Democratic Scandals

While the press has dutifully reported the various recent scandals and peccadillos of Democratic politicians, but there is nothing like the drumbeat of offense-taking when it is a Republican politician. Note the following list:

Illinois Governor Rod Blagojevich tried to sell Barack Obama's vacated Senate seat. He was removed from office through impeachment.

Blagojevich appointed Roland Burris to that Senate seat, who has now admitted he wasn't completely forthcoming (i.e., he lied) about his interactions with Blagojevich before he received the Senate appointment. The new governor of Illinois, and the other Illinois Senator, has called on Burris to resign.

Secretary of Treasury Timothy Geithner didn't pay the Social Security and Medicare taxes from when he worked for the IMF. Note that Geithner's responsibilities include oversight of the IRS.

Former Senate majority leader Tom Daschle also had tax problems that led to his withdrawing his nomination to be Secretary of Health and Human Services.

In reality, he only left when tax problems befell Nancy Killefer, who withdrew her nomination, and feminist organizations began wondering why a woman was forced to withdraw her nomination over tax problems that were a tiny fraction of Daschle's.

Tax problems continue to plague Obama's cabinet nominees. Hilda Solis, the new Labor Secretary, had her husband settle tax liens outstanding as far back as 1993.

Charles Rangel, the Chairman of the House Ways and Means Committee (in charge of tax legislation in the House), is being investigated by the House ethics panel for a series of problems for: failing to pay taxes on rental income from a Caribbean home he owns; controlling multiple rent control apartments; using stationary from the House to raise money for a center named for him; and helping secure a tax break for a donor to his center.

William Jefferson, a representative from Louisiana, was indicted for 16 charges of corruption and, in a remarkable development, lost his overwhelming Democratic house district to a Republican last fall.

Senator Chris Dodd received below market mortgages from Countrywide, a company falling under his purview on the Senate Finance Committee. His promise to release documents related to the matter was delayed over six months, and he acted on his promise by letting journalists briefly review the documents in his office without allowing them to make copies and review at their leisure.

Tim Mahoney, a representative from Florida, paid his mistress $121,000 to keep their affair quiet after she threatened to sue him; he berated her on a voice mail that became public; and Rahm Emanuel, now Barack Obama's chief of staff, tried to keep the matter private to prevent it from hurting Maloney' re-election chances.

Contrast that with the intense media frenzy that accompanied Republican Mark Foley (whose seat Mahoney won), who wrote lewd messages to congressional pages but didn't act on those messages. The media used the Foley matter, which arose in September 2006, to help elect Democrats in congressional elections that fall. No similar drumbeat existed with the Mahoney matter in the fall of 2008.

Republicans have had their share of problems, but the Democratic scandals include a long list of significant political figures - without the near-hysterical media attention lavished on Republican scandals.

Atlas "Just Says No" to TARP

A Louisiana-based bank, IBERIABANK Corp. announced that it is returning the $90 million in TARP funds it previously received, making it the first bank to return the money. It said it is doing so to avoid being placed at a competitive disadvantage as result of being tarped.

In a bleak day of economic problems and the strong left tilt of President Obama as manifested in his disastrous budget plan, this qualifies as the best news of the day.

Let's hope more banks return TARP funds soon.

Europe 1, Obama 0

In an effort to get our European allies to contribute a meaningful number of additional troops to Afghanistan, Barack Obama has come up short. Other than commitments of a couple hundred troops, Europe has added nothing like the 17,000 new troops we just announced.

It looks like an Obama administration has not ushered in a sea change in our allies' willingness to help us in the fight against terrorism. As I discussed earlier, that is not surprising. The only thing that is surprising about this situation are the claims to the contrary during the presidential campaign.

Spending Blow Out Continues

Congressional Democrats are demonstrating just how much budget discipline Barack Obama really expects. The House passed a $410 billion spending bill, an 8.7% increase over the previous year. Future spending bills will now grow from this new, higher base. This is on top of the "stimulus" bill's spending spree.

Moreover, the bill includes additional support for key Democratic constituencies. The bill phases out school vouchers used in the atrocious Washington, DC school system. No doubt the teachers' unions are quite pleased their support for Democrats has been rewarded again.

It would be encouraging if Barack Obama threatened to veto the bill unless the voucher program is restored. Don't count on it.

Constitutional Change

A major change to out government institutions is underway with little debate. Guess which party this change helps?

Congress is planning to add two members to the House of Representatives, one for Washington, DC and one elsewhere. While the second seat will be for heavily Republican Utah in the short run, which is why Sentor Orrin Hatch (R-Utah) supports the measure, Utah would have gotten another House seat soon anyway while the DC seat will be asuredly Democrat.

Moreover, this will help lay the groundwork to make DC a state, which would add two Democrats to the Senate.

In 1937, FDR proposed adding six new Supreme Court justices to prevent the court from declaring unconstitutional various parts of the New Deal.  The uproar in the country, for something that was constitutional but was a radical change in our governing processes, led to its defeat.  

The number of representatives has been fixed at 435 for nearly 100 years, other than a temporary increase when Alaska and Hawaii became states.  There is disagreement whether allowing DC to have representatives is constitutional, and such a fundamental change in our basic governing process and institutions needs to be thoroughly debated and discussed.

Promises Made, Promises Broken*

Barack Obama continues to retreat as President from positions he took on the campaign trail, mostly for the better.

On his recent visit to Canada, he said that trade protectionism would be harmful to the economy. Contrast that with his campaign promise to reopen the North American Free Trade Agreement signed over 15 year ago.

