PLEASE TAX AMNESTY

Dictatorship for Dummies

Learn how to quash dissent Chávez-style.

• By MARY ANASTASIA O'GRADY

Optimists have long theorized that Venezuela's Hugo Chávez would meet his Waterloo with the burst of the petroleum bubble. But with oil prices down some 75% from their highs last year and the jackboot of the regime still firmly planted on the nation's neck, that theory requires revisiting.

AP

It is true that popular discontent with chavismo has been rising as oil prices have been falling. The disillusionment is even likely to increase in the months ahead as the economy swoons. But having used the boom years to consolidate power and destroy all institutional checks and balances, Mr. Chávez has little incentive to return the country to political pluralism even if most Venezuelans are sick of his tyranny. If anything, he is apt to become more aggressive and dangerous as the bloom comes off his revolutionary rose in 2009 and he feels more threatened.

Certainly "elections" can't be expected to matter much. Mr. Chávez now controls the entire electoral process, from voter rolls to tallying totals after the polls have closed. Under enormous public pressure he accepted defeat in his 2007 bid for constitutional reforms designed to make him president for life. But so what? That loss allowed him to maintain the guise of democracy, and now he has decided that there will be another referendum on the same question in February. Presumably Venezuela will repeat this exercise until the right answer is produced.

Mary Anastasia O'Grady speaks with James Freeman. (Jan. 12)

All police states hold "elections." But they also specialize in combining the state's monopoly use of force with a monopoly in economic power and information control. Together these three weapons easily quash dissent. Venezuela is a prime example.

The Venezuelan government is now a military government. Mr. Chávez purged the armed forces leadership in 2002 and replaced fired officers with those loyal to his socialist cause. Like their counterparts in Cuba, these elevated comandantes are well compensated. Lack of transparency makes it impossible to know just how much they get paid for their loyalty, but it is safe to say that they have not been left out of the oil fiesta that compliant chavistas have enjoyed over the past decade. Even if the resource pool shrinks this year, neither their importance nor their rewards are likely to diminish.

Mr. Chávez has also taken over the Metropolitan Police in Caracas, imported Cuban intelligence agents, and armed his own Bolivarian militias, whose job it is to act as neighborhood enforcers. Should Venezuelans decide that they are tired of one-man rule, chavismo has enough weapons on hand to convince them otherwise.

Yet the art of dictatorship has been greatly refined since Stalin killed millions of his own people. Modern tyrants understand that there are many ways to manipulate their subjects and most do not require the use of force.

One measure that Mr. Chávez relies on heavily is control of the narrative. In government schools children are indoctrinated in Bolivarian thought. Meanwhile the state has stripped the media of its independence and now dominates all free television in the country. This allows the government to marinate the poor in Mr. Chávez's antimarket dogma. His captive audiences are told repeatedly that hardship of every sort -- including headline inflation of 31% last year -- is the result of profit makers, middlemen and consumerism.

The Orwellian screen is also used to stir up nationalist sentiment against foreign devils, like the U.S., Colombia and Israel. The audience has witnessed violence in Gaza through the lens of Hamas, and last week Mr. Chávez made a show of expelling the Israeli ambassador from Caracas.

Investments in revolution around South America may have to be pared back as revenues drop. But outreach to Iran and Syria is likely to continue since those relations may serve as a source of financing Mr. Chávez's military buildup. In December, the Italian daily La Stampa reported that it has seen evidence of a pact between Caracas and Tehran in which Iran uses Venezuelan aircraft for arms trafficking and Venezuela gets military aid in return. This month Turkish officials intercepted an Iranian shipment bound for Venezuela that reportedly contained materials for making explosives.

Despite all this, the most effective police-state tool remains Mr. Chávez's control over the economy. The state freely expropriates whatever it wants -- a shopping center in Caracas is Mr. Chávez's latest announced taking -- and economic freedom is dead. Moreover, the state has imposed strict capital controls, making saving or trading in hard currency impossible. Analysts are predicting another large devaluation of the bolivar in the not-too-distant future. The private sector has been wiped out, except for those who have thrown in their lot with the tyrant.

The drop in oil revenues may impoverish the state, but the opposition is even poorer. Organizing a rebellion against a less-rich Chávez remains a formidable task.

