Saving the Republicans
The Young Guns go for it
Two possible candidates to lead the party out of the wilderness
POLITICIANS capable of renewing the unpopular and demoralised Republican Party are hard to find in the Senate, where they cannot even mount a filibuster these days. Neither do state governors promise much: scandal, resignation and botched appearances on the national stage have hurt the ambitions of South Carolina’s Mark Sanford, Alaska’s Sarah Palin and Louisiana’s Bobby Jindal respectively.
So conservatives seeking saviours are increasingly alighting upon the House of Representatives, and especially the youthful duo of Eric Cantor, the Republican whip, and Paul Ryan (pictured above), the party’s senior member on the budget committee. Both represent swing states: Mr Cantor, 46, is from Virginia, Mr Ryan, 39, from Wisconsin. Both leapfrogged older stalwarts to get their current posts (Mr Cantor is the most senior House Republican after the minority leader, John Boehner, who is 59). Along with Kevin McCarthy, a representative from California, they run the Young Guns, a team of House Republicans devoted to helping favoured candidates get elected.
Neither man is widely mooted as a presidential candidate, at least not yet. Conservative pundits initially regarded Mr Cantor, a prodigious fund-raiser and peripatetic campaigner reportedly considered as a running-mate by John McCain last year, as the obvious leader. Mr Ryan, a prolific source of policy ideas, was considered the thinker. More recently, however, Mr Ryan has come to be seen by many as the more natural front-man.
But whatever the division of labour, it is not hard to see the two men’s usefulness to their party. Their determination to produce alternatives rather than mere opposition to Democratic policies should help to prevent the Republicans from being typecast as the party of “no”. And they are generally more mindful of the tone they strike than older, grouchier Republicans. Mr Ryan’s political hero is the late Jack Kemp, the soul of sunny conservatism.
Both are also conversant with life outside the conservative bubble. Mr Cantor, the only Jewish Republican congressman, has a wife who hails from a prominent Democratic family (“a mixed marriage”, he calls it). Mr Ryan is one of the few senior House Republicans to represent a competitive district in a swing state. His district, won by Barack Obama in the presidential election, contains lots of union members.
But if a Republican recovery requires a centrewards shift in some of the party’s economic thinking, the two men seem less plausible agents of change. For if their dynamism is evocative of Newt Gingrich’s mid-term revolution of 1994, so too is their zeal for small government. True, a “road map for America’s future”, published by Mr Ryan last year, included ideas for broadening health-care coverage. But it focused on steep cuts to taxes and entitlements. Budding congressmen seeking the support of the Young Guns must demonstrate a commitment to shrinking the state.
All this is more coherent than the big-government conservatism of the Bush years. Mr Ryan understandably defines himself against the profligate House Republicans of that era. But whether this is enough to win back floating voters is unclear—despite gathering worries about the deficit under Mr Obama. Both men have devoured the recent slew of books attempting to sketch a path back to power for the Republicans. But their authors, including David Frum, Ross Douthat and Reihan Salam, agree that the party needs to become more open-minded about government intervention if it is to address popular worries, such as the environment and the stagnation of middle-class incomes.
Democrats are frustrated that Mr Ryan in particular is being defined more by his amiable personality than his conservative take on economics. That may not last as he comes under more scrutiny. There are also obstacles to Mr Cantor and Mr Ryan from within. Some older Republicans are resentful of their rapid rise and their hostility to Washington orthodoxy, including the pork-barrel culture. But if the party is serious about leaving the wilderness, it cannot be choosy about who leads them out.
The deficit and health care
Falls the shadow
The enormous deficit is complicating the president’s ambitious plans
IT WAS a rare victory for fiscal rectitude. On July 21st the Senate stripped the funding for seven more F-22 fighter jets from a big spending bill, bowing to Barack Obama’s threat to veto the aircraft.
But it was overshadowed by the much bigger setback Mr Obama had suffered a few days earlier. Three committees in the House of Representatives had presented a plan to provide health cover for the uninsured with the help of hefty tax increases on the rich. On July 16th Douglas Elmendorf, Congress’s chief budget scorekeeper, stunned Washington when he said the bill would not only fail to tame health-care costs, but would permanently shift them higher. It would add $239 billion to the deficit in the next decade and far more thereafter. The next day conservative Democrats joined Republicans on two committees in voting against the bill, though it still passed.
That Mr Elmendorf’s comments made such an impact signifies the growing political potency of the deficit. By a big margin, Americans think Mr Obama is paying too little attention to it, according to one recent poll (see chart). The proportion who consider it the most important issue facing the country has risen from 12% last December to 24% in June, according to another poll by the Wall Street Journal and NBC News. That is unusually rapid, says William Galston, a scholar at the Brookings Institution: “That’s now part of the political reality Obama has to reckon with.”
Many presidents have seen their ambitions frustrated by the realities of red ink. Ronald Reagan cut taxes shortly after taking office, but soon had to reverse course and raise them. George Bush senior promised “no new taxes” and then had to break the pledge, scarring his party for years. Bill Clinton campaigned for a middle-class tax cut, but abandoned the idea shortly after he was elected. The second George Bush managed to escape this fate because he inherited a surplus. But by the time he left office, his profligate combination of serial tax cuts and unrestrained spending guaranteed the deficit would again loom over his successor.
The severity of the recession spared Mr Obama, at first, from confronting the deficit. Indeed, with the economy spiralling downward and the Federal Reserve’s monetary ammunition all but spent, he rightly chose to boost the deficit in the short term through hefty fiscal stimulus.
But the recession has inflicted horrific damage on the government’s accounts. Mr Elmendorf’s Congressional Budget Office (CBO) predicts the deficit will be $1.8 trillion this year. This is bearable given the scale of the recession; the real problem is that it will decline only to $1.2 trillion by 2019, still a horrendous 5.5% of GDP. On July 21st Ben Bernanke, the Fed chairman, suggested that a deficit of no more than 3% was sustainable—a figure that would arrest the growth in debt as a share of GDP.