The Associated Press' Ron Fournier came up with "accountability journalism", whose goal is to hold politicians accountable for the promises they make. Suffice to say, he has been AWOL on this and other issues related to the Obama administration.

More broadly, the press continues to give Obama a pass on these flip-flops, ensuring that politicians will continue to lie to the electorate while campaigning for office and making the political culture of the country more confrontational than reality warrants.

* An ongoing series that compares Barack Obama's campaign rhetoric with the reality of his administration's actions and policies (see previous columns on energy policy, Osama Bin Laden, and cabinet members).

Budget Shenanigans

Barack Obama has announced that he wants Congress to mandate across-the-board cuts in spending to offset any new spending programs or tax cuts.

Sounds like touch fiscal discipline? Think again.

Unlike a common sense approach to budgeting, the federal government's budget includes many programs that automatically increase each year due to inflation, demographic changes or rules. Obama is not saying that any increase in spending would be offset by automatic spending cuts - just any new spending program or tax cut. So the budget will balloon due to the automatic growth in Social Security and Medicare, for example, without triggering the spending cuts.

Moreover, note that Obama proposes this after securing passage of the biggest budget busting bill in history, our "stimulus" bill. So the baseline budget is now higher, so much easier to promise spending restraint after this spending spree.

Last, the plan would also mean tax cuts will never happen to any meaningful degree or without offsetting tax increases. Just as spending grows automatically, tax revenues are also on auto pilot to increase faster than inflation and growth in the economy due to their steeply progressive nature.

Since taxes and spending will continue to rise significantly even with no new programs, Obama's "get tough" approach on the budget is mostly about PR and laying the groundwork for tax increases.

The Air Force Caves

The Air Force announced it has reduced the number of its next generation lead fighter, the F-22, that it wants to acquire. Secretary of Defense Gates has pressed the armed forces to devote its weapons procurement toward fighting the current wars in Iraq and Afghanistan, rather than potential wars against other threats.

While of course we need to fight the current wars to victory, there is a grave danger that we are losing sight of other strategic needs. The F-22 isn't critical to fighting in Iraq and Afghanistan, but it is important to maintaining superiority over Russia and China.

Gates may be re-writing the old saying that "generals are always fighting the last war", with "the Defense Secretary is ignoring future wars and what it takes to deter them".

State of Fear

Michael Crichton wrote a book with that title, describing the use of scare tactics to make people more amenable to the view that global warming and other environmental concerns are a major problem.

We may very well have experienced something similar with the economy over the past few months, with winning the presidential election being the initial incentive to spur fear-mongering and now a "stimulus" bill, that is long on Democratic priorities being funded and adding to the baseline budget, being the current incentive.

Tragically, inciting that fear adds to our economic woes, since a significant amount of economic activity is predicated on confidence in the future. In response to these fears, businesses have cut employment and reduced new investment, and consumers have reduced spending. This is why FDR said, in the Great Depression, that "we have nothing to fear but fear itself."

The "nothing" part was an exaggeration then and today, since there are genuine economic problems today as there were in the 1930's. But fear mongering can deepen the recession and delay recovery.

Atlas Continues to Shrug

Jon Winkelried, the co-president of Goldman Sachs, recently announced he is leaving the firm.

While it is certainly possible he would have done so without Goldman being "tarped", including the recent caps on executive compensation, we shouldn't be surprised if he decided he didn't want to work long hours under government restrictions for greatly reduced compensation.

If there was a stock price on the TARP investments, it would have dropped on the news.

Pakistan 2, Obama 0

Pakistan has agreed to impose sharia law in a Taliban-controlled region in northwest Pakistan, in opposition to U.S. demands. This region had historically been under the Pakistani government's control, unlike other parts of northwest Pakistan, so this development will allow the Taliban to consolidate their control over the region.

What Happened to the New Deal?

One of the less discussed aspects of the bail out and stimulus frenzy over the past few months is that we long ago put in place measures to ameliorate the effect of a recession and to address problems in the banking sector.

The New Deal started, and subsequent legislation expanded, various programs to soften the blow of a recession: unemployment insurance, Social Security, welfare, Medicaid and Medicare. On the banking side, the Federal Reserve and the FDIC were created to address banking problems (albeit the Fed caused the Great Depression of the 1930's with overly tight money and caused our current recession with obscenely loose money from 2001 onward).

So why were all these anti-recession tools not allowed to play out? Why are multi-trillion sums thrown at banks, auto makers, and for "stimulus"?

I submit one explanation is cultural/philosophical. We have lost our ability to see adversity and setbacks as a normal part of life, and instead see them as requiring intervention. The war in Iraq is a great example, where it enjoyed widespread support went things well, but when the enemy fought back, support vanished and turned to utter despair of defeat. Fortunately, and to his great credit, George Bush had the character and vision to see the war through to the success we are enjoying now.

Most politicians, except for the few who genuinely buck the popular trend and advocate difficult measures (Ronald Reagan being a great example of this), respond to these attitudes. By running from the Iraq war - and now by running scared on the economy.

But it's worse. Because of the presidential election, the press and the Democrats had an incentive to exaggerate the risks and overstate the need for intervention. And by intervening, the Democrats have cloaked the pursuit of long-standing domestic policy goals (more government control of health care, and more spending on education and the environment) under the guise of "stimulus".

Tax Follies

The Wall Street Journal recently reported, based on 2006 data, that the top 400 taxpayers in the nation paid the lowest tax rate since the recession year of 1991. The article does mention that the driver of the low tax rate is that most of the income for taxpayers is in the form of capital gains, which are taxed at a maximum rate of 15% versus 35% for ordinary income.