PLEASE TAX AMNESTY

Suspend Your Disbelief

Suspend Your Disbelief

How to enjoy an inauguration fully.

• By PEGGY NOONAN

Washington

Flying in, we take the route over the Lincoln Memorial, the Jefferson, the Tidal Basin: the signs and symbols of the great republic. And you've seen it all a thousand times but you can't stop looking, and you can't help it, your eyes well. After a minute you realize you must have a moony look on your face, and you lean back. The lady to your right, engrossed in a paperback of "Marley & Me," sees nothing. Your gaze continues across the aisle, and you see another woman looking out the window in the same way, avidly taking it in. Her view includes the Capitol. She leans back.

David Gothard

I know her. A woman of the Reagan era, an old acquaintance, and when we land we greet each other. "Isn't it something that no matter how many times you see it, it still grabs your heart?" I say. She responds, wonderingly, "I never see it that I'm not moved. To this day."

We are grownups, we have seen limits and imperfections, compromises and mess, and yet this brilliant thing endures. Lincoln will always be Lincoln, and nothing can mess that up.

The District is braced happily for the onslaught. You can't fail to see the excitement. The inauguration is all anyone talks about. Everyone seems to preface their observations with how many they've seen. "This is my fourth inauguration," and "This is my eighth time with one of these." But everyone feels that this one is different.

"The calm before the storm" said the desk clerk in the quiet lobby of a Georgetown hotel. "It starts Friday." The shops are full of tchotckes: Obama cocktail glasses and coins, plastic Obamas standing at podiums waving flags. A clerk shows me the Obama wristwatches for $35. I buy a friend an Obama Action Figure whose arms and legs can be configured to walk forward, pointing us toward the future.

A cabdriver crows that he'll have an easy time getting around next week: "No traffic allowed into town but cabs and limos!" The USAir agents at Reagan National say they'll be sleeping over in the airport—in cots, right over there where the shuttle security lines are—on Monday and Tuesday nights. Roads in and out of the city will be closed. "A slumber party," an agent laughed. "At least it's not for something sad."

Barack Obama isn't president yet, but already is he is omnipresent. At the Hay-Adams Hotel, security tents block off the street. Motorcades come and go. He dines at a private home in a neighborhood where you can't see the numbers of the houses from the street, but it's clear where the gathering is from the sharpshooters on the roof.

A young Obama staffer comes for breakfast, roots in the pockets of his overcoat, and spills two BlackBerrys onto the tablecloth. He has just been given a tour of the West Wing. He had been warned so many times that it's smaller than you think that he's struck by how big it is. And the Oval Office. It doesn't matter how many times you've seen it in the movies, the sight of it catches the throat. This is the real one.

This week in the transition headquarters, the president-elect walked by a row of offices. Someone had given him a basketball; he dribbled it as he walked down the hall. Suddenly a young veteran of the campaign turned to another and said, "The black guy with the basketball is the next president." For them it's a rolling realization: You know it, lose it in the flow, realize it again, and suddenly it's new again. The aide says, "He's in a line with Washington and Lincoln, and luminaries like JFK and Reagan." He shakes his head wonderingly. I have seen new guys say this about new presidents most of my professional life. I never see it that I'm not moved. To this day.

The first draft of the inaugural address was done by this Tuesday, and it went into staffing for comment. The president-elect and speechwriter Jon Favreau have aimed for short. Mr. Obama had declared it short. But it's growing longer, as speeches do.

Mr. Obama is a writer, and he sees himself as a writer. It is an important part of his self-perception. He is the author of two books, the first of considerable literary merit. He loves words. It is in writing that he absorbs, organizes data, thinks his way through to views and decisions, all of which adds to the expectations for his speech.

