Injustice of State Subsidies
My colleague Chris Edwards made a good point yesterday in his post on the injustice of federal subsidies. The wrangling between the states to haul in the federal largesse is wasteful, and getting worse. But the underlying issue in the article Chris cites — a state using taxpayer money to lure a company away from another state — is another wasteful activity that is all too common.
Instead of competing with other states to attract industry by lowering taxes and reducing regulations, it seems most state governors prefer a politically opportunistic method I call “press release economics.” Here’s how it works:
A state “economic development” agency offers an out-of-state company (or even an out-of-country company) tax breaks and/or direct subsidies to locate some or all of its business operations in that state. Most likely, the business would have located there anyhow due to myriad factors including demographics, transportation logistics, and workforce capabilities. Sometimes several states will engage in a “bidding war” to get a business to set up shop within their borders. The governor of the “winning” state will then issue a press release citing the new jobs and capital his administration has just brought to the state. The locating company usually tells the press that the winning state’s package helped seal the deal. The company and the governor’s press staff then typically arrange a photo-op at an orchestrated ground-breaking ceremony for the new facilities.
If a state is already bleeding jobs, as is often the case in the current economy, such press releases and photo-ops can be a political coup. Moreover, the governor will have given up, or foregone, relatively little in tax revenue in comparison to, say, cutting the state corporate income tax. This also leaves the governor with more money to spend on various vote-buying programs. I’m picking on governors, but the legislature generally prefers the press-release economics route for similar reasons. And if you’re a governor, why risk the headache of engaging the legislature in a fight over reducing corporate taxes, unemployment taxes, or any other tax — including personal income taxes and sales taxes — that effect industry when you can take the easy win?
Am I too cynical? Actually, I had first-hand experience with this issue when I worked in state government. My suggestion that the governor eliminate or reduce the state’s high corporate income tax rate, and “pay for it” — at least in part — by getting rid of the state’s corporate welfare apparatus, was routinely ignored for the reasons I cited above. That one would be hard-pressed to find support among the economics profession for the state corporate welfare give-away game means little to the majority of policymakers and their minions who naturally favor short-term political gain over long-term economic gain. That other companies already located within the state are stuck paying the regular tax rate, and are thus put at a competitive disadvantage, is a secondary or non-concern as well.
Another issue that I won’t delve into here is the fact that these giveaways often blow up in a state’s face when the locating company ends up not producing the jobs it promised and/or it relocates to another state or country after pocketing the free taxpayer money. Anyhow, journalists should be on the lookout for more press-release economics schemes coming from the states as revenues remain tight and politicians become desperate to demonstrate they’re “doing something.” Journalists should examine a state’s tax structure when a taxpayer giveaway is announced to see if perhaps the governor is masking economic-unfriendly fiscal policies.
Note: South Carolina Gov. Mark Sanford proposed late last year to do exactly what I recommended: eliminate the state’s corporate income tax, offset in part by the elimination of corporate tax incentives. There is hope.
Rollback Time
Recall the stimulus, let the de-TARPing begin, and set the Fed free.
Testifying before the House Budget Committee this week, Ben Bernanke said that when the time comes, the Fed will raise interest rates in order to stop inflation from building in the next recovery. He also asked for “fiscal balance” to sustain financial stability. On the surface -- in terms of keeping prices stable and restoring value to the softening U.S. dollar -- this is positive. Surely Mr. Bernanke wants to do right for America, and he’s giving it his best shot.
But when you talk to traders and economists, the whisper story is that Bernanke and the Fed are no longer truly independent of the Obama White House and Treasury. As a result, Bernanke will not be able to slow down the printing presses and gradually lift the near-zero target rate in a timely and effective manner. Already the Fed has created more than $1 trillion in new cash, and the M2 money supply is growing at its fastest pace in 25 years.
This monetary explosion explains what’s really driving the dollar down and Treasury rates up (alongside rising gold and oil prices). It’s not huge budget deficits, but the growing fear that a less-than-independent Fed will keep pushing new money into the financial system in order to fund Obama’s liberal spending policies.
This week, German chancellor Angela Merkel launched a broadside against the Fed, saying she views the Fed’s powers “with great skepticism.” It was an important rebuke. Here’s the elected leader of a major country actually telling a central bank to stop the printing presses and avoid creating yet another inflationary bubble during the next recovery cycle. In other words, it’s the printing presses, stupid.
Rising inflation and interest rates are always a monetary problem. When Dick Cheney said a few years ago that deficits don’t matter, he was basically right. There is no clear relationship between budget deficits, inflation, and interest rates. In fact, for most of the’80s and ’90s, and much of the 2000s (excepting the 2003–05 bubble), interest rates and inflation fell while deficits averaged over $200 billion a year and got as high as 6 percent of GDP at some points. This is because Paul Volcker and Alan Greenspan restrained money-supply growth in a non-inflationary manner.
Now surely today’s $2 trillion deficit -- which is 13 percent of GDP and likely to remain very high -- is a shocking number. But if the Fed refuses to monetize the deficit, inflation will stay low and long-term interest rates will normalize. Conventional economists and most politicians do not understand that excess money is the root cause of inflation, spiking rates, and a bad, unwanted dollar.
Unfortunately, with the Fed purchasing Treasury bonds, mortgage-backed securities, and other asset-backed bonds, the growing suspicion is that Bernanke & Co. is too entangled in Obama economic policy. Therefore, a timely Fed exit strategy is just as unlikely as a timely fiscal exit strategy to remove unnecessary budget spending and TARP money.
With clear signs of economic recovery on the horizon, some are now calling for an end to the unnecessary stimulus package and a de-TARPing across-the-board. Along with a big rise in the money supply, there’s been a rebound in commodities, a stabilization in housing, falling unemployment claims, a booming stock market, narrowing credit spreads, and rising ISM manufacturing reports. All this is telling us that additional stimulus is unnecessary.
Economic blogger Scott Grannis says “recall the stimulus.” Prof. Russell Roberts of George Mason notes that only $36 billion of the stimulus has been spent through May, out of a total $787 billion. And USA Today reports that $209 billion in countercyclical automatic safety-net stabilizers -- which is apart from the stimulus package -- has already been spent on unemployment insurance, food stamps, Medicaid, and early Social Security retirements.
On the eve of recovery, with all this prior spending, why on Earth do we need more?
Policy analyst Dan Clifton tells me that the $200 billion spending increase scheduled for 2011 to 2019 should definitely be rolled back from the Obama stimulus package, before it’s built into the current-services spending baseline. And let’s not forget that the Obama Democrats already passed a $400 billion omnibus spending bill for 2009. So anybody in Washington who is serious about spending and deficits can save hundreds of billions of dollars by rolling back the stimulus package and TARP. The financial system is healing, and banks want to pay TARP down anyway.
