided so much ready money for so many speculators and borrowers. And if the Fed under Alan Greenspan had done what it was supposed to do – that is, to “take away the punch bowl” before the party got out of control – the bubble in the financial sector probably would have been much more modest.

Of course, people drew all the wrong conclusions. They thought “capitalism failed.” They saw the car drive off the cliff…but didn’t notice how government had twisted the road signs. Instead of warning investors of the dangerous curve ahead, the Fed’s low lending rates said: ‘Step on the gas!’

We all know the story from there…

Dictum number 3: Capitalism doesn’t always take an economy where it wants to go; but it always takes an economy where it ought to be.

Whoever was responsible for the mistakes, capitalism went about correcting them with its customary élan. It hit imprudent investors with trillions in losses. It knocked down mismanaged corporations. It whacked homeowners…and pounded housing-based derivatives to dust.

Capitalism operates by a process that the great economist Joseph Schumpeter called “creative destruction.” It destroys mistakes to make room for new innovations and new businesses. Unfortunately, this puts it at odds with government…and what most people want. When people make mistakes, they maintain that they are blameless (“who could have seen this crisis coming?”) and that someone else should pay for the loss.

So today, the feds, who mismanaged their regulatory responsibilities during the Bubble Epoque, are bailing out mismanaged corporations in order to protect lenders who mismanaged their money. They are determined to prevent capitalism from making major changes – in the worst possible way. What’s the worst possible way? Simple. Leave the mismanagers in place. Keep the brain-dead companies alive – along with the zombie banks. Let the government take ownership of major sectors of the economy. And stick a debt-ridden society with even more debt! The feds are expected to borrow $2 trillion this year alone. From whom? And who will repay it?

And the fourth dicta: The severity of a depression is inversely correlated with government’s efforts to stop it.

The more the feds try to delay and distract the process of creative destruction, the longer it takes to get the job done. And the higher the eventual bill.

There are only two fairly clear examples in modern history. After the crash of ’29, the Hoover and Roosevelt administrations tried desperately to stop the correction. They could not make bad debts disappear, nor turn bad decisions into good ones. All they could do was to retard the necessary corrections – and cause new mistakes! It wasn’t until after WWII, 15 years later, when the New Deal was largely forgotten, that the United States got back to work. Similarly, when Japan was confronted with a major correction in 1990, its politicians followed the Hoover/Roosevelt model. Over the years, an amount equivalent to almost an entire year’s output was applied to recovery efforts. But all they did was to prevent and forestall the needed changes. Now, 19 years later, the Japanese economy is still in corrective mode.

Tomorrow…beware the suckers’ rally…

Uh oh…we might be next. The U.K. government has published a list of people it won’t allow in the country. The list includes some terrorists…but also conservative U.S. talk show host Michael Savage.

The idea, as near as we can make it out, is that Britain feels it can exclude people who nurture hatred.

So, let us make it perfectly clear: Here at The Daily Reckoning we do not hate bankers, politicians, lawyers, bureaucrats, tax collectors, gypsies, slow drivers, rich people, snitches, women, dwarfs, English twits or anyone else.

Nor do we advocate the use of violence in any form – unless it is necessary…and unless it is against small, defenseless little nations that can’t fight back.

Of Pigs, Planes and Protectionism

Of Pigs, Planes and Protectionism

The World Health Organization, the United Nations’ Food and Agriculture Organization, the World Trade Organization and the Organization for Animal Health have stated flat out that properly cooked pork “will not be a source of infection” for influenza A(H1N1).

That has not stopped China, Indonesia, Russia and a dozen more countries from banning imports of pork products from the United States, Canada and others touched by the virus. Egypt hasn’t had a case of flu, yet the government ordered herds slaughtered. Afghanistan quarantined its only known pig, in the Kabul zoo.

The last pigs reported to have contracted the swine flu probably got it from a human in Canada. Unfortunately, the aversion to pigs and their products is not simply a case of bad science. It is another example of the dangerous insularity and protectionism that has rippled around the world since the start of the financial crisis.

Russia took the opportunity to ban all meat products from Mexico and parts of the United States. Even before the flu outbreak, China had deployed several arguments to try to keep out American pork. India has imposed new tariffs on steel imports; Argentina slapped import licensing requirements on products from textiles to tires. Congress put a Buy American clause in the fiscal stimulus plan.

Egyptian pig farmers, Christian Copts, believe the government is using the crisis to punish them. Other measures, like the suspension of flights to Mexico by Argentina, Cuba, Ecuador, Peru and China, might be misguided attempts to quell popular fear.

What these measures are clearly not about is protecting public health.

The W.H.O. explicitly advised against travel bans, stating that they would do nothing to stop the spread of the virus. Indeed, these disproportionate responses might end up undermining the world’s ability to deal with future pandemics, as afflicted countries will be less willing to disclose the extent of the threat they face.

As the world works its way through what will be a couple of more years of dismal economic performance and likely social unrest, governments should temper the fear-mongering and self-serving protectionism. They must buttress the rules, treaties and organizations that have promoted global integration and rising prosperity for a half century. That is the best way to deal with an uncertain and dangerous world.

A bad tax idea

A bad tax idea

Illinois-based McDonald's, Caterpillar and Boeing make billions of dollars selling their burgers, earthmovers and airplanes around the world. Like other multinational companies located here, they pay U.S. corporate income taxes of up to 35 percent on those revenues only when they ship the money back to the U.S. or pay it out as dividends. Otherwise, the taxes are deferred.

President Barack Obama believes that encourages overseas investment rather than U.S. investment and robs money from the U.S. Treasury. He has proposed to restrict the corporate tax deferment.

Obama this week blasted the loophole-ridden U.S. tax code as one "that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y."

The example was strong on alliteration, but weak on logic. India's corporate tax rate is just under 34 percent, according to the international accounting firm KPMG International's most recent survey of tax rates. In other words, it's right there with the U.S. rate. Low labor costs and access to a highly educated population have more to do with the surge in Bangalore jobs than any tax advantage does.

Obama estimated that his tax deferment changes, along with cracking down on individual and corporate tax havens, would raise $210 billion over the next decade.

But why would Obama want to make American companies less competitive in the world?

Most countries don't tax their companies' foreign profits -- and most have lower corporate tax rates than the U.S. does. The U.S. deferment exists as partial compensation for the different tax treatment by the U.S.

A French company doing business in Dublin pays Ireland's 12.5 percent corporate tax rate and faces no additional French taxes. The French company can use the profits to build new plants and create jobs in France or elsewhere.

But a U.S. firm doing business in Dublin pays Ireland's corporate tax rate, and then pays U.S. corporate taxes if it brings the money home for investment or a payout to stockholders. (Essentially, it pays 35 percent to the U.S., minus the taxes it paid to Ireland.) Rather than encouraging multinationals to bring that money home with the lure of lower taxes, Obama wants to hike their U.S. tax exposure.

To be competitive in the international marketplace, many countries in the last decade have cut their corporate tax rates -- on average from 31.4 percent to 25.9 percent, according to the KPMG survey.

Obama insisted that he wants "to see our companies remain the most competitive in the world." There's a way to do that: Simplify the tax code, get rid of sweetheart loopholes and lower the overall corporate tax rate so there isn't such a disparity between the U.S. and other nations.

Geithner's Revelation

Geithner's Revelation

He concedes that monetary policy was 'too loose too long.'

The Earth stood still, the seas parted and a member of the U.S. political class admitted last week that the Federal Reserve helped to cause the financial meltdown. OK, only the last of those happened, but it's a welcome miracle nonetheless.