Most of the red ink results from the enormous hole the recession has punched in GDP and consequently in tax revenue, the cost of bailing out the financial system, and interest on the mounting debt. Only a small part of it comes from America’s big and growing entitlements, Medicare and Medicaid (health care for the elderly and poor, respectively) and Social Security (public pensions), whose worst fiscal problems lie beyond 2019. “Unless we demonstrate a strong commitment to fiscal sustainability,” Mr Bernanke remarked, “we risk having neither financial stability nor durable economic growth.”
Mr Obama knows all this: he promises repeatedly not to leave the problem to his successors. Yet he has done little to back up the rhetoric. His willingness to veto more F-22 spending is admirable, but the $1.75 billion at stake is immaterial. He will release an updated budget outlook in mid-August, but it is unlikely to contain any notable new initiatives. There is still no sign of a path towards fiscal tightening over the medium term as the economy recovers. Quite the opposite; Mr Obama has not wavered from his position that taxes on those earning less than $250,000 will not go up. In fact, they’ve been temporarily cut. He did say in an interview this week that he might set up a commission that could look at ways of reducing entitlements spending once the recession is over.
The president has promised that health-care reform will be deficit-neutral, but this is a slippery concept. A plan may be deficit-neutral over ten years, but add significantly to it thereafter by front-loading revenue and backloading costs. The CBO figures show that this is a big problem with the House plan, whose shortfall will balloon beyond the ten-year horizon.
Jim Cooper, one of the Democrats’ most fiscally hawkish congressmen, fears that if push comes to shove, his party will not long remain stalwart on deficit-neutrality. “Health care has been such an impossible dream for so many decades that a lot of today’s Congress would overlook the deficit problems. I hear it all the time from colleagues in leadership: ‘We always find enough money for defence. We’ll find enough for health care’.” Mr Galston, though, thinks that the public’s worries about the deficit will reinforce Mr Obama’s commitment that health reform should not boost the deficit over the medium or long term. This could mean that he ends up with a plan that covers fewer of the uninsured than many had hoped.
None of this deals with the still-gaping hole in the budget. Indeed, a truly deficit-neutral health-care plan may make it tougher to fill that hole: if the rich are already being taxed more to pay for health reform, that makes it harder to use them to address the wider deficit. There are other ways to reduce the deficit, including getting rid of the mortgage-interest deduction, raising the age of eligibility for Medicare and Social Security, altering the inflation-indexation formula, or proposing some sort of tax reform that raises additional revenue. These ideas need not be implemented immediately; that would contradict the purposes of stimulus. But the knowledge that they are in the works would help reassure the public and investors that the federal debt—forecast on current policies to explode from a net $5.8 trillion last year to a net $11.7 trillion in 2019—may be tamed.
Dow Tops 9000; Nasdaq Rolls On
PETER A. MCKAY GEOFFREY ROGOW
Good news about profits and housing sparked a broad-based stock rally on Thursday, with the Dow Jones Industrial Average gaining nearly 200 points and moving above 9000 for the first time since January.
The blue-chip average gained 188.03 points, or 2.1%, to 9069.29, its highest closing level since Nov. 5. The Dow has now risen in 12 of 16 trading days this month and is up 7.4% for the month thus far. The benchmark has risen 38.52% from its 12-year closing low of 6547.05 hit on March 9 and is 35.97% from its record close of 14164.53 hit on October 9, 2007.
Among the Dow's components, AT&T rose 2.6% and 3M rose 7.3%. Both posted declines in second-quarter profits that were smaller than expected. Microsoft climbed 3.1% and American Express rose 2.4%. They are due to report after the closing bell.
Upbeat earnings reports have been the key driver of the Dow's recent march.
"The early part of this rally was clearly short covering going into earnings season. The market was big-time held short and with the lack of bad news, the path of least resistance has been up," said Kevin Kruszenski, director of equity trading for KeyBanc Capital Markets. "People have been so trained to buy weakness but now they're being forced to chase their long ideas."
The S&P 500 rose 22.22 points, or 2.3%, to 976.29, helped by gains in every sector. The broad measure is up 6.2% so far this month and has risen in seven of the last nine sessions.
![[Markets Data]](http://s.wsj.net/public/resources/images/MDGpromo_D01222009151210.jpg)
The rally began early in the trading day after the National Association of Realtors said existing-home sales rose again in June. An exchange-traded fund tracking the S&P 500's homebuilders rose 4.8% following the report. KB Home was up 6.5%, Pulte Homes was up 4.4%, and Toll Brothers was up 5.8%.
A better-than-forecast report on claims for unemployment benefits also added fuel to the rally. The Labor Department said initial jobless claims climbed by 30,000 to 554,000 last week, less than economists, on average, expected. The tally of continuing claims fell by 88,000 to the lowest level since April 11.
Cyclical sectors like technology rallied. The Nasdaq Composite Index rose 47.22 points, or 2.5%, to 1973.60, its 12th straight day of gains. The tech-heavy measure hasn't recorded a winning streak of that length since the 13 day-stretch ending Jan. 9, 1992. The Nasdaq has risen 13% over its 12-day run.
EBay rose 11% after the online auctioneer said current-quarter results would top analyst estimates. Rival online retailer Amazon.com gained 5.7% after striking a deal to acquire online shoe retailer Zappos.com, but its shares were moving lower in after-hours trading after it posted a 10% drop in earnings.
The health-care sector also rallied as Bristol-Myers Squibb posted better-than-expected results and said that it plans to buy Medarex for $2.4 billion. Bristol-Myers shares rose 2.8% and Medarex leapt 89%.
President Barack Obama's press conference Wednesday evening regarding proposed health-care legislation also appeared to help the sector. Traders have been betting that the package will be delayed and may not effectively control costs, leaving room for health-care providers to make solid profits.