Here’s the moral of this story: Excessive Fed pump-priming and over-the-top federal spending is what matters, not the budget deficit. If we keep paying people not to work by piling on more transfer payments and government subsidies, economic growth will suffer mightily. And if the Fed keeps buying bonds issued by Uncle Sam, inflation will ratchet higher.
Republicans, are you listening? Rollback the unnecessary stimulus and restore the Fed’s independence.
What Business Management Is and What It Is Not
The entrepreneurs are not omnipresent. They cannot themselves attend to the manifold tasks which are incumbent upon them.
Economic calculation as practiced in the market economy, and especially the system of double-entry bookkeeping, make it possible to relieve the entrepreneur of involvement in too much detail. He can devote himself to his great tasks without being entangled in a multitude of trifles beyond any mortal man's range of sight.
He can appoint assistants to whose solicitude he entrusts the care of subordinate entrepreneurial duties. And these assistants in their turn can be aided according to the same principle by assistants appointed for a smaller sphere of duties. In this way a whole managerial hierarchy can be built up.
A manager is a junior partner of the entrepreneur, as it were, no matter what the contractual and financial terms of his employment are. The only relevant thing is that his own financial interests force him to attend to the best of his abilities to the entrepreneurial functions which are assigned to him within a limited and precisely determined sphere of action.
It is the system of double-entry bookkeeping that makes the functioning of the managerial system possible. Thanks to it the entrepreneur is in a position to separate the calculation of each part of his total enterprise in such a way that he can determine the role it plays within his whole enterprise. Thus he can look at each section as if it were a separate entity and can appraise it according to the share it contributes to the success of the total enterprise.
Within this system of business calculation each section of a firm represents an integral entity, a hypothetical independent business, as it were. It is assumed that this section "owns" a definite part of the whole capital employed in the enterprise, that it buys from other sections and sells to them, that it has its own expenses and its own revenues, that its dealings result either in a profit or in a loss which is imputed to its own conduct of affairs as distinguished from the result of the other sections. Thus the entrepreneur can assign to each section's management a great deal of independence. The only directive he gives to a man whom he entrusts with the management of a circumscribed job is to make as much profit as possible.
An examination of the accounts shows how successful or unsuccessful the managers were in executing this directive. Every manager and submanager is responsible for the working of his section or subsection. It is to his credit if the accounts show a profit, and it is to his disadvantage if they show a loss. His own interests impel him toward the utmost care and exertion in the conduct of his section's affairs. If he incurs losses, he will be replaced by a man whom the entrepreneur expects to be more successful, or the whole section will be discontinued. At any rate, the manager will lose his job. If he succeeds in making profits, his income will be increased, or at least he will not be in danger of losing it. Whether or not a manager is entitled to a share in the profit imputed to his section is not important with regard to the personal interest he takes in the results of his section's dealings. His welfare is at any rate closely connected with that of his section. His task is not like that of the technician, to perform a definite piece of work according to a definite precept. It is to adjust — within the limited scope left to his discretion — the operation of his section to the state of the market.
Of course, just as an entrepreneur may combine in his person entrepreneurial functions and those of a technician, such a union of various functions can also occur with a manager. The managerial function is always subservient to the entrepreneurial function. It can relieve the entrepreneur of a part of his minor duties; it can never evolve into a substitute for entrepreneurship. The fallacy to the contrary is due to the error confusing the category of entrepreneurship as it is defined in the imaginary construction of functional distribution with conditions in a living and operating market economy. The function of the entrepreneur cannot be separated from the direction of the employment of factors of production for the accomplishment of definite tasks. The entrepreneur controls the factors of production; it is this control that brings him either entrepreneurial profit or loss. It is possible to reward the manager by paying for his services in proportion to the contribution of his section to the profit earned by the entrepreneur. But this is of no avail. As has been pointed out, the manager is under any circumstances interested in the success of that part of the business which is entrusted to his care. But the manager cannot be made answerable for the losses incurred. These losses are suffered by the owners of the capital employed. They cannot be shifted to the manager.
Society can freely leave the care for the best possible employment of capital goods to their owners. In embarking upon definite projects these owners expose their own property, wealth, and social position. They are even more interested in the success of their entrepreneurial activities than is society as a whole. For society as a whole the squandering of capital invested in a definite project means only the loss of a small part of its total funds; for the owner it means much more, for the most part the loss of his total fortune. But if a manager is given a completely free hand, things are different. He speculates in risking other people's money. He sees the prospects of an uncertain enterprise from another angle than that of the man who is answerable for the losses. It is precisely when he is rewarded by a share of the profits that he becomes foolhardy because he does not share in the losses too.
The illusion that management is the totality of entrepreneurial activities and that management is a perfect substitute for entrepreneurship is the outgrowth of a misinterpretation of the conditions of the corporations, the typical form of present-day business. It is asserted that the corporation is operated by the salaried managers, while the shareholders are merely passive spectators. All the powers are concentrated in the hands of hired employees. The shareholders are idle and useless; they harvest what the managers have sown.
This doctrine disregards entirely the role that the capital and money market, the stock and bond exchange, which a pertinent idiom simply calls the "market," plays in the direction of corporate business. The dealings of this market are branded by popular anticapitalistic bias as a hazardous game, as mere gambling. In fact, the changes in the prices of common and preferred stock and of corporate bonds are the means applied by the capitalists for the supreme control of the flow of capital. The price structure as determined by the speculations on the capital and money markets and on the big commodity exchanges not only decides how much capital is available for the conduct of each corporation's business; it creates a state of affairs to which the managers must adjust their operations in detail.
The general direction of a corporation's conduct of business is exercised by the stockholders and their elected mandataries, the directors. The directors appoint and discharge the managers. In smaller companies and sometimes even in bigger ones the offices of the directors and the managers are often combined in the same persons. A successful corporation is ultimately never controlled by hired managers. The emergence of an omnipotent managerial class is not a phenomenon of the unhampered market economy. It was, on the contrary, an outgrowth of the interventionist policies consciously aiming at an elimination of the influence of the shareholders and at their virtual expropriation.
In Germany, Italy, and Austria it was a preliminary step on the way toward the substitution of government control of business for free enterprise, as has been the case in Great Britain with regard to the Bank of England and the railroads. Similar tendencies are prevalent in the American public utilities. The marvelous achievements of corporate business were not a result of the activities of a salaried managerial oligarchy; they were accomplished by people who were connected with the corporation by means of the ownership of a considerable part or of the greater part of its stock and whom part of the public scorned as promoters and profiteers.
