Obama's 32 Czars
By Eric Cantor
"The biggest problems that we're facing right now have to do with George Bush trying to bring more and more power into the executive branch and not go through Congress at all. And that's what I intend to reverse when I'm president of the United States." -- Sen. Barack Obama, March 31, 2008
To say President Obama failed to follow through on this promise is an understatement. By appointing a virtual army of "czars" -- each wholly unaccountable to Congress yet tasked with spearheading major policy efforts for the White House -- in his first six months, the president has embarked on an end-run around the legislative branch of historic proportions.
To be sure, the appointment of a few special officers to play a constructive role in a given administration is nothing new. What is new is the elevation of so many czars, with so much authority on endless policy fronts. Vesting such broad authority in the hands of people not subjected to Senate confirmation and congressional oversight poses a grave threat to our system of checks and balances.
At last count, there were at least 32 active czars that we knew of, meaning the current administration has more czars than Imperial Russia.
The administration has a Mideast peace czar (not to be confused with the Mideast policy czar), a Sudan czar and a Guantanamo closure czar. Then there's the green jobs czar, sometimes in conflict with the energy czar, who talks to the technology czar, who sometimes crosses paths with the urban affairs czar. We mustn't forget the Great Lakes czar or the WMD czar, who no doubt works hand in hand with the terrorism czar. The stimulus accountability czar is going through a rough time right now, as is the TARP czar -- but thankfully they have to answer to the government performance czar. And seemingly everyone falls under the auspices of the information czar. In a government full of duplicative bureaucracies, adding more layers with overlapping responsibilities hardly seems the way to go.
Even Democratic Sen. Robert Byrd (W.Va.) was fearful enough to pen a letter to President Obama in February highlighting his concerns with the administration's tactics. The Constitution mandates that the Senate confirm Cabinet-level department heads and other appointees in positions of authority -- known as "principal officers." This gives Congress -- elected by the people -- the power to compel executive decision-makers to testify and be held accountable by someone other than the president. It also ensures that key appointees cannot claim executive privilege when subpoenaed to come before Congress.
As we move forward, proper oversight of the growing lineup of czars is essential. From orchestrating bailouts to making industrial policies to moving toward government-run national health care, Washington seems intent on sailing into uncharted waters -- and the czars are often steering the ship.
The car czar, who stepped down this month amid controversy over his former firm's role in a scandal, had been managing government's recent takeover of a huge swath of the domestic auto industry and making decisions for auto companies. The pay czar -- also known in White House circles as the "special master for compensation" -- has the power to reject or accept any current and future compensation for the top 100 earners at companies that received, in some cases under pressure, money from the Troubled Assets Relief Program. In the coming months he will decide the fate of $235 million in pending retention bonuses at AIG. And the health czar, meanwhile, has become as influential as perhaps anyone in the Obama administration, spearheading White House negotiations with doctors, hospitals and other health providers. She will play a key role in determining which medicines, treatments and cures are deemed necessary for the public.
The point here is not that President Obama's reliance on czars is illegal (although it does raise significant, unresolved constitutional issues). Nor is it that these czars are bad people. It's that we have not been able to vet them, and that we have no idea what they're doing. It's that candidate Obama made a pledge to keep Congress in the light. Yet less than six months after his inauguration, the president appears intent to keep Congress more and more in the dark. Dozens of czars at a time.
The writer, a Republican from Virginia, is the House minority whip.
Hands Off Microsoft-Yahoo, Please
Antitrust Law: Congress and federal regulators are likely to put the Microsoft-Yahoo deal through the political meat grinder. Should the government have such power over private companies?
Microsoft and Yahoo, a couple of giants of the tech world, have hopes of pooling their brain power and resources to create a Web search engine that can compete with market leader Google. Yahoo will license its Internet search technologies to Microsoft, which will apply them to its new search engine called Bing. Revenue generated by the marriage will be split.
Clearly, it's just a business deal. There's no reason to think that something remotely illegal or sinister is going on. But busybodies in Washington, always eager to exercise authority, refuse to leave the private parties alone to conduct their affairs.
The arrogance displayed by antitrust regulators and congressmen who think their job is to rule should offend any fair-minded person. There's no better example of the trustbusters' exaggerated sense of their own worth than a recent statement from David Balto.
The policy director of the Bureau of Competition at the Federal Trade Commission under the Clinton administration told Business Week: "We don't want markets to become concentrated. It is like prescribing ice cream for someone who is overweight."