The implication of the article is that there is something wrong or inappropriate with such low tax rates for people with such high income.

There is one critical fact that the article doesn't discuss, which is overlooked by critics when discussing the capital gains and dividend tax rates. Shareholders of companies face double-taxation on the same underlying earnings. First, companies pay taxes of up to about 39% on their U.S. income. Then individuals pay taxes on either dividends or capital gains, which when including state taxes can add another 24%.

As example, imagine a company earns $100 in the U.S. before taxes and pays all of its net income to shareholders as a dividend. The company will typically pay $39 in corporate taxes, leaving it with net income of $61. Shareholders will then pay about $15 in taxes on the receipt of dividends, leaving them with a net of about $46 - resulting in an all-in tax burden of 54%.

So the low tax rates on individual tax returns only captures one layer of the tax burden such income effectively pays. That is the underlying economic reality.

It gets complicated by the fact that some corporate income is earned overseas at lower tax rates (meaning U.S. tax rates are higher than overseas), some shareholders aren't taxpayers (such as pension funds) or pay taxes at lower rates, and capital gains and their realization occur over time.

The U.S. is unusual in that it engages in this double taxation; many European countries don't. That's a comparison to Europe the left doesn't make, and for good reason. We tax capital at very high rates, notwithstanding the claims of the left.

Who Knew?

The Obamas are bringing their personal chef from Chicago to cook for them in the White House.

I'm all for the Obamas, and all Americans, enjoying the fruits of their labor - even if it means living quite a luxurious lifestyle, which a personal chef clearly represents.

Interesting how during the presidential campaign we learned all about John and Cindy McCain's multiple homes, but not a peep about Obama's personal chef.

It wouldn't have anything to do with a biased media, would it?

Energy Consumption is Good for You

The Wall Street Journal recently published data from the World Resource Institute on per capita energy consumption by country. And guess what? The United States was not on top of the list.

Instead, we were tenth on the list. The top 10 is dominated by smaller countries, with a number in the Middle East and the Caribbean. But Canada was ahead of us. Doesn't that left-leaning nation realize what an outrage their lifestyle is?

Not only is there nothing wrong with consuming a great deal of energy, but in fact it is wonderful to do so. Whether it is for climate control, the use in industrial and commercial activity, transportation, powering modern medicine, or the enjoyment of electronic devices, our lives are immeasurably better because of energy usage.

More broadly, harnessing energy for human purposes has done more to improve the material conditions of our lives than any other activity.

Barack Obama apparently thinks so too, although his public comments on the subject toe the environmental line. He keeps the Oval Office at very high temperatures, so high that David Axelrod said, "He likes it warm. You could grow orchids in there."

If only his policies and rhetoric matched his deeds.

Wells Fargo Fights Back

Wells Fargo ran a full page in the Wall Street Journal recently defending the right to manage its business as it thinks best, as compared to how pundits and politicians think it should be run.

The issue in question relates to an employee recognition event, where Wells Fargo was taking employees on a four-day event to recognize their achievements. The company did cave to public pressure and cancelled the event, and all similar events for the rest of the year. But its ad defended the value and importance of such events to reward good performance throughout the company and to help in business planning.

The general criticism of companies, of which we have heard a never-ending bashing of the financial services in particular the past several months, is that they are inappropriately focused on making money.

But such critics don't fully appreciate the logic of their position, because it means that companies' actions and policies are guided by a desire to make the most money they can. So whether it is the size of bonuses paid, Citigroup's marketing efforts by sponsoring the new baseball stadium for the Mets, or team recognition events by Wells Fargo (and most companies), companies undertake these actions in the belief that it will help them maximize profits in the long-run.

Corporate critics need to choose what they really believe: are companies self-interested entities out to maximize profits, or altruistic institutions who like to pay above-market bonuses, subsidize baseball teams, and give free trips to employees?

Companies generally are, and certainly ought to be, in the business of making the most money they legally and ethically can for their shareholders. That is just and moral, reflecting the very reason for their existence.

The criticism of such corporate behavior, reminiscent of attacks on business during the Great Depression, will only lengthen the recession and make recovery harder. We need an increase in the willingness of companies and investors to make investments, and such criticisms tend to encourage businesses to retrench rather than expand their activities.

Media Silence

Barack Obama announced his plan to deploy 17,000 additional troops to Afghanistan, continuing the Bush administrations policy of increasing America's efforts in that country. While Obama also announced that a review of our Afghan strategy is underway, which could lead to additional troops being deployed, it is important to note that the U.S. commander in Afghanistan asked for 30,000 troops.

So why are we delivering fewer troops than the military believes is necessary? Remember the howls directed against George Bush for supposedly doing the same thing?

The silence is deafening.

Pakistan 1, Obama 0

Other nations continue to push their foreign policy objectives as they test the boundaries of how strongly Barack Obama will defend America's interests and values in the world.

Russia is posing obstacles to our efforts in Afghanistan and is flexing its muscles regarding its gas exports to Europe, and we have rewarded their behavior with a softening on our position on stationing a missile defense system in Eastern Europe and on Georgia's ascension to NATO.

Pakistan has released from house arrest A.Q. Khan, who sold nuclear weapons technology to North Korea.

North Korea appears to be making preparations for another test of its ballistic missile capabilities.

Iran launched a satellite into orbit, now the only country in the world who can launch a satellite but doesn't possess nuclear weapons. Yet.

If Barack Obama doesn't start making other nations pay a price for thwarting important goals of our international diplomacy, we should expect more of these disturbing developments.

