Then and Now

North Korea's latest military attack on South Korea yesterday and its disclosure of building a uranium enrichment facility continues the tyrannical regime's efforts to extract concessions from the United States and South Korea.

The South Korea responded by saying it would take "stern measures" if attacked again.

Attacked again? But yesterday's attack was the "again" - after sinking the South Korean warship this past spring that killed 46 South Korean sailors.

In a similar vein of wanting to keep tensions to a minimum, the Obama administration initially said it wasn't deploying additional military forces to the region, citing our existing forces in South Korea, Japan, and Guam.

It is instructive to review our response to the Cuban missile crisis in 1962 to see how far we've come in accepting threatening behavior today and attacks on us or our allies.

After the United States discovered that the Soviet Union had deployed nuclear missiles to Cuba, we imposed a quarantine on Cuba - a naval blockade in all but the name.

Vast military forces began to pour into our military bases in Florida and the Gulf coast as we prepared for a possible invasion of Cuba.

Most ominously, our nuclear-armed bombers in the Strategic Air Command greatly increased their air patrols and carried out attack runs aimed at the Soviet Union - each time pulling back before carrying out the attack but intending to intimidate the Soviets.

And the intimidation worked. Because despite the threat of looming war, which typically leads nations to at least prepare for war by deploying its forces accordingly, the Soviet Union didn't move a muscle. After starting the crisis with the deployment of its missiles, it then became terrified with America's overwhelming response and military superiority in the region and in nuclear weapons - so scared it didn't even prepare for war.

48 years ago, we responded to military threats by preparing for the worst, and in doing so, deterred war and obtained a better political settlement.

Today, we and our allies are the ones who are scared of preparing for war, and in so doing, increase the risk of war and of obtaining a worse political settlement.

Our enemies observe this, and plan accordingly. North Korea has had great success in pushing past previous "lines in the sand", only to find we don't really mean it and will appease them with concessions to avoid future provocations. Then North Korea repeats the cycle, crossing new lines in the sand and obtaining new concessions.

Will Barack Obama be up to the challenge to stop this dangerous pattern, that both Bill Clinton and George Bush engaged in?

American Leadership, or Not

Many countries believe the Fed's recent round of quantitative easing is designed to depress the value of the U.S. dollar relative to other countries, and thereby to increase American exports by making goods produced in America cheaper in foreign currency terms.

This had led to much outrage expressed by international leaders, with Brazilian leaders saying the U.S. is engaged in a "currency war." Germany's Finance Minister Wolfgang Schaueble not only thinks QE2 is bad policy but says it violates the Obama administration's international commitments. Schaueble said: "These huge economic problems cannot be solved with more debt. That was the joint policy all developed nations, even the United States, agreed on at the G20 summit in Toronto."

Schaueble went on to say the United States should follow Germany's example of how to deal with the financial crisis - in which Germany cut government spending!

And how does Barack Obama feel about the Fed's QE2 policy in light of this international criticism of American policy? He supports the Fed's actions.

The U.S. dollar has a unique role in the world economy as the global reserve currency. Many nations (through their central banks holding most of their foreign currency reserves in dollars) and individuals look to the dollar as the ultimate safe store of value; the dollar is the currency used to price many commodities (such as oil); and is the benchmark for setting interest rates.

Having the global reserve currency provides the United States great financial flexibility. For decades, China and Japan have been sending America products that fill our homes, and in returns we have been sending them dollars that fill their central bank reserves. It also allows the federal government to run huge deficits and confidently believe it can easily borrow the money to support such debts.

However, the price for having the reserve currency is that the United States has a global responsibility to manage our financial affairs in a prudent manner. Huge budget deficits, a housing-led financial crisis, and debasing the dollar through QE2 all contradict the required prudence.

This is why there is such international outrage directed at the United States, for understandable reasons.

What do we need to address this problem? Stop QE2, cut government spending dramatically to reduce the budget deficit, approve the free trade agreements with South Korea and other nations that the Democrats have stalled for several years, and implement policies that promote economic growth through lowering tax rates and reducing regulatory burdens such as ObamaCare.

Solutions exist which can improve the economy, ease international tension, and restore American leadership to the world. Unfortunately, Barack Obama is not the man for such a job.

Surprise, Surprise

The Federal Reserve has recently began another round of what it calls quantitative easing (dubbed in the press QE2, to reflect the second time the Fed has engaged in this policy since the financial crisis began and as a play-on-words with the famous passenger liner). And the amounts are huge; the Fed is spending $900 billion on this effort: $600 billion in new money and $300 billion by reinvesting proceeds from previous bonds it bought that have matured.