Sen. Herb Kohl, chairman of the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights exhibited similar hubris when he said the deal "warrants our careful scrutiny." The Democrat from Wisconsin, who seems to have a longtime obsession with telling companies how to conduct their business, threatened to sic "my subcommittee" on the agreement's participants.
Bert Foer, president of the American Antitrust Institute, doesn't have a congressional panel at his disposal. But he did expose the thinking that drives the regulators in a story about the deal that appeared Thursday in our own news pages.
"The issue," he said, "provides (the Justice Department) with an opportunity to put on their thinking caps and come forward with a vision for an appropriate competition policy."
In other words, we should all just relax while a small, elite group of remarkably wise men in Washington does what's best for everyone else.
It's hard to fathom why the regulators think it's so necessary to invade this particular process. Google, the dominant player that Microsoft and Yahoo want to catch, holds roughly 65% of the Web search engine market. Yahoo has 20%, while Microsoft owns about 8%. There's nothing about the deal that suggests that the market will be harmed by its completion.
But trustbusters really don't need a compelling reason. While they excuse their actions as efforts to ensure competitiveness and prevent monopolies from forming, what the elected and appointed regulators want is to control markets and commerce, to take every opportunity they can to manipulate the private sector and remake it so that it conforms to their standards.
It's a shame that trustbusters have a bias against the free market, because the free market is the only mechanism that can fairly and efficiently sort out commercial activities.
The record of antitrust law, though, leaves a lot to be desired. In fact, it tends to leave messes in its wake.
It nearly ruined IBM when regulators hounded the computer giant from 1969 to 1982. The case was finally dropped, but the probe was enough of a drain on IBM to topple the one-time tech leader from the top spot. And because it was the market leader, the company's legal struggles without question had an adverse effect on the evolution of computer technology.
Microsoft has had a similar experience. In 2000, a federal judge tore the company in pieces in a Justice Department case that put Microsoft's stock on a sideways slide from which it has yet to recover.
Many decades earlier, both Standard Oil and Alcoa were broken up on grounds that their efficiencies and success drove down the price of goods they made.
Washington just might let the Microsoft-Yahoo deal go through. (Maybe it will instead go after Google because of its dominant position in the market.) But in the process, both companies will have burned through precious resources and time defending themselves from the regulatory meddling. In a country where freedom is supposed to be the animating force, that should not happen.
Obama’s ‘Race to the Top’
Who’ll blink first: the unions, or the White House?
The Obama Administration unveiled its new “Race to the Top” initiative late last week, in which it will use the lure of $4.35 billion in federal cash to induce states to improve their K-12 schools. This is going to be interesting to watch, because if nothing else the public school establishment is no longer going to be able to say that lack of money is its big problem.
Four billion dollars is a lot of money, but it’s a tiny percentage of what the U.S. spends on education. The Department of Education estimates that the U.S. as a whole spent $667 billion on K-12 education in the 2008-09 school year alone, up from $553 billion in 2006-07. The stimulus bill from earlier this year includes some $100 billion more in federal education spending—an unprecedented amount. The tragedy is that nearly all of this $100 billion is being dispensed to the states by formula, which allows school districts to continue resisting reform while risking very little in overall federal funding.
All of this is on top of the education spending boom during the Bush years to pay for the 2001 No Child Left Behind law. Democrats liked to claim that law was “underfunded,” but the reality is that inflation-adjusted Education Department elementary and secondary spending under President Bush grew to $37.9 billion from $28.3 billion, or 34%. NCLB-specific funding rose by more than 40% between 2001 and 2008.
It’s also worth noting that the U.S. has been trying without much success to spend its way to education excellence for decades. Between 1970 and 2004, per-pupil outlays more than doubled in real terms, and the federal portion of that spending nearly tripled. Yet reading scores on national standardized tests have remained relatively flat. Black and Hispanic students are doing better, but they continue to lag far behind white students in both test scores and graduation rates.
Education Secretary Arne Duncan and President Obama
So now comes “Race to the Top,” which the Obama Administration claims will reward only those states that raise their academic standards, improve teacher quality and expand the reach of charter schools. “This competition will not be based on politics, ideology or the preferences of a particular interest group,” said President Obama on Friday. “Instead, it will be based on a simple principle—whether a state is ready to do what works. We will use the best data available to determine whether a state can meet a few key benchmarks for reform, and states that outperform the rest will be rewarded with a grant.”
Sounds great, though this White House is, at the behest of the unions, also shuttering a popular school voucher program that its own evaluation shows is improving test scores for low-income minorities in Washington, D.C. The Administration can expect more such opposition to “Race to the Top.” School choice is anathema to the nation’s two largest teachers unions, the National Education Association and the American Federation of Teachers, which also oppose paying teachers for performance rather than for seniority and credentials.
