How to Think About Taxing Carried Interest
On May 28, the House of Representatives passed a bill that would make a number of significant tax and spending changes. The Senate is expected to vote on the bill shortly. One provision of the bill would increase the tax rate on the carried interest received by managers of equity funds, hedge funds, and others. In this article, we examine the bill’s tax increase on carried interest.1
Background
We focus our background discussion on private equity funds, one of the key sectors that uses the carried-interest compensation arrangement. A private equity fund is a partnership. The fund’s limited partners are investors, usually a mix of wealthy individuals, corporations, and tax–exempt organizations. The fund’s general partner is the sponsoring private equity firm. The firm is itself a partnership, in which the managers are general partners. The fund, which may last for ten or more years, owns stakes in a number of portfolio companies at any given time. The stake in each portfolio company may be held for several years and then liquidated. Private equity funds include both buyout funds that purchase established companies and venture capital funds that finance start–up companies.
The private equity fund receives the income from holding and selling the portfolio companies. Because the fund is a partnership, the income is allocated among its partners. A common arrangement calls for the sponsoring private equity firm, as the fund’s general partner, to receive an annual fixed fee equal to 2 percent of the fund’s invested capital and a “carried interest” equal to 20 percent of the fund’s income. As the firm’s general partners, the managers receive the fee and the carried interest.2
Part of the fund’s income, and therefore of the managers’ carried interest, may consist of ordinary income taxed at a 39.6 percent top rate. In most cases, however, a large portion of the fund’s income, and of the carried interest, consists of long-term capital gains and dividends taxed at a 20 percent tax rate.3
Proposals for Change
In early 2007, a then-unpublished article by law professor Victor Fleischer aroused congressional interest in the issue of whether carried interest, including the portion that consists of dividends and capital gains, should be taxed as ordinary income.4 In November 2007, June 2008, and December 2009, the House of Representatives passed bills that included provisions to tax carried interest as ordinary income, but these provisions were not passed by the Senate.5
On May 28, the House passed a revised version of the December 2009 bill. Unlike the three previous bills, the revised bill, which would take effect on January 1, 2011, would not apply the full 39.6 percent rate to capital gains and dividends received as carried interest. Under the bill, half of such income would be taxed at 39.6 percent and half at 20 percent in 2011 and 2012; thereafter, three-quarters would be taxed at 39.6 percent and one-quarter at 20 percent. The same tax treatment would apply to capital gains that the managers receive from sales of their partnership interests. The bill recognizes that some managers also invest their own money into the fund and (with an exception noted below) would preserve the 20 percent tax rate for capital gains and dividends allocated to those investments and for capital gains from the sale of such investments.
Proponents of this change make a simple argument. They contend that the 20 percent tax rate should apply only to capital gains and dividends that arise from the investment of the taxpayer’s own money, not to capital gains and dividends that the taxpayer receives as compensation for working. Because carried interest is compensation for the managers’ labor, the argument holds, it should be taxed at the same rate as wages; it is unfair that managers pay a lower tax rate on this labor income than their secretaries pay on wages. This rationale explains why the bill would generally allow the 20 percent tax rate when a manager invests her own money in the fund, but would disallow it when she is compensated for her labor.
Although this argument seems plausible at first glance, much of its plausibility disappears upon further scrutiny. To understand the issues, it is necessary to first dispose of several myths that have figured prominently in the debate.
DISSECTING THE MYTHS
Myth 1: Private Equity Funds Do Not Produce Real Output
It is now well-documented that private equity contributes significant value to firms and the economy.6 The empirical research shows increased profits, value, and cash flows. The private equity firm typically identifies a company that is underperforming and buys a stake in the company. This transaction generally involves the purchase of convertible securities bought at a discount, as well as board representation for the private equity firm. The firm brings to the table industry and financial modeling and assistance in recruiting, capital allocation, and management well beyond what a typical board member can offer. With these increased resources and expertise, firms can develop more effective goals, strategy, and leverage.
The ability to revive or create a successful business could well be a highly specific skill that would allow the most talented managers to earn very high returns. If such a star system exists, then the private equity organizational form might well maximize the social benefit contributed by the most talented managers. This is because the private equity model allows managers to swoop in, increase the value of an asset, then swoop out. Given the high returns achieved by the industry, there clearly is a valuable place in the American economy for such actors.
Myth 2: All Carried Interest Is Taxed at the Capital Gains Rate
In actuality, the tax treatment of carried interest is the same as the tax treatment that the partner would receive if she had received the income directly as an individual. If the fund sells a portfolio company that it has held for more than a year, the resulting profit is long-term capital gain. The partner pays the 20 percent rate on her share of that profit, just as she would if she had sold the portfolio company as an individual. If the fund receives interest income, however, the partner pays the 39.6 percent tax rate on her share of that income, just as she would if she had received interest income as an individual. (The 39.6 percent rate also applies to the fixed fees received by the managers.) The fraction of carried interest on which the partner receives the 20 percent rate therefore depends on how much of the fund’s income takes the form of capital gains and dividends.