California Dreaming

California's state government is in budget crisis, facing a $42 billion budget deficit. The deficit is driven by a spending explosion in the past 10 years.

The state spent $68.5 billion in fiscal 1997-1998, which ballooned to $144.8 billion in fiscal 2007-2008. If the state had adopted an important budget reform, which limits the growth in state spending to the increase in population and inflation, then California would have a budget surplus today - even with declining tax revenues due to the recession.

This spending explosion, along with the Democrats' desire to raise California's already high taxes to resolve the budget crisis, helps the state deserve the nickname the "People's Republic of California".

This is Stimulus?

As an illustration of the misplaced priorities of the recently passed "stimulus" bill, note that significant money will be spent on sectors that have expanded employment during the recession.

Education spending proved to be a source of contention in the "stimulus" bill. This was a priority of Democrats, both to reward an important constituent, the education unions, and to further a long-standing goal of Democrats, the expansion of the federal government's role in education. Likewise, increased spending on health care was also a priority for Democrats, who are taking further incremental steps toward nationalized health care.

Compare those efforts with what employment data from the Labor Department (as reported here). In an otherwise dismal employment picture, with most sectors of the economy showing significant job losses, the education/health sectors experienced significant job creation since the recession began. In fact, the only other sector to experience a growth in employment is in government.

How about that. The "stimulus" bill will result in greater government employment, to oversee and manage all of this new government spending. And education/health care will see additional employment as well, on top of recent gains.

Chris Dodd to Wall Street: Drop Dead

Chris Dodd, as a U.S. Senator from Connecticut and a former presidential aspirant in the Democratic primaries in 2008, is an important figure in our national politics. Tragically for our country, he is a real menace to our well-being.

He has long sought to improve U.S. relations with Hugo Chavez, the socialist thug in charge of Venezuela who is doing his best to make himself dictator.

He received low interest rate mortgages from Countrywide in a "Friends of Angelo" program to provide politically important figures attractive mortgages, in a program named for Countrywide's CEO Angelo Mozilo. Countrywide had an extensive relationship with the failed mortgage giants, Fannie Mae and Freddie Mac, providing Friends of Angelo loans to key executives there while Fannie and Freddie were buying Countrywide mortgages.

And why would Dodd get such favorable treatment? Because he sat on the Senate Finance committee that regulates the financial services industry in general, and Fannie and Freddie in particular. Suffice to say, he presided over the massive expansion of mortgage lending by Countrywide/Fannie/Freddie that has helped cause our current financial crisis.

And now Dodd has pulled another caper, worthy of this distinguished record. At the last minute, he inserted to the recent "stimulus" bill a provision that limits bonuses to a broad number of top executives at future and previous recipients of TARP money. It is so destructive, even the Obama administration is opposed to the measure. The measure:

• Encourages TARP recipients to increase salaries, since only bonuses are limited, to offset the reduction in compensation. More compensation will be fixed, rather than performance-based as bonuses provide.

• Motivates employees of TARP firms to leave for financial firms that are not TARP recipients, where these restrictions don't apply. This "brain drain" will increase the likelihood that TARP firms continue to struggle and be unable to repay the government for the money invested in them.

• Provides incentives for TARP recipients to repay the government investment sooner, and discourage potential future TARP recipients from accepting such funds. While this has some positive aspects to it, it is important to recognize that the Treasury Department under both President Bush and Obama want to encourage firms to accept TARP money to strengthen the financial system.

• Violates the principle that ex post facto laws are wrong, since existing TARP recipients didn't realize when they accepted TARP funds that this restriction would be applicable. Recall that the government twisted the arms of some firms to accept TARP money so as to minimize the stigma for the weaker firms for receiving TARP money. The financial sector gets tarped again.
  

This is quite a record for the dear Senator.

Russia 2, Obama 0

Joe Biden has softened America's position on the importance of Georgia joining NATO. Whereas George Bush strongly favored NATO membership for Georgia, Biden recently said that he favors "Georgia's continued independence and autonomy" and that joining NATO was a "decision for Georgia to make."

Diplomats have interpreted these verbal nuances as a marked shift in the U.S. position, in apparently a further attempt by the Obama administration to placate Russia. Throwing Georgia to the Russian wolves, and weakening our commitment to building a European defense system against Iranian missiles, begin the path of giving Russia two important victories.

That's quite an accomplishment for the first few weeks of the Obama administration. Just imagine what the President can do in four years.

A Modest Proposal

The spectacle of parading the eight CEOs of the largest TARP recipients before Congress sure gave our representatives a chance to show how "tough" and "mad" they are. But it doesn't really shed much light on why we got into this mess.

But there is a public hearing that would be quite instructive.

Convene a panel, comprised of leading economists, to question the leaders of the Federal Reserve and Congress for their role in promoting policies that caused our crisis.

A robust questioning of Alan Greenspan and Ben Bernake by their peer economists would highlight the devastating effect the Fed's low interest rate policy had in creating the debt-fueled housing bubble, and would be far more interesting than similar questioning in the past by a Congressional committee.

Then the panel could question Congressmen and Senators, such as Barney Frank and Chris Dodd, about their push for Fannie Mae and Freddie Mac to expand subprime lending, their opposition to Republican efforts to rein them in (see this video), and their comments about the lack of risks posed by them. Chris Dodd could also explain the sweetheart mortgage deals he received from Countrywide, an important partner to Fannie Mae.

The panel could also call as witnesses members of The Wall Street Journal editorial board, who could discuss their warnings years ago about the risks posed by the Fed's low interest rate policy and by Fannie and Freddie - making clear that the crisis could have been avoided.