NEA President Dennis Van Roekel told the Washington Post last week that charter schools and merit pay raise difficult issues for his members, yet Education Secretary Arne Duncan has said states that block these reforms could jeopardize their grant eligibility. We’ll see who blinks first. The acid test is whether Messrs. Duncan and Obama are willing to withhold money from politically important states as the calendar marches toward 2012.
Race to the Top is bound to have some impact, and lawmakers in several states—including Tennessee, Rhode Island, Louisiana and Massachusetts—already have passed charter-friendly legislation in hopes of tapping the fund. But the exercise will fail if it is merely a one-off trade of cash for this or that new law. The key is whether the money can be used to promote enough school choice and other reforms that induce school districts to change how the other $800 billion or so is spent.
Charter schools and voucher programs regularly produce better educational outcomes with less money. But as long as most education spending goes to support the status quo, Race to the Top will be mostly a case of political show and tell.
Obama, Gates and Lakoff: The Perils of 'Framing'
By John B. Parrott"Framing" refers to the employing of narratives, rather than facts, to describe an event or phenomenon. Its purpose is to contextualize a subject matter in a way that illustrates the validity of something the frame-maker wants to show. The theory behind framing, and the practice of the device in a political context, is put forward by University of California at Berkeley professor and Democratic Party strategist Dr. George Lakoff. Lakoff attends Party strategizing sessions, including one in early 2005 that planned the successful Party counteroffensives against Bush on Social Security reform and federal judges. President Obama's reaction in the Gates affair illustrates how Framing works, as well as the pitfalls attendant to its use.
The myth of American free-market health care
by Mike MillerThe blue screen revealed the next answer: “A quasi-government organization that has the power to print money out of thin air with little direct oversight.” Uh… What is the Federal Reserve? That’s correct! A 2002 Jeopardy game show champion, blogger, and Reuters Money and Politics columnist has published a column denouncing Ron Paul’s HR.1207 and his effort to bring more transparency to the Federal Reserve.
James Pethokoukis writes:
An audit would create an explicit and clear congressional assessment of the Fed’s performance.
I’m with you here, compared to what we have now which is an unclear generalization from the Fed itself about its performance.
“Indeed, there would be no point to this proposal, given Humphrey-Hawkins, if it were not the intention of the bill’s proponents to exert congressional control of monetary policy decisions in a way that the Humphrey-Hawkins testimony alone does not allow them to,” argues Michael Woodford, an economics professor at Columbia University.
Wow. Having the Fed Chairman testify twice a year to Congress is the equivalent of a GAO audit? Put your crack pipe down professor.
How might more influence be exerted? Economist Anil Kashyap of the University of Chicago thinks an audit suggests the GAO and Congress could force the Fed to supply all the background information that goes into an interest-rate decision and compel all members of the FOMC to share their individual thinking on any issue in real time.
“The spirit of the Paul bill seems to be that having FOMC meetings live on C-SPAN would be best way to make monetary policy. That would be a disaster.”
This is laughable. The bill would merely require an audit be done by the GAO by the end of 2010. The “spirit” suggested here is an evil fantasy concocted in a feeble effort to find something to criticize the bill for. Allow me to present the summary of HR.1207 for Mr. Kashyap:
Directs the Comptroller General to complete, before the end of 2010, an audit of the Board of Governors of the Federal Reserve System and of the federal reserve banks, followed by a detailed report to Congress.
Any detractor of Fed transparency who tries to paint the picture that Paul’s bill is an effort to televise FOMC meetings live does not understand English.
Pethokoukis continues:
The effect on the economy might not be so beneficial, either. Even if the result of the Fed bill is only more aggressive congressional questioning and criticism, financial markets might well fear the bank would start taking congressional wishes into account when making policy.
There is more to the economy than “financial markets”. Even if an audit results in more aggressive questioning, would that be a bad thing? It gets pretty aggressive already (see Grayson) and it seems to have little or no effect on the economy or financial markets. The Fed Chairman is a big boy. He deserves to be questioned aggressively given his position and power with our money.
If the Fed were to begin taking congressional wishes into account when making policy, it wouldn’t be such a bad thing. As it stands right now, the only boss is the President. Perhaps a little congressional oversight would be another check on runaway executive power. Of course, the President would still have the ultimate power over the Fed chairman. He can fire him should the chairman attempt to cut his own puppet strings.
“I’ll take transparency for $1000, Alex.”