Myth 3: Private Equity Funds Receive a Special Tax Break
The tax treatment of carried interest actually follows from partnership tax principles that apply to industries throughout the economy. Internal Revenue Code section 702(b) sets forth the general rule that partners are taxed on partnership income in the same manner “as if such item were realized directly from the source from which realized by the partnership.” If a furniture store partnership, for example, realizes long-term capital gains or dividends, the partners who gain are taxed at the 20 percent rate.
Some critics are troubled by the fact that the carried interest arrangement allocates part of the fund’s capital gains and dividends to the managers when such income “belongs” to the investors who put up the money. It’s not clear, of course, why the gains and dividends don’t belong to the managers, whose labor helped produce this income. In any case, Code section 704(a), a rule that also applies throughout the economy, permits the partnership agreement to allocate different items of partnership income and expense in any desired manner.7 If the furniture store partnership has two partners, one of whom works and the other of whom put up the money, the partnership agreement may allocate any capital gains and dividends received by the store to the working partner and she is then taxed at the 20 percent rate on that income.
The provision in the House bill would not alter the general rule that partners are taxed on partnership income at the same rate as if they had earned the same income directly. Instead, it would carve out an exception to that rule, partially applying the 39.6 percent rate to capital gains and dividends, for only some partners. The affected partners would be those who, at the time they acquired their partnership interest, are reasonably expected to perform “a substantial quantity” of any of the following “investment services”: advising about the value of securities, real estate (held for rental or investment), commodities, partnership interests, and related options and derivatives; advising about the desirability of holding such assets; managing, acquiring, or disposing of such assets; arranging financing to acquire such assets; or activities that support the above services. The provision is clearly intended to target managers at hedge funds, private equity funds, and real estate firms, although it could also affect some other partners. The general partnership rule would continue to apply to all other partners.
Myth 4: The Use of Carried Interest Turns Ordinary Income into Capital Gains
In some ways, this myth goes to the heart of the debate, because it concerns exactly how the tax savings from the use of carried interest arises. The best way to pose the question is: What are the tax implications of the fact that the fund pays carried interest to its managers rather than a salary?8
Consider a fund with one manager, one investor, and $100 of income, all of which is long-term capital gain. Also, assume that the fund simply gives the manager a 20 percent carried interest, ignoring fixed fees and other complicating features of actual compensation arrangements. So, the manager receives $20 of the capital gain and the investor receives the other $80.
Looking at the manager alone, carried interest does appear to turn ordinary income into capital gain. With carried interest, the manager is taxed at 20 percent on $20 of capital gain; if a salary had been paid instead, she would be taxed at 39.6 percent on $20 of wages. (The manager has a $3.92 tax savings). From an overall perspective, though, there cannot be any conversion between ordinary income and capital gain. The fund has $100 of capital gain, neither more nor less, and the only question is how to allocate it between the manager and the investor. So, to get the full picture, we also need to look at the investor. With carried interest, the investor has $80 of capital gain and no ordinary income. If the manager had received a salary instead, the investor would have received the entire $100 of capital gain and would have negative $20 of ordinary income (because the payment of the salary would be an ordinary business expense), which presumably could be used to offset other income.
Although the use of carried interest increases the manager’s capital gain by $20 and reduces her ordinary income by $20, relative to the salary alternative, the arrangement has the opposite effect on the investor. The use of carried interest rather than salary does not convert ordinary income into capital gains and dividends at the aggregate level, but instead reallocates the two types of income between the manager and the investor.
Carried interest is not guaranteed to yield a net tax saving in every instance. If the investor and the manager are both individuals in the top tax bracket, the $3.92 tax savings for the manager are offset by a $3.92 tax increase on the investor. There is no loss to the federal treasury. And, since both the manager and the investor know about the tax effects going in, they can negotiate the terms of their arrangement to cancel out their individual tax effects.
In practice, though, carried interest usually yields a net tax reduction, because the investor is often a tax-exempt organization that pays no tax on either capital gain or ordinary income. In that case, the reallocation of the two types of income is tax-reducing, because there is no offset for the manager’s tax savings. It is unsurprising that the Joint Tax Committee estimates an $18 billion revenue increase from the proposal.
Although carried interest often reduces taxes, the tax reduction is not obtained by “turning” ordinary income into capital gain. Instead, it is obtained by reallocating the two types of income between managers and investors. The key question is whether this reallocation is inappropriate.
As stated above, this type of rearrangement is available to any partnership in the economy under general tax rules. To be sure, there are three reasons the tax savings available to private equity funds are likely to be greater than the tax savings available to other partnerships, such as furniture stores. First, the dollar amounts are larger. Second, capital gains play a much larger role for private equity funds than other partnerships; in a furniture store partnership, most of the income is likely to be ordinary operating income. Third, tax-exempt organizations provide more of the investment in private equity funds.