If you think this is somehow too tough on the politicians and the Fed, consider this. CEOs of financial services firms have lost jobs, wealth, income, and reputation from the crisis - as well as they should. These politicians have been rewarded with greater political power, while the Fed has been rewarded with unprecedented economic power.

So by all means let's convene panels to question the key actors in our economic crisis - let's just make sure it covers the right participants.

France Gives Obama the Heisman

France's defense minister has refused for now to increase his country's military presence in Afghanistan.

For years we heard that America wasn't getting more help in international affairs because other nations didn't like George Bush, and that Barack Obama would usher in a new era in this regard.

This a wake up call for those who think international politics is personality driven. It is mostly driven by a government's perceived interests. Those perceived interests aren't always just, or even correct, and we can lament France doesn't see the situation differently.

Barack Obama's presidency won't change that.

Madoff's Inspiration

The cartoon below amusingly depicts a serious problem: the Social Security systems shares similarities to a Ponzi scheme.

Unlike private pension plans, Social Security does not take the taxes paid into the system on your behalf and create a dedicated account which grows in value by earning a rate of return from which future benefits are drawn.

Instead, the payments you receive in retirement come from taxes paid by current workers. If those workers stopped paying taxes (hypothetically), then you couldn't receive your payment.

Moreover, based on the rate of return implied from taxes paid and benefits received, Social Security proved to be a "good deal" for the initial recipients. But to overcome this initial deficit, in recent years the rate of return on Social Security has become terrible, on average well below that which could be earned on U.S. Treasury bonds.

So here are the Ponzi scheme elements of Social Security: a lack of assets which therefore can't earn a genuine rate of return, requiring that Social Security benefits must come from the payments of future contributors - and a good deal for initial contributors but a worse deal for later ones.

Social Security differs from the Madoff scheme in a couple of important ways. Future contributions to Social Security are mandatory since they are a tax liability. Even though returns on Social Security are well below what could be earned in a private retirement plan (even if you conservatively just invested in Treasury bonds), you can't opt out of Social Security in the face of these poor returns and demand your money back.

So the collapse that must come eventually to all private Ponzi schemes, when either returns don't live up to their promise and/or investors demand their money back which doesn't exist, is not a problem for Social Security.

Correspondingly, private Ponzi schemes work because of the promise of high returns, or more cunningly in the case of Madoff, decent returns consistently "delivered". Social Security has dealt with this problem by simply reducing the rate of return going forward, and since it has the taxing power of the government to ensure the inflow of new cash to pay benefits to retirees, it doesn't have to worry about contributors fleeing due to the new, lower return expectations.

Instead, we all lose, slowly but surely.

Fannie and Freddie Dwarf the Rest

When the government put Fannie Mae and Freddie Mac into conservatorship in September, it committed to provide up to $100 billion in equity capital for each company. The companies have drawn down or said they need to draw down $55-60 billion in government equity.

The first thing to note is this amount of government equity investment is greater than the amount is has invested in any other financial institution (so far, $45 billion is the maximum in the case of Citigroup, although the new bailout plan being discussed may raise this amounts). Yet it hasn't received the publicity or scandal-mongering that is associated with TARP recipients.

Why? Because it is a creature of government and its poor financial policies were spurred on and even mandated in some cases by the government in general, and the Democrats in particular - including many of the Democrats who now wield power in Washington (Barney Frank and Chris Dodd are leaders of the pack in this regard). So the left-leaning media doesn't turn up the attack machine on Fannie Mae and Freddie Mac as it does for private companies such as Bank of America or Citigroup.

But Federal Reserve policies, and government promotion of the housing market led by Fannie Mae and Freddie Mac, are the fundamental cause of our economic crisis today (as discussed here). We can't lose sight of that, and the staggering losses at Fannie and Freddie only reconfirm that fact.

The Doomsday Clock Inches Closer to Midnight

The news this week that Iran successfully launched a satellite into orbit is further evidence of Iran's ability to deliver weapons of mass destruction (nuclear, chemical, or biological) from a ballistic missile. Combined with Iran's nuclear program, this is a disturbing development.

All other nations in the world who can launch satellites into space possess nuclear weapons.

How much do you want to bet Iran would be the exception to this pattern, if left unchecked?

The Doomsday Clock, a hypothetical countdown to the midnight of a nuclear holocaust published by the Bulletin of Atomic Scientists, ticks towards midnight as Iran's nuclear and ballistic missile programs continue (see an earlier column for more on the subject).

Russia 1, Obama 0

Joe Biden signaled today in a speech in Munich that the Obama administration may be willing to negotiate with Russia over the missile defense system we plan to deploy in Poland and the Czech Republic. The purpose of this limited defense system is to protect Europe from ballistic missiles fired from Iran, while Russia fears such weapons could neutralize its nuclear arsenal.

Russia aids Iran with weapons, nuclear technology, and favorable votes on the UN Security Council, and is now constraining our ability to supply our troops in Afghanistan, then suggests it can help America on these matters so long as we help them with their concerns over the missile defense system.

Unless the Obama administration believes it will end up destroying the Iranian nuclear and ballistic missile programs with a military strike, this is shaping up as a win for Russia and a loss for us.

Obama Strikes Back and Misses the Target

Barack Obama hasn't liked the strenuous and successful Republican opposition to the "stimulus" bill that has been debated in the Senate after its passage in the House. The Senate bill agreed to last night reflects significant concessions to three Senate Republicans to secure a 60 vote majority.