United Colors of Democracy
by Ted Galen Carpenter
Americans have a long, depressing history of idealizing foreign political movements and revolutions. Even some followers of Thomas Jefferson fawned over the French Revolution, mistaking it for an ideological cousin of America's own campaign for liberty. It was not until the onset of the Terror and its overtime use of the guillotine that admirers in the United States belatedly recoiled in horror.
Now we have two new examples of Americans projecting democratic values onto murky foreign upheavals. One occurred in Honduras, where the military ousted left-wing President Manuel Zelaya and sent him into exile. American opinion leaders immediately took sides. The Obama administration stressed that Zelaya was democratically elected and demanded that he be restored to office. Conservatives asserted that Zelaya's opponents were the real democrats. This was not an old-fashioned Latin American coup, they insisted, noting that the army chiefs acted only after both the Honduran supreme court and national legislature urged them to do so. Zelaya, American critics charged, was a Hugo Chavez clone who unconstitutionally sought to extend his term and create a dictatorship.
Both American factions deserve awards for naïveté. Given the long history of military coups in Central America, it strains credulity to believe that the Honduran military acted merely at the behest of civilian judges and legislators. And one should not assume that those civilian factions were spurred by pure motives rather than engaging in a mundane power struggle.
Why are Americans so susceptible to being gulled?
The Obama administration's attitude was even more obtuse. The president's position was reminiscent of Bill Clinton's Haitian policy in the mid-1990s, when the U.S. threatened to invade if the military junta didn't restore elected President Jean-Bertrand Aristide. Never mind that Aristide was both erratic and autocratic. Never mind that his followers routinely tortured and murdered political opponents. Never mind that his corrupt economic policies made the situation in a desperately poor country even worse. The fact that he won an election seemed to be all that mattered to his hero worshipers in the United States. Obama administration officials appear to regard the Honduran situation in much the same way, conveniently ignoring Zelaya's abuses.
While there was a split along ideological fault lines in the United States regarding the Honduran turmoil, there was pervasive enthusiasm about the anti-government demonstrations in Iran. Here were pro-Western democratic reformers struggling against religious zealots who blatantly stole a presidential election.
As is often the case, the narrative contained a kernel of truth. Iran's regime is certainly one of the more stifling on the planet, and there seemed little doubt that the hardline clerics maneuvered to keep Mahmoud Ahmadinejad in power. (The announcement of final results barely four hours after the polls closed, when 40 million paper ballots were cast, was compelling evidence of fraud, as was Ahmadinejad's startling ability to carry long-standing reformist strongholds.)
Yet the many Americans cheering the demonstrators who took to the streets to challenge the results painfully oversimplified the situation. To start, the "reformist" presidential candidate, Mir-Hossein Mousavi, was not exactly a secular democrat. During the 1980s, he served as Ayatollah Khomeini's prime minister and ordered the imprisonment or execution of thousands of regime critics. In the recent political struggle, Mousavi and many of his followers appeared moderate only when compared to Ahmadinejad and other Islamic fire-breathers.
Republicans who pressed President Obama to endorse the demonstrations predictably equated the Iranian opposition with Eastern Europeans who resisted the Soviet occupation of their countries during the Cold War. But Lech Walesa, Vaclav Havel, and most other prominent dissidents were genuine democrats, albeit often with rather left-leaning economic views. The political makeup of the Iranian opposition was decidedly cloudier. Key players who backed Mousavi included former presidents Rafsanjani and Khatami, as well as approximately 40 percent of the Guardian Council, the assembly of senior mullahs. Virtually none of those individuals could be mistaken for committed democrats. On balance, the tumult was at least as much a split within the clerical hierarchy as a true democratic rebellion, a point that largely eluded Americans who urged the Obama administration to get involved.
This was hardly the first time that the U.S. had viewed allegedly democratic movements in other countries through the prism of American values. In April 2005, President George W. Bush described Ukraine's Orange Revolution, led by Viktor Yushchenko and Yulia Tymoshenko, as "a powerful example of democracy for people around the world." "The ideals of the new Ukraine are the ideals shared by Western civilization," he asserted. That praise was relatively restrained compared to his assessment of the achievement in Georgia.
In a May 2005 speech in Tbilisi, Bush hailed Georgia's democrats for creating the template for Crayola revolutions: "Before there was a Purple Revolution in Iraq or an Orange Revolution in Ukraine or a Cedar Revolution in Lebanon, there was a Rose Revolution in Georgia." He continued, "Your courage is inspiring democratic reformers and sending a message that echoes around the world: Freedom will be the future of every nation and every people on Earth." Georgia, he added, was "building a democratic society where the rights of minorities are respected; where a free press flourishes; where a vigorous opposition is welcomed and where unity is achieved through peace."