Quantitative easing is a fancy term for printing money, since it means that the Federal Reserve will buy bonds on the open market from investors and pay for it with newly created money (in the modern era, such vast amounts of newly created money are in the form of electronic credits deposited to an investor's account, not printed dollars - although such credits could of course be converted into dollar bills if desired).

The Fed's stated goal is to lower interest rates of U.S. government bonds, since, all else being equal, by adding its demand to the market, the price of bonds should rise (and interest rates decline as bond prices rise). This is the application of the laws of supply and demand to the bond market. And lower interest rates on government bonds tend to lead to lower interest rates on mortgages and loans to corporations, to higher stock prices, and to greater risk taking on the part of investors who seek higher returns away from government bonds.

But the problem with the Fed printing money is it raises the specter of higher inflation in the future, since, all else being equal, more money in circulation means prices should rise. This is the application of the laws of supply and demand to the money supply and the economy's price level. Further, if investors believe inflation will increase in the future, they will demand higher interest rates on bonds today to compensate them for investing their money at a fixed rate of return.

So some factors suggest QE2 will lead to lower interest rates, and other factors suggest it will lead to higher interest rates. The Fed is betting that lower interest rates will predominate, while many have criticized the Fed for downplaying the risks from higher inflation.

So who is right? Well, so far, QE2 has led to higher interest rates! That could change with new market conditions, but so far the Fed's plan is not doing what it intended.

Two Steps Forward, One Step Back

Recently, it seemed that Barack Obama was getting a new seriousness about foreign policy. During his Asian trip, he told an audience that the United States would not be leaving Afghanistan in July 2011, notwithstanding his previous comments to begin withdrawing troops then.

One of the colossal mistakes Obama made in announcing his Afghanistan "surge" was to concurrently announce the withdrawal of American troops 20 months later - thus giving comfort to the Taliban that they could wait out an impatient America and causing Hamid Karzai to accommodate the Taliban given his desire to secure political power for himself without the benefit of American power in the near-term.

So Obama's comments mark an attempt to change direction, give heart to America's allies in Afghanistan that we have staying power, and to cause our enemies to realize we aren't leaving until we secure our goals.

Likewise, within a few days of Obama's comments on Afghanistan, an administration official indicated the need for the American military to remain engaged in Iraq longer than previously discussed. Since this shift in policy was made during a belated effort by the Obama administration to resolve the political stand off in Iraq that has led to delays in forming a new government after elections this past March, it has the appearance that such an American commitment was demanded by some of the political parties in Iraq - since an American presence helps ensure that sectarian disputes don't turn into civil war.

Both these changes are critical to having America as favorable an outcome in Iraq and Afghanistan as we can, and it is a sign of growing maturity on the part of Obama to change course.

It may also be a recognition that now that the Obama has suffered a severe loss in the mid-term elections, his ability to achieve any of his agenda on domestic policy is in tatters - whereas foreign policy remains largely (but not entirely) his prerogative. This growing assertiveness of America's interests may also be a way for Obama to move right in preparation for the 2012 elections.

Unfortunately, all is not well with Obama's recent foreign policy pronouncements. While in Indonesia, he felt the need to criticize Israel again for building more housing in the Jerusalem. Obama's previous criticisms of Israel for such construction activity led to a breakdown in the very discussions between the Israelis and Palestinians that Obama so fervently wanted to encourage.

So Obama's recent maturation on foreign affairs can't fully overcome his desire to appease his Indonesian hosts nor his left wing base.

Well Done, Mitch

While one always prefers a politician to do the right thing because they come to that conclusion on their own, without political pressure to change their mind, it is still better to come to that conclusion eventually while the issue is at hand. And the sooner, the better.

As example, Barack Obama could have concluded from Scott Brown's stunning Senate win in January 2010 that his healthcare legislation was a bad idea. Instead, the President doubled down - and the "shellacking" he and his party took in the mid-terms elections were the result.

This week, Mitch McConnell, the Republican leader in the Senate, came out strongly against earmarks - reversing course from comments he made a week ago. McConnell no doubt saw the intense opposition his pro-earmark comments generated, and quickly accommodated the anti-spending sentiment in the country.