Everyone wants to be part of it. Mr. Obama's aides and speechwriters have been engulfed with ideas, thoughts and language, as they say, for the speech. An acquaintance of speechwriter Favreau got in a cab, chatted with the driver, and mentioned he knew someone in the new administration. The cabdriver handed him a fully written inaugural address, and asked him to pass it on. Later, thinking of this, unbidden and for no clear reason, the words of the theme of the 1956 movie "Friendly Persuasion" came to mind: "Thee is mine, though I don't know many words of praise / Thee pleasures me in a hundred ways." Jessamyn West's celebration of the Quakers of Indiana during the Civil War is a tale of a community living apart from a great drama and yet within that drama. And so the cabdriver, who works a shift, is up at night writing his inaugural address for Mr. Obama, knowing, this being America, the most fluid country in history, a place of unforeseen magic, that he would meet someone who knows someone. We all want to be together, to work together, we all want to be part of the history, of the time. And why not? Join in. Lightning strikes.

And this has grown old, and maybe it's the last time to say it, history moving so fast, but there's something we all know so well that we are perhaps forgetting to see it in the forefront. But a long-oppressed people have raised up a president. It is moving and beautiful and speaks to the unending magic and sense of justice of our country. The other day the journalist John O'Sullivan noted that 150 years after slavery, a black man stands in the place of Lincoln in the inaugural stands, and this country has proved again that anything is possible, that if we can do this we can do anything. That is a good thing to remember at a difficult time.

What is required for full enjoyment of an inauguration, from opening prayers to speeches to marching bands is, in the great 19th-century phrase, the willing suspension of disbelief. If you don't put your skepticism aside, you will not fully absorb and experience the drama. You must allow it to be real for you. Those two young people on the stage did not really take poison and die, but Romeo and fair Juliet did, and that is the reason the audience, which knows the actors still live, says, with genuine feeling, "Oh, no!"

To believe, suspend disbelief. We have been through this before, the flags and fine speeches, the brass donkey paperweight, the glass elephant, the rise and fall of administrations, the coming and going of figures great and small. It's good to put that aside for a few days, to remove yourself from politics, partisanship and faction, to suspend your disbelief, to be grateful that the signs and symbols endure, as does the republic, and raise a toast: "To the president of the United States."

Mexico's Instability

Mexico's Instability Is a Real Problem

Don't discount the possibility of a failed state next door.

JOEL KURTZMAN

Mexico is now in the midst of a vicious drug war. Police officers are being bribed and, especially near the United States border, gunned down. Kidnappings and extortion are common place. And, most alarming of all, a new Pentagon study concludes that Mexico is at risk of becoming a failed state. Defense planners liken the situation to that of Pakistan, where wholesale collapse of civil government is possible.

One center of the violence is Tijuana, where last year more than 600 people were killed in drug violence. Many were shot with assault rifles in the streets and left there to die. Some were killed in dance clubs in front of witnesses too scared to talk.

It may only be a matter of time before the drug war spills across the border and into the U.S. To meet that threat, Michael Chertoff, the outgoing secretary for Homeland Security, recently announced that the U.S. has a plan to "surge" civilian and possibly military law-enforcement personnel to the border should that be necessary.

The problem is that in Mexico's latest eruption of violence, it's difficult to tell the good guys from the bad. Mexico's antidrug czar, Noe Ramirez Mandujano was recently charged with accepting $450,000 from drug lords he was supposed to be hunting down. This was the second time in recent years that one of Mexico's antidrug chiefs was arrested for taking possible payoffs from drug kingpins. Suspicions that police chiefs, mayors and members of the military are also on the take are rampant.

In the past, the way Mexico dealt with corruption was with eyes wide shut. Everyone knew a large number of government officials were taking bribes, but no one did anything about it. Transparency commissioners were set up, but given no teeth.

And Mexico's drug traffickers used the lax law enforcement their bribes bought them to grow into highly organized gangs. Once organized, they have been able to fill a vacuum in underworld power created by Colombian President Álvaro Uribe's successful crackdown on his country's drug cartels.

The result is that drug traffickers are getting rich, while Mexico pays a heavy price in lost human lives and in economic activity that might otherwise bring a modicum of prosperity to the country.

In 2008, Mexico ranked 31st out of 60 countries studied in the Milken Institute/Kurtzman Group Opacity Index. The cost to ordinary Mexicans from poorly functioning institutions has been huge. My colleague, Glenn Yago, and I calculate that if Mexico were to reduce corruption and bring its legal, economic, accounting and regulatory standards up to U.S. levels (the U.S. ranks 13th and Finland ranks first), Mexico's nominal per capital GDP would increase by about $18,000 to roughly $28,000 a year. And it would also receive a lot more direct foreign investment that would create jobs.