Four years later, the bloom is definitely off the Rose Revolution. There is mounting evidence implicating President Mikheil Saakashvili in political corruption and human-rights abuses. In September 2007, Irakli Okruashvili, an opposition leader and former defense minister, reported that Saakashvili had instructed him to have a Georgian economic oligarch assassinated. More generally, he accused the government of "dishonesty, injustice and repression." In response, Georgian authorities arrested Okruashvili.
Even if lurid tales of assassination plots remain unsubstantiated, other abuses do not. A 2008 report by the International Crisis Group concluded that Saakashvili's government "has become increasingly authoritarian." A 2007 Human Rights Watch report accused the regime of "taking serious steps" to undermine human rights and the rule of law. Saakashvili's administration has brutally suppressed opposition street demonstrations, jailed dozens of political critics, and just before the crucial January 2008 election, shut down opposition media outlets, including the country's main television station. International observers refused to certify the May 2009 parliamentary elections as either free or fair. Even Freedom House, an early admirer of the Rose Revolution, concedes in its new Freedom of the World 2009 report that Georgia ranks as only "partly free" and that the trend arrow is pointing down.
Ted Galen Carpenter, vice president for defense and foreign policy studies at the Cato Institute, is the author of eight books on international affairs, including Smart Power: Toward a Prudent Foreign Policy for America.
More by Ted Galen CarpenterThe situation in Ukraine is only marginally better. The Orange coalition has degenerated into a comic opera rivalry between Yushchenko and Tymoshenko, with the latter periodically making common cause with Viktor Yanukovych, an old-style communist pol whom U.S. officials scorned as a Russian stooge. Corruption charges continue to dog Yushchenko's administration: his young son tools around the streets of Kiev in a six-figure sports car. The president's approval rating is now in the single digits, and Tymoshenko's is not much better. Once again, an American-lauded "democratic" revolution has become an embarrassment.
Such developments mock the breathless enthusiasm that the Bush administration and most conservatives expressed for the Rose and Orange Revolutions. It would be a mistake, though, to conclude that misplaced support for foreign "democratic" political movements is the exclusive fantasy of conservative Republicans. It is a bipartisan folly.
Before and during the Kosovo War in 1999, liberal politicians and pundits in the United States lionized the Kosovo Liberation Army. Sen. Joe Lieberman gushed, "The United States of America and the Kosovo Liberation Army stand for the same values and principles. Fighting for the KLA is fighting for human rights and American values." In realty, the KLA was a motley collection of unreconstructed communists, Albanian nationalists, organized crime thugs, and Islamic extremists. Lieberman's paean verged on the obscene. Unfortunately, his fondness for the KLA was only slightly greater than that exhibited by Secretary of State Madeleine Albright, United Nations ambassador Richard Holbrooke, and the other Clinton administration officials directing Washington's policies in the Balkans.
Perhaps the most notorious example of our policymakers linking America's fortunes to sleazy foreign movements was our support for Ahmad Chalabi and the Iraqi National Congress in the years leading up to the invasion of Iraq. Despite longstanding indications that Chalabi and company were corrupt political operators with disturbing ties to Iran, neoconservative cheerleaders treated Chalabi as the George Washington of Iraq. The INC exploited that gullibility to feed the U.S. government and the American news media bogus information about Saddam Hussein's alleged ties to al-Qaeda and Iraq's nonexistent weapons of mass destruction.
Chalabi's lame excuse that he and his associates were "heroes in error" did not allay suspicions that the deception had been deliberate. His democratic credentials and his political support inside Iraq proved to be illusory. When elections were held for Iraq's parliament, his party garnered barely 0.5 percent of the vote. So much for the political giant that Washington believed would lead Iraq into a new democratic era.
One would hope that policymakers might learn from these bruising experiences. But the Iran episode suggests that they continually fail to appreciate cultural differences or complexities. Consider the portrayal of Lebanon's Cedar Revolution as a democratic surge. Lebanon's political arena is a labyrinth of opaque and shifting alliances involving pro- and anti-Syrian forces; Sunni, Shi'ite, and Druze factions; and at least two major — often feuding — Christian groups. Sorting all that out taxes even the most knowledgeable experts. Yet the talking heads on Fox News saw fit to pontificate about Lebanon's political struggle.