The entrepreneur determines alone, without any managerial interference, in what lines of business to employ capital and how much capital to employ. He determines the expansion and contraction of the size of the total business and its main sections. He determines the enterprise's financial structure. These are the essential decisions which are instrumental in the conduct of business. They always fall upon the entrepreneur, in corporations as well as in other types of a firm's legal structure. Any assistance given to the entrepreneur in this regard is of ancillary character only; he takes information about the past state of affairs from experts in the fields of law, statistics, and technology; but the final decision implying a judgment about the future state of the market rests with him alone. The execution of the details of his projects may then be entrusted to managers.
The social functions of the managerial elite are no less indispensable for the operation of the market economy than are the functions of the elite of inventors, technologists, engineers, designers, scientists, and experimenters. In the ranks of the managers many of the most eminent men serve the cause of economic progress. Successful managers are remunerated by high salaries and often by a share in the enterprise's gross profits. Many of them in the course of their careers become themselves capitalists and entrepreneurs. Nonetheless, the managerial function is different from the entrepreneurial function.
It is a serious mistake to identify entrepreneurship with management as in the popular antithesis of "management" and "labor." This confusion is, of course, intentional. It is designed to obscure the fact that the functions of entrepreneurship are entirely different from those of the managers attending to the minor details of the conduct of business. The structure of business, the allocation of capital to the various branches of production and firms, the size and the line of operation of each plant and shop are considered as given facts and it is implied that no further changes will be effected with regard to them. The only task is to go on in the old routine. In such a stationary world, of course, there is no need for innovators and promoters; the total amount of profits is counterbalanced by the total amount of losses. To explode the fallacies of this doctrine it is enough to compare the structure of American business in 1945 with that of 1915.
But even in a stationary world it would be nonsensical to give "labor," as a popular slogan demands, a share in management. The realization of such a postulate would result in syndicalism.[22]
There is furthermore a readiness to confuse the manager with a bureaucrat.
Bureaucratic management, as distinguished from profit management, is the method applied in the conduct of administrative affairs, the result of which has no cash value on the market. The successful performance of the duties entrusted to the care of a police department is of the greatest importance for the preservation of social cooperation and benefits each member of society. But it has no price on the market, it cannot be bought or sold; it can therefore not be confronted with the expenses incurred in the endeavors to secure it. It results in gains, but these gains are not reflected in profits liable to expression in terms of money. The methods of economic calculation, and especially those of double-entry bookkeeping, are not applicable to them. Success or failure of a police department's activities cannot be ascertained according to the arithmetical procedures of profit-seeking business. No accountant can establish whether or not a police department or one of its subdivisions has succeeded.
The amount of money to be expended in every branch of profit-seeking business is determined by the behavior of the consumers. If the automobile industry were to treble the capital employed, it would certainly improve the services it renders to the public. There would be more cars available. But this expansion of the industry would withhold capital from other branches of production in which it could fill more urgent wants of the consumers. This fact would render the expansion of the automobile industry unprofitable and increase profits in other branches of business. In their endeavors to strive after the highest profit obtainable, entrepreneurs are forced to allocate to each branch of business only as much capital as can be employed in it without impairing the satisfaction of more urgent wants of the consumers. Thus the entrepreneurial activities are automatically, as it were, directed by the consumers' wishes as they are reflected in the price structure of consumers' goods.
No such limitation is enjoined upon the allocation of funds for the performance of the tasks incumbent upon government activities. There is no doubt that the services rendered by the police department of the City of New York could be considerably improved by trebling the budgetary allocation. But the question is whether or not this improvement would be considerable enough to justify either the restriction of the services rendered by other departments — e.g., those of the department of sanitation — or the restriction of the private consumption of the taxpayers. This question cannot be answered by the accounts of the police department. These accounts provide information only about the expenses incurred. They cannot provide any information about the results obtained, as these results cannot be expressed in money equivalents. The citizens must directly determine the amount of services they want to get and are ready to pay for. They discharge this task by electing councilmen and officeholders who are prepared to comply with their intentions.
Thus the mayor and the chiefs of the city's various departments are restricted by the budget. They are not free to act upon what they themselves consider the most beneficial solution of the various problems the citizenry has to face. They are bound to spend the funds allocated for the purposes the budget has assigned them. They must not use them for other tasks. Auditing in the field of public administration is entirely different from that in the field of profit-seeking business. Its goal is to establish whether or not the funds allocated have been expended in strict compliance with the provisions of the budget.
In profit-seeking business the discretion of the managers and submanagers is restricted by considerations of profit and loss. The profit motive is the only directive needed to make them subservient to the wishes of the consumers. There is no need to restrict their discretion by minute instructions and rules. If they are efficient, such meddling with details would at best be superfluous, if not pernicious in tying their hands. If they are inefficient, it would not render their activities more successful. It would only provide them with a lame excuse that the failure was caused by inappropriate rules. The only instruction required is self-understood and does not need to be especially mentioned: seek profit.
Things are different in public administration, in the conduct of government affairs. In this field the discretion of the officeholders and their subaltern aids is not restricted by considerations of profit and loss. If their supreme boss — no matter whether he is the sovereign people or a sovereign despot — were to leave them a free hand, he would renounce his own supremacy in their favor. These officers would become irresponsible agents, and their power would supersede that of the people or the despot. They would do what pleased them, not what their bosses wanted them to do. To prevent this outcome and to make them subservient to the will of their bosses it is necessary to give them detailed instructions regulating their conduct of affairs in every respect. Then it becomes their duty to handle all affairs in strict compliance with these rules and regulations. Their freedom to adjust their acts to what seems to them the most appropriate solution of a concrete problem is limited by these norms. They are bureaucrats, i.e., men who in every instance must observe a set of inflexible regulations.
Bureaucratic conduct of affairs is conduct bound to comply with detailed rules and regulations fixed by the authority of a superior body. It is the only alternative to profit management. Profit management is inapplicable in the pursuit of affairs which have no cash value on the market and in the nonprofit conduct of affairs which could also be operated on a profit basis. The former is the case of the administration of the social apparatus of coercion and compulsion; the latter is the case in the conduct of an institution on a nonprofit basis, e.g., a school, a hospital, or a postal system. Whenever the operation of a system is not directed by the profit motive, it must be directed by bureaucratic rules.
Bureaucratic conduct of affairs is, as such, not an evil. It is the only appropriate method of handling governmental affairs, i.e., the social apparatus of compulsion and coercion. As government is necessary, bureaucratism is — in this field — no less necessary. Where economic calculation is unfeasible, bureaucratic methods are indispensable. A socialist government must apply them to all affairs.