Republican Waffling

Earmark spending is the effort by individual Congressmen to get specific spending proposals for the benefit of their district enacted into legislation, such as the infamous Bridge to No Where in Alaska that would cost a couple hundred million dollars to connect to an island with 50 residents. Not only do earmarks cost about $8 billion a year, but it is often the grease to getting other legislation passed (think along the lines of: "if you vote for this healthcare bill, I will make sure you get that earmark you want"). As such, it has been called the "gateway drug" to expanding government spending.

Some have argued that earmarks are a legitimate Congressional prerogative to battle the power of the president. Some have said it is a way for Republicans to right the balance of spending toward their districts, since so much of the spending explosion under the Democrats went to Blue states and districts. While there may be some validity to those points, they miss the larger picture.

If the government can't eliminate earmarks, which so many Americans detest, how can the government tackle the big spending amounts?

And if someone thinks $8 billion isn't that much money, then that perfectly defines the spending problem we have in Washington - it is a staggering amount of money, averaging out to over $100 for a family of four, and until the government starts thinking every dollar matters, it won't have the conviction to cut the many hundreds of billions of dollars in spending that is necessary to balance the budget.

House Republicans in the past voted to end earmarks, but under Nancy Pelosi's leadership Democrats went ahead with earmarks. Now that the House has turned Republican, and the likely next Speaker of the House John Boehner and likely next Majority Leader Eric Cantor have continued to speak out forcefully against earmarks, we can count on the House to eliminate earmarks.

Unbelievably, some Senate Republicans aren't sure. Minority leader Mitch McConnell and others are opposing the efforts to end earmarks. And now Barack Obama is getting to the right of some Senate Republicans by calling for a ban on earmarks.

Mitch McConnell is wrong on policy and clearly wrong on the politics of earmarks. The Republican ascendancy will be short-lived and unhelpful to righting the ills of the country if Senate Republicans get this wrong.

Who is the Biased One?

Around 7:30 pm on election night, Fox News came out with its estimate that the Republicans would gain 60 seats in the House of Representatives. Later that evening, CNN made its estimate that Republicans would gain 52 House seats.

As of Sunday morning, Republicans picked up 60 seats with eight races undecided. CNN now estimates that Republicans will gain 64 seats when the undecided races are resolved.

So if Fox is such a biased news organization in favor of Republicans, and CNN is the arbiter of truth, why was Fox more accurate with its prediction than CNN? And similarly, why was CNN's prediction inaccurate in a way that helped Democrats? Did CNN want to shade the results in favor of Democrats to maximize Democratic votes where polls remained open in the west at the time of their prediction?

There may not have been anything sinister going on at CNN, other than not being as good at making such predictions. Or perhaps more subtly, their left-leaning organization had a hard time believing the blood bath their preferred candidates were undergoing.

Fox's more accurate prediction (even they seem to have underestimated the Republican win if some of the undecided races break for the GOP) is evidence of being good journalists, notwithstanding that many of their commentators are conservatives. It isn't as if Fox predicted a Republican win of 80 or 90 seats, which some people speculated was possible in the days before the election.

This reminds me of a study published by the Pew Research Center's Project for Excellence in Journalism about the 2008 presidential election. The study characterized the percentage of stories in a journalistic outlet that were positive, neutral, or negative toward Barack Obama and John McCain. Here is that data:

			Obama						McCain
	Positive		Neutral		Negative		Positive		Neutral		Negative
Fox	25%		35%		40%		22%		38%		40%
MSNBC	43%		43%		14%		10%		17%		73%
CNN	30%		25%		39%		13%		26%		61%
NBC	43%		36%		20%		17%		30%		54%
Network TV	--		--		--		14%		29%		57%
Newspapers	45%		27%		27%		6%		25%		69%
Overall	30%		35%		29%		14%		29%		57%

Some interesting observations from the data. Fox's coverage was far more balanced than the other cable news programs and NBC (the study doesn't provide this data for CBS and ABC, nor NBC's Obama data, otherwise I would have included it in the table above).

Fox was equally negative toward Obama and McCain (40% each) and 14% more positive toward Obama than McCain (25% vs. 22%).

MSNBC, on the other hand, was 420% more negative toward McCain than Obama (73% vs. 14%) and 330% more positive toward Obama than McCain (43% vs. 14%).

CNN was 56% more negative toward McCain than Obama (61% vs. 39%) and 131% more positive toward Obama than McCain (30% vs. 13%).

Looking at NBC, network TV broadcasts, newspapers, and the media overall paints a similar picture as CNN and MSNBC - stories far more positive toward Obama and far more negative toward McCain than Fox.