The attempt to portray events in Iran as a replay of the ouster of Soviet puppet regimes in Eastern Europe is erroneous on many levels. While Eastern Europeans may have welcomed an American embrace, few Iranians would. Washington was seen as the enemy of Eastern Europe's imperial oppressor, the Soviet Union. Yet Middle Eastern populations — rightly or not — regard the United States as their region's imperial oppressor.
Furthermore, whether or not foreign movements are genuinely democratic should have little bearing on U.S. foreign policy. Even if Mikheil Saakashvili were the second coming of Thomas Jefferson, it would have been unwise for the United States to go nose to nose with a nuclear-armed Russia when war broke out last year between that country and Georgia. In the same fashion, a victory by anti-Ahmadinejad forces would not necessarily solve the issue of Tehran's nuclear ambitions. That program began under the Shah, not the clerical regime, and there is no evidence that a new, more moderate government would give it up.
Why are Americans so susceptible to being gulled? Cynics might argue that our leaders do not actually believe that most supposedly democratic upheavals are genuine, but portray them as such if the insurgent faction is amenable to Washington's economic or strategic goals. They stress alleged democratic credentials to soothe an American public that would balk at embracing questionable movements or regimes on the basis of realpolitik. After all, throughout the Cold War, Washington routinely portrayed friendly autocrats, no matter how brutal, as members of the "free world." At one point, Vice President George H.W. Bush hailed Ferdinand Marcos for his "commitment to democratic principles," even as the Philippines groaned under martial law imposed a decade earlier.
Yet one should not underestimate the capacity of even jaded politicians to engage in self-delusion. How else does one explain George W. Bush's embarrassing assertion that he had looked into the eyes of Vladimir Putin and seen the soul of a good man?
Ordinary citizens can be even more susceptible to wishful thinking. Americans are understandably proud of the values symbolized by our revolution and enshrined in the Declaration of Independence. For more than two centuries, we have expected other societies to emulate that model. At times this has occurred. On too many other occasions, Americans have mentally shoehorned unsavory political movements into the category of liberal democracy. To win support from the United States, foreign factions have become adept at telling us what we want to hear. But for our psychological, as well as our political and strategic well-being, we might pause before automatically embracing the next gathering of dissidents in some far-flung capital as newborn democrats begging for our aid.
Does Inequality Still Matter?
by Will Wilkinson
Whatever happened to income inequality?
George W. Bush's last term was a golden age of the moralizing polemic decrying a widening income gap. Since then, this once paramount concern has completely evaporated. Yet if the question of income inequality was ever interesting or urgent, you'd think a transformative shock to the American economy would make it more urgent still. A wealth-obliterating disaster has put our economy in the dump along with the livelihoods of millions of lower-income Americans. So why have we stopped talking about income inequality?
First, it's useful to analyze what income inequality does and does not tell us. As I argue in a paper recently released by the Cato Institute, in a wealthy nation like the U.S. income is a poor measure of economic well-being and income inequality is an even worse measure of social justice. To capture the real gap in standards of living, we would need to look at the shifting patterns of consumption throughout entire lives, not at context-free snapshots of income at particular moments.
A generous immigration policy can widen the income gap in this country while at the same time reducing world poverty.
If we take a snapshot right now, for instance, in the thick of the downturn, we'll see the shortcomings of income inequality as a social gauge. The official data covering the financial crisis and the current recession won't roll in for some time, so the true story's not yet ripe to be told. But a glance at historical trends allows us to predict the general effect of the downturn with a fair degree of certainty.
In a widely-lauded 2003 paper that looked at trends in the income and wealth of high-income households from 1913-1998, economists Thomas Piketty and Emmanuel Saez showed that the earnings and accumulated wealth of the happy few at the top have dived with each recession, reducing their share of national wealth and income with each dip of the business cycle.
Salaries, bonuses, and hourly wages now make up a much larger part of the total income of those near the top of the earnings ladder than they did even twenty or thirty years ago, when high-income households depended much more heavily on gains from investments of capital. The ladies and gentlemen of leisure who live off inheritances have ceased to dominate the upper ranks of income. These days, the people who really rake it in invest long hours striving for high pay. "The working rich have replaced the rentiers at the top of the income distribution," as Piketty and Saez put it.
The way in which the working rich get paid has changed, too. The annual compensation of hedge fund jocks, Wall Street rainmakers, and corporate honchos is increasingly determined by performance-based bonuses, which have made the incomes of America's biggest earners increasingly sensitive to the vicissitudes of the market.