And this impacts the U.S. Thanks to Mexico's retarded economic growth, millions of Mexicans have illegally moved to the U.S. to find work. Unless the violence can be reversed, the U.S. can anticipate that the flow across the border will continue.

To his credit, Mexico's President Felipe Calderón has deployed 45,000 members of his military and 5,000 federal police to fight drug traffickers. This suggests that he is taking the violence and the threat to civil government seriously.

But the path forward will be a difficult one. Not only must Mexico fight its drug lords, it must do so while putting its institutional house in order. That means firing government employees who are either corrupt or not willing to do the job required to root out corruption. It will also likely require putting hundreds, or even thousands, of police officers in jail.

For more than a century, Mexico and the U.S. have enjoyed friendly relations and some degree of economic integration. But if Mexico's epidemic of violence continues, that relationship could end if the U.S. is forced to surge personnel to the border.

Mr. Kurtzman, a senior fellow at the Milken Institute, is co-author of "Global Edge: Using the Opacity Index to Manage the Risk of Cross-Border Business" (Harvard Business School Press, 2007).

The End of Citi's Financial Supermarket

The End of Citi's Financial Supermarket

The Internet did in Sandy Weill's business model.

ANDY KESSLER

The great unwind of Citigroup's financial supermarket has begun. In the face of $10 billion in losses in the latest quarter, and with its stock at a 16-year low, Citi struck a deal on Tuesday to effectively sell control of its Smith Barney brokerage unit to Morgan Stanley.

A slimmed down Citi is long overdue. The rationale for a financial supermarket always struck me as odd. Why would anyone stick all their bank/brokerage/insurance eggs in one basket?

Citibank, founded as City Bank of New York in 1812, has been beat up before. Overextended in mostly bad real-estate loans in the downturn of 1990, losses mounted and the stock got killed, hitting the equivalent of $1 after stock splits. Wall Street was abuzz, debating if the U.S. government had a "too big to fail" doctrine. The bank didn't wait around to find out. It cut its dividend and took a $590 million investment from Saudi Arabia's billionaire Prince Alwaleed bin Talal.

Wall Street veteran Sandy Weill, once chairman of Shearson Loeb Rhoades, had long pitched financial services all under one roof. To justify the 1981 merger of his Shearson brokerage with American Express, he claimed in a Time magazine interview that "a typical consumer may have a stockbroker in California, a banker in New York, an insurance agent in Maryland and a real estate agent jetting back and forth from Chicago to Boston." It's an old Wall Street ploy -- pitch a dream and use the premium valuation to do deals.

After squabbling with Amex CEO James Robinson III, Mr. Weill left in 1985. Then independent, he got Control Data to spin off Commercial Credit to him, and with that as a platform he bought Primerica and its Smith Barney brokerage. Again pitching his supermarket vision to raise capital, he picked up Travelers insurance, bought back Shearson, and added Aetna and Salomon Brothers.

The financial groceries were growing, and by 1998 Mr. Weill consummated a $76 billion merger of Travelers with Citibank. In 2000, he ended up as sole CEO.

Were their any real synergies from Citibank's one-stop shop? I doubt it. It failed because internal compensation incentives mainly stressed units, not the whole, the downside of all behemoths. Plus, I don't know how many customers bought stocks at an ATM machine, because almost simultaneous to his big merger, the Internet disintermediated most of Mr. Weill's businesses. The best rates and terms and service were in the Giant Supermarket on the Web, rather than just in Sandy's shopping cart.

Each segment's profits became suspect as Fed Chairman Alan Greenspan lowered short-term rates to 1% in November 2002. While usually a boon for banks who borrow short and lend long, those pesky long-term rates stayed low, as the Chinese kept buying 10- and 30-year Treasurys. This flattish yield curve meant lower returns on investment. Mr. Weill stepped down in 2003.

Normally, when a bank sees smaller returns on investment, it stops investing, or at least slows down and lowers its equity until better returns are available. Others did. But this was Citigroup, which never sleeps, where money lives, and the bank DNA was watered down. Instead of reining in, those in charge went for it. Borrowed more. Levered up.