The revelation came from Timothy Geithner last Wednesday with PBS's Charlie Rose, who asked the Treasury Secretary: "Looking back, what are the mistakes and what should you have done more of? Where were your instincts right, but you didn't go far enough?"

Getty Images

Mr. Geithner: "We need a little more time to get full perspective."

Mr. Rose: "Right."

Mr. Geithner: "But I would say there were three types of broad errors of policy and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk. People trying to get a higher return. That was just overwhelmingly powerful."

Mr. Rose: "It was too easy."

Mr. Geithner: "It was too easy, yes. In some ways less so here in the United States, but it was true globally. Real interest rates were very low for a long period of time."

Mr. Rose: "Now, that's an observation. The mistake was that monetary policy was not by the Fed, was not . . ."

Mr. Geithner: "Globally is what matters."

Mr. Rose: "By central bankers around the world."

Mr. Geithner: "Remember as the Fed started -- the Fed started tightening earlier, but our long rates in the United States started to come down -- even were coming down even as the Fed was tightening over that period of time, and partly because monetary policy around the world was too loose, and that kind of overwhelmed the efforts of the Fed to initially tighten. Now, but you know, we all bear a responsibility for that. I'm not trying to put it on the world."

Mr. Geithner went on cite a lack of supervision over bank risk-taking and the slow pace of government response to the problem -- both of which are now conventional wisdom. But the real news here is Mr. Geithner's concession that monetary policy was "too loose too long." The Washington crowd has tried to place all of the blame for the panic on bankers, the better to absolve themselves. But as Mr. Geithner notes, Fed policy flooded the world with dollars that created a boom in asset prices and inspired the credit mania. Bankers made mistakes, but in part they were responding rationally to the subsidy for credit created by central bankers.

We disagree with Mr. Geithner on one point. He's right that monetary policy needs to be considered in global terms, but he's still too quick to pass the buck from the Fed to other central banks. The European Central Bank was much tighter than the Fed throughout this period. The Fed was by far the major monetary player because much of the world was on a dollar standard, with its monetary policy linked to the Fed's. That was true of China, most of Asia and the Middle East.

The Fed's loose policy from 2003 to 2005 created the commodity and credit bubbles that made these countries flush with dollars. Given their low domestic propensity to consume, these countries then recycled those dollars back into dollar-denominated assets, such as Treasurys and real-estate-related assets such as Fannie Mae securities. The Fed itself had created the surplus dollars that kept long rates low and undermined for a substantial period its belated attempts to tighten.

Mr. Geithner's concession is important nonetheless because before he moved to Treasury he was vice chairman of the Fed's Open Market Committee that sets monetary policy. His comments mark a break with the steadfast refusal of Fed Chairmen Alan Greenspan and Ben Bernanke to admit any responsibility. They prefer to blame bankers and what they call the "global savings glut," as if the Fed had nothing to do with creating that glut.

Mr. Geithner's remarks are a sign of intellectual progress, and they suggest that at least some in government are thinking about their own part in creating the mess. The role of Fed policy should also be at the heart of the hearings that Speaker Nancy Pelosi is planning on the causes of the financial meltdown. We won't begin to understand the credit mania and panic until we acknowledge their monetary roots.

The Fed's Stressed Out

How ObamaCare Will Affect Your Doctor

How ObamaCare Will Affect Your Doctor

Expect longer waits for appointments as physicians get pinched on reimbursements.

SCOTT GOTTLIEB

At the heart of President Barack Obama's health-care plan is an insurance program funded by taxpayers, administered by Washington, and open to everyone. Modeled on Medicare, this "public option" will soon become the single dominant health plan, which is its political purpose. It will restructure the practice of medicine in the process.

Chad Crowe

Republicans and Democrats agree that the government's Medicare scheme for compensating doctors is deeply flawed. Yet Mr. Obama's plan for a centrally managed government insurance program exacerbates Medicare's problems by redistributing even more income away from lower-paid primary care providers and misaligning doctors' financial incentives.

Like Medicare, the "public option" will control spending by using its purchasing clout and political leverage to dictate low prices to doctors. (Medicare pays doctors 20% to 30% less than private plans, on average.) While the public option is meant for the uninsured, employers will realize it's easier -- and cheaper -- to move employees into the government plan than continue workplace coverage.

The Lewin Group, a health-care policy research and consulting firm, estimates that enrollment in the public option will reach 131 million people if it's open to everyone and pays Medicare rates, as many expect. Fully two-thirds of the privately insured will move out of or lose coverage. As patients shift to a lower-paying government plan, doctors' incomes will decline by as much as 15% to 20% depending on their specialty.

Physician income declines will be accompanied by regulations that will make practicing medicine more costly, creating a double whammy of lower revenue and higher practice costs, especially for primary-care doctors who generally operate busy practices and work on thinner margins. For example, doctors will face expenses to deploy pricey electronic prescribing tools and computerized health records that are mandated under the Obama plan. For most doctors these capital costs won't be fully covered by the subsidies provided by the plan.

Government insurance programs also shift compliance costs directly onto doctors by encumbering them with rules requiring expensive staffing and documentation. It's a way for government health programs like Medicare to control charges. The rules are backed up with threats of arbitrary probes targeting documentation infractions. There will also be disproportionate fines, giving doctors and hospitals reason to overspend on their back offices to avoid reprisals.

The 60% of doctors who are self-employed will be hardest hit. That includes specialists, such as dermatologists and surgeons, who see a lot of private patients. But it also includes tens of thousands of primary-care doctors, the very physicians the Obama administration says need the most help.

Doctors will consolidate into larger practices to spread overhead costs, and they'll cram more patients into tight schedules to make up in volume what's lost in margin. Visits will be shortened and new appointments harder to secure. It already takes on average 18 days to get an initial appointment with an internist, according to the American Medical Association, and as many as 30 days for specialists like obstetricians and neurologists.

Right or wrong, more doctors will close their practices to new patients, especially patients carrying lower paying insurance such as Medicaid. Some doctors will opt out of the system entirely, going "cash only." If too many doctors take this route the government could step in -- as in Canada, for example -- to effectively outlaw private-only medical practice.

These changes are superimposed on a payment system where compensation often bears no connection to clinical outcomes. Medicare provides all the wrong incentives. Its charge-based system pays doctors more for delivering more care, meaning incomes rise as medical problems persist and decline when illness resolves.

So how should we reform our broken health-care system? Rather than redistribute physician income as a way to subsidize an expansion of government control, Mr. Obama should fix the payment system to align incentives with improved care. After years of working on this problem, Medicare has only a few token demonstration programs to show for its efforts. Medicare's failure underscores why an inherently local undertaking like a medical practice is badly managed by a remote and political bureaucracy.

But while Medicare has stumbled with these efforts, private health plans have made notable progress on similar payment reforms. Private plans are more likely to lead payment reform efforts because they have more motivation than Medicare to use pay as a way to achieve better outcomes.

Private plans already pay doctors more than Medicare because they compete to attract higher quality providers into their networks. This gives them every incentive, as well as added leverage, to reward good clinicians while penalizing or excluding bad ones. A recent report by PriceWaterhouse Coopers that examined 10 of the nation's largest commercial health plans found that eight had implemented performance-based pay measures for doctors. All 10 plans are expanding efforts to monitor quality improvement at the provider level.

Among the promising examples of private innovation in health-care delivery: In Pennsylvania, the Geisinger Clinic's "warranty" program, where providers take financial responsibility for the entire episode of care; or the experience of the Blue Cross Blue Shield plans in Pennsylvania, Michigan and Virginia, where doctors are paid more for delivering better outcomes.