In a speech before House Democrats, Obama criticized the speed with which the bill is moving through Congress, suggesting it is Republicans' fault for having the temerity to propose alternatives. Aside from the fact that a Senator has no more critical job than discussing and debating important legislation, yet alone a bill costing $800-900 billion, Obama's complaints miss the mark.

If the speed of implementing the "stimulus" bill were so critical, why:

• Is so much of the bill's impact occurring in 2010 and 2011?

• Did the House laden the bill with so much special interest spending, slowing down the budget reconciliation process that now has to occur between the House and Senate?

• Do the Democrats' proposals include measures of lasting importance outside mere "stimulus", such as significant steps toward nationalizing health care (when that is a subject that should be debated on its own) or expanding the role of the federal government in education (which is a major point of disagreement between the parties)? In other words, why did the Democrats seek lasting policy changes for what is purportedly near-term stimulus?

• Hasn't Barack Obama appointed the car czar, which has led to inaction on the part of the auto industry and UAW in meeting the looming deadlines in the late December auto bail out?

Obama also had the nerve to complain about the size of the deficit he inherited upon taking office and the increase in the national debt - when he is proposing massive increases in the deficit and the national debt!

"When you start hearing arguments, on the cable chatter, just understand a couple of things," he said. "No. 1, when they say, 'Well, why are we spending $800 billion [when] we've got this huge deficit?' - first of all, I found this deficit when I showed up, No. 1"

"I found this national debt, doubled, wrapped in a big bow waiting for me as I stepped in the Oval Office."

Aside from the incongruity of him complaining about the deficit and national debt when he wants to increase both dramatically, it does raise a substantive point that is missing from much of the debate over the "stimulus" plan: before including the higher deficits from the new "stimulus" plan, the size of this year's budget deficit, as a percentage of GDP, will be the highest ever in peace time - much higher than it was during the Great Depression.

So if deficit spending was the key tool for stimulating economic activity, we are already doing more than ever before. And the deficits of the previous years should have led to economic nirvana, rather than the recession of today.

Mr. President, we thank you for indirectly helping making the case against such "stimulus".

Profiles in Courage - Not

Trade protectionism is on the rise, in a reprise of policies that helped create the Great Depression of the 1930's.

And Barack Obama is largely AWOL on the issue.

It began with Obama campaigning against NAFTA, saying he would reopen its terms. In a sign of the gamesmanship, rather than leadership, on the issue, he then reportedly dispatched a campaign adviser to tell the Canadian government that his comments were for domestic political consumption and not to worry.

Contrast that with the principled stand John McCain took in support of free trade last year.

Congressional Democrats, led by Nancy Pelosi, lived right down to the level set by their party's standard bearer by refusing to hold the votes that trade legislation requires on free trade pacts with Columbia, South Korea, and Panama.

Now the "stimulus" bill moving through Congress has buy-American provisions that mandate purchases from American suppliers.

Sounds good? Well, it will raise the cost to the government of the "stimulus" bill, and put Americans out of jobs in other sectors as other countries retaliate - since such provisions violate international trade agreements we have signed.

This is the new American approach to working with the rest of the world?

I guess those sound bites refer to policies that weaken America's posture against the thugs of the world. But when it comes to doing the bidding of union leaders, we can throw international relations aside.

But more importantly, we invite a downward spiral of international trade as other countries retaliate against our exports - which actions are gathering steam.

The echoes of the Smoot-Hawley tariff of 1930 can be heard: one of the worst pieces of legislation in American history as it destroyed our exports when other nations retaliated for its trade limiting provisions.

This is where Barack Obama needs to demonstrate presidential leadership, rising above the wishes of an important constituency (unions). He should insist that the buy-American provisions of the "stimulus" bill be removed (he has called for its watering down) but also explain why free trade is important to America, now more than ever, and lobby Congress both to ratify the pending free trade pacts and to grant the his administration fast-track negotiating authority for new free trade agreements.

Free trade will help us get out of this recession. Trade restrictions will make the economic downturn worse.

Tax Cheats R Us III

Well, there they go again. Now Barack Obama's nominee to be Labor Secretary, congresswoman Hilda Solis, has a tax problem. Her husband settled this week $6,400 in tax liens on his auto repair business, some of which were from 16 year ago.

Like Daschle, it sure appears there was no desire to pay this tax liability without the pressure from public scrutiny, with Solis's husband paying the tax only after USA Today began investigating the matter.

Some will say this isn't her problem, since it his her husband's business (although they file joint returns). But as a member of the House, and a nominee for the cabinet, we need public officials who don't flaunt or condone violating our laws. Nor who think that by virtue of their prominence, local tax liens won't be enforced.

Being Tarped

Wall Street firms want to repay the TARP funds so they can manage their firms effectively.

Bankers are leaving firms that have received TARP funds for boutiques or foreign banks, where government-imposed restrictions on pay and business activities aren't relevant.

So I propose a new word, "tarped", defined as:

1. (specifically) having an important investor demand you pursue value destructive activities, such as making bad loans for the sake of lending or capping compensation so your best performers leave.

2. (generally) being screwed, from a financial point of view

Executive Compensation Mania

To gauge the destructiveness of Barack Obama's proposed pay cap for firms who receive government funds, look at what private equity firms, among the world's most sophisticated investors who generate high returns, do when the buy a company. They usually give the CEO and key executives a chance to make more money, not less.

Instead, the President would rather score PR points then lead by explaining to the public that, as emotionally satisfying as it may be to punish financial executives, it won't help the economy to do so.

Moreover, the financially stronger TARP recipients are talking of raising private capital to repay the TARP investment and free themselves from political interference. Given the growing government restrictions, that will give such liberated firms a distinct competitive advantage over the weaker TARP recipients.