For Citi, the sure-thing investment du jour was subprime loans, conveniently packed into mortgage-backed securities. You could borrow at 2% and get 4%-6%-8% yields. Who could turn this down? Leverage of 20 to 1 or even 30 to 1 was used to buy this stuff. Shareholders might have balked at so much leverage. Citi, unlike other big U.S. banks, kept this borrowing off its balance sheet in so-called conduits or SIVs (structured investment vehicles). This is how Citigroup grew its earnings.

The SIVs allowed for huge borrowings. There was an unwritten or "implicit obligation" for Citigroup to take the SIVs back onto its balance sheets in the unlikely event that something went wrong. Well, it did. The SIVs collapsed when short-term financing dried up, and are now on Citi's balance sheet.

So once again, Citigroup is thought to be too big to fail. The U.S. government has agreed to backstop some $250 billion of bad loans, which perversely may have Citigroup dumping assets at any price. As shareholders anticipate further losses and equity dilution, Citi is worth under $21 billion.

Contrary to the reregulation crowd, it wasn't the repeal in 1999 of the Depression-era Glass-Steagall Act (which had separated commercial and investment banking) that killed Citi. It was bad management. J.P. Morgan and Bank of America and Wells Fargo didn't have SIVs -- and while they too were caught in the credit crunch, these institutions have emerged as net acquirers of broken banks.

At the end of the day, Citi will either be a smaller stand-alone bank or a subsidiary of, say, Goldman Sachs. For now, like Bear Stearns last March and Lehman last September, Citigroup is selling everything not nailed down to survive. There is collateral damage to other banks like Bank of America, which is asking for more federal funds. The bottom comes when the last bad loans, and banks, are priced for doomsday. It smells like we're getting closer.

Mr. Kessler, a former hedge-fund manager, is the author of "How We Got Here" (Collins, 2005).

Obama's Loyal Opposition

Meet Obama's Loyal Opposition

• By KIMBERLEY A. STRASSEL

"I do not work for Barack Obama." Mitch McConnell, Senate minority leader? No. Ben Bernanke, Fed chief? No, again.

Try Harry Reid, huffing at the idea anyone calls the shots on Capitol Hill other than him. What was that about "change"?

AP/Meet the Press

Senate Majority Leader Harry Reid.

The president-elect used that word on the campaign trail in the context of bipartisanship. To that extent, he's doing a fabulous job. Some of the gushiest quotes about him are emanating from Republicans, giddy at his outreach.

But the "change" Mr. Obama really needs is to avoid the fate of the last two Democratic presidents, both sabotaged by their own majorities. So far, not good. Mr. Obama has yet to assume office, and already his own party is beating his priorities like a conga drum.

When the incoming Democratic president asked the outgoing GOP president to request the second $350 billion in rescue money, Mr. Bush graciously complied. At which point the Democratic majority informed the Democratic president that he'd see not a dime until they decided how to spend it. After all, giving Mr. Obama control over his own Treasury funds would rob them of a pot that they could earmark for Detroit, or bankruptcy judges, or local institutions.

When incoming Office of Management and Budget Director Peter Orszag proved reluctant to commit Mr. Obama to specific uses of the money, Florida's Sen. Bill Nelson accused him of spouting "mumbo jumbo." North Dakota's Sen. Kent Conrad, fresh off dictating the shape of Mr. Obama's stimulus tax cuts, had to intervene. In a last-ditch effort to rally Democratic support, Mr. Obama was forced to agree in writing to commit up to $100 billion to homeowners. Even so, nine of his own senators yesterday voted to deny him the funds.

Speaking of the stimulus, the Obama team, trying to shelter the party from accusations of profligate spending, initially capped the package at (a whopping) $775 billion. At which point Mr. Reid explained, publicly, that at least 20 of Mr. Obama's own economists felt it should in fact be at least, $800 billion -- maybe even $1.3 trillion! Five impoverished Democratic governors chimed in that anything less than $1 trillion really wasn't worth it. At last count, Mr. Obama had been talked up to $825 billion (and rising).