There are plenty of alternatives to Mr. Obama's plan that expand coverage to the uninsured, give them the chance to buy private coverage like Congress enjoys, and limit government management over what are inherently personal transactions between doctors and patients.

Rep. Nydia Velazquez (D., N.Y.) has introduced a bipartisan measure, the Small Business Cooperative for Healthcare Options to Improve Coverage for Employees (Choice) Act of 2009, that would make it cheaper and easier for small employers to offer health insurance. Mr. Obama would also get bipartisan compromise on premium support for people priced out of insurance to give them a wider range of choices. This could be modeled after the Medicare drug benefit, which relies on competition between private plans to increase choices and hold down costs. It could be funded, in part, through tax credits targeted to lower-income Americans.

There are also measures available that could fix structural flaws in our delivery system and make coverage more affordable without top-down controls set in Washington. The surest way to intensify flaws in the delivery of health care is to extend a Medicare-like "public option" into more corners of the private market. More government control of doctors and their reimbursement schemes will only create more problems.

Dr. Gottlieb, a former official at the Centers for Medicare and Medicaid Services, is a fellow at the American Enterprise Institute and a practicing internist. He's partner to a firm that invests in health-care companies.

Abraham Delano Messiah Obama?

Abraham Delano Messiah Obama?

by Thomas J. DiLorenzo

The political Left (which includes almost all journalists in America) just can’t make up its mind over whether Barack Obama most resembles Lincoln, FDR, Jesus Christ – or some combination thereof. All during his campaign many of his supporters kept referring to him as "The Messiah"; there is much talk of how he will immediately propose the re-adoption of many of FDR’s government interventions (that only made the Great Depression worse); and we are told (constantly) that he intends to make use of Lincoln’s rhetoric, especially in his first inaugural address. He has been studying Lincoln’s speeches, we are told by his handlers. If so, we are in for a lot of doubletalk and lies bordering on the psychotic.

There has been so much "spin" attached to Lincoln’s speeches by the Lincoln Cult, which often produces entire books instructing us all on how to "properly" interpret a single short speech, that it is almost impossible for the average person to understand what was actually said. (The speeches are all online, so all interested parties are able to read them for themselves without the spin.)

Lincoln’s White Supremacy Speech

The May 25, 2004 edition of the Washington Post included a story about how Hillary Clinton joined a number of neo-conservatives at the home of the Heritage Foundation’s James Swanson to "celebrate" a new book by Hillary pal Harold Holzer entitled "Lincoln at Cooper Union: The Speech that Made Abraham Lincoln President." I agree with these left-wing and right-wing neoconservatives that it did indeed provide a big boost to Lincoln’s candidacy. In order to understand why, one must understand that in the speech Lincoln promised to do all that he could, if elected, to keep black people out of the new territories and isolated in the Southern states. He pledged to keep them as far away as possible from the Northern population, in other words, which was very pervasively racist. That’s why the speech was so well received in New York City, which had just ended slavery in 1853 (see the book Slavery in New York). A key paragraph of the Cooper Union speech is one where Lincoln refers to the founding fathers:

As those fathers marked it [slavery], so let it be again marked, as an evil not to be tolerated and protected only because of and so far as its actual presence among us makes that toleration and protection a necessity. Let all the guarantees those fathers gave it, be, not grudgingly, but fully and fairly maintained. For this Republicans contend, and with this, so far as I know or believe, they will be content.

Speaking to a New York City audience, Lincoln stated here that the federal government’s protections of Southern slavery should be "fully" maintained. The reason for this, he said, was that, well, slavery exists! The audience reaction was reportedly quite enthusiastic, for most Northerners wanted slavery – and black people – to remain in the South.

In his October 16, 1854 speech in Peoria, Illinois, Lincoln first explained his (and the Republican Party’s) position on the extension of slavery into the new territories. "The whole nation is interested that the best use shall be made of these territories. We want them for the homes of free white people" (emphasis added). Lincoln’s secretary of state, William Seward, explained that "the motive of those who protested against the extension of slavery had always really been concern for the welfare of the white man, and not an unnatural sympathy for the Negro" (James McPherson, The Struggle for Equality, p. 24). Illinois Senator and Lincoln confidant Lyman Trumbull declared that "we, the Republican Party, are the white man’s party" (Eugene Berwanger, The Frontier Against Slavery, p. 133). Historian Eugene Berwanger noted in The Frontier Against Slavery (p. 154) that "Republicans [in 1860] made no pretense of being concerned with the fate of the Negro and insisted that theirs was a party of white labor. By introducing a note of white supremacy, they hoped to win the votes of the Negrophobes and the anti-abolitionists who were opposed to the extension of slavery." And Lincoln was the man they chose to accomplish this task.

The "spin" that the Lincoln Cult has put on Lincoln’s (and the Republican Party’s) opposition to the extension of slavery into the new territories is that that would somehow magically lead eventually to the destruction of slavery everywhere. They were "picking the low-hanging fruit" is how it is often explained. This of course is complete nonsense.

Lincoln’s Slavery Forever Speech

Lincoln’s first inaugural address may be considered his "slavery forever" speech because in it he goes to extremes to promise his everlasting support for Southern slavery. Quoting himself, he declared that "I have no purpose, directly or indirectly, to interfere with the institution of slavery in the States where it exists. I believe I have no lawful right to do so, and I have no inclination to do so." He then quoted the Republican Party platform of 1860 which made the exact same pledge. In what was the first Big Lie of his administration, which was barely one hour old, he repeated the statement from the Republican Party platform that said: "[W]e denounce the lawless invasion by armed force of the soil of any State or Territory, no matter what pretext, as among the gravest of crimes." Within a month he would prove himself, and his party, to be liars.

Lincoln then strongly supported the Fugitive Slave Clause of the Constitution, reminding his audience that every member of Congress had taken an oath to support this, and all other parts of the Constitution. All members of Congress, Lincoln assured his audience, agreed that runaway slaves "shall be delivered up" to their owners.

Near the end of the Slavery Forever speech Lincoln pledges his support for a constitutional amendment (the "Corwin Amendment") that would have prohibited the federal government from ever interfering with Southern slavery. In his words:

I understand a proposed amendment to the Constitution – which amendment, however, I have not seen – has passed Congress, to the effect that the Federal Government shall never interfere with the domestic institutions of the States, including that of persons held to service. To avoid minsconstruction of what I have said, I depart from my purpose not to speak of particular amendments so far as to say that, holding such a provision to now be implied constitutional law, I have no objection to its being made express and irrevocable.

The Corwin Amendment had just passed the House and Senate and, as Doris Kearns-Goodwin details in her book Team of Rivals, it was Lincoln who orchestrated the passing of the amendment by instructing William Seward to see to it that it made its way through the Senate. (This would suggest that Lincoln lied when he said "I have not seen" the amendment.)

Lincoln literally fabricated his own personal version of American history in the Slavery Forever speech when he argued that the states were never sovereign, that the "union" preceded them, and that no state, therefore, could withdraw from the union. This was not the understanding of the founding fathers. All one needs to do to understand this is to read Article 1 of the Treaty of Paris which ended the Revolutionary War (and was negotiated by John Adams, Benjamin Franklin, and John Jay.) It says this:

His Brittanic Majesty acknowledges the said United States, viz., New Hampshire, Massachusetts Bay, Rhode Island and Providence Plantations, Connecticut, New York, New Jersey, Pennsylvania, Delaware, Maryland, Virginia, North Carolina, South Carolina and Georgia, to be free sovereign and independent states, that he treats them as such, and for himself, his heirs, and successors, relinquishes all claims to the government, propriety, and territorial rights of the same and every part thereof.