No business, whatever its size or specific task, can ever become bureaucratic so long as it is entirely and solely operated on a profit basis. But as soon as it abandons profit — seeking and substitutes for it what is called the service principle — i.e., the rendering of services without regard as to whether or not the prices to be obtained for them cover the expenses — it must adopt bureaucratic methods for those of entrepreneurial management. (For a detailed treatment of the problems involved, see Bureaucracy.)
Central banks' exit strategies
This way out
The Federal Reserve weighs plans to unwind its unconventional stimulus
A FIREFIGHTER’S first rule of survival is “know your way out”. The same can be said of financial firefighting. Though it has no intention of exiting soon, the Federal Reserve is planning its path out from the extraordinary measures it has taken to free credit markets and boost demand.
With other central banks, the Fed is under growing pressure to explain its exit strategy in order to allay fears that its policies will produce inflation. On June 2nd Angela Merkel, the German chancellor, launched an astonishing attack on the Fed, the Bank of England and the European Central Bank (ECB) for their loose monetary policies. Mrs Merkel’s outburst, which trampled on a German political tradition of not commenting on the actions of independent central banks, makes life awkward for the ECB, which was due on June 4th to announce details of a plan to buy €60 billion ($86 billion) of covered bonds. But her most pointed barbs were aimed elsewhere. “I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe,” she said.
The Fed did most to unsettle Mrs Merkel and its other critics when it said on March 18th that it would buy $300 billion in Treasuries by September, plus $200 billion in bonds issued by Fannie Mae and Freddie Mac, America’s two housing-finance giants, as well as $1.25 trillion of their mortgage-backed securities by December. The purchases are meant to drive down long-term interest rates, and at first they did. Ten-year Treasury yields fell to 2.5% from 3%. But by June 3rd they were back up to 3.5%.
Some of this increase is indeed down to higher inflationary expectations. Inflation-protected bonds now imply future inflation of 2%, up from close to zero late last year, according to Barclays. On June 3rd Ben Bernanke, the Fed chairman, put some of the increase in yields down to concern about surging government borrowing.
But the Fed attributes most of the increase in yields to investors abandoning the safety of Treasuries for riskier investments as economic optimism rises. By itself, that is not a reason for the Fed to step up bond purchases, an option it has kept open. “The aim of the programme was mostly to bring down mortgage rates and generate another wave of refinancing, which it did,” says William Dudley, president of the Federal Reserve Bank of New York*. “That said, if the choice were to keep mortgage rates lower for longer or have a recovery, I’d pick the latter.” But there may be a case for the Fed to schedule extra, smaller purchases to avoid a sharp rise in yields when the current programme ends.
The Fed has financed its loans and securities purchases in the past year by creating new reserves for the banking system (in effect, printing money). Reserves have rocketed, to almost $900 billion now from an average of $11 billion in the year to September. Many analysts see these excess reserves as a pool of inflationary fuel just waiting for the match of credit demand.
The Fed considers this analysis flawed. It sees excess reserves as a problem only if they overwhelm its ability to raise the federal funds rate when need arises. That risk has shrunk since the Fed received authority in September to pay interest on reserves, as other major central banks have long been able to. That in theory should put a floor under the Fed funds rate. Banks should not lend excess reserves at, say, 1%, if they can earn 2% from the Fed.
That said, the Fed cannot be certain that paying interest will work as planned, so it would also like to be able to soak up some reserves. Some were created by the Fed’s myriad loans to banks, issuers of commercial paper and others to unfreeze the credit markets. Those liquidity facilities charge borrowers a penalty rate which makes them less attractive as private credit returns. That is now happening, and the liquidity facilities have begun to shrink (see chart). The Fed could hurry that process up by raising the penalties.
Managing its growing securities holdings will be tougher. The Fed could simply sell them but that would create waves. “The day you sell will be a big market event,” says Mr Dudley. “Historically, the Fed has been buy and hold.” Since the average maturity of the Fed’s bond holdings is five to ten years, the Fed will have to find a way to mop up, or “sterilise”, the related bank reserves for a long time. The usual approach is to conduct reverse-repurchase agreements, borrowing from one of its 16 primary dealers for short periods of time in order to finance the assets on its balance-sheet. But dealers may not have the necessary capacity for the task.
The Fed is currently absorbing reserves by having the Treasury issue more debt than it needs. When dealers purchase the debt, cash shifts from their reserves accounts to Treasury deposits at the Fed, where they remain, unspent. But the Treasury itself is constrained by the debt ceiling set by Congress, and an independent central bank should not rely on the fiscal authority for one of its tools.
A better solution would be for the Fed to issue its own bills, as other central banks do. It could rely on a wider variety of investors, not just primary dealers, to manage its balance-sheet. It would restrict the maturity of such bills to less than 30 days to avoid interfering with Treasury’s longer-dated issuance. The hitch is that Congress has to authorise it. It may come to that. “As long as people are worried about whether we have adequate tools, it makes sense for us to get more tools even if we don’t think we need them,” says Mr Dudley.
Russia's ailing economy
Red square blues
Russia’s failure to diversify away from oil should worry the Kremlin
NOT long ago, Russia proudly counted itself as one of the BRICs—with Brazil, India and China, the four emerging-market giants that were outgrowing the rich world. Yet it now makes more sense to talk of the BICs. With GDP shrinking by almost 10% in the year to the first quarter, Russia is in deep recession.
This is upsetting and worrying for the country’s political masters in the Kremlin. Upsetting because, as late as last autumn, they dismissed the economic crisis as a Western problem that would leave Russia unscathed. But the collapse in the oil markets has shown just how much Russia still depends on getting a good price for its natural resources. Neither President Vladimir Putin in 2000-08 nor (since last May) President Dmitry Medvedev has done anything like enough to diversify the economy—indeed, it depends more on oil and gas now than it did. The government has utterly failed to create a legal and political infrastructure to support business and enterprise.
The Kremlin may not care much about either of these shortcomings, especially now that oil once again costs $70 a barrel. Yet even at this price it must worry, for it can no longer honour its side of Mr Putin’s original bargain: that, in return for a guaranteed rise in living standards, ordinary Russians would accept curbs on the media, rigged elections and a slide into autocracy. The Russians are now lumbered with the second part of this deal without gaining the benefits of the first. Not since Mr Putin came to power have high inflation and shrinking GDP caused such a fall in real incomes (see article).
Why has this not led to more protests? Partly because the Kremlin is firmly in charge and partly because many Russians built up savings in the boom years and have yet to feel the full impact of recession. Besides, faith in the “good tsar” and low expectations of government mean that few blame Mr Putin, now Mr Medvedev’s prime minister.
In the past few months the Kremlin has also tried to show a friendlier face. Mr Medvedev gave his first full Russian interview to Novaya Gazeta, an opposition newspaper, on the grounds that its journalists “did not suck up to anyone”. He has acknowledged critics among non-governmental organisations. He hailed Barack Obama in their first meeting in London in April, inviting the American president to Moscow in July.