"The sector has been really sensitive to the policy news for about six months or so," said trader Todd Leone, of Cowen & Co. "But it's been acting a lot better the longer they seem to be pushing the thing off."
Shares of Ford Motor rose 9.4% after the auto maker said that it had returned to profitability in its second quarter and slowed its cash burn.
The dollar strengthened against the Japanese yen but fell versus the euro.
Treasury prices sank. The two-year note was down 6/32 to yield 1.035%. The 10-year note fell 1 7/32 to yield 3.697%.
Some market veterans said that stocks could yet suffer a correction thanks to persistent weakness in employment and corporate revenue even as profits have been ticking higher.
Doreen M. Mogavero, chief executive of the New York floor brokerage Mogavero, Lee & Co., was busy executing customers' orders to buy shares on Thursday, but said she remains wary that the Dow could yet tumble to 8600 or so.
"If I get an order from a client, i have to go with the momentum," Ms. Mogavero said. "But my opinion is still that I'm not convinced this rally is really sustainable. Where is the [economic] growth supposed to come from?"
You Can't Print Production and Prosperity
It's hard to imagine that the monetary policy talk can get any nuttier, but we've likely only just begun. After all, despite the Federal Reserve growing its balance sheet by 140 percent and dropping rates essentially to zero, the bankruptcies just keep on coming. Ex-Fed governor Wayne Angell told Larry Kudlow's CNBC audience, "monetary policy always works!" Although Angell does stipulate that it takes time before the tromping on the monetary gas pedal will spin the economic tires and spray the prosperity gravel.
But good grief, the Fed started cutting rates in September 2007, dropping the federal-funds rate from 5.25 percent to 4.75 percent, and it was cut, cut, cut until daddy set the target rate at 0 to .25 percent in December of last year. In the meantime, one trillion dollars has been added to the M-2 money supply.
Despite all this money creation, Circuit City, Sharper Image, Goody's, Gottschalk's, Comp USA, Levitz Furniture, Chrysler, General Motors, General Properties, and — most recently — Eddie Bauer have filed for bankruptcy protection. And personal bankruptcy filings are up in every state and soaring in Nevada, Georgia, Alabama, Tennessee, Indiana, and Michigan.
In May, forty-eight states had more people out of work than in the previous month or year, with the national unemployment rate increasing from 8.9 percent to 9.4 percent. Moreover, California, Nevada, North Carolina, Oregon, Rhode Island, and South Carolina had their highest rates of unemployment on record. Maybe Mr. Angell will change his mind when he gets laid off. Just how long are we supposed to wait for this monetary magic to work?
Now the word is that zero-percent interest rates are just too darn high. That's why we haven't seen a reinflation of bubble America. The Financial Times reports the existence of a Federal Reserve staff memorandum that makes the case for a negative-five-percent federal-funds rate. Meanwhile, Japanese authorities are toying with the idea of outlawing cash in their country. Despite using every fiscal trick in the book and keeping interest rates at zero percent for a decade, that economy has been mired in a postbubble depression. So the current theory "would suggest that nominal interest rates of [negative four] percent might be closer to what is required to rescue the economy from another deflationary spiral," reported the Times Online.
The talking heads and policy wonks are trying to tell us that we're not borrowing enough, and that's why we're in a depression and why the Japanese economy has been depressed for more than a decade.
However, the real reason we're in a depression is because businesses and individuals borrowed too much and invested it poorly. Economist Murray Rothbard explained that a depression is the recovery stage: "The liquidation of unsound businesses, the 'idle capacity' of the malinvested plant, and the 'frictional' unemployment of original factors that must suddenly and en masse shift to lower stages of production — these are the chief hallmarks of the depression stage."
That's why monetary policy isn't working and won't work. People must save and pay off their debts. The malinvestments of the boom must be liquidated. New liquidity and zero-percent interest rates will only create new malinvestments, not a sound economy.
But you won't hear that on TV or read it in the New York Times. The Nobel Prize–winning economist and Gray Lady columnist Paul Krugman is now worried about the "paradox of thrift," the theory that, when consumers save too much en masse, the economy is worse off because there is not enough consumption.
But as economist Frank Shostak explains, it is savings — not demand — that enables the expansion of production of goods and services. "In short, no effective demand can take place without prior production," Shostak writes. "If it were otherwise, then poverty in the world would have been eradicated a long time ago." In other words, you can't print production and prosperity, much as the Fed may try. And Ben Bernanke is trying.
For those not familiar with Krugman's policy suggestions, he wrote back in August 2002 that "[t]o fight this recession, the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."
Sir Alan followed Krugman's advice, and look where we are now. More of the same will only create more financial pain.
Economics focus
Great barrier grief
Countries that clung fast to the gold standard in the early 1930s resorted most to protectionism
ONE consequence of the worst economic crisis in 80 years is that dismal scientists everywhere have had to gen up on the Depression in order to contribute to the policy debate. Most have by now picked up the stylised fact that a rigid adherence to the gold standard made a bad slump worse. Countries that cut the link to gold quickly and allowed their currencies to fluctuate endured shallower recessions and recovered more quickly than those that stuck with it. Freed from the need to uphold a gold-price parity, these countries could lower interest rates and so stimulate spending. By devaluing against gold, their money also became cheaper against currencies that kept their gold parity, giving domestic producers a cost advantage over many foreign firms.
A new paper* by Barry Eichengreen of the University of California, Berkeley, and Douglas Irwin of Dartmouth College adds a fresh dimension to this analysis. It examines how the decision to quit gold or to cleave to it affected trade policies. The picture painted by most accounts is of a rush to erect new barriers to trade, as each country tried to shield its businesses and workers from the deepening slump and responded in kind to the protectionism of others. In fact, say the authors, trade barriers were not imposed uniformly. Countries that stuck with gold were more protectionist than those that abandoned it. Tariffs were a poor substitute for policy stimulus, but in an era of balanced budgets they were all that gold-standard countries had.