Before directly tackling the question of whether the tax saving from carried interest is appropriate, one more myth should be addressed.
Myth 5: Carried Interest Is Simply a Means of Tax Avoidance
In reality, carried interest serves important non-tax purposes by giving managers strong incentives to choose the best investments and manage them properly, and helping the firm attract more able managers (who would find this arrangement the most attractive). Fleischer, the most prominent advocate of changing the tax treatment of carried interest, has recognized that carried interest “provides the most powerful incentive to work hard … and is considered essential to attracting talented managers.”9 Carried interest would, therefore, likely be used even if it offered no tax savings; indeed, as the University of Chicago’s David Weisbach has observed, it was used in years when capital gains and ordinary income were taxed at the same rates.10
Of course, because carried interest does usually provide tax savings, tax motivations have probably prompted its increased use to some extent. It also may have attracted more tax-exempt organizations to invest in funds that use this arrangement; if the provision is adopted, the incentive for tax-exempts to take their cash elsewhere may be powerful.
ARE THE TAX SAVINGS LEGITIMATE OR ABUSIVE?
With the myths disposed of, it is possible to address the question of whether the tax savings from the use of carried interest are improper. Should managers and investors be prevented from reallocating the two types of income in this manner?
It’s important to realize that the tax savings from the use of carried interest are not markedly different from the tax savings that result from a variety of behavioral responses to the capital gains and dividend tax break. The key fact is that individuals enjoy a tax saving when they receive capital gains and dividends rather than ordinary income while tax-exempt organizations do not. That difference in treatment has ramifications for asset holdings throughout the economy. Compared to a world without taxes, individuals undoubtedly hold more assets that yield capital gains and dividends (such as stocks) and tax-exempts undoubtedly hold more assets that yield ordinary income (such as bonds). That rearrangement of asset holdings increases the tax savings generated by the capital gains and dividend tax break.
Like most tax-motivated asset reallocation, this reallocation is, by itself, likely to be inefficient. It’s an inevitable consequence, though, of Congress deciding to offer a tax break for capital gains and dividends that is beneficial to some, but not all, asset holders. And, given Congress’s chosen form of the tax break, such reallocation actually makes the tax break more effective in stimulating new production that will yield capital gains and dividends. On balance, it’s far from clear that such reallocation should be aggressively discouraged.
To see how similar carried interest is to other asset reallocations, return to the earlier example. Supporters of the bill contend that it is improper for the fund to use carried interest to swap the $20 of capital gain between the manager and the investor. Suppose, though, that instead of using carried interest, the manager simply sold bonds that yielded $20 of ordinary interest income taxed at 39.6 percent and bought stocks that yielded $20 of capital gains taxed at 20 percent, while the tax-exempt investor sold stocks and bought bonds. Nobody would consider this portfolio reallocation improper. Is there any reason to condemn the carried interest arrangement that yields the same result?
One potential reason: Congress has imposed a limit on portfolio reallocation that doesn’t apply to the use of carried interest. The manager’s tax savings from portfolio reallocation are likely to hit a maximum at the point at which she puts her entire financial wealth in stocks and reduces her bond holdings to zero. She then has no more latitude to reduce interest income and increase capital gains. Of course, she could borrow and use the borrowed money to buy still more stock. But that strategy generally wouldn’t yield any tax savings because she couldn’t deduct the interest payments on her borrowing. Internal Revenue Code section 163(d) limits deductible investment interest expense to the amount of investment income taxed at ordinary rates, thereby preventing interest from being deducted against capital gains and dividends taxed at the 20 percent rate.
So, carried interest does permit some tax savings beyond what could be achieved through simple portfolio reallocation. The use of carried interest allows the manager and investor to achieve a larger exchange of ordinary income and capital gains than could be accomplished by the manager placing her entire financial wealth in stocks.
Is this extra latitude objectionable? The grounds for objection seem weak. The reallocation is achieved through the use of longstanding partnership tax rules that currently apply throughout the economy and that the bill would leave in place for most of the economy. Also, the managers to whom the gains and dividends are allocated helped generate the gains and dividends. Moreover, the use of carried interest is not primarily driven by tax motivations, but is instead motivated by the need to attract skilled managers and provide them with proper incentives. It is unclear why this method of reallocating ordinary income and capital gains income should be singled out.
In any case, one feature of the provision is particularly indefensible. As mentioned above, the provision would generally allow the 15 percent rate to apply to capital gains and dividends distributed to the managers when they invest money into the fund. But the provision sets forth one exception to that rule. Managers would remain subject to the higher rate imposed by the bill if they invested money they borrowed from the investors in the fund. Because managers who borrow from the investors would still be limited by section 163(d), it is hard to see why they should be targeted for an additional restriction not imposed on other people who borrow to buy assets that yield capital gains and dividends. As Fleischer himself has noted, there is “nothing offensive” about managers borrowing from investors.11 They receive no special tax break beyond what any other borrower would receive.