The trouble is that this has yet to produce any change. The second sham trial of Mikhail Khodorkovsky, former boss of the Yukos oil company, makes a mockery of judicial independence. Better relations with America are portrayed in Russia as a belated American recognition of past errors and a vindication of the Kremlin’s assertiveness, notably over Georgia.
Nor is there any sign of the promised falling-out between a hardline Mr Putin and a liberal Mr Medvedev. In fact, the differences between the two men are largely of style. After a year of Mr Medvedev’s presidency, only 12% of Russians feel that he is in charge, whereas over 30% believe that power remains with Mr Putin. And Mr Putin has hinted once again that he may resume the presidency for two more six-year terms in 2012.
Bear markets
The risk for the Kremlin is not that it will lose control or collapse into internecine fighting—Mr Putin’s grip is too firm. Nor is it that Russia will go bust, as the Soviet Union almost did in the late 1980s and Boris Yeltsin’s Russia did in 1998. Foreign reserves of $380 billion mean there is enough money to pull through. But without legal, political and economic reform, Russia could well lapse into stagnation. It has squandered one oil-price boom. The price of doing nothing again would be to condemn Russia to the vagaries of the oil market. Mr Putin and Mr Medvedev must not make the same mistake twice.
Accusing Angelo
Angelo Mozilo
Accusing Angelo
Regulators charge Angelo Mozilo, the former king of America’s mortgage market, with fraud
IT IS enough to wipe the Hollywood smile off Angelo Mozilo’s face, if not his equally legendary perma-tan. On Thursday June 4th America’s Securities and Exchange Commission (SEC) charged the former boss of Countrywide, America’s largest mortgage lender before the credit crisis, and his former chief operating and financial officers with securities fraud. The civil suit also accuses Mr Mozilo of insider trading. He thus has the dubious privilege of becoming the first high-profile moneyman to be fingered for alleged wrongdoing in the credit crunch—Bernie Madoff was hardly a household name before the exposure of his ponzi scheme.
The SEC alleges that the three Countrywide executives deliberately misled investors about the risk of its mortgage loans souring as it aggressively built market share. It was, according to the complaint, “a tale of two companies”: In public, Mr Mozilo praised the quality of his firm’s loans, describing Countrywide as a “role model to others in terms of responsible lending”; in private, he is described as having become increasingly alarmed at the poor quality of the mortgages and their chances of blowing up, issuing “dire” assessments to colleagues.
The firm did not disclose these concerns to investors, as it was required to do in SEC filings. The executives allegedly rejected warnings from the chief risk officer about lax loan-underwriting standards. From 2005 on, Countrywide loosened these to match the sloppiest of its competitors, even as Mr Mozilo publicly trumpeted the firm’s prudence. The race to the bottom only accelerated after house prices started to fall. The insider-trading charges stem from Mr Mozilo’s sale of nearly $140m of Countrywide shares. The complaint portrays him as a gambler, betting his investors’ chips on ever-crazier hands while quietly pocketing his own.
As is the way these days, the SEC’s case rests largely on internal emails. In one, Mr Mozilo described one of Countrywide’s subprime-mortgage products as “toxic”. Another of the firm’s offerings was “the most dangerous product in existence.” In a 2006 e-mail, he expressed concern that loans requiring scant documentation were allowing borrowers to lie about their finances. He also wrote of “flying blind” when trying to assess whether the firm’s option-ARM loans—a particularly risky type of mortgage—would survive a downturn. Damningly, if proved true, Mr Mozilo was keen to sell the ARM portfolio long before he stopped praising it in public.
Since the case is civil, the SEC can seek only financial penalties. It is also wants the accused banned from serving as company officers or directors. All three deny wrongdoing. Their best hope of acquittal may lie in convincing the court that while their underwriting was undeniably shoddy, there was no intent to deceive: poor risk management, though lamentable, is not illegal. They can seek some comfort in the fact that the legal climate has shifted in favour of corporate defendants. In civil cases three rulings by the Supreme Court have made fraud harder to prove. Some aggressive tactics used by prosecutors in criminal cases after the bursting of the dotcom bubble have been curbed.
Mr Mozilo’s conviction would make an already remarkable rise-and-fall story even more spectacular. The son of a Bronx butcher, he co-founded Countrywide in New York in the late 1960s, later moving it to California. The firm’s breakneck expansion earned it plaudits and its market value peaked at close to $45 billion. But it eventually buckled under the weight of its subprime loans and in January 2008 it was forced into the arms of Bank of America, which is still valiantly defending the $4.1 billion price tag. The Countrywide name was dropped earlier this year.
It is one of the safest bets in finance that Mr Mozilo will not be the last big name hauled into court. The SEC, bruised by criticism of its failure to catch Mr Madoff and fighting to prove its relevance as a regulatory overhaul approaches, is itching to expose more white-collar criminals. Under Mary Schapiro, its new chairman, enforcement is being beefed up. One of the lawyers representing the “Countrywide Three” has accused the commission of bringing the case after political pressure to revive its reputation. Federal prosecutors and state attorneys-general, meanwhile, are working on dozens of cases, including one alleging fraud against the managers of a Bear Stearns hedge fund whose demise in the summer of 2007 precipitated the crisis.
Indeed, Mr Mozilo is hardly alone in having stood in the doorway of his own business, talking up its credentials, even as large cracks began to spread across the back wall. If he is found guilty, others on Wall Street will have reason to lose their colour.
Let's Keep Many Eyes on the Banks
The move to centralize regulation doesn't make sense.
RICHARD H. NEIMAN
The nation is about to make two momentous policy choices about the future of our financial system. One will be made by the president, the other by the Supreme Court. Both decisions involve the proper roles for state and federal regulatory authority, and both have far-reaching consequences. Yet the country seems barely aware of the issues, or the stakes involved.
The Bush administration promulgated a blueprint for financial regulatory reform in March 2008 that proposed a single federal regulator with virtually no role for state authorities. The Obama administration will shortly announce its own restructuring plan. It should take a fresh approach by including a significant role for the states. This is necessary to maintain checks and balances and protect consumers from predatory lending and other abusive practices.
A move toward complete centralization would be a serious mistake. In an increasingly complex financial-services landscape, we need the local perspective for early detection of emerging risks. States like New York and North Carolina sounded the first alarm on predatory lending issues more than 10 years ago. Unfortunately, instead of cooperating, the primary federal regulators -- the Comptroller of the Currency and the Office of Thrift Supervision -- thwarted state efforts as far back as 2003 by aggressively asserting that federal law pre-empts state law. This exacerbated the subprime crisis by allowing federal banks and thrifts to avoid state antipredatory lending laws.