As to the makeup of the stimulus bill, Mr. Obama directed at least $300 billion go to tax cuts. This was partly to fulfill a campaign pledge, partly to sweeten the deal for Republicans, partly because his economic team might actually believe it a good idea -- especially business provisions.

Sen. Dianne Feinstein pronounced herself "concerned" (uh-oh) that so much might go to Americans, over appropriators. House Speaker Nancy Pelosi informed the incoming president that, duh, he should be raising taxes. Rep. Charlie Rangel, who heads Ways and Means, and knows it, decreed $300 billion a maximum, not a minimum. At last count, that number was $275 billion (and falling).

"I love earmarks," said House Majority Whip James Clyburn, as he griped that the president-elect had banned them in the stimulus. Mr. Obama wants no whiff of pork that might further sour a wary public. Mr. Clyburn is nonetheless leading a House rebellion against the edict. After all, it's only fair Democrats get to buy votes with stimulus dollars.

"There will be no earmarks in the stimulus. Nada. Zero. Zilch," said a Reid spokesman. The majority leader might have made the comment himself, had he not been busy reassuring Nevadans that he'd just go around the ban by leaning on Obama agencies to deliver dollars to his state's projects. Meanwhile, Mr. Reid is making as his first present to the president a pork-riddled public-lands bill that includes $3.5 million for a city's birthday party, $5 million for botanical gardens, and $3 million for a "road to nowhere" in (where else?) Alaska.

Some of this is ego. Thrilled as Democrats were to take back the White House, John Conyers, David Obey, Mr. Rangel and Pete Stark alone can boast of (and do) cumulatively 146 years more in Washington than the Illinois rookie. They've also been waiting a long time to run things their way.

Some of this is pique. Democrats invested so heavily in the myth of Mr. Bush as hyperpartisan they now believe it. They don't feel Republicans deserve accommodation.

Some of it is politics. Don't forget, 95 House Democrats initially voted against rescue funds, worried about "bailout" sentiments back home. Until the Obama team offers leadership on the economy, they'll take the safe route over standing blindly with an untested president.

Whatever the cause, it is a dangerous beginning. Mr. Obama can currently afford to do some accommodating. But if he gets a reputation for getting rolled by the unruly mob, his agenda is kaput. Congressional Democrats, with their 9% approval rating, are meanwhile picking a fight with a guy who, if backed into a fight, may win. Though neither side will "win."

All this is taking place on the honeymoon. Yet to come are difficult issues -- the budget, health care, climate change. At that point, we'll find out who works for whom.

A Book that Changes Everything - Jeffrey A. Tucker

A Book that Changes Everything - Jeffrey A. Tucker

Thursday, January 15, 2009

Beware of the Big-Government Tipping Point

Beware of the Big-Government Tipping Point

Socialized health care fundamentally changes the relationship between citizens and state.

PETER WEHNER

PAUL RYAN

For most of our nation's history, our approach to economics has favored enterprise, self-reliance and the free market. While the American economy has never been entirely laissez-faire, we have historically cared more about equality of opportunity than equality of results. And while Americans have embraced elements of the New Deal, the Great Society and progressive taxation, we have traditionally viewed welfare as a way to help those in dire need, not as a way of life for the middle class. We have grasped, perhaps more than any other nation, that there is a long-run cost to dependency on the state, including an aversion to risk that eventually enervates the entrepreneurial spirit necessary for innovation and prosperity.

Chad Crowe

This outlook, once assumed, is now under attack due to a recent series of political and economic events.

The first is the unprecedented intervention by the federal government, in the form of a $700 billion relief package intended for our financial institutions after the credit crisis last September. This was followed by extending billions of dollars of federal assistance to America's auto makers in order to prevent their imminent bankruptcy -- the first emergency bailout that went to companies outside the financial sector. We understand why the federal government did this, and even supported legislation that, while hardly perfect, prevented an economic meltdown.

Nonetheless, the consequences of this undertaking are enormous. Not only has the size of the expenditures been staggering -- there is talk of another stimulus package worth an estimated $825 billion -- but we are witnessing a fundamental transformation of government's relationship with the polity and the economy.

The last several months are a foreshadowing of a new era of government activism, rather than an unfortunate but necessary (and anomalous) emergency action. We will soon shift from a market-based economy to a political one in which the government picks winners and losers and extends its reach and power in unprecedented ways.