OTHER ISSUES
A number of other issues also raise concerns about the proposal.
Current Law Imposes Extra Tax Burden on Some Fund Managers
In some cases, the corporate income tax imposes a disguised payroll tax on fund managers’ earnings, a payroll tax that does not apply to other workers in the economy. The tax savings from the use of carried interest help offset this disguised tax.
The corporate income tax is normally a tax on capital rather than labor, because the corporation deducts its wage payments. This deduction cancels out the tax on the value that the corporation reaps from the employees’ work. Consider the case, though, in which the corporation is a portfolio company held by a private equity fund and the fund manager’s work increases the corporation’s earnings. The corporate income tax paid on those extra profits reduces the after-tax value of the manager’s work and therefore reduces what the fund will pay her. But the corporation cannot deduct the compensation paid to the manager, because the manager is paid by the fund (the corporation’s stockholder) rather than the corporation. The result is a disguised payroll tax on the manager.12
Of course, there are a number of circumstances in which there is no disguised payroll tax. The portfolio company may not pay corporate income tax, either because it is a non-corporate firm or it is losing money. Or the managers’ labor may consist of buying and selling companies to exploit price discrepancies in securities markets rather than boosting the companies’ operating profits. Or the managers’ labor may consist of devising better ways for the portfolio company to avoid corporate income tax, perhaps by adding to the company’s debt. When the disguised payroll tax does exist, though, the tax savings from the use of carried interest plays the useful role of helping offset it.
Transition and Expectations
The provision in the House bill would take effect on January 1, 2011, which raises concerns about the transition. Specifically, private equity funds that have large unrealized capital gains would have a strong incentive to realize those positions during the remaining months of 2010.
Because this provision targets for special treatment an industry that has been particularly successful, it could have a chilling effect on other businesses. They might conclude that they will be singled out for similar treatment at a future date if they prosper enough to become an attractive target for revenue-hungry legislators. These concerns are exacerbated by the demonization of private equity firms that has been associated with efforts to pass this legislation. From oil companies to health insurance companies to private equity firms, the list of industries targeted for special punitive measures seems to grow each year. The sequence of targeted measures runs the risk of creating an environment that is viewed as generally hostile to business.13
The provision is also complex in a very troubling way. The real problem is not that the provision sets forth a lengthy set of intricate rules. It does do that, of course, which is hardly a boon to the economy. But, complexity of that type is common in partnership tax law. Instead, the real problem is what’s missing from the provision, namely clarifications of some of its fundamental ambiguities. For example, the provision defines the partnership interests to which it would apply as those held by partners who are expected to provide a “substantial quantity” of the investment services listed earlier. Despite the high stakes surrounding the question, the provision does not define “substantial.” This is only one of many ambiguities that the American Bar Association Section on Taxation and other observers have noted. One of us noted in 2008 that these ambiguities could be “addressed through more careful drafting,”14 but most of the necessary drafting has not been done.
Of course, IRS regulations are likely to eventually resolve many of these ambiguities; the IRS has a good (and underappreciated) track record of resolving the complexity and ambiguity of the tax laws passed by Congress. But the IRS will not be able to issue all of the necessary clarifications before the provision takes effect at the beginning of 2011.
CONCLUSION
Economic theory provides strong support for the view that consumption, rather than income, is the best tax base.15 Under a consumption tax, all investment income would face a zero effective tax rate on the margin. By increasing overall taxes on investment income, the bill moves the tax system further away from the consumption-tax ideal.
Of course, given that the United States has an income tax rather than a consumption tax, there is a legitimate interest in adopting income tax rules that allocate capital efficiently. In some cases, tax changes that raise the overall tax burden on investment and thereby tend to shrink the capital stock can be justified if they promote a more efficient allocation of the (smaller) capital stock. But such changes should be accepted only when there is a compelling case that they will produce a significantly more efficient allocation. That case has not been made for this provision.
Kevin A. Hassett is senior fellow and director of economic policy studies at the American Enterprise Institute. Alan D. Viard is a resident scholar at the American Enterprise Institute.