Thus, King George III recognized each state as being an independent and sovereign nation, just as Great Britain and France were independent nations. They were part of a union of "free sovereign and independent states" that had joined together for a common purpose. This of course is also how Adams, Franklin and Jay, and all the other founders, viewed it.

Moreover, Article 7 of the U.S. Constitution explains that the citizens of the sovereign states are to ratify (or not) the Constitution. They created the union, not the other way around as Lincoln’s theory proclaimed.

In the Slavery Forever speech Lincoln gets down to very ugly business when he threatens his fellow citizens with "bloodshed." He did not threaten a foreign power that might contemplate invading his country, but his fellow countrymen. "[T]here needs to be no bloodshed, and there shall be none unless it is forced upon the national authority," he said. What on earth was he talking about? What could cause of the "national authority" to murder its own citizens? Failure to collect taxes, said Dishonest Abe. It was his duty "to collect the duties and imposts," he said in the next sentence, and as long as the citizens of all states continued to pay these taxes, the most important of which, the tariff, had just been doubled, "there will be no invasion, no using of force against or among the people anywhere." (At the time, tariff revenues accounted for over 90 percent of all federal tax revenues.)

Of course, the Southern states that had already seceded had no intention of paying any more taxes to the government in Washington. Lincoln kept his promise and delivered "bloodshed" in the form of killing some 350,000 Southerners, including about 50,000 civilians.

Lincoln’s "Blame-It-All-On-God" Speech

Lincoln cultists have been very busy recently urging Barack Obama to emulate Lincoln’s second inaugural address where he uses Biblical language to "justify" his armies’ killing of hundreds of thousands of their own fellow citizens, the burning down and ransacking of entire cities, the mass murder of civilians, and the plundering of the Southern population. There is no record of Lincoln ever having become a Christian; he never joined a church and rarely set foot in one; he was famous for ridiculing and lampooning the religious; but he was very knowledgeable about the Bible, which he skillfully used to dupe the Northern public.

By March of 1865 Lincoln’s war had resulted in the death of more than half a million Americans on both sides and unbelievable destruction of Southern cities and towns. Like the master politician that he was, Lincoln found a scapegoat for the war that he had started with his invasion of his own country (no one was even hurt, let alone killed at Fort Sumter). The scapegoat was God. The war was God’s punishment of America for the sin of slavery, he said, pretending to know what was in the mind of God. He failed to explain, however, why God did not punish Great Britain, Spain, France, The Netherlands, Denmark, Sweden, and other countries that were responsible for 96 percent of all the slaves that were brought to the Western Hemisphere from Africa. Only 4 percent ended up in the U.S. (Not to mention the fact that the Holy Scriptures make no mention of punishment for slavery).

The war just "came," said Dishonest Abe, as though he and his political party had nothing whatsoever to do with it. As Charles Adams wrote in When in the Course of Human Events (p. 205), "Not even the maddest of religious fanatics ever uttered words to equal Lincoln’s second inaugural address." Adams’s interpretation of the speech is that "Lincoln had to shift the blame and remove his own guilt, and he was quite willing to resort to reasoning more characteristic of a psychotic mind than a healthy mind . . . . Lincoln was guilt ridden and was close to being mentally ill at this time."

The Lincoln Cult does not even deny that Lincoln did in fact suffer from mental illness. In his very favorably-received book, Lincoln’s Melancholy, which was made into a History Channel documentary, Joshua Wolf Shenk described in detail how Lincoln suffered from manic depression his entire life; was so obsessed with suicide that his friends once removed all knives and razors from his home; wrote poems about suicide with titles like "The Suicide’s Soliloquy"; had several nervous breakdowns; took a primitive anti-depression drug that contained a heavy dose of mercury; brooded in misery his entire adult life worrying that he would die before becoming famous; and his friends claimed that he had "gone crazy."

The "spin" that Shenk and other Lincoln cultists put on Lincoln’s mental illnesses is that it proves him to be even greater than we believed he was, for he achieved what he did despite the fact that he was mentally ill. They always have numerous excuses for everything. That’s what it means to be a "Lincoln scholar."

Lincoln’s Lying-About-American-History Speech

The great H.L. Mencken was right when he wrote that the Gettysburg Address was good poetry but bad logic. It was Lincoln’s attempt to rewrite American history in a way that would serve the purposes of the Hamiltonian nationalists, who by his time had morphed into Republicans. Nearly every claim in the speech is false. The united states were not created by the Declaration of Independence "four score and seven years" before Gettysburg; the Constitution was ratified by the sovereign states in 1789. Our forefathers did not bring forth "a new nation" but a confederacy of free, independent, and sovereign states.

Americans were not "engaged in a great civil war," for a civil war is a contest for the takeover of a nation’s central government. Jefferson Davis did not want to be president of the United States any more than George Washington wanted to become King of Great Britain. It was a war to prevent Southern independence.

The U.S. government would have "endured" had the South prevailed, contrary to Lincoln’s rhetoric. It had managed to field the largest army in the history of the world despite Southern secession. The dead at Gettysburg did not give their lives "that the nation might live." The U.S. government was never in danger of disappearing. And as Mencken pointed out, it was the South that was fighting for the principle of consent of the governed. Through numerous popular votes, Southerners decided they no longer wanted to be ruled by Washington, D.C. Government "by the people . . ." would not have "perished from the earth" had the Republican Party lost its war. Democracy was alive and well in Europe and elsewhere, and would also have existed in the Confederate States of America as well as the United States of America.

Barack Obama will have a very long way to go indeed if he is ever to imitate the tongue-twisting, logic-attacking, a-historical, and sometimes psychotic rhetoric of Dishonest Abe. Let’s hope that he never tries.

Obama Loses His "Cool"

Obama Loses His "Cool"

With his glib dismissal of pot legalization, the president looks less like the man, and more like The Man.

Matt Welch

When the generation of Americans under the age of 30 gets around to realizing that this handsome young president might not be nearly as cool as they’d hoped, it won’t be hard to affix a date on when the milk began to sour. It was March 26, 2009, when Barack Obama conducted a live town hall press conference featuring questions submitted online.

Near the beginning of this hip and mildly groundbreaking interaction, the president said this: “We took votes about which questions were gonna be asked.…Three point five million people voted. I have to say that there was one question that was voted on that ranked fairly high, uh, and that was whether legalizing marijuana would improve, uh, the economy and job creation. And, uh (chuckles), uh, I don’t know what this says about the online audience (laughs), but I just want—I don’t want people to think that—this was a fairly popular question; we want to make sure that it was answered. Uh, the answer is, no, I don’t think that is a good strategy to grow our economy.”

The live audience laughed and applauded. The kids online? Not so much.

“Way to discredit a lot of the ‘online audience’ who got you elected, Mr. President,” wrote one commenter on the social news-aggregating website Digg, where Obama’s dismissal was heavily criticized. “Enjoy your approval rating now, Mr. President, I think you just lost a bunch of help,” wrote another. A third Diggster treated legalization with a seriousness (if not grammaticalness) that Obama failed to muster: “To me this is justa common sense issue, legalize Marijuana, decriminalize drug use, thereby crippling drug lords, creating a safe and in the open means to distribute cannabis, give the economy a shot in the arm, and propel snack food sales through the roof. I know the man has a lot on his plate, but seriously this is not justa pot head issue. and it ain’t cute that folks are rotting in prisons for cultivating and smoking a ***** plant.”

No, it ain’t cute at all.