State supervision also fosters thousands of community and regional banks that provide diversity and stability to our financial system. These smaller banks largely steered clear of the exotic mortgage lending that triggered the subprime crisis, and they are responsible sources of hometown lending. A single federal regulator would tend to focus on the largest institutions to the detriment of smaller ones that benefit from close interaction with local regulators in developing innovative products for the communities they serve.
The second big issue involves the ability of states to enforce valid laws already on their books. The Supreme Court is deliberating the case of Cuomo v. Clearinghouse, which will determine whether state attorneys general or the federal regulator alone can enforce fair lending and other consumer protection laws against national banks.
A decision against the states would result in a perverse situation in which states would be forced to stand by while their laws are violated. States must be able to ensure that financial institutions, like any other businesses, comply with their laws. We want more "cops on the beat," not fewer.
I urge President Barack Obama and Treasury Secretary Timothy Geithner to see this moment in history as an opportunity for establishing a cooperative federalism to bring together the unique expertise and resources of each level of government in a more coordinated approach.
We have much to lose by any well-intentioned but perilous experiment in extreme centralization. If such an experiment does not live up to expectations, there would be no simple way for states to restore their authority and the balance of power. Authority once relinquished is seldom regained.
As Thomas Jefferson so aptly warned in a letter to George Washington in 1791, for the federal government to overstep the boundaries of the states is "to take possession of a boundless field of power, no longer susceptible to any definition."
I appreciate that centralized oversight has competitive advantages in a globalized marketplace. But we can harness those advantages without sacrificing the flexibility and accountability of our more decentralized model. Our country's banking system can combine the efficiency of Hamilton with the soul of Jefferson. We always have, and the creative tension between the two approaches is an important aspect of our national heritage.
Mr. Neiman is superintendent of banks for the state of New York and a member of the TARP Congressional oversight panel.
Obama and Dresden
What is he doing there? Making apologies for World War II?
DANIEL SCHWAMMENTHAL
On his way to the 65th D-Day commemorations in France, President Obama plans a curious stop-over in Germany, my home country. He will travel to Buchenwald, the concentration camp his great uncle helped liberate, a visit that makes personal and historical sense. It is his other German destination, Dresden, that seems out of place. Will the president, who likes to apologize for America's alleged sins, now also apologize for World War II?
For many Germans, the destruction of Dresden in February 1945 has become a symbol of Allied "bombing terror." Many still believe the true number of deaths is closer to the Nazi propaganda of 200,000 than the 20,000 to 35,000 historians believe is correct.
Google "Dresden" and "Kriegsverbrechen," the German word for "war crimes," and you'll get almost 26,000 results. Neo-Nazis marched through the streets of Dresden this February commemorating the "Bombing Holocaust." A flood of recent books, articles and documentaries has shifted Germany's historical debate from its war crimes to its own war victims. As part of this trend, in 2006 public TV station ZDF broadcast "Dresden: The Inferno," the most expensive German television production at the time. Its graphic display of carnage and burning people is at odds with German movie tradition. Films about the Holocaust tend to be more subtle and less emotional.
Mr. Obama's visit to Dresden is an unfortunate gesture. Even if the president were not to make an outright apology for the allied bombings, he could hardly not mention them in this city so preoccupied with its wartime history. And even if he were not to give any speech at all and just toured the city, he'd inevitably be led to the many landmarks that were once reduced to rubble.
His mere presence in Dresden -- on the heels of a visit to Buchenwald and just before attending the Normandy commemorations -- would boost the revisionist cause. It would suggest a sort of moral equivalence between industrialized genocide and the bombings of German cities -- bombings, remember, that were designed to bring an end to the genocidal regime.
Mr. Obama's encounter with the reality of governing does not seem to have tempered his appetite for second-guessing past U.S. presidents. Having already come close to a mea culpa for America's use of atomic bombs against Japan, he may now add Dresden to the revisionist charges against the U.S. Even if the president doesn't say that America lost its moral bearings by bombing Dresden, people will read between the lines of his visit.
Mr. Schwammenthal is an editorial writer for The Wall Street Journal Europe.
There Is No Upside to a Down Economy
TODD G. BUCHHOLZ
I have no sympathy for Mr. and Mrs. "I Deserve Four Bedrooms and a Jacuzzi," the couple who saved no money, put no money down and moved into a McMansion -- from which they are now sneaking out. And yet I have grown weary of all the scolds who are treating Americans like naughty dogs, rolling up newspapers and smacking them on the snouts, shouting: "Bad American! Bad consumer! Stop spending! Get yourself a small car, a small house, or -- even better -- a pup tent in a national park!"
Maybe amid the financial wreckage we feel a natural yearning to go back to simpler times. But some of our commentators have taken this urge a little far. In April, the Chronicle of Higher Education carried an article subtitled "The Gift of Financial Insecurity," noting that, as a result of the crisis, "perhaps Americans can now begin to temper their ingrained optimism with a more elegiac sensibility." In a sweeping Time cover story, Kurt Andersen told readers that "it's time to ratchet back our wild and crazy grasshopper side and get in touch with our inner ant." Baron Layard, a British economist and the author of "Happiness: Lessons From a New Science," seems to think that we would be better off psychologically if we erased a few more zeroes from our bank accounts. After all, he says, "extra income has done so little to produce a happier society, there must be something quite wasteful about much of it." And if you type the word "affluenza" into Amazon's search engine, you'll come up with four books and a PBS special bemoaning our rise from poverty.
![[Grant Robertson]](http://s.wsj.net/public/resources/images/ED-AJ610_buchol_DV_20090604215031.jpg)
Grant Robertson None of this is new, of course. "Small Is Beautiful" by E.F. Schumacher was a book that millions of undergraduates had to read in the 1970s, until roughly the time Jimmy Carter gave his fireside "malaise" speech in a cardigan sweater and looked so sad that the fire went out. Mr. Schumacher, the world's first German-born, Buddhist-British economist, argued for "enoughness," a Buddhist view that we should get by with far less. For Mr. Schumacher, modern society "requires so much and accomplishes so little." True, until you consider that in 1900 life expectancy was just 47 years.
In fact, small is not necessarily better, and there is a difference between a simpler life and the life of a simpleton. At what point in time should we declare: "Stop. Enough progress. Let's keep things simple"? Would 1 B.C. have been a good time to hit "pause"? Or July 3, 1776? Or on the eve of the 1964 Civil Rights vote? It's a good thing Teddy Roosevelt did not lock us into the standard of living of 1904 or we would never fly on airplanes, get a polio vaccination or expect to live past the age of 50. With all due respect to medicine men, who did sometimes come across valuable herbal tonics, it was daring science, not the jungle, that produced Jonas Salk. Grants from the Mellon Foundation helped, too.