The upshot? The government's limits on compensation will reduce the viability of financial firms and increase the likelihood that taxpayers will see losses on TARP funds.

Shovel-Ready is No Viable Standard

Much discussion of the "stimulus" bill refers to shovel-ready projects, meaning those activities for which plans have been drawn and are ready to be implemented quickly.

While speed of any stimulus plan is critical, which is one of the major faults of all the plans proposed by the Democrats where much of the spending is deferred into 2010 and beyond, the problem with many of these projects is that they are a waste of money.

As an extreme example, imagine the government pays 100 people to build a big pile of rocks. Those 100 people get paid salaries and trucks are rented which helps the construction firms - all of which increases spending (it also increases debt, which I have discussed previously).

But then we are left with just a pile of rocks.

Contrast that with private construction activity, which actually builds something of value - whether it is a consumer purchase such as a home or a business investment to produce new goods and services.

While the multitude of projects embedded in the House's "stimulus bill" are not quite the equivalent of building rock piles, many if not most are of dubious value.

That is just one virtue of tax cuts as a genuine stimulus plan, since the people and companies receiving the tax cuts will spend or invest that money with a focus on doing things which they value - whether it is purchases of consumer goods or investments they believe will create value.

A Growth Industry in Tough Times

Tom Dachle received $5 million in income for the past two years, for what is essentially lobbying activity. Leon Paneta, Barack Obama's nominee to head the CIA, received $700,000 in speaking and consulting fees last year.

Apparently, being a politician is quite lucrative.

More importantly, their paydays reflect the desire of business to secure protection and influence against the depredations of predatory government actions. Such actions can cost the company a fortune, or help it make one.

The root cause of this "pay-to-play" mess is the power government holds over economic activity. Curtail or end that power, and business won't waste its money on such spending.

This is just one of the many sordid, wasteful, and wrong results from government intervention in the economy. Given the explosion in such activity that Obama and Congressional Democrats promise, expect more such extractions from industry.

Chrysler: May it Rest in Peace

January sales figures show why Chrysler should not receive additional government funding and should liquidate. Its sales were down 55% from last January, as compared to 32% for Toyota, 40% for Ford, and 49% for GM. The company has a five month supply of vehicles just at its facilities, separate from dealer inventories.

If Chrysler shut down, it would greatly help GM and Ford as Chrysler buyers would tend to gravitate to the remaining two American-based auto makers, making them more viable and reducing if not eliminating the "need' for further government aid.

A Chrysler liquidation would be a gutsy and bold move by the Obama administration. It would also infuriate the UAW. As such, don't count on it.

Three Cheers for Al Gore

No, this isn't an homage to his crusade against global warming, or how he "invented" the internet.

Instead, it's his stance on terrorism that I'm applauding. Terrorism, you ask?

Well, at least it was his stance on "extraordinary rendition", and it was from 1993. And I don't recall him exactly defending President Bush's policies publicly. But at least during his tenure as Vice President, he seemed to bring a dose of realism to the Clinton administration.

The Wall Street Journal reports that Richard Clarke, the anti-terrorism official under President Clinton and Bush, described a scene in his book "Against All Enemies" in which President Clinton and others were debating Clarke's proposal to have U.S. forces capture a terrorist and then turn him over to a foreign government for questioning. Presumably, such questioning would not have been consistent with the left's standards (i.e., use no more than pressure, and usually less than, normal police criminal procedure).

Clinton was leaning against the proposal, and then Al Gore joined the meeting late. Clinton summarized the issues, and Gore replied:

"That's a no-brainer. Of course it's a violation of international law, that's why it's a covert action. The guy is a terrorist. Go grab his a--."

Let's hope Barack Obama has people with similar views advising him, or better yet, that he feels the same way. Initial impressions aren't hopeful.

We Don't Need No Stinkin' Contracts

Responding to enormous political pressure, Citigroup is exploring breaking its deal with the New York Mets to pay $400 million over 20 years for naming rights to the new Mets' ballpark.

Politicians have complained that Citi is paying all this money for naming rights when it has received $45 billion in government investment plus additional guarantees.

First, such naming rights are a form of advertising, and while I have no idea if it is a worthwhile investment of marketing dollars, it is in principle no worse than other forms of advertising. In fact, I'm sure Citi's marketing budget dwarfs the $20 million per year cost for naming rights. But if it were a good marketing investment, getting rid of it would hurt, not help, the company and its investors - which now prominently includes the U.S. government.

Killing a good investment is hardly a good idea to help the bank recover.

But there is a more profound problem. Citi has a legally binding contract with the Mets. They can't just walk away from it. Presumably, for Citi to negotiate its way out of the naming rights, it would need to pay the difference between what a new party would pay for naming rights and Citi's $400 million commitment.

The other alternative is that the Mets, who received state and city aid to help fund the construction of their stadium, get additional aid from the government to make up their loss.

Scoring cheap political points is easy. Real leadership requires applying good sense.

Phantom Fears

The New York Times reports on a truly remarkable fact of modern life: we deny ourselves a tool to save lives and prevent sickness, because of phantom fears.

The tool at issue is irradiating food, which kills the bacteria that causes much of the food poisoning outbreaks in this country. About 5,000 people a year die from food-borne bacteria, with 325,000 people hospitalized and 76 million becoming sick.

Not only would irradiation significantly reduce the number of deaths and illnesses, it also extends the shelf-life of food - reducing spoilage and saving money.

But people are afraid of the word "irradiation", even though no radiation resides in the food after it is treated.