In order to stand up that claim, the authors first show how the global monetary system broke down. In the decades leading up to the first world war, paper currencies were backed by gold at a fixed parity, in effect linking countries through a system of pegged exchange rates. Once war broke out, the system went into abeyance. When the gold standard was revived in the 1920s, it was a more fragile entity. Despite high inflation in the meantime, many countries restored their pre-war gold parities. With more money in circulation that led to a shortage of bullion. So the two main paper currencies, sterling and the dollar, were used as gold substitutes. Such a ruse relied on credible monetary policy in both Britain and America.
Of the two America is often seen as the main culprit for the spread of protectionism. The infamous Smoot-Hawley act, which was passed in June 1930 and increased nearly 900 American import duties, is usually viewed as central to the collapse in world trade that followed. But Messrs Eichengreen and Irwin argue that it was Britain’s ditching of gold in September 1931 that really started the “avalanche” of protectionism.
The ensuing rush to protect home markets served only to depress commerce further. By 1933 the volume of world trade was down by one-quarter from its 1929 level. Many of Britain’s trading partners responded quickly to sterling’s devaluation by coming off gold too. Two groups of countries held out for longer. The first, including Germany and Austria, was haunted by memories of hyperinflation and fearful of the consequences for financial stability of de-linking from gold. A second group, which included France and Switzerland and is labelled the “gold bloc” by the authors, held fast to gold to preserve their status as financial centres.
Establishing that these countries were more prone to protectionism is tricky. Comprehensive data on 1930s trade barriers are hard to find. One source, a League of Nations estimate of the share of imports covered by import quotas, supports the authors’ thesis: in a small sample of eight countries the gold bloc used more quotas than the others. To test whether that finding holds up in a bigger sample, the authors compared exchange-rate fluctuations of 40 countries between 1928 and 1935 with the increase in import barriers over the same period, using the share of customs revenue in the value of imports as a measure of tariffs. They found barriers rose least where countries had devalued.
The British exception
Though the results look solid, they contain an awkward outlier: Britain. Its devaluation blew a hole in the global monetary system, causing America to raise interest rates in the midst of a slump and forcing others to scrabble for bullion to replace their sterling reserves. The Eichengreen-Irwin theory says Britain, with its cheaper currency, should have been among the freer traders. Yet it raised its import barriers almost immediately. The authors put this down to local politics: the financial crisis brought an avowedly protectionist party, the Conservatives, to power. Mr Eichengreen says the paper has provoked two contrasting responses from colleagues. “Half say we spend far too much time explaining why Britain is a special case. The other half complain that we don’t fully explain why Britain is different.”
The tale underlines the importance of policy co-ordination. It would have been better if all countries had devalued against gold at the same time, allowing a looser global monetary policy much earlier. By 1936 even the gold-bloc countries had abandoned the link, but by then the damage to world trade had been done. There is a similar need today for co-ordination, this time in fiscal policies. If countries feel that others are gaining from their own stimulus packages, they may be tempted to resort to trade barriers.
The broader message is a happier one. The risk of a 1930s-style outbreak of protectionism is much lower because countries are able to use fiscal and monetary policy more flexibly. However, within that big lesson is a smaller one, that devaluations cause trade tensions. In an echo of the 1930s crisis Britain has again benefited from a weaker currency, upsetting its trading partners (notably Ireland). But Mr Eichengreen notes that the euro, by militating against more widespread beggar-thy-neighbour policies, may have helped preserve the European single market.
World trade
Unpredictable tides
World trade is no longer collapsing and fears of rampant protectionism have not been realised. Even so, the way to revival looks far from smooth
THE worst global economic slump since the Depression has generated reams of mind-boggling numbers. Among the starkest—and the most worrying—have been measures of world trade. According to the World Bank, the dollar value of trade is about a third lower than it was a year ago. Barry Eichengreen, an economic historian at the University of California, Berkeley, estimates that trade has contracted by more in this crisis than it had at a comparable stage of the Depression (see article).
Lately the news has been more encouraging. Trade is far from booming, but it has at least stopped declining. The World Bank even detects “hints of an uptick” in early data for June. Bernard Hoekman, director of the bank’s international trade department, has “little doubt that the decline in trade has bottomed out”.
Whether global commerce makes a speedy and lasting recovery depends, in the first place, on how quickly and sustainably global demand picks up. But it also depends on two other factors.
One is the reason why trade slumped so badly at the turn of the year. If the main culprit was the drop in global demand, as most economists believe, trade should recover smartly when demand picks up. But if it was an increase in protection, trade will be slow to emerge from the doldrums. Such measures, as past crises show, are easier to put in place than to remove.
The second is global trade politics. Governments will continue to be under pressure to erect trade barriers as unemployment continues to rise and as their room for more fiscal and monetary expansion becomes cramped. Leaders of the world’s biggest economies have repeatedly promised to conclude the Doha round of trade talks, which have already dragged on for more than seven years and been near to death several times. In doing so, they have set themselves an important test.
A hole in the hull
Compared with a year ago, the state of trade is dire. According to the World Bank, the dollar value of exports in the 48 countries for which final data for May are available was still about one-third lower than in May 2008. However, year-on-year data mask recent changes (see chart 1). Month-on-month figures point to a dramatic slump at the turn of the year, but stability since. The bank reckons that the average value of exports (for 44 economies accounting for three-quarters of world trade) dropped by 15.4% in November, held steady in December and plunged by 12.2% in January before flattening out.
The precipitate drop in trade—far more marked than anything that has happened to global GDP—was caused in part by the way production is now organised. Trade has always been more than proportionally affected by fluctuations in output, but the globalisation of the supply chain has increased its responsiveness. Stages of production that were once local are now much more likely to be carried out abroad. Douglas Irwin, of Dartmouth College, estimates that in the 1960s and 1970s, if global GDP increased (or decreased) by 1%, trade would grow (or shrink) by about 2%. In the 1990s, the change in trade was 3.4%.