Without the progress of the 20th century, Milton Berle said, we'd all be watching television by candlelight. (Of course, postal delivery might be roughly the same.) The point is that we cannot know what we could be missing by halting our climb to toward affluence, any more than Emperor Joseph II could help Mozart by declaring that his opera had "too many notes."
And there is something unfair about decrying consumption at this stage in the game. Even if we simplify our lives and forswear "extra income," we will still benefit from centuries of innovation and wealth-creation that others have yet to enjoy. Make no mistake: To embrace the small-is-beautiful ethos is to crank up the drawbridge and leave a crocodile-infested moat between elites who already own Viking ranges and the masses yearning to gain access to indoor plumbing. Never mind that in the past 20 years, thanks in part to the explosion of American consumption, hundreds of millions of people around the world, now with jobs to meet U.S. import demands, have eaten three meals in one day -- for the very first time in their lives. This is a War on Poverty that we are winning! Snobs would rather downsize and turn victory into defeat.
As for the simple life, its charms wear off fast. Many tourists have tramped around Walden Pond snapping photos, but few would take seriously what Thoreau would probably advise today: to throw away our BlackBerrys and start growing real berries.
And yet there are plenty of books on happiness urging us to do something like that: to surrender our raw capitalistic drives and to leave the rat-race before the entire world turns into a Habitrail. I would argue that it is the excitement of competition -- sloppy, risky and tense -- that brings us happiness. It is the pursuit of knowledge, money and status that releases dopamine and ignites our passion. Neuroscientists report that when a person begins to take a risk, whether gambling on roulette or ginning up the nerve to ask a pretty girl to the prom, his left prefrontal cortex lights up, signaling a natural "high." Alpha waves and oxygenated blood rush to the brain. Sitting alone in a pup tent does not yield the same effects.
Humans have competed ever since Cain picked up a rock and knocked Abel on the head. And, from a historical point of view, the idea of competition has not imprisoned us but liberated us, psychologically and materially. I write this at St. John's College, Cambridge, just a few blocks from the pub where Watson and Crick interrupted lunch to announce they had found "the secret of life" (the DNA double helix). They were driven by beer, moxie, ego and competitiveness.
As Albert O. Hirschman noted in his book "The Passion and the Interests," traditional societies believed that the noble classes living in the castles were composed of fundamentally different kinds of humans from the rest of us. Kings and queens, it was thought, should pursue their passions, whereas the rest of us should just tend our sheep, drink ale and forget about the mannered and manored life. But all that changed with the rise of democracy and industrial society -- and the arrival of a broad "affluence." Now is no time to send ourselves back to a life of simple serfdom.
Mr. Buchholz is writing a book called "RUSH: Competition and the Human Race for Happiness."
'High Noon' for Freedom
Communism began to collapse in Europe on the same day democracy was crushed at Tiananmen.
The 20th anniversary of the Tiananmen Square massacre yesterday recalled the suppression of the democratic spirit in China. However, by quirk of ambivalent fate -- and too easily forgotten -- June 4, 1989 saw a more successful flowering of freedom in Soviet-run Europe.
From the autumn of that dizzying year, the iconic images of communism's fall are the sledgehammers taken to the Berlin Wall or the crowds gathered in Prague's Wenceslas Square. But the end began in Poland, and to be precise on that June day when Poles went to vote in the first, even if only partially, free elections since communists took over after World War II.
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Tomasz Sarnecki To quell growing public protests against economic stagnation, the regime legalized Lech Walesa's Solidarity movement, which had been banned since the imposition of martial law in 1981. It allowed a free vote for all seats in the Senate and a third in the more powerful lower house, or Sejm. The communists thought these provisions guaranteed their hold on power.
But Poles got a taste of freedom and never let go. Not for 40 years, if ever, had the Eastern bloc seen anything like that feverish campaign. In the most famous poster, a red Solidarity banner is emblazoned above a black and white picture of Gary Cooper in the role of the good Marshall. "High Noon, June 4 1989" said the caption, as nearby.
Once votes were counted, Solidarity leaders were as stunned as their rulers: Solidarity won 99 out of 100 seats in the Senate and every seat it could contest in the Sejm. Two months later, the first noncommunist government in Eastern Europe since the 1940s took office in Warsaw. Spontaneous and similarly peaceful revolutions brought down communism in the other Eastern European states before the year was out. By the end of 1991, the Soviet Union had expired and the Cold War was over.
The story of communism's collapse, which began in full the same day Tiananmen's students were crushed by People's Liberation Army tanks, is a timely reminder of the deep-seated human desire for freedom. And an antidote to the fatalism that says Russians, Iranians, Chinese or Egyptians are somehow destined to cower under dictatorship.
Markets Sway After Jobs Report
Gains in industrial stocks helped support the broader stock market on Friday morning, amid a volatile session in which an early rally in the aftermath of better-than-expected jobs data was upended by a reversal in commodities prices.
The Dow Jones Industrial Average, which opened strong and then flattened in subsequent trading, was recently up 43 points. The benchmark turned positive for the year, trading up 0.2% for 2009. Boeing shares jumped 4.7% amid a broad advance in the shares of industrial companies. Caterpillar was up more than 1%, and United Technologies gained more than 2%.
Holding the Dow in check was a 5% slide in DuPont after an analyst downgrade. Merck was down 1.8% after it said that won't seek approval for a heart-failure drug this year.
The Dow's energy components were also down after oil futures turned lower after pushing above $70 a barrel after the release of the jobs report. The dollar was strengthening against the euro and the yen, pressuring commodities prices.
The S&P 500 was up 0.2%, led by a 1.7% jump in its industrial sector. The Nasdaq Composite Index was down 0.1%.
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The Labor Department said nonfarm payrolls shed 345,000 workers in May, well below Wall Street's expectation for a decline of 525,000 jobs. May's job loss was the smallest since September 2008, when Lehman Brothers collapsed. The unemployment rate jumped half a percentage point to 9.4%, highest since August 1983. Economists had expected a 9.2% rate.
That rise helped to offset participants' initial euphoria over the smaller-than-expected move in the total number of lost jobs. Traders were also nagged by worries that inflation pressures may arise earlier than expected, causing the Federal Reserve to tighten rates before a firm growth trend is in place in the U.S. economy, said Anthony Conroy, head trader at BNY ConvergEx, a New York brokerage.
Despite the improvement in the headline payrolls figure, economists at BNP Paribas wrote in a note to clients that the data show a job market "gripped in a very severe recession."