More Anti-Democrat than Anti-Incumbent
More Anti-Democrat than Anti-Incumbent
The year 2010 is proving “a tough year for the overdog,” as I wrote in a recent Wall Street Journal column. Coincidentally, National Journal’s Charlie Cook wrote a column published the same day entitled “Incumbents Face Twin Furies.” Cook noted that 12 House incumbents had won their primaries with 70 percent or less of the vote. Given the enormous advantages that House incumbents usually enjoy, which usually net them 80 percent or more in primaries against little-known challengers, that is a low percentage. It’s also a sign of genuine weakness and potential vulnerability in later primaries or, in districts that are not one-sided in partisan terms, in the general election. After all, the incumbent has been elected at least once before, and in many cases many times, and every primary voter shares a partisan affiliation with the incumbent. While Democratic spin doctors have been arguing that this is an anti-incumbent rather than an anti-Democratic year, Cook argued that both anti-incumbent and anti-Democratic winds are blowing this year.
Since Cook and I wrote, primaries have been held in five more states, bringing the total of states holding primaries to 12 so far this year: Illinois, Texas, Indiana, North Carolina, Ohio, Nebraska, West Virginia, Arkansas, Kentucky, Oregon, Pennsylvania, and Idaho. Those states elect 133 of 435 members of the House of Representatives, nearly one-third of the total; they also elect 9 of the 36 senators who will be chosen this year.
When we take a first look at the list of incumbent House members who won their primaries with 70 percent or less of the vote, the results tend to confirm the Democratic spin: ten Republican incumbents and ten Democratic incumbents won with less than 70 percent. Two Republicans and two Democrats won less than 50 percent of the vote. Only one of those, Democrat Alan Mollohan (West Virginia-1), was defeated; the others had multiple opponents and were running in states that don’t have runoffs when no candidate exceeds a threshold percentage (usually 50 percent, but 40 percent in North Carolina).
Here are the Republican incumbents who won 70 percent or less, in the order in which the primaries were held:
Ralph Hall (TX-4), 57%
Kay Granger (TX-12), 70%
Mark Souder (IN-3), 48%
Dan Burton (IN-5), 30%
Howard Coble (NC-6), 64%
Patrick McHenry (NC-10), 63%
Jean Schmidt (OH-2), 62%
Lee Terry (NE-2), 63%
Todd Platts (PA-19), 70%
Mike Simpson (ID-2), 58%
There are some backstories here. Hall is the oldest member of the House. Souder resigned soon after the primary because of a sex scandal not disclosed before the vote. Burton, a longtime House member with some record of controversy, had two serious opponents and came close to losing. Schmidt has run behind the Republican base vote in general elections. Simpson is considered a moderate in one of the nation’s most conservative districts.
Here are the Democrats who won their primaries with less than 70 percent of the vote:
Danny Davis (IL-7), 67%
Sheila Jackson Lee (TX-18), 67%
Baron Hill (IN-9), 69%
Larry Kissell (NC-8), 63%
Heath Shuler (NC-11), 61%
Charlie Wilson (OH-6), 69%
Alan Mollohan (WV-1), 44%
Nick Joe Rahall (WV-3), 67%
Paul Kanjorski (PA-11), 49%
Tim Holden (PA-17), 65%
Two of these, Davis and Jackson Lee, are members of the Congressional Black Caucus and represent overwhelmingly Democratic districts. The other eight represent areas in or near the Appalachian chain, where Barack Obama ran very weakly in the 2008 Democratic primaries and where he ran behind traditional Democratic strength in the 2008 general election; he carried only two of these eight districts (NC-8 and PA-11). So while the subpar performance of some of the Republican incumbents listed above reflects personal factors, the subpar performance of many of the Democratic incumbents above suggests weakness in the president’s party.
We find much more evidence of this weakness when we look at the performance of all incumbents in all the districts in these 12 states’ primaries. The following table shows, for Republican- and Democratic-held districts, the number of seats with no incumbents running, the number in which incumbents had no opposition (or only write-in opposition), the number in which incumbents got more than 70 percent of the primary vote, and the number in which incumbents got less than 70 percent of the primary vote:
No incumbent No opposition > 70% to incumbent
These results suggest that the anti-Democratic wind is stronger than the anti-incumbent wind. Nearly half of Democratic incumbents with opposition ran under 70 percent, while only about one-third of Republican incumbents with opposition ran under 70 percent. More than half of Democratic incumbents had no primary opposition—there’s no telling how many would have run under the 70 percent mark if they had, but it’s possible quite a few of them would have. If all incumbents had had primary opposition, and the number running under 70 percent had been the same proportion as among those who did have primary opponents, some 38 Democrats would have run under 70 percent as compared to 19 Republicans.
The results in the nine Senate races in these 12 states present a similar picture. Four of them had no incumbent running: in Republican-held seats in Ohio and Kentucky and Democratic-held seats in Illinois and Indiana. The two incumbent Republicans running, in North Carolina and Idaho, both won with more than 70 percent of the vote. Only one incumbent Democrat running did so, in Oregon. The other two Democratic incumbents won less than 50 percent of the vote: Arlen Specter, with 46 percent, was defeated in Pennsylvania and Blanche Lincoln, with 44 percent, was forced into a runoff in Arkansas. As I wrote in my May 26 column in the Washington Examiner, while much press attention has been devoted to intraparty strife in the Republican Party, there actually seems to be more such strife in the Democratic Party.