In recessions, according to a new paper by Caroline Freund of the World Bank, trade contracts even more sharply than it responds in easier times. Using data from the global downturns of 1975, 1982, 1991 and 2001, Ms Freund finds that whereas real income growth was, on average, 1.5 percentage points lower than its pre-recession rate, trade growth stumbled by 7.2 points, or nearly five times as much.
Several reasons why trade should decline so fast in recessions suggest themselves. It could be that, anticipating a sudden slowdown in growth, firms draw down accumulated inventories sharply, causing a rapid contraction of trade. But it is also possible that during downturns governments turn to protectionist policies, heightening the responsiveness of trade to a fall in demand.
Broadly speaking, the timing of the collapse and stabilisation in trade flows, as well as the sectoral and geographical pattern of the decline, suggest that demand and destocking, rather than a retreat into protection, are the chief causes. The World Trade Organisation (WTO) points out that America, which was the first big economy to enter recession, also saw the sharpest contraction of imports last year (see chart 2). Data for America and Japan show that trade in non-durable consumer goods like clothes and food, for which a basic level of demand persists and purchases of which cannot be put off for as long as those of bigger-ticket items, has declined least among main product categories. Exporters specialising in capital goods and durables, such as Germany, have been hit harder than others. And even for cheap non-durables, the early falls were the sharpest, suggesting that retailers were furiously running down their inventories.
Differences in the trends of goods and services trade also support the destocking thesis. Aaditya Mattoo and Ingo Borchert, economists at the World Bank, point to the relative resilience of trade in services, which unlike goods cannot be stored and are therefore immune to the inventory effect. In April America’s imports of goods were 34% lower than a year earlier. Its exports were 27% lower. Both imports and exports of services, however, were down by only 10%. Imports of business, professional and technical services (including information-technology services outsourced to places like India) were 4% higher in the first quarter of 2009 than a year earlier.
The WTO has analysed trade policies as well as trade flows. There have been several instances of countries raising tariffs, within the limits of their WTO commitments. America, the European Union and Switzerland have all introduced new farm subsidies (or restarted programmes that had been allowed to lapse). The number of anti-dumping cases initiated by WTO members rose sharply in 2008, from a 12-year low in 2007, and continued at a high rate in the first quarter of this year.
Other measures, especially when carried out by sub-national governments (counties and states), are less explicit. Local-procurement provisions attached to several stimulus packages, including America’s and China’s, are intended to favour domestic suppliers over foreigners. Sectoral subsidies, particularly to carmakers, have often come with pressure to ensure that any job cuts take place abroad, not at home.
But changes in trade policy have not all gone one way. Several countries, from Australia and China to Ecuador and Paraguay, have moved in a liberal direction, reducing import duties or removing non-tariff barriers since the beginning of March. Chad Bown, an economist at Brandeis University, points out that the total value of trade targeted by the flurry of new anti-dumping actions is small: less than 0.45% of the total value of G20 countries’ imports.
All this is fairly reassuring. The bottoming-out of trade reflects a slowing of the decline in the world economy. Destocking may have run its course. Given its responsiveness to output, a lively rebound in trade is not inconceivable. Meanwhile, protectionism has not run riot.
But caution is still needed. Several big economies are being supported by expansionary fiscal and monetary policies, which will eventually have to be unwound. Recovery is likely to be sluggish. Unemployment will probably continue to rise—by between 21m and 50m this year, according to the International Labour Organisation. With monetary and fiscal stimulus already near their limits, trade barriers may seem a tempting way to protect jobs. Some countries could raise tariffs substantially without breaking WTO rules. Or stricter buy-local provisions, say, could squeeze trade.
The road back to Doha
This is why the politics of trade—not least the prospects of completing the Doha round—remain important. Some of the round’s doubters have questioned its value because it promises no substantial further reductions in actual tariffs, merely aiming to limit countries’ scope to raise them. The World Bank’s Mr Hoekman is more optimistic. Countries realise that open markets cannot be taken for granted, and few of them want to be seen to fall foul of their international commitments. This makes the “insurance” aspect of the Doha round more attractive than it was just a few months ago.
But the crisis has also revealed the limitations of existing multilateral norms. WTO rules on public procurement do not restrict the ability of local governments to discriminate against foreign suppliers. Countries that have not signed the WTO Agreement on Government Procurement are free to pursue discriminatory policies. This leads Mr Hoekman to argue that another benefit of concluding Doha will be that it will open up the scope for negotiations to establish rules of the game in areas such as international financial sector regulation, government procurement and services trade, where the crisis has revealed scope for protectionism.
Unfortunately, a successful conclusion to the round is still far from certain. The last attempt collapsed in July 2008, when India insisted on more protection for its farmers against sudden surges in imports than America was willing to accept. For all the good intentions of world leaders, hope therefore rests largely on Ron Kirk, America’s new trade representative, and Anand Sharma, India’s new commerce minister, finding common ground. The two have already met several times. Mr Kirk has spoken of the need to conclude Doha in a way that is “balanced and ambitious”. Mr Sharma has stressed that he has a mandate from his prime minister to sign a global trade deal.
But since his appointment, Mr Kirk has focused mainly on the enforcement of existing trade rules. His latest policy speech, at a steel plant in Pittsburgh, concentrated on detecting violations of labour standards by trading partners and promises to resort to legal action if necessary. Gary Hufbauer, of the Peterson Institute for International Economics in Washington, worries that a “fusillade of cases will set Doha back”.
Some argue that by demonstrating that his resolve to a worried domestic audience, Mr Kirk may find it easier to get the authority he needs to negotiate Doha. Those who are hoping for the trade talks to reach a successful end can only hope that this reading is correct. If it is not, an agreement may be no nearer.
The, Arab world
Waking from its sleep
A quiet revolution has begun in the Arab world; it will be complete only when the last failed dictatorship is voted out
WHAT ails the Arabs? The United Nations Development Programme (UNDP) this week published the fifth in a series of hard-hitting reports on the state of the Arab world. It makes depressing reading. The Arabs are a dynamic and inventive people whose long and proud history includes fabulous contributions to art, culture, science and, of course, religion. The score of modern Arab states, on the other hand, have been impressive mainly for their consistent record of failure.