After the employment report, Treasury prices dropped, pushing yields up sharply. The 10-year Treasury yield was off 1-3/32, yielding 3.854%, near a six-month high. Yields on foreign government debt also surged, with the 10-year bund and the 10-year gilt hitting their highest yields since November.
Among stocks to watch, Rio Tinto surged 9% after it walked away from a deal with Aluminum Corp. of China. The Australian bellwether said it was selling over $15 billion worth of shares and unveiled a joint venture with BHP Billiton. BHP shares rose 7%.
Asia markets finished mostly higher on optimism about a rebound in global demand. European shares jumped in the wake of the U.S. jobs report.
Thursday, June 4, 2009
The Only Statue
The Only Statue That Is Smiling
Ronald Reagan, cast in bronze, arrives at the Rotunda.
Washington
"You are there." The rotunda of the U.S. Capitol, that great, sandstone-walled, light-filled hall ringed with statues of the great of American history—Jefferson, Washington, proud Andrew Jackson in his flowing cape, Eisenhower, U.S. Grant, his eyes surveying the terrain as if he sees something out there in the wilderness. It's 11 a.m. Wednesday, June 3, 2009, and Ronald Reagan marches in, surrounded by his peers. Actually his newly installed statue is unveiled there, in a ceremony attended by officials of both parties (including the speaker of the House and the leaders of the minority), his wife, Nancy, and a few hundred of his friends, appointees, staffers and cabinet members. It was standing room only.
The mood: mellow, proud and modest with the increased modesty of age. "How lucky was I to walk into history when Ronald Reagan was in the room?" The speeches ranged from the heartfelt to the appropriate, with two (James Baker and Mrs. Reagan) being outstanding. It is usual, after formal ceremonies with their frozen rhetoric, to come away feeling that no cliché was left untouched. In some cases here they were quite thoroughly molested, but no matter. The general feeling was that Ronald Reagan restored America to itself, and that's what people more or less said.
It was a great day and almost a decade in the making. Each of the 50 states is allowed two statues in the Capitol, they are sometimes but not frequently changed, and the changing process is complicated: Both chambers of a state legislature must vote, the governor must agree, the federal government is petitioned. A California congressman told me the hardest part was explaining to the people who the man being replaced was. (Thomas Starr King, a Universalist minister; he helped keep California in the Union during the Civil War.)
The statue was covered by a blue felt drop cloth. The dignitaries walked to the platform—Nancy Pelosi, Mitch McConnell, the Republican senate leader, John Boehner of the House. Mrs. Reagan walked slowly onto the platform in a bright white suit. At public events Mrs. Pelosi always tries to look engaged, a pleasant half-smile on her face. This is a courtesy women in their middle years unconsciously give to the world. It is precious and largely unremarked. You see it on the street in small towns. Mr. McConnell had a good speech. Rather than recite a history lesson, he said, he'd note that in the 1980s, when the world said America was over, America said not quite, and when they said freedom was yesterday, America said I don't think so. Reagan "stood taller than any statue."
The colors were presented. The U.S. Army chorus sang the national anthem so beautifully, with such harmonic precision and depth, that some dry eyes turned moist, including those of the crusty journalist to my right. Congressmen hear choirs sing patriotic songs all the time and grow used to it. The rest of us do not and are stirred. Tourists walk through the Rotunda and think to themselves that they'd die for the signs and symbols of this place. Lawmakers experience the Rotunda as a connecting point between House and Senate that's too often clogged by overweight tourists in shorts from Bayonne. We need term limits. When the music no longer moves you, you should leave. When you cannot leave, you should be pushed.
James Baker, who served as Reagan's Treasury secretary, was elegant in his remarks. To Mrs. Reagan he said, "You created that secure space from which he ventured forward to change the world." And, "If anyone deserves to be in Statuary Hall it is Ronald Reagan," a "principled pragmatist" who would fight for the right, push hard, get the best deal possible, accept it at a crucial moment, "declare victory and move on." The Reagan that Baker presented was a romantic who lived in the real. The nation said goodbye to him when he lay in state in the Rotunda five years ago, but he stands now "a silent sentry in its hallowed halls."
Mrs. Reagan had a bit of a one-minute masterpiece. Her face said it all. It was her first time in the Rotunda since her husband lay in state. History had come to endorse what she and her husband's supporters long thought: that he was great. "The statue is a wonderful likeness of Ronnie, and he would be so proud." And at the end she said, simply, "That's it," and the crowd erupted in applause. She turned, helped pull the big blue drop cloth down, and there he was. That was his posture, that was the way he held his arms as he walked, that was the two button suit. The Gipper will be the only statue in the rotunda that is smiling. (In Statuary Hall, Will Rogers bears a look of wry amusement.)
Mrs. Reagan looked up at the statue, leaned forward, patted the right knee, and wiped her eyes.
The sculptor, 42-year-old Chas Fagan, was in college when Reagan was in the White House. Mrs. Reagan, he said, had input. She wanted a "positive, upbeat visage." Mr. Fagan studied pictures, campaign videotapes and old films of the president making speeches, telling jokes. A smile on a statue can look frozen; he wanted to get Reagan on the way to a smile, the moment before it is "fully expressed." He worked on the model in the Reagan library. It was made from clay and then translated into bronze, with a high patina. "He's in his brown suit again," Mr. Fagan laughed.
That night there was a candlelit dinner in Statuary Hall. Mrs. Reagan told me of being in the Rotunda again, after five years. "That was hard," she said in a soft voice. A line of well-wishers spontaneously formed around her chair, and she greeted senators, governors, former cabinet members and old White House staffers by name. She embraced Mrs. Pelosi. There was a lot of happiness at the dinner, but a lot of concern expressed too, privately, about the economy and our security. There was a feeling of well-wishing toward President Obama—it is a difficult world he faces—but concern as to his decisions and direction. Does he understand, fully, all that is at stake in his new approaches to the Arab world? Are we spending ourselves into bankruptcy? Will California's government be the first terrible test case of the new era?
There were a number of toasts. Ronald Reagan had been rightly lauded all day, but my thoughts were on what a beautiful bipartisan moment we had all experienced, for Republicans and Democrats together had formally embraced the Gipper's memory, and a Democratic House had made the ceremonies possible. "This is one of those nights when you remember, when the information pierces you, that we are a great nation, a vibrant, peaceful nation of two parties and much bipartisan affection." My thoughts too were on California, the Golden State, where he'd come to full adulthood, where he came first to see himself as a leader as a union president. California, full of pioneers and originals and artists, which was open to him as he entered politics, which elevated him to two terms as governor, and which had sent the statue of its beloved son to grace our Capitol. And my thoughts were on Mrs. Reagan, whose contribution had been summed up by James Baker. Looking back, she made it all possible. Without her there was no him.
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