Scratch a young Obama voter and you won’t necessarily find someone who likes bailouts or cares about financial market regulations one way or another. Instead you’re likely to hear about how the awful Republicans wage wars, bait gays and racial minorities, and basically act like a bunch of mean old white men. Party membership and voting are frequently more about group identity than philosophical orientation about the proper role of government. (For a wonderful exploration of the dissonances this can create, see Associate Editor Katherine Mangu-Ward’s “Dangerous Toys, Strange Bedfellows,” page 42.) There’s little doubt about the broad mores of Generation Obama: pro-choice, pro-gay, and pro-legalization. Obama’s got the first one covered, but his youngest supporters are finding out quickly that on the latter two the president is not offering substantive “change” from the last few administrations.

Freedom works in chaotic, unpredictable ways. Sometimes you can go for decades without an inch of progress; and then, the next thing you know, the whole architecture of oppression gets swept away within a matter of days. At a recent screening in Washington, D.C., for the new Velvet Revolution documentary The Power of the Powerless, an American activist type asked the former Czech student leader Šimon Pánek how much behind-the-scenes logistical groundwork and drawn-out planning his fellow revolutionaries engaged in before the 10 days in November 1989 that overthrew the Communist Party. Pánek laughed. “Oh, no,” he said. “It all happened so fast, you cannot plan for such a thing.”

Marijuana legalization isn’t happening remotely that fast, but there are some preliminary indicators that something new and hopeful is stirring within the populace in 2009. It started in late January, when photos surfaced of record-shattering Olympic gold medal swimmer Michael Phelps smoking a bong at a party. As a nation prepared for the usual round of hypocritical and self-righteous denunciations, something stranger happened: nothing. The country’s sports pages, normally not known for their permissive attitudes about what humans put in their bodies, greeted the news of a 23-year-old acting like a 23-year-old with a collective shrug.

Ostensibly conservative corporate America, at least in the form of Phelps’ many sponsors, almost unanimously stood by their man. The one company that did not, cereal-maker Kellogg Co., found itself the target of a boycott, and its spokespeople spent the month of February loudly (and not very convincingly) claiming that the two sides’ parting of the ways was a simple matter of a contract expiring. “Our marijuana laws have been ludicrous for as long as we’ve been alive,” the conservative columnist Kathleen Parker wrote in the Washington Post. “The problem isn’t Phelps, who is, in fact, an adult. The problem is our laws—and our lies.”

Aside from the shattered lives of those caught either in the drug war or in the dangerous black market that prohibition produces, it is the lies that make marijuana criminalization so infuriating. For decades we have allowed billions of our tax dollars to be spent on propaganda telling us, falsely, that pot is “dangerous,” that winners don’t do drugs, and that recreational drug users finance terrorism. Barack Obama is the living refutation of all of that: Not only did he inhale, but he freely admitted that “that was the point.” Yet countless federal agencies still require either marijuana-free pasts or (more likely) skilled lying about it. This at a time when more than half of Americans born after World War II have tried pot at least once.

Forcing people to lie, even a little bit, is one of the single most appalling and corrosive things a government can do. That’s the bad news. The good news is that this model is ultimately unsustainable, for the simple reason that people would rather tell the truth. At Andrew Sullivan’s blog in March and April, readers sent in dozens of testimonials explaining that they are perfectly upstanding members of society yet have broken the nation’s idiotic marijuana laws multiple times in the past and are now tentatively “coming out of the closet” about it. Though it’s another sign that the architecture of lies is finally showing the first signs of collapse, the act is nonetheless kind of pathetic. What kind of fearful, groveling supplicants have we become after these four decades of abuse?

That’s why Obama’s pot answer, and the immediately hostile reaction to it by his core fan base, was so interesting. The president has done some good things in office, most notably giving word to the Drug Enforcement Administration that it is no longer to conduct raids on medical marijuana clubs in states they are legal. Though there still have been a couple of raids during the transition period, the new policy presents a marked change from the past. But considering that that’s about as far as Obama appears willing to go, events and public sentiment may soon overtake him.

In moments of liberation, leaders who seemed so progressive during times of stagnation suddenly appear archaic, even obstructionist. Mikhail Gorbachev was far more liberal than the communist leaders of East Germany and several other Soviet satellites, yet the revolutionaries there who rammed through the opening he helped create nonetheless tended to hate his guts. He was, after all, still an authoritarian Communist. By demonstrating that some winners do do drugs, and by allowing cannabis clubs to show the world that pot buyers and sellers are as American as apple pie, Obama is perhaps unwittingly helping to unleash a long-overdue correction in the way America lies to itself. Taking advantage of that window of opportunity might not be a good strategy for growing the economy, but it’s an excellent way to begin regrowing our spines.

Stop Falling for Distractions. Please, Pay Attention!—Obama, Liberals Are Destroying Our Country

Ronald Reagan on Socialized Medicine

Barack Obama Is Too Much Of A Democrat

Barack Obama Is Too Much Of A Democrat

John Tamny

And that won't help him succeed in our center-right nation.

In his endlessly interesting diary-based account of his time as Tony Blair's consigliere and media adviser, The Blair Years, Alastair Campbell noted that Blair saw a lot of good in Thatcherism. This frequently bothered some of his more left-of-center advisers, but as Blair once explained to them, "What gives me real edge is that I'm not as Labour as you lot."

Indeed, to prove to the voters that his Labour Party was truly New Labour, Blair scratched a dated part of his party's platform, which required shared ownership of the means of production. Symbolic gestures like this mattered quite a bit for a party that was seen as anti-economic growth. Blair also shied away from raising income tax rates on the rich, because, as Campbell observed, "the minute we signaled we were raising the top rate, as far as the public is concerned, that was us back to the old ways they rejected."

Blair's largely successful two-and-a-half term run as Britain's prime minister should serve as a model for President Obama. Indeed, his ascent to the presidency was not so much a rejection of pro-growth policies as it was a rejection of a Republican Party that had forgotten what caused economic growth. Content to rest solely on its tax-cutting laurels, the GOP became an increasingly "inside Washington" party that seemingly only existed to maintain its power, all the while raising taxes on the electorate through nosebleed spending and dollar debasement.

The Wall Street Journal's Gerald Seib recently acknowledged that, in total, we're still "a center-right nation." Republicans forgot this as they shed all manner of political and policy principle, while President Obama ignores the state of the U.S. electorate at his peril. If he continues to be too old-style-Democrat, as opposed to the more centrist Bill Clinton of the '90s, voters will be reminded yet again why they've mostly rejected Democratic presidential candidates since the 1960s.

In short, if Obama is too succeed, he must be less of a Democrat. The problem--at least for now--is that from taxes to spending to investment to credit, Obama is showing himself to be the very kind of Democrat that turned the electorate Republican in the past.

On the individual income-tax front, Obama has made plain that taxes on the rich should go up as a way of sharing the wealth. What he ignores is that high incomes frequently disappear when Washington puts a bull's eye on them. More importantly, be they rich Democrats or Republicans, all Americans are blessed by the productive efforts of what economist Reuven Brenner calls the "vital few." If high-earners feel their efforts are being penalized, their disappearance will be an economic negative for all us, and a blemish on the reputation of the party that Obama would like to cast as "post-partisan."

With regard to spending, not only did massive spending increases under George W. Bush do nothing to stimulate economic growth, they offended many Americans--irrespective of party--who feel budget deficits loom as an economic millstone around our collective necks. Worst of all, when Obama proposes a $3.6 trillion dollar budget, what he's really saying is that he'd like to remove $3.6 trillion from our wages. Simplified, when governments spend, they are by definition removing money from the private economy--money that would foster job and company creation along with higher pay. The Democrats were pushed out of power partially because they were seen as a tax-and-spend party, and now Obama is moving to restore that failed reputation.