They have, for a start, failed to make their people free: six Arab countries have an outright ban on political parties and the rest restrict them slyly. They have failed to make their people rich: despite their oil, the UN reports that about two out of five people in the Arab world live on $2 or less a day. They have failed to keep their people safe: the report argues that overpowerful internal security forces often turn the Arab state into a menace to its own people. And they are about to fail their young people. The UNDP reckons the Arab world must create 50m new jobs by 2020 to accommodate a growing, youthful workforce—virtually impossible on present trends.
Arab governments are used to shrugging off criticism. They had to endure a lot of it when George Bush was president and America’s neoconservatives blamed the rise of al-Qaeda on the lack of Arab democracy. Long practice has made Arab rulers expert at explaining their failings away. They point to their culture and say it is unsuited to Western forms of democracy. Or they point to their history, and say that in modern times they would have done much better had they not had to deal with the intrusions of imperialists, Zionists and cold warriors.
Some of this is undeniable. A case can indeed be made that Islam complicates democracy. And, yes, oil, Israel and the rivalry between America and the Soviet Union meant that the Arab world was not left to find its own way after the colonial period ended. More recently the Arabs have been buffeted by the invasion of Iraq. Now they find themselves caught in the middle as America and Iran jostle for regional dominance.
Strangely, your highness, they like voting
Still, as the decades roll by the excuses wear thin. Islam has not prevented democracy from taking root in the Muslim countries of Asia. Even after its recent flawed election, Iran, a supposed theocracy, shows greater democratic vitality than most Arab countries. As for outside intrusion, some of the more robust Arab elections of recent years have been held by Palestinians, under Israeli occupation, and by Iraqis after America’s invasion. When they are given a chance to take part in genuine elections—as, lately, the Lebanese were—Arabs have no difficulty understanding what is at stake and they turn out to vote in large numbers. By and large it is their own leaders who have chosen to prevent, rig or disregard elections, for fear that if Arabs had a say most would vote to throw the rascals out.
For this reason, you can bet that if the regimes have their way, Arabs will not get the chance. Arab rulers hold on to power through a cynical combination of coercion, intimidation and co-option. From time to time they let hollow parties fight bogus elections, which then return them to power. Where genuine opposition exists it tends to be fatally split between Islamist movements on one hand and, on the other, secular parties that fear the Islamists more than they dislike the regimes themselves. Most of the small cosmetic reforms Arab leaders enacted when Mr Bush was pushing his “freedom agenda” on unwilling allies have since been rolled back. If anything, sad to say, the cause of democracy became tainted by association with a president most Arabs despised for invading Iraq.
The illusion of permanence
Can regimes that are failing their people so clearly really hold sway over some 350m people indefinitely? Hosni Mubarak has been Egypt’s president for 28 years; Muammar Qaddafi has run Libya since 1969. When Hafez Assad died after three decades as president of Syria, power passed smoothly to his son Bashar. After the failure of Mr Bush’s efforts to promote democracy, and the debacle in Iraq, Barack Obama has put “respect” rather than “freedom” at the centre of America’s discourse with the Muslim world. That may be wise: since the advent of Mr Obama, America’s standing has risen in Arab eyes, and Mr Bush’s zeal for reforming other countries was counterproductive anyway. But this suggests that if the Arabs want democracy, they will have to grab it for themselves.
Some in the West are wary of Arab elections, fearing that Islamists would exploit the chance to seize power on the principle of “one man, one vote, one time”. Yet Islamists seem to struggle to raise their support much above 20% of the electorate. Non-Arab Muslim countries like Turkey and Indonesia suggest that democracy is the best way to draw the poison of extremism. Repression only makes it more dangerous.
Democracy is more than just elections. It is about education, tolerance and building independent institutions such as a judiciary and a free press. The hard question is how much ordinary Arabs want all this. There have been precious few Tehran-style protests on the streets of Cairo. Most Arabs still seem unwilling to pay the price of change. Or perhaps, observing Iraq, they prefer stagnation to the chaos that change might bring. But regimes would be unwise to count on permanent passivity. As our special report in this issue argues, behind the political stagnation of the Arab world a great social upheaval is under way, with far-reaching consequences.
In almost every Arab country, fertility is in decline, more people, especially women, are becoming educated, and businessmen want a bigger say in economies dominated by the state. Above all, a revolution in satellite television has broken the spell of the state-run media and created a public that wants the rulers to explain and justify themselves as never before. On their own, none of these changes seems big enough to prompt a revolution. But taken together they are creating a great agitation under the surface. The old pattern of Arab government—corrupt, opaque and authoritarian—has failed on every level and does not deserve to survive. At some point it will almost certainly collapse. The great unknown is when.
American health-care reform
Can he make it better?
Barack Obama pushes plans for reforming health care in America
DEMOCRATS dominate both houses of Congress and Barack Obama is a president who is still popular. So why did Mr Obama seem so defensive at a press conference on Wednesday July 22nd when taking a stand on a massive legislative overhaul of health care, a job which he has left to Congress thus far?
It may be because reforming health care is far and away the biggest domestic challenge facing Mr Obama. More than 40m Americans still fall through the cracks of a system that only provides care for those with a good job, the elderly and the very poor. Lose his biggest domestic battle in his first year in office and the Republicans can “break him” and his broader agenda, according to Jim DeMint, a Republican senator from South Carolina. Mr DeMint says that health care is Mr Obama’s Waterloo.