"High-income households are highly exposed to aggregate booms and busts," report Northwestern University economists Jonathan A. Parker and Annette Vissing-Jorgenson in a recent National Bureau of Economic Research working paper. They estimate that our current bust is hitting the income and consumption of households in the top 20 percent of income earners significantly harder than the households in the 80 percent below. And the higher up the distribution you go, the harder the hit is likely to be.
Let's assume then that the financial collapse and recession really have hit high-income households the hardest, resulting in a dramatic decline in income inequality. Is that a good thing? A disaster that leaves almost everyone worse off is no improvement — especially for low-income workers who have lost their jobs. Likewise, a stretch of economic progress that leaves almost everyone better off is hardly a disaster — even if income inequality rises in the process.
Income inequality can rise and fall for all sorts of reasons. Twenty-somethings just starting out and retired seventy-somethings both earn a lot less on average than peak-earning fifty-somethings. As the age profile of the population shifts, income inequality figures shift, too. So what? Consider another example. A generous immigration policy can widen the income gap in this country while at the same time reducing world poverty. That's good, if you ask me.
Will Wilkinson is a research fellow at the Cato Institute and editor of Cato Unbound. He has recently written the Cato study "Thinking Clearly about Income Inequality."
More by Will WilkinsonIncome inequality can also rise as a side-effect of injustice in our socio-economic system. But injustice should be rooted out because it is wrong, not because it widens the income gap as a side effect. If, just to take a wildly hypothetical example, the government has unjustly dumped loads of taxpayer money on Goldman Sachs, such a narrow allocation of public funds for private use should concern us for its own sake — not because Goldman's bountiful bonuses are likely to exacerbate income inequality.
A good hard jog and an oncoming heart attack may produce the same racing heartbeat. But the distinction matters. A mathematical abstraction like national income inequality is a similarly ambiguous symptom. We can slash the level of income inequality in an instant by slapping even higher taxes on big earners. Or we can slash the level of income inequality by falling into recession. But neither remedy addresses the real problem, which is persisting poverty, not income inequality.
The corruption of a political system in which crises are used to pay off the governing party's allies is also a real problem. The current silence about inequality — from news editors, pundits and politicians alike — would be golden if only it were based on a grasp of the limited utility of income statistics in guiding us toward more effective and humane public policy. But that is not the case. Instead, it appears that the commentators who fretted over income inequality so publicly for so long have simply stopped worrying about it. Inequality, it seems, only matters when a Republican is in the White House.
Socialist-Market Virus Threatens US and China
by James A. Dorn
The Sino-US Strategic and Economic Dialogue sought to find areas of mutual interest so that both countries could co-operate on economic, security, environmental and foreign-policy issues. Nothing of substance came out of the meeting, but a "Memorandum of Understanding" was signed to further consider environmental and energy policy, and participants discussed steps needed to rebalance the two economies in the interest of global prosperity and to avoid destructive protectionism.
As the largest holder of US debt, China would suffer large losses if the Fed engineered a policy of inflation to reduce the real value of US debt. Although there is no immediate threat, China is already talking about a new "super-sovereign" reserve currency to replace the dollar.
While leaders of both nations discussed conventional issues, they did not acknowledge the significant policy mistakes on both sides that helped bring about the most serious recession since the 1930s.
James A. Dorn is vice-president for academic affairs and a China specialist at the Cato Institute in Washington.
More by James A. DornRather than allowing market forces to rebalance their respective economies, both Beijing and Washington are engaging in the very politicisation of investment decisions that is the hallmark of a socialist economy. Unfortunately, little mention was made of that fact during the dialogue. No one seemed concerned about the drift from market principles toward state planning - with the consequent socialisation of risk.
Vice-Premier Wang Qishan did lecture US officials on the need to reduce the growth of government debt and to "balance and properly handle the impact of the dollar's supply" - that is, to avoid inflation. Both sides agreed that any move towards protectionism would severely damage the global economy and should be avoided, and both agreed to work to restore global balances: the US by increasing saving and China by increasing consumption.
The irony is that China's own policies - pegging the yuan to the dollar at an artificially low rate, spurring exports and accumulating large foreign exchange reserves - have allowed the US to live beyond its means and fuelled US federal spending, thus spreading the socialist-market virus.
China's own stimulus programme is creating asset bubbles in the stock and housing markets. Current money and credit growth are not sustainable and could well increase inflationary expectations. The People's Bank of China, like the Fed, needs an "exit" strategy.
Beijing's overriding desire to maintain growth at any cost could end up spoiling the Communist Party's 60th anniversary. There are considerable distortions in China's financial markets. The government-led stimulus programme may lead to short-term growth, but only at the expense of further distorting capital markets and slowing down real reform. The danger is that the dynamic non-state sector will recede while the state sector gains ground.