Conclusion: it’s more perilous for an incumbent to be a Democrat than a Republican this year, in primaries as well as in the general election. Democratic incumbents without primary opposition in states where the filing deadline has passed have good reason to heave a sigh of relief—at least until the fall campaign period begins.
List of districts in each category:
- Republican seats with no incumbent running: IL-10, IN-4, AR-3.
- Republican seats where incumbent had no primary opposition: IL-6, IL-13, IL-15, IL-16, IL-18, TX-1, TX-2, TX-3, TX-5, TX-6, TX-7, TX-13, TX-19, TX-22, IN-6, NC-9, OH-4, OH-14, WV-2, KY-1, KY-2, KY-4, KY-5, OR-2, PA-5, PA-9, PA-16, PA-18.
- Republican seats where incumbents won more than 70% in the primary: IL-1, TX-8, TX-10, TX-11, TX-14, TX-21, TX-24, TX-26, TX-31, TX-32, NC-3, NC-5, OH-3, OH-5, OH-7, OH-8, OH-12, NE-1, NE-3, PA-6, PA-15.
- Republican seats where incumbents won 70% or less in the primary: TX-4, TX-12, IN-3, IN-5, NC-6, NC-10, OH-2, PA-19, NE-2, ID-2.
- Democratic seats with no incumbent running: IN-8, AR-1, AR-2, PA-7, PA-12.
- Democratic seats where incumbent had no primary opposition: IL-2, IL-4, IL-5, IL-8, IL-9, IL-11, IL-12, IL-14, IL-17, TX-9, TX-16, TX-17, TX-20, TX-25, TX-27, TX-28, TX-29, TX-30, IN-1, IN-2, NC-2, NC-4, NC-7, NC-12, NC-13, OH-10, OH-15, OH-16, OH-18, AR-4, KY-3, KY-6, OR-4, OR-5, PA-1, PA-2, PA-4, PA-8, PA-10, PA-13, PA-14, ID-1.
- Democratic seats where incumbents won more than 70% in the primary: IL-1, IL-3, TX-15, TX-23, IN-7, NC-1, OH-1, OH-9, OH-11, OH-13, OH-17, OR-1, OR-3, PA-3.
- Democratic seats where incumbents won 70% or less in the primary: IL-7, TX-18, IN-9, NC-8, NC-11, OH-6, WV-1, WV-3, PA-11, PA-17.
Michael Barone is a resident fellow at the American Enterprise Institute.
Calling a State Sponsor a State Sponsor
Calling a State Sponsor a State Sponsor
This month a dozen U.S. senators fired the opening salvo in what promises to be an aggressive oversight campaign to get to the bottom of Venezuelan dictator Hugo Chávez’s support for terrorism. A May 25 letter challenges Secretary of State Hillary Clinton to explain what the administration knows about Venezuela’s support for a sprawling network of terrorist states and groups, including Iran, Hezbollah, Colombian “narcoterrorists,” Cuba, and Syria.
Rallied by John Ensign (R-Nevada) and George LeMieux (R-Florida), the senators are asking that Secretary Clinton explain what the administration knows about alleged arms shipments, high-level contacts, and financial dealings linking Venezuela to a rogue’s gallery of, well, rogues. The detailed letter signals that the senators already know more than the administration has been willing or able to substantiate about dictator Chávez’s collaboration with anti-American terror groups and hostile regimes.
Since the last years of the George W. Bush administration, U.S. diplomats have steered clear of Chávez for fear of ‘provoking’ him. Thanks to congressional oversight, we are about to confront the terrible downside of that naïve, passive policy.
“We are deeply concerned about Venezuelan president Hugo Chávez’s growing ties to U.S.-designated foreign terrorist organizations and state sponsors of terrorism,” the letter begins. Following a litany of examples of how Chávez economically bolsters terrorist regimes (including Cuba and Iran) and provides material support to terrorist groups (from Hezbollah to the Revolutionary Armed Forces of Colombia), the senators ask Clinton to explain why Venezuela evades designation under U.S. law as a state sponsor of terrorism.
Among Chávez’s notorious actions the senators cite:
• The provision of “sanctuary” and the “flow of guns and money”—including the provision of portable missiles, anti-tank rockets, and other weaponry—to Colombian guerrillas;
• Complicity in the illegal narcotics trade that fuels terrorism—including the burgeoning traffic from Venezuelan territory to west and north Africa;
• The “presence and activities of Hezbollah inside Venezuela,” and a November 2009 shipment of Russian weapons from a Venezuelan arms cache to that group;
• “Extensive support of the Castro regime in Cuba,” and Chávez’s reliance on Castro henchman Ramiro Valdes to repress internal opponents;
• Possible support for “Iran’s covert nuclear enrichment program” in exchange for Iran’s providing “nuclear knowhow” to Chávez;
• Venezuela’s delivery of gasoline to Iran and its help for Iran to evade international sanctions; and
• Suspicious air traffic and lax immigration controls on Caracas-Damascus-Tehran airline flights.