Mr Obama made a quick and lively statement, in contrast to some of his more drawn-out speeches. Regarding health-care inflation, he said “If we do not control these costs we cannot control our deficit. If we do not act, 14,000 Americans will continue to lose their health insurance every single day.” After depicting the crisis, he addressed the criticisms. Ordinary voters, Mr Obama conceded, would ask “what’s in it for me?” He reiterated that those with insurance would stay covered comfortably. Those who moved jobs or ran small businesses could buy insurance through an exchange, which he said would reduce costs. He also said that nobody would be denied coverage for pre-existing conditions.
This is important. Contrary to its barbaric image, the American health-care system does not leave grievously sick or injured people dying on the steps of hospitals. Democrats in favour of reform say that they are taken in anyway, with the cost to doctors and hospitals coming out of the public purse—so covering the uncovered counts as a saving, not a cost.
Other savings are expected to come from the public-insurance programmes. Also on Wednesday Peter Orszag, the White House's budget director, told the Council on Foreign Relations in New York that the president supported a public commission to keep costs down in Medicare, which insures the elderly. Under this innovation, a watchdog would oversee Medicare and Congress would keep a check on that body’s decisions, but not tinker with the details. Congress would be limited to approving the annual recommendations to increase of decrease Medicare’s budget.
Mr Obama did not explain how he would live up to his promise, reiterated on Wednesday, that his health-care reforms would not add to America’s deficit. He said that two-thirds of the cost could be met by trimming fat on federal programmes, but gave no new details. He also mentioned taxing the rich more heavily to make up the rest. His plan has powerful backers including the traditionally reform-shy American Medical Association, which endorsed the main bill from House Democrats (and which helped to sink Bill Clinton’s reforms in the early 1990s). Mr Obama also gave warning that “we are guaranteed to see Medicare and Medicaid basically break the federal budget,” but he did not say how this could be forestalled.
Americans want health-care reform, and trust Democrats to deliver it more than Republicans. But Mr Obama still faces huge obstacles, not least from a restive Congress, where fiscally conservative Democrats might put up resistance. Six senators, three of them Democrats, have urged him to slow the passage of legislation in order to win bipartisan support. And on Wednesday the Mayo Clinic in Minnesota, a hospital singled out by Mr Obama for its quality health care at an affordable price, criticised his plan. Republicans are rumoured to be planning a concerted campaign to block the reforms by claiming that they will increase the deficit while handing control of patient care and medicines to the government.
Mr Obama is right that America’s health-care system is not providing value for money. But competing congressional bills and the inevitable difficulties of thrashing out hard compromises means that reform is still up in the air.
GovernmentCare’s Assault on Seniors
By Betsy McCaughey
Since Medicare was established in 1965, access to care has enabled older Americans to avoid becoming disabled and to travel and live independently instead of languishing in nursing homes. But legislation now being rushed through Congress—H.R. 3200 and the Senate Health Committee Bill—will reduce access to care, pressure the elderly to end their lives prematurely, and doom baby boomers to painful later years.
The Congressional majority wants to pay for its $1 trillion to $1.6 trillion health bills with new taxes and a $500 billion cut to Medicare. This cut will come just as baby boomers turn 65 and increase Medicare enrollment by 30%. Less money and more patients will necessitate rationing. The Congressional Budget Office estimates that only 1% of Medicare cuts will come from eliminating fraud, waste and abuse.
The assault against seniors began with the stimulus package in February. Slipped into the bill was substantial funding for comparative effectiveness research, which is generally code for limiting care based on the patient’s age. Economists are familiar with the formula, where the cost of a treatment is divided by the number of years (called QALYs, or quality-adjusted life years) that the patient is likely to benefit. In Britain, the formula leads to denying treatments for older patients who have fewer years to benefit from care than younger patients.
When comparative effectiveness research appeared in the stimulus bill, Rep. Charles Boustany Jr., (R., La.) a heart surgeon, warned that it would lead to “denying seniors and the disabled lifesaving care.” He and Sen. Jon Kyl (R., Ariz.) proposed amendments to no avail that would have barred the federal government from using the research to eliminate treatments for the elderly or deny care based on age.
In a letter this week to House Speaker Nancy Pelosi, White House budget chief Peter Orszag urged Congress to delegate its authority over Medicare to a newly created body within the executive branch. This measure is designed to circumvent the democratic process and avoid accountability to the public for cuts in benefits.
Driving these cuts is the misconception that preventative care can eliminate sickness. As President Obama said in a speech to the American Medical Association: “We have to avoid illness and disease in the first place.” That would make sense if most diseases were preventable. But the two most prevalent diseases of aging—cancer and heart disease—are largely caused by genetics and their occurrence increases with age. Your risk of being diagnosed with cancer doubles from age 50 to 60, according to the National Cancer Institute.
The House bill shifts resources from specialty medicine to primary care based on the misconception that Americans overuse specialist care and drive up costs in the process (pp. 660-686). In fact, heart-disease patients treated by generalists instead of specialists are often misdiagnosed and treated incorrectly. They are readmitted to the hospital more frequently, and die sooner.
“Study after study shows that cardiologists adhere to guidelines better than primary care doctors,” according to Jeffrey Moses, a heart specialist at New York Presbyterian Hospital. Adds Jeffrey Borer, chairman of medicine at SUNY Downstate Medical Center: “Seldom do generalists have the knowledge to identify the symptoms of aortic valve disease, even though more than 10% of people over 75 have it. After valve surgery, patients who were too short of breath to walk can resume a normal life into their 80s or 90s.”
While the House bill being pushed by the president reduces access to such cures and specialists, it ensures that seniors are counseled on end-of-life options, including refusing nutrition where state law allows it (pp. 425-446). In Oregon, some cancer patients are being denied care by the state that could extend their lives and instead are afforded the benefit of physician-assisted suicide instead.
The harshest misconception underlying the legislation is that living longer burdens society. Medicare data prove this is untrue. A patient who dies at 67 spends three times as much on health care at the end of life as a patient who lives to 90, according to Dr. Herbert Pardes, CEO of New York Presbyterian Medical Center.