Save lives, reduce illness, reduce costs - irradiate food.

Tax Cheats R Us II

The New York Times reports that Tom Daschle knew as early as last June that he may owe additional taxes, but didn't pay the tax bill until recently, after his nomination to be secretary of Health and Human Services.

Daschle claims the delay was due to the time it took for his accountant to prepare a report on the matter. But it isn't that complicated to determine the liability, so it suggests there was another motivation to wait: he wasn't planning on paying the additional taxes unless he was nominated to an administration post.

Barack Obama has promised a renewed focus on ethics in his administration (with the implication of a lack of ethics in the Bush administration). Two people have received administration roles despite new lobbyist rules, and now two people have been nominated (with one already confirmed) to the cabinet despite cheating on their taxes.

This is a change, but not in the way Obama promised.

Stimulus that Actually Stimulates

With the House of Representatives passing a pork-laden and special interest satisfying spending spree that is being called stimulus, it is important to realize there are genuine alternatives that can help the economy.

The Cato Institute ran a full-page ad in the Washington Post this week which contradicts President Obama's assertion that there is widespread agreement on the need for massive government spending to stimulate the economy, with hundreds of economists including Nobel laureates signing the statement. Even more economists have added their names to the statement since it was published (here).

Aside from the fact that the House plan is mostly about satisfying a leftist wish list of pet projects and causes than it is about stimulus, the very premise that government spending will solve the problem is in question. This plan shares a key premise with the stimulus plan passed in early 2008, which comprised tax rebates: if the government puts money in people's pockets, it will stimulate economic activity.

The problem with such efforts is that the money has to come from somewhere. Specifically, the additional spending or tax rebates are paid for with additional government borrowing, which means there is less money available for other forms of investment or spending. So the impact is not nearly as great as it seems.

Instead, an economic stimulus plan can be crafted that can change the behavior of individuals, businesses, and investors to increase economic activity. An across-the-board cut in all income tax rates, including corporate, capital gains, and dividend tax rates, increases the incentives for everyone to make new investments, start new ventures, and in general work harder - since the payoff from all such efforts is now greater.

Yes, such a tax cut puts money in taxpayers' pockets like a tax rebate or infrastructure spending, but it does much more by encouraging effort and risk-taking - which is the key to stimulating real economic growth.

John McCain did a poor job in the campaign explaining why his plan to cut corporate tax rates was so beneficial. The reason such a tax cut promotes economic growth is simple. When companies make decisions to build a new factory or R&D facility, they compare many variables, all with the goal of maximizing their after-tax income from the investment. If corporate tax rates are reduced for investments in the U.S., then companies (both domestic and international) will be find investments in America more profitable and hence more likely to make such investments in America.

Ireland has experienced dramatic economic growth by using a low corporate tax rate to induce companies to locate operations there. And since the U.S. corporate tax rate is now among the highest in the world, cutting that rate will make investing here more competitive. That will mean more jobs, and more tax revenue, generated in the U.S.

A 30% cut in all such tax rates would cost the government approximately $500 billion, before any stimulating effects of higher economic activity are considered. For individual taxes, the 15% tax bracket would be 10.5%, the 25% tax bracket would become 17.5%, and the 35% tax bracket would be 24.5% - all dropping by 30%. The corporate tax rate of 35% would be 24.5%, which when adding in state taxes would make it about 29% - higher than many countries but much more competitive than today.

A second important element of a pro-growth stimulus plan is to expand free trade globally, rather than threaten to reduce trade as Barack Obama did during the campaign by suggesting he would change the terms of NAFTA or refuse to approve free trade agreements with Colombia, South Korea, and Panama as the Democratic Congress has done. Approving these trade agreements and in general seeking to expand free trade will send a strong signal of America's commitment to expanding trade - which will encourage economic activity as businesses seek new opportunities that more open trade permits.

A third element of a pro-growth stimulus plan is to look to cut regulations that impede economic activity. The auto industry has long been hamstrung with fuel efficiency standards and limits on rationalizing its dealer network. Reducing or eliminating those restrictions won't immediately solve the auto makers deep woes, but will help - and are an example of the type of constraints that limit business activity throughout the economy. Naturally, instead President Obama and Congress want to increase the constraints on the auto industry which will only make economic recovery harder.

Lastly, pro-growth government policies would not include attacking businesses and Wall Street to score PR points. President Obama has resoundly failed in this regard with his recent bashing of Wall Street: if Wall Street didn't pay bonuses to its employees, as the President suggested, then these firms would wither as employees left to work for other firms (existing or new ventures) that haven't received TARP funds.

The key to reviving the economy is having people willing to take risks by investing money and time in new ventures and investments. Lowering taxes, increasing free trade, and reducing regulations all help create incentives for such risk-taking. Criticizing businesses will discourage risk taking by creating an atmosphere of fear - better to hoard cash since you don't know when the next assault will occur or to what restrictions your business will be subject.

All of the above suggestions stand in sharp contrast to the policies pursued during the Great Depression, when taxes were raised significantly; free trade was devastated with high tariffs; new regulations were unleashed; and business leaders were subject to verbal and legal assault.

Contrary to the popular mythology of the New Deal, all of these policies exacerbated the crisis of the 1930's and prevented a full recovery from occurring for over ten years. After six years of the New Deal in 1939, unemployment was about 19% - down from 25% in 1933 but still at depression levels. Note that today's unemployment rate is 7.2%.

Let's not repeat the same mistakes again. Pro-growth policies, consistent with our capitalist heritage, give us the best chance to begin a sustainable recovery.