The Ensign-LeMieux letter was co-signed by John McCain (R-Arizona), Robert Bennett (R-Utah), Scott Brown (R-Massachusetts), Sam Brownback (R-Kansas), Jim Bunning (R-Kentucky), John Cornyn (R-Texas), James Inhofe (R-Oklahoma), Republican Whip Jon Kyl (R-Arizona), James Risch (R-Idaho), and Roger Wicker (R-Mississippi). LeMieux’s involvement is significant because he was one of several senators who held up multiple diplomatic nominations last year over concerns regarding the administration’s policy toward Latin America.
This stepped-up congressional oversight is bound to build on the growing body of evidence pointing to Chávez’s singular role in supporting terrorism and related criminality. The Obama administration’s decision to the pull the trigger on Venezuela may hinge on whether the United States can afford to forfeit petroleum exports from that South American country.
Ironically, oil-rich Venezuela may be one of the few countries against which these anti-terror sanctions may have a decisive impact.
Anticipating the argument that Venezuela’s oil supply is too essential to the U.S. economy to risk slapping that country with the terrorist label, the senators ask the administration to explain its “contingency plan” for dealing with a “sudden and prolonged unavailability of Venezuelan oil exports to the United States.”
The reality is, although the United States will likely find new sources of oil on the international market within a few weeks, Venezuela’s economy will be crippled by the loss of oil revenue and consumer imports. Moreover, Chávez has wrecked Venezuela’s state-owned oil company and has failed to identify new importers with the special refineries required to distill the viscous heavy crude his country produces. Ironically, oil-rich Venezuela may be one of the few countries against which these anti-terror sanctions may have a decisive impact.
Since the last years of the George W. Bush administration, U.S. diplomats have steered clear of Chávez for fear of “provoking” him. Thanks to congressional oversight, we are about to confront the terrible downside of that naïve, passive policy.
Roger F. Noriega was Ambassador to the Organization of American States from 2001-2003 and Assistant Secretary of State from 2003-2005. He is a visiting fellow at the American Enterprise Institute and managing director of Vision Americas LLC, which represents U.S. and foreign clients.
The lives and deaths of Dennis Hopper
The lives and deaths of Dennis Hopper
Jesse Walker
For the general public, Dennis Hopper was identified to the end with the '60s counterculture, thanks to his career-making role as a hippie biker in Easy Rider. So when he died this past weekend, you're forgiven if you were surprised to read that he spent the last few decades of his life as a Republican. Unlike many famous figures who moved from one end of the spectrum to the other, Hopper never underwent a big public conversion. The man who once "was probably as Left as you could get without being a Communist" voted for Ronald Reagan in 1980, but he didn't make a stink about it at the time; the closest he came to giving his past persona a public burial came when he disavowed the drug abuse that just about wrecked his career in the 1970s. When no less a leftist than Abbie Hoffman criticized celebrity ex-dopers for issuing atonements that "look like cartoon confessions extracted under threat," the old radical nonetheless singled out Hopper's renunciation as one of a few "sincere" repudiations "by people I know and admire." This was in 1987, seven years after the actor started quietly casting his ballots for the GOP.
Not many people could vote for Reagan while maintaining the admiration of Abbie Hoffman, but Hopper's cultural impact was much larger than his private political sympathies. In virtually all his roles, including the roles he played in the gossip columns, Hopper exuded an individualism too explosive to be reduced to mere ideology, be it left, right, or libertarian. It was the individualism of a talented actor eager to play eccentric characters and the individualism of a self-destructive rascal who alienated his colleagues, the individualism of the counterculture's cosmic cowboys and the individualism of a Kansas Republican. It was the individualism of someone willing not just to stare into the abyss but to fall into it, climb out, then merrily dive back in.
Born in Dodge City, Hopper started acting onscreen in the mid-1950s, playing small parts in cowboy movies and JD flicks. He was blackballed after battling director Henry Hathaway on the set of 1958's From Hell to Texas, so he fell into TV work and low-budget films. Even after he started getting roles in respectable movies again, he continued to do lowbrow pictures for people like Roger Corman, the B-movie producer whose young actors and directors would become some of the most prominent names of the New Hollywood of the late '60s and the '70s. Hopper himself would help usher in that New Hollywood by directing, co-writing, and co-starring in Easy Rider, a 1969 release that at first seemed to be just another biker picture but eventually revealed itself as something more.