What is costly is when seniors become disabled. In a 2007 Health Affairs article, researchers reported that surgeries to unclog arteries and replace worn out hips and knees have had a major impact on steadily reducing disability rates. And nondisabled seniors use only one-seventh as much health care as disabled seniors. As a result, the annual increase in per capita health spending on the elderly is less than for the rest of the population.
Nevertheless, Medicare is running out of money. The problem is the number of seniors compared with the smaller number of workers supporting the system with payroll taxes. To remedy the problem, the Congressional Budget Office has suggested inching up the eligibility age one month per year until it reaches age 70 in 2043, or asking wealthy seniors to pay more.
These are reasonable solutions—reducing access to treatments and counseling seniors about cutting life short are not. Medicare has made living to a ripe old age a good value. ObamaCare will undo that.
Ms. McCaughey is chairman of the Committee to Reduce Infection Deaths and a former lieutenant governor of New York state.
Treating Financial Consumers as Consenting Adults
RICHARD A. POSNER
Will the epitaph of the Obama administration be “too much, too soon, too costly”? Among worrisome signs is its proposed Consumer Financial Protection Agency Act of 2009.
The agency would have regulatory authority over retail financial products such as mortgages and credit cards, with the aim, the bill says, of ensuring that consumers “have, understand, and can use the information they need to make responsible decisions.” But the agency will go beyond the conventional consumer-protection function of providing information. It also will design “standard” consumer financial products that will contain whatever “features or terms [are] defined by the Agency for the product or service.”
The seller of a mortgage or credit card, for example, will be required to offer the customer the agency-designed product. And according to the bill, the agency can forbid the seller to offer his own product if the offer would “cause substantial injury to consumers” that “is not reasonably avoidable by consumers and . . . is not outweighed by countervailing benefits to consumers or to competition.”
The administration wants oversight of consumer finance to be based on “actual data about how people make financial decisions,” according to a Treasury Department White Paper. It believes these data will show that consumers don’t make rational decisions because they can’t understand financial products. That is why the agency not only will design “plain vanilla” products that must be offered to prospective borrowers, but also will restrict the terms in the lenders’ own products. Consumers will be pushed—not quite coerced—to choose the product designed by the agency.
The plain vanilla products, according to Elizabeth Warren, the Harvard law professor who first proposed such an agency and may become its first chairman, will be “designed to be read in less than three minutes.” Sellers of those products will have a safe harbor from being sued. What seller will be bold enough to offer an alternative and invite litigation? What consumer will refuse the product designed by the consumer protection agency?
The plan of the new agency reveals the influence of “behavioral economics,” which teaches that people, even when fully informed, often screw up because of various cognitive limitations. A leading behavioral economist, Richard Thaler of the University of Chicago Booth School of Business, wrote “Nudge: Improving Decisions About Health, Wealth, and Happiness” last year with Cass Sunstein, who is President Barack Obama’s nominee for “regulatory czar.”
Mr. Thaler, whose views are taken seriously by the Obama administration, calls himself a “libertarian paternalist.” But that is an oxymoron. He is a paternalist with a velvet glove—as the agency will be. Through the use of carrot and stick, the agency will steer consumers to those financial products that it thinks best for them, whatever they naïvely think.
Thus the agency might outlaw adjustable-rate mortgages on the theory that consumers don’t give adequate weight to a future increase in interest rates. But such mortgages are cheaper than fixed-rate mortgages, because they shift the risk of interest-rate fluctuations from lender to borrower. Do borrowers not understand they are trading a lower interest rate for greater risk?
The agency might also outlaw prepayment penalties on mortgages. They do make refinancing more costly, but mortgages that include such penalties compensate by charging a lower interest rate. Is the choice among such alternatives really beyond the cognitive competence of the average home buyer? Is three minutes the limit of his attention span?
Congress has just created a commission, modeled on the 9/11 Commission, to inquire into the causes of the financial crisis. It will report its findings by the end of next year. One might have thought that a proposal to overhaul consumer finance would await a determination of the role of consumer credit practices in the crisis.
It cannot just be assumed that most people who during the housing boom bought homes with adjustable-rate mortgages, or mortgages with prepayment penalties, or mortgages that required a low or even no down payment, were fools or victims of fraud. At the time, the government was denying that the rapid increase in housing prices (which made such mortgages seem a good investment to people who could not otherwise afford a home) was a bubble. When interest rates are low (as they were in the early 2000s—too low, because of errors by the Federal Reserve) and credit therefore abundant, Americans borrow.
Yale economist Robert Shiller, like Mr. Thaler a leading behavioral economist, has expressed doubt that a consumer financial protection agency would have prevented the housing bubble and financial crisis. Nevertheless, Mr. Thaler backs the new agency. And here is the irony: For many years he has been questioning the size of the “equity premium”—the amount by which the return on common stock (equity) exceeds the return on bonds (debt). He believes that people exaggerate the riskiness of equities.
They should invest more of their savings, including their retirement savings, in common stock, since, as he noted in a National Bureau of Economic Research paper in 1993, college and university “faculty who had allocated all of their [retirement] funds to stocks would have done better in virtually every time period, usually by a large margin,” and “those [who invest] in all-stock portfolios often do better by very large amounts” than investors in portfolios that contain debt as well as equities.
It has been his constant theme. For example, in the Journal of Economic Perspectives in 1997 he called “the case for equities compelling” and said that “myopic loss aversion”—investors’ failure to aggregate returns over time (where they would see losses offset by gains)—prevents people from investing as much as they should in equities.
Invest all your money in stocks? People who followed that advice—advice based on the kind of myopia that bases predictions about the future on naïve extrapolation from the past—find themselves in deep trouble today.
Behavioral economists are right to point to the limitations of human cognition. But if they have the same cognitive limitations as consumers, should they be designing systems of consumer protection?
Mr. Posner, a federal circuit judge and a senior lecturer at the University of Chicago Law School, is the author of the recently published “A Failure of Capitalism: The Crisis of ’08 and the Descent Into Depression (Harvard).
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