Non-performing loans at state-owned banks could mushroom, corruption associated with the political allocation of capital could worsen, and inflation could lead to wage and price controls that impede economic and personal freedom. Such setbacks would shift the balance of power further in favour of the party, just as it has shifted to Washington during the current financial crisis.
Indeed, the legacy of the global financial crisis, which was due in large part to government failure, may be the permanent increase in the size and scope of government - both in China and the US.
Signs of Life in the Housing Market
by Gerald P. O'Driscoll Jr.
The good news is that government efforts to prop up prices didn't do much.
The economic crisis began with a housing downturn that spread to housing finance, and then to the entire economy in the form of a deep recession. Stability in the financial sector and growth in the economy will not resume until there is recovery in housing. But what will constitute a recovery in housing?
While the news this week about an uptick in home prices and sales in some markets is encouraging, those anticipating a return to pre-bubble price levels will find the wait to be a long one. In some markets it might not happen for a decade or more. Other markets may never return to pre-crisis prices — certainly not when adjusted for inflation.
Unfortunately, many public policy proposals have been aimed at propping up home prices, or at least cushioning their fall. Nothing could be more counterproductive.
[T]he cure for falling prices in the aftermath of a speculative bubble is, paradoxically, to allow them to fall.
The housing downturn was a classic bursting of an asset bubble. The suddenness of the collapse was frightening and, for a time, prices seemed to be in a free-fall, especially in over-heated areas in Arizona, California, Florida and Nevada. But the cure for falling prices in the aftermath of a speculative bubble is, paradoxically, to allow them to fall.
In housing, as with other assets, falling prices clear markets. They do so by making homes more affordable. During the bubble, homes had become out of reach for many people. In some areas — such as the San Francisco Bay area — households with a median income could not afford a median-priced home. This locked first-time buyers out of the market and made existing homes the currency for purchasing another home. To get around this, creative financing (such as "liar loans") sprang up to enable some to acquire a substitute currency. We know where that led — defaults and bankruptcies.
Another way falling prices clear markets is by raising future expected returns. This draws in speculative buyers. The very process that fueled an asset bubble can be harnessed to help stop a downward price spiral. When home prices fall sharply, banks and others help facilitate a process to sell homes more quickly than during normal conditions. That is what's happening in Phoenix and other cities right now as speculators scoop up homes on the brink of auctions. Often a buyer will allow a prior owner to remain in the home as a renter at a much reduced cost. The new buyers can cover some or all of their costs and hold the properties until such time as home prices actually turn up again.
First-time home buyers also contribute to the housing recovery process. People who thought that they were shut out forever discover that they can become homeowners. I know of a young woman and her fiancé who are now proud homeowners where heretofore they had been renters. They are helping restore a local housing market by restoring sales.
Government programs to prop up home prices have been half-hearted and ineffective overall, and mercifully so. A successful program to prop up home prices would have aborted the recovery process. It would have created an overhang of unsold, over-priced homes. Speculators would have held off buying and first-time buyers would have remained frozen out of the market.
Gerald O'Driscoll Jr. is a senior fellow at the Cato Institute. He was formerly a vice president at the Dallas Fed and a vice president at Citigroup.
More by Gerald P. O'Driscoll Jr.That is what happened in the aftermath of the Savings & Loan crisis of the 1980s. Congress created the Resolution Trust Corporation (RTC), which took over the bad assets of failed S&Ls. Most of those assets comprised commercial, not residential, real estate. But the principle was the same. Prices needed to fall to revive sales.
The RTC has been hailed as a success, and it was, but not at first. Its original policy was to "warehouse" the assets so as not to push prices down further. But as those assets were set aside, the commercial real-estate market froze up. Only when the RTC decided to dump the assets did real-estate markets start functioning again. Texas was the epicenter of the S&L crisis and the collapse of commercial real-estate prices. When the RTC changed course, Texas recovered and the rest is history.
For all the talk of the failure of markets, what is actually working is markets. What failed were government policies of cheap credit and attempting to make housing affordable by stimulating demand. As amply demonstrated by Thomas Sowell in his new book, The Housing Boom and Bust, land-use restrictions and "smart growth" (read no-growth) policies are the culprit for the lack of affordable housing. Stimulating demand through cheap credit only fuels unsustainable price bubbles. The way to avoid a future housing bust is to stay away from demand-stimulating and supply-restricting housing policies. Meanwhile, keep letting markets work.
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