This shift is exemplified by the desire of President-elect Barack Obama and the Democratic Congress to push us toward government-run health care.

For all his talk of allowing consumers to select their own health-care coverage, Mr. Obama's proposal, as he laid it out in his campaign, will provide strong financial incentives for employers and individuals to sign up with a new, Medicare-style government plan for working-age people and their families. This plan will almost certainly use a price-control system similar to the one in place for Medicare, allowing it to charge artificially low premiums by paying fees well below private rates. These low premiums will serve as a magnet for enrollment and will devastate the private companies trying to compete in the health-insurance market. The result will be the nationalization of the health-care sector, which today accounts for 16% of U.S. gross domestic product.

Nationalizing health care will be profoundly detrimental to the quality of American medicine. In the name of cost control, the government would make private investment in medical innovation far riskier, and thus delay the development of potentially lifesaving treatments.

It will also put America on a glide path toward European-style socialism. We need only look to Great Britain and elsewhere to see the effects of socialized health care on the broader economy. Once a large number of citizens get their health care from the state, it dramatically alters their attachment to government. Every time a tax cut is proposed, the guardians of the new medical-welfare state will argue that tax cuts would come at the expense of health care -- an argument that would resonate with middle-class families entirely dependent on the government for access to doctors and hospitals.

Of course, this health-care plan is occurring against our particular fiscal backdrop: Without major reform, our federal entitlement programs will soon double the size of government. The result will be a crushing burden of debt and taxes.

In short, we may be approaching a tipping point for democratic capitalism.

While the scope of the challenge should not be underestimated, those of us worried about this fundamental reorientation of politics and economics have several things working in our favor. Among them is that a public accustomed to iTunes, Facebook, Google, eBay, Amazon and WebMD is not clamoring for centralized, bureaucratic government. The strong American instinct for individual initiative and entrepreneurship remains intact.

In addition, confidence in government -- from Congress to those responsible for oversight of the financial system -- is quite low.

Our sense is that at the moment, the public is not thinking in terms of "big government" or "small government." Instead, Americans want efficient government -- one that is modern, responsive and adaptive. People want government to act as a fair referee, providing guardrails that allow individuals to rise without intrusively dictating individual decisions.

If conservatives hope to win converts to our cause, we need to understand this new moment and put forward an agenda that reforms key institutions in a way that advances individual freedom, without creating an unacceptable level of insecurity.

This is no easy task, and it must begin with providing a compelling alternative to what contemporary liberalism and Mr. Obama are about to offer. This especially includes health care, where we must start by recalling that our current health-insurance system was designed to meet the needs of a 20th century economy and World War II-era employment laws. It is hopelessly outdated, yet the Obama plan would make the system even more sclerotic.

The core of our message needs to be a commitment to creating a health-care plan that meets the demands of the modern economy. We need to convince concerned citizens that we can help the uninsured find coverage in the private sector and use market incentives to contain costs. The result will be a system that makes it possible for everyone to afford health insurance, including those with pre-existing conditions.

Tax credits, high-risk pools, insurance choice and regulatory reform can form the basis of a transformation from today's enormously costly and inefficient third-party system into one driven by ownership, choice and competition. And at the nucleus of this redesigned system will be the patient-doctor relationship.

If we hope to succeed in making our case, it will require a concerted education campaign that relies on hard data and facts, rigorous and accessible public arguments, and persuasive public advocates.

This is quite a tall order. But if we do not succeed in resisting greater state involvement in the economy -- and health care is meant to be the beachhead of this effort -- we will move from a limited welfare state into a full-blown one. This will reshape, in deep and enduring ways, our nation's historic sensibilities. It will lead here, as it has elsewhere, to passivity and dependence on the state. Such habits, once acquired, are hard to shake.

Between now and the end of this decade may be one of those rare moments in which among other things will turn decisively one way or the other. The stakes could hardly be higher for our way of life.

Mr. Wehner, a former deputy assistant to President George W. Bush, is a senior fellow at the Ethics and Public Policy Center. Mr. Ryan, a Republican congressman from Wisconsin, is a member of the Budget Committee and the Ways and Means Committee.