When it comes to corporate taxes, Obama just announced a plan to close tax loopholes that enable U.S.-based companies to keep some of their foreign profits from the greedy hand of the federal government. As Obama put it, he wants to address imbalances in "a tax code that says you should pay lower taxes if you create a job in Bangalore, India than if you create one in Buffalo, N.Y."

What the president misunderstands is that the corporate profits gained thanks to the efficient utilization of the worldwide labor pool is what attracts the very investment that funds their growth here and around the world. To paraphrase Democrat John Kerry during the 2004 presidential primaries, "you can't love jobs while hating job creators." In Obama's case, he regularly talks up job creation out of one side of his mouth, all the while sneering at the efforts of companies seeking job-creating profits out of the other side. Obama claims that more aggressive overseas tax collection would raise $210 billion--good luck with that--but even if successful, this would mean $210 billion less for companies and individuals to invest in the private economy.

Rising interest rates on credit cards are doubtless bringing pain to many Americans, but this is what credit-card companies must do in order to remain profitable amid rising defaults. Obama has made it clear that he thinks this is unfair, but what would really be unfair is if the White House succeeded in reducing rates through governmental force.

In the near term some Americans would benefit, but over the long-term they would pay dearly for many purveyors of credit exiting an unprofitable industry altogether. When we consider how many successful businesses have been able to open their doors thanks to the plentiful existence of credit, not to mention how many are reliant on consumers in possession of credit cards, Obama's alleged compassion will ultimately carry an economically hurtful price tag.

Perhaps most scary of all is Obama's stance with regard to Chrysler's bankruptcy. Many of Chrysler's creditors have understandably made their unhappiness known about the potential for a government-enforced "haircut" that would require senior creditors to get very little back in return for making risky bets on the dying carmaker.

Obama decries these creditors as "speculators," but in truth, those speculators are the ones with the capital necessary to keep struggling businesses afloat. If it becomes apparent that creditors will be treated badly by the Obama administration, it can be assured investments will dry up. Without capital, companies can't exist, so in seeking to punish the capital providers, Obama risks the future health of more than Chrysler.

What Barack Obama seemingly forgets is that no amount of soaring rhetoric can whitewash over policies that tend toward collectivism. Tony Blair understood this, and so did Bill Clinton; George W. Bush failed for not understanding this. No matter the 2008 election results, we remain a center-right nation, so if Obama wants to be successful, he must gain an edge by being less Democrat than some of his supporters.

John Tamny is editor of RealClearMarkets, a senior economist with H.C. Wainwright Economics and a senior economic adviser to Toreador Research and Trading. He writes a weekly column for Forbes.

Addressing Overseas Tax Dodge Questions

Addressing Overseas Tax Dodge Questions

By Robert Samuelson

The U.S. tax code is "full of corporate loopholes that makes it perfectly legal for companies to avoid paying their fair share."

-- President Obama, May 4

Like it or not, ours is a world of multinational companies. Almost all of America's brand-name firms (Coca-Cola, IBM, Microsoft, Caterpillar) are multinationals, and the process works both ways. In 2006, the U.S. operations of foreign firms employed 5.3 million workers. Fiat's looming takeover of Chrysler reminds us again that much business is transnational.

For most people, the multinational company is a troubling concept. Loyalty matters. We like to think that "our companies" serve the broad national interest rather than just scouring the world for the cheapest labor, the laxest regulations and the lowest taxes. And the tax issue is especially vexing: How should multinationals be taxed on the profits they make outside their home countries?

Listen to President Obama, and the status quo seems a cesspool. Pervasive "loopholes" engineered by "well-connected lobbyists" allow U.S. multinationals to skirt American taxes and outsource jobs to low-tax countries. So the president proposes plugging loopholes. Some jobs will return to the United States, he said, and U.S. tax coffers will grow by $210 billion over the next decade.

Sounds great -- and that's how the story played. "Obama Targets Overseas Tax Dodge," headlined The Post. But the reality is murkier; the president's accusatory rhetoric perpetuates many myths.

Myth: Aided by those overpaid lobbyists, American multinationals are taxed lightly -- less so than their foreign counterparts.

Reality: Just the opposite. Most countries don't tax the foreign profits of their multinational firms at all. Take a Swiss multinational with operations in South Korea. It pays a 27.5 percent Korean corporate tax on its profits and can bring home the rest tax-free. By contrast, a U.S. firm in Korea pays the Korean tax and, if it returns the profits to the United States, faces the 35 percent U.S. corporate tax rate. American companies can defer the U.S. tax by keeping the profits abroad (naturally, many do), and when repatriated, companies get a credit for foreign taxes paid. In this case, they'd pay the difference between the Korean rate (27.5 percent) and the U.S. rate (35 percent).

Myth: When U.S. multinationals invest abroad, they destroy American jobs.

Reality: Not so. Sure, many U.S. firms have shut American factories and opened plants elsewhere. But most overseas investments by U.S. multinationals serve local markets. Only 10 percent of their foreign output is exported back to the United States, says Harvard economist Fritz Foley. When Wal-Mart opens a store in China, it doesn't close one in California. On balance, all the extra foreign sales create U.S. jobs for management, research and development (almost 90 percent of American multinationals' R&D occurs in the United States), and the export of components. A study by Foley and economists Mihir Desai of Harvard and James Hines of the University of Michigan estimates that for every 10 percent increase in U.S. multinationals' overseas payrolls, their American payrolls increase almost 4 percent.

Myth: Plugging overseas corporate tax loopholes will dramatically improve the budget outlook as multinationals pay their "fair" share.

Reality: Dream on. The estimated $210 billion revenue gain over 10 years -- money already included in Obama's budget -- represents only six-tenths of 1 percent of the decade's tax revenue of $32 trillion, as projected by the Congressional Budget Office. Worse, the CBO reckons that Obama's endless deficits over the decade will total a gut-wrenching $9.3 trillion.

Whether Obama's proposals would create any jobs in the United States is an open question. In highly technical ways, Obama would increase the taxes on the foreign profits of U.S. multinationals by limiting the use of today's deferral and foreign tax credit. Taxing overseas investment more heavily, the theory goes, would favor investment in the United States.

But many experts believe his proposals would actually destroy U.S. jobs. Being more heavily taxed, American multinational firms would have more trouble competing with European and Asian rivals. Some U.S. foreign operations might be sold to tax-advantaged foreign firms. Either way, supporting operations in the United States would suffer. "You lose some of those good management and professional jobs in places like Chicago and New York," says Gary Hufbauer of the Peterson Institute.

Including state taxes, America's top corporate tax rate exceeds 39 percent; among wealthy nations, only Japan's is higher (slightly). However, the effective U.S. tax rate is reduced by preferences -- mostly domestic, not foreign -- that also make the system complex and expensive. As Hufbauer suggests, Obama would have been better advised to cut the top rate and pay for it by simultaneously ending many preferences. That would lower compliance costs and involve fewer distortions. But this sort of proposal would have been harder to sell. Obama sacrificed substance for grandstanding.

David Frum: Quick fix today, crisis tomorrow in Obama's White House

David Frum: Quick fix today, crisis tomorrow in Obama's White House

Something bad and dangerous is happening in Barack Obama's America.

The powers that the Obama administration claimed in order to arrest the financial crisis and mitigate the recession are being used and abused in ways that are underming the legal and financial stability of the United States. Investors: You are warned.

The first warning was the attempt to snatch Chrysler's assets away from their rightful owners to pay off administration friends and supporters.