So Fox is an outlier - it looks conservative not because its coverage is skewed Republican (as evidenced by the similar ratio of positive/negative stories about Obama and McCain) but because the rest of the media is so left-leaning as evidenced by its lopsided coverage in favor of Obama.

And the left is shocked and gasps in horror when Fox dominates the ratings, as it did on election. Fox's ratings not only beat the network election coverage but with 6.96 million average viewers dwarfed those of CNN (2.42 million) and MSNBC (1.94 million) combined.

Maybe the left should start living up to its claim to be advocates of science and reason and look at the data and think rationally about what it means. Instead, Obama claims Fox isn't even a real news organization. That's the response of a bully and a thug, not a man who claims science is on his side.

The End of the Beginning

Two years ago, I began writing this column in response to the fear that the policies of our government were undermining our (now partly) capitalistic economic system with strongly socialist policies. My initial concern was that a false narrative was developing regarding the cause of the financial crisis that engulfed the world in 2008, one which focused on an alleged lack of regulation, poor compensation practices by financial institutions, and exotic financial instruments such as derivatives. This led to TARP, bail outs for the auto industry, an explosion of government spending, healthcare legislation that would lead us to a European-style social democracy, efforts to regulate carbon, and looming crushing tax increases.

In short, the capitalist system that produced the greatest economic growth in the history of the world, which has occurred in America for over 400 years since the founding of Jamestown, was at risk of being overturn.

My column was my response to this erosion of our founding principles as articulated in the Declaration of Independence. As it turns out, millions of Americans felt similarly about the situation, and a grass roots effort arose throughout the country to oppose this assault on freedom sprang up. The Tea Party movement was a major, although by no means only, part of this effort.

Remarkably, further assault on our system was stopped with this week's election that produced a stunning defeat for Barack Obama and the Democratic party. Republican control of the House, and sufficient Senate numbers to lead a filibuster, ensure that new legislative efforts such as cap-and-trade are dead.

The election represents the end of the beginning of the effort to stop the socialist policies we have suffered these past two years. But there remains a great deal to do to get our economy growing again and creating jobs, to significantly reducing government spending and debt, to reform the housing market and Fannie/Freddie, to abolish ObamaCare, to reform the compensation and retirement policies of federal, state, and local governments to avoid the crushing financial burdens those policies have produced.

And we can't lose sight of the need to stop Iran from developing nuclear weapons, even if it means using military force to do so, and destroying terrorist networks and preventing states from using terrorism to advance their interests.

And so the struggle for freedom continues.

The House vs. The Senate

During the election coverage last night, a number of commentators suggested or implied that the Republicans, despite a historic victory in the House of Representatives, governor's races, and state legislative tallies, somehow didn't do all that well in the U.S. Senate.

The numbers simply don't bear that out.

It is critical to remember that all seats in the House were up for election, but only 37 Senate seats. As of this morning per CNN's estimates, the Republicans have picked up six seats in the Senate and 60 in the House. This assumes that the Republicans don't pick up Colorado or Washington (Alaska will remain Republican either way), which would make the gains in the Senate even more impressive.

These gains represent 16.2% (six out of 37) of the seats up for election in the Senate, which is more than the gain of 13.8% (60 out of 435) in the House. Even if you use CNN's estimated total, which allocates the undecided races between the parties, the Republicans would pick up 64 seats in the House, or 14.7% of all seats.

An alternative analysis looks at Republican gains as a percentage of Democratic seats up for election. There were 19 Democratic seats up for election in the Senate, and the Republican gain of six seats means 31.6% of Democratic seats were won by the Republicans (again, this would increase if Republicans eke out wins in Colorado or Washington). In the House, the current Republican gain is 60 out of 256 Democratic seats, or 23.4% of the available seats. CNN's estimated total gain of 64 is 25.0% of the available seats.

No matter how you look at it, the Republican victory in the Senate was more impressive than in the House. The reason the balance of power in the Senate didn't change hands is because only 37% of the Senate seats were up for grabs.

And the greater relative Republican strength in the Senate does not bode well for Obama. Due to gerrymandering, many House seats are not competitive so the relative underperformance in the House vs. the Senate by Republicans isn't surprising. But Senate races are statewide and represent broad swaths of voter sentiment, similar to Presidential elections.

Look for commentators to try to spin the Senate outcome as somehow undermining or inconsistent with the overall Republican victory. Doing so, they betray their partisanship and/or their innumeracy.