The Obama plan to save Chrysler would have sold Chrysler's most valuable assets into a new company co-owned by the U. S. and Canadian governments, Fiat and the United Auto Workers (UAW) -- with the UAW getting the biggest piece, 55%.

The trouble was: those assets belonged to somebody else. They belonged to the company's bondholders, who had a legal first claim. Under the administration's plan, those senior-secured creditors would have received just 29¢ on the dollar.

For a failing company to shuffle assets so as to favor some creditors over others with a stronger claim is a very serious wrong, potentially even a crime. There's a sound economic reason for this rule of law: Bondholders accept lower returns in good times in exchange for greater security in bad times. Protecting bondholders in bad times ensures that future borrowers will be able to borrow in good times.

The bondholders squawked. Well -- not all the bondholders. Bondholders who had previously taken government bailouts for themselves, via the Troubled Asset Relief Program (TARP), kept quiet. That's bad enough. It means that these major lenders were breaching their fiduciary duty to their shareholders in order to placate their new masters in Washington.

But what happened to the non-TARP bondholders was even worse. When they squawked, the administration tried to muscle them. Lawyers for the bondholders contend that senior representatives of the Obama administration threatened them. Michael Barone, the ultra-knowledgeable (and normally unflappable) editor of the Almanac of American Politics called it "gangster government."

The Obama administration denies it threatened anyone. And yet over the past week, one by one, formerly protesting bondholders have abruptly gone silent. Last week, the non-TARP group represented bondholders holding $1-billion in Chrysler bonds. By the end of this week, the group had shrunk to represent only $300-million in bonds. As one commenter observed: that shrinkage suggests that the threats were real.

Then, on Thursday, another alarm sounded.

The state of California faces a desperate fiscal situation. California now has the worst credit rating of any American state. Governor Arnold Schwarzenegger and the Democratic majority legislature have struggled to balance the books, as they are constitutionally obliged to do. They have raised taxes dramatically, but they have also cut some programs. Among the cuts: a $2-an-hour cut in the wages of home health-care workers.

Those workers were unionized, and their union -- the Service Employees International Union - carries clout in Obama's Washington. On Thursday, California state officials told the Los Angeles Times that they had received a warning: The federal government would deny California $6.8-billion in stimulus funds unless the wage cut was rescinded. Since the wage cut will save only about $74-million, the state will have little choice but to surrender.

That missing money will have to be compensated for. Already, California's budget plans rely overwhelmingly on a mix of accounting tricks (selling future lottery revenues for an up-front payment) and tax increases. Now the state will need more tricks and more tax increases.

And so will the other states, as they too get the message: no pay cuts for unionized workers will be tolerated by Obama's Washington.

So, result:

In barely four months, Barack Obama has nudged the United States toward a future in which government will be bigger and more assertive -- where taxes will be higher and government unions more powerful -- where legal rights are less secure and contracts more uncertain.

In California, he is pushing a state toward the fiscal edge in order to favour a union ally. At Chrysler, he has put at risk the security of every contract in the country to please another union.

Meanwhile, his administration is planning changes to the regulation of finance that are likely to leave the United States less dynamic and less innovative in the years ahead -- at the same time as taxes rise and educational levels decline. (Already the Educational Testing Service-- the people who run America's SAT exam -- predicts a less skilled U. S. workforce in 2030 than today, with literacy rates declining by an average of 5% as unskilled immigration and rising rates of single parenthood take their toll.)

It's easy to lose sight of these wrong and costly choices in the turmoil of the immediate crisis. But it is these decisions of today that are preparing the crisis of tomorrow.

Social Conservative Leaders Feel Scapegoated

Social Conservative Leaders Feel Scapegoated

By David Paul Kuhn

There is a brooding sense within top social conservative circles that they have become the revolving scapegoat of the Republican Party. Many of the longtime leaders of the Christian right, from Richard Land to Tony Perkins to Gary Bauer, expressed resentment in extended interviews with a singular theme: that the most loyal GOP bloc has been so quickly thrown under many critics' bus.

"There are powerful interest groups in the party and in the country that are trying to scapegoat social conservatives," Land said, who has long served as a bridge between Southern Baptists' political concerns and GOP leadership. "It's people who have no problem ignoring facts."

Social conservatives have proven perhaps the most loyal Republicans. The September 15th economic crisis brought Democrats to new ground across red America. States from Indiana to Florida to North Carolina shifted to Barack Obama after the market crash. In this last chapter of the campaign Obama made inroads with GOP strongholds like white men.

But social conservatives did not budge. Only 29 percent of whites who attend church weekly backed Obama. That is the precise portion who voted for Al Gore and John Kerry. Half of all Americans who voted for John McCain were weekly church attendees. White evangelicals or born-again Christians comprised 42 percent of the GOP vote, according to exit polls.

Despite their loyalty to the GOP, traditionally, after national losses, social conservatives feel like the whipping boy of GOP critics.

"The party alienated too many Americans by allowing social conservatives to dominate," read one New York Times article shortly after Bill Clinton won in 1992. To win, "we're going to have to take on the religious nuts," argued a GOP strategist after Clinton's reelection four years later.

"That's the pattern that has emerged over the last couple of decades," said Perkins, who heads the Family Research Council. "People want to find an easy excuse for the GOP's failures and they try to point to the social conservative issues and by extension social conservatives."

Today, many social conservatives believe that this pointing is more pervasive.

There was Chris Matthews recently grilling Indiana Rep. Mike Pence, chairman of the House Republican Conference, over whether he believes in creationism.

There was the first gathering of top Republicans this month to talk about the future of the GOP. Notably absent from the conversation led by Virginia Rep. Eric Cantor, a top House Republican, former Florida Gov. Jeb Bush and former Massachusetts Gov. Mitt Romney, was talk of cultural issues like abortion.

At an April gathering of Log Cabin Republicans, a gay GOP organization, McCain's 2008 campaign manager Steve Schmidt urged Republicans to support gay marriage. Schmidt's speech was a widely publicized break with one of social conservatives two primary political concerns.

"The Republicans deserve to lose elections under the rule of 'too-stupid-to-govern' if they choose the Log Cabin constituency over social conservatives," Land said of Schmidt's speech.

Social conservatives also contend with Schmidt's, among others, broader inference that the GOP is becoming a fundamentalist religious party.

"You put public policy issues to a religious test, you risk becoming a religious party," Schmidt said in his speech.

Conservative Christian leaders argue that they don't tout veto power over the GOP. McCain was not their top choice in the 2008 Republican primaries, they note.

"Social conservatives are not the gatekeeper of the Republican party," Bauer said, a longtime Christian conservative leader who served as Ronald Reagan's chief domestic policy adviser.

At the same time, social conservatives face a cultural hurdle with younger voters. Voters under age 30 are slightly more conservative on the abortion issue than earlier generations. But young people are more liberal on gay rights issues.

McCain's daughter, Meghan, personifies this generational tension. "I am a pro-life, pro-gay-marriage Republican," she describes herself.

Voters under age 30 are more likely to believe abortion should be illegal than voters age 30 to 64, by a margin of 48 to 41 percent, according to the April poll by the Pew Research Center--a trend Pew polling also found in 2008. Pew polling in recent years has also shown that younger voters are less likely to oppose gay marriage.

Still, overall, it does seem peculiar that in this year, of all years, discussion of the GOP's minority status has centered mostly on moving away from cultural conservatives.

Not since 1980 has the economy so dominated a presidential campaign, based on the portion of voters who selected it as their primary issue in exit polls. Sixty-three percent of voters said the economy was their top issue. A Pew post-election media report found that social issues--like abortion or gay marriage--constituted less than one percentage point of all campaign news, surely a low since the beginning of the Reagan era.

On Election Day, in one of the few metrics of national cultural debates, a majority of voters in California, Arizona and Florida approved bans on same-sex marriage.

More recently, Pew polling found in late April that the American public has actually become slightly more conservative on cultural issues like abortion and gun control. Other polls show the public view of abortion remaining steady. At minimum, it's clear Americans are as divided as ever on the issue.

A recent CNN/Opinion Research Corporation poll found that by a margin of 49 to 45 percent, the public considers itself more "pro-choice" than "pro-life." Though significantly, amid talk of cultural moderation, two-thirds of Republicans said they were "pro life" in the poll.

The same-sex marriage debate particularly poses a regional cultural hurdle for the GOP. Rhode Island may soon be the sole New England state where same-sex marriage is not legal. Legislators in Maine and New Hampshire recently voted to legalize gay marriage.

Washington D.C. legislators also recently voted to recognize same-sex marriages in other states. Gay marriage advocates have gained ground perhaps nowhere more visibly than in Iowa. An Iowa Supreme Court ruling in April made Iowa the first state in the nation's heartland to allow same-sex marriage.

Many conservative Christian leaders do acknowledge that in more socially liberal regions of the country like New England, the GOP cannot have a strict cultural litmus test on social issues.

"Republicans in those moderate districts have to choose the Republicans that most represent their views," Land said, when asked by me if Republicans running in more culturally left-leaning constituencies should be opposed by cultural conservatives.

Debate over gay marriage has particularly placed cultural conservatives in an awkward position. They bristle at assertions that their opposition is comparable to opposition to blacks' civil rights in the sixties or that their position is radical.

The CNN poll shows that a majority of voters, including a majority of independents, believe same-sex marriages should not be legal. Yet in the sixties, a majority of Americans also opposed the pace of civil rights reforms.

Social conservatives emphasize however that their opposition to same-sex marriage is shared by Obama, as well as other top Democrats like Hillary Clinton.

Cultural conservatives were especially riled recently by the debate over whether California's Carrie Prejean was denied the national crown in the Miss USA pageant because she said, when asked, that marriage should be between a man and a woman.

"I have not been able to find a difference between Barack Obama's position and Miss California's position," Bauer said. "But Miss California is being smeared and Barack Obama is seen as a hero by that community."

The coming Senate hearings over the nomination of a new Supreme Court justice will likely further ratchet up the cultural debate.

There is some chatter in circles of moderate Republican strategists that the GOP should stay with cultural conservatives on rhetoric but shy away on policy. If that occurs, Land said, "Republicans delude themselves to thinking that social conservatives will have no where else to go."

In the end, the GOP leadership will likely not move away from social conservatives anytime soon. They are aware of the coalition math. A divorce between the Christian right and the GOP would leave Republicans in ruin.

This is why, despite the heightened rhetoric today, Bauer is skeptical of any divide between the GOP and its largest bloc.

"I'm not concerned that they could actually be that stupid," Bauer said. "There are whole areas of the country where the only reason the Republicans are competitive are because of values and social issues."

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David Paul Kuhn is the Chief Political Correspondent for RealClearPolitics and the author of The Neglected Voter. He can be reached at david@realclearpolitics.com

The Great Tax Dodge Demystified

The Great Tax Dodge Demystified

By Robert Samuelson

"(The U.S. tax code is) full of corporate loopholes that makes it perfectly legal for companies to avoid paying their fair share."
-- President Barack Obama, May 4

WASHINGTON -- Like it or not, ours is a world of multinational companies. Almost all of America's brand name firms (Coca-Cola, IBM, Microsoft, Caterpillar) are multinationals, and the process works both ways. In 2006, the U.S. operations of foreign firms employed 5.3 million workers. Fiat's looming takeover of Chrysler reminds us again that much business is transnational.

For most people, the multinational company is a troubling concept. Loyalty matters. We like to think that "our companies" serve the broad national interest rather than just scouring the world for the cheapest labor, the laxest regulations and the lowest taxes. And the tax issue is especially vexing: How should multinationals be taxed on the profits they make outside their home countries?

Listen to President Obama, and the status quo seems a cesspool. Pervasive "loopholes" engineered by "well-connected lobbyists" allow U.S. multinationals to skirt American taxes and outsource jobs to low-tax countries. So the president proposes plugging loopholes. Some jobs will return to the United States, and U.S. tax coffers will grow by $210 billion over the next decade.

Sounds great -- and that's how the story played. "Obama Targets Overseas Tax Dodge," headlined The Washington Post. But the reality is murkier; the president's accusatory rhetoric perpetuates many myths.

Myth: Aided by those overpaid lobbyists, American multinationals are taxed lightly -- less so than their foreign counterparts.

Reality: Just the opposite. Most countries don't tax the foreign profits of their multinational firms at all. Take a Swiss multinational with operations in South Korea. It pays a 27.5 percent Korean corporate tax on its profits and can bring home the rest tax-free. By contrast, a U.S. firm in Korea pays the Korean tax and, if it returns the profits to the United States, faces the 35 percent U.S. corporate tax rate. American companies can defer the U.S. tax by keeping the profits abroad (naturally, many do), and when repatriated, companies get a credit for foreign taxes paid. In this case, they'd pay the difference between the Korean rate (27.5 percent) and the U.S. rate (35 percent).

Myth: When U.S. multinationals invest abroad, they destroy American jobs.

Reality: Not so. Sure, many U.S. firms have shut American factories and opened plants elsewhere. But most overseas investments by U.S. multinationals serve local markets. Only 10 percent of their foreign output is exported back to the United States, says Harvard economist Fritz Foley. When Wal-Mart opens a store in China, it doesn't close one in California. On balance, all the extra foreign sales create U.S. jobs for management, research and development (almost 90 percent of American multinationals' R&D occurs in the United States) and the export of components. A study by Foley and economists Mihir Desai of Harvard and James Hines of the University of Michigan estimates that for every 10 percent increase in U.S. multinationals' overseas payrolls, their American payrolls increase almost 4 percent.

Myth: Plugging overseas corporate tax loopholes will dramatically improve the budget outlook as multinationals pay their "fair" share.

Reality: Dream on. The estimated $210 billion revenue gain over 10 years -- money already included in Obama's budget -- represents only six-tenths of 1 percent of the decade's tax revenues of $32 trillion, as projected by the Congressional Budget Office. Worse, the CBO reckons that Obama's endless deficits over the decade will total a gut-wrenching $9.3 trillion.

Whether or not Obama's proposals would create any jobs in the United States is an open question. In highly technical ways, Obama would increase the taxes on the foreign profits of U.S. multinationals by limiting the use of today's deferral and foreign tax credit. Taxing overseas investment more heavily, the theory goes, would favor investment in the United States.

But many experts believe his proposals would actually destroy U.S. jobs. Being more heavily taxed, American multinational firms would have more trouble competing with European and Asian rivals. Some U.S. foreign operations might be sold to tax-advantaged foreign firms. Either way, supporting operations in the United States would suffer. "You lose some of those good management and professional jobs in places like Chicago and New York," says Gary Hufbauer of the Peterson Institute.

Including state taxes, America's top corporate tax rate exceeds 39 percent; among wealthy nations, only Japan's is higher (slightly). However, the effective U.S. tax rate is reduced by preferences -- mostly domestic, not foreign -- that also make the system complex and expensive. As Hufbauer suggests, Obama would have been better advised to cut the top rate by ending many preferences. That would lower compliance costs and involve fewer distortions. But this sort of proposal would have been harder to sell. Obama sacrificed substance for grandstanding.