A central theme of the western is the tension between the sometimes lonely freedom of the road and the sometimes suffocating security of the rooted community. Easy Rider took place in a modern western landscape, not in the days of the frontier, but it grappled with the same idea. J.F.X. Gillis has argued that the film is, despite its reputation, a deeply conservative movie with parallels to Chaucer's "The Pardoner's Tale." In their stops along the road, Gillis argues, the protagonists "were given choices, opportunities to find meaning in their lives beyond that gas tank filled with money, beyond the pleasure of the brothel or the bottle, beyond the aimless wandering, meaning offered through spiritual commitment. Could there be a more conservative theme? The rancher and his family, the commune: first they were given a model of a meaningful life, then they were given an invitation to build that life. Invited to stay and join a family and find God, they refused."
"If this narrative had been Medieval, could there be any doubt at all of the theme or the moral teaching intended?" Gillis asks. "Sinners wander the countryside on a secular quest, encountering God's message but failing to acknowledge Him. They seek worldly pleasure at the expense of spiritual fulfillment, finding treasure and discussing it under a tree, only finally to die a horrid death by the wayside." That might not match the popular understanding of the movie's message, but it isn't far from at least one of the filmmakers' views. "My heroes are not right, they're wrong," Hopper's co-writer and co-star Peter Fonda said. "Liberty's become a whore, and we're all taking the easy ride."
Easy Rider was a hit and Hopper suddenly had Hollywood clout, which he burned through rapidly. He fell into disfavor again, and then he had another comeback. Along the way he had several memorable roles: as the amoral Tom Ripley in The American Friend, a crazed photographer in Apocalypse Now, a deranged '60s burnout in River's Edge, an alcoholic seeking redemption in Hoosiers, a cold-blooded hit man in Red Rock West, a post-apocalyptic dictator in Land of the Dead. But only one Hopper part would become as iconic as his character in Easy Rider: Frank Booth, the violent, impulsive, scenery-chewing sociopath at the center of Blue Velvet—a film written and directed by another unexpected Reaganite, David Lynch. If Easy Rider is the story of some footloose travelers who can't bring themselves to settle down, Blue Velvet is about a boy returning to a rooted community only to find that it too contains demons.
In 1984, it was possible for Gene Siskel to contrast Easy Rider (which, he informed us, "trashed establishment America") with the anti-Communist thriller Red Dawn (which was "nothing less than a military manifesto for our nation's youth"), concluding that "After more than two decades of pervasive liberalism, the Hollywood film industry is suddenly producing popular pictures that can only be called conservative." As it happens, Red Dawn director John Milius is a self-described "Zen anarchist" and a product of the same New Hollywood that gave us Easy Rider, but it's easy to miss those sorts of nuances when you're looking through the distorting prism of the Culture War. In retrospect, the New Hollywood was too big to be contained by either the counterculture or the left; it included John Milius as well as Robert Altman, Clint Eastwood as well as Jack Nicholson, Hopper the budding Republican as well as Hopper the hippie. In the best movies of the period, the animating idea wasn't some clichéd battle between the hipsters and the squares. It was the concept that powered those westerns of an earlier era: the tension between the home and the road, and the happiness and horrors to be found in both.
In that tug of war, Hopper embodied the most extreme sorts of rootlessness, playing a series of unconstrained ids and the wrecked shells they left behind. Sometimes, as in Hoosiers, the Hopper character managed to climb back into the community; other times, as in Apocalypse Now, he stayed out on the edge. His great gift was to make those excesses exciting and perversely attractive, even when his characters were at their darkest and most damaged.
Managing Editor Jesse Walker is the author of Rebels on the Air: An Alternative History of Radio in America (NYU Press).
Nanny of the Month: Anti-Raw-Milk Crusader Stephanie Rose
Nanny of the Month: Anti-Raw-Milk Crusader Stephanie Rose
Got milk? Only if Uncle Sam allows it.
Runners-up for Reason.tv's Nanny of the Month for May 2010 features a proposed ban on drive-through restaurants in the hometown of In-And-Out Burgers, one of America's most beloved drive-through restaurants, and the mayor of Kure Beach, North Carolina, whose got his undies in a bunch over thong bikinis.
But there can be only one Nanny of the Month and this time it goes to the federal lawyer who wants to give raw milk drinkers a raw deal, and who really, truly believes that Uncle Sam can control what you shove in your pie hole.
Presenting Reason.tv's Nanny of the Month for May 2010: U.S. Attorney Stephanie Rose!
Redeeming Reform
Redeeming Reform
In the last century, those who have advocated reform have usually defined it as more government employees, more regulations, more agencies, more spending, more taxes, more special pay-offs to the clients of political spoils systems, and more powers for government.
Does American history move in only one direction—toward government domination of every detail of our daily lives? Did we reach a high-water mark of government power when ObamaCare was signed into law? Or was that just the crest of a wave that will sweep away the few remaining decisions we can still make about the things that are most important to us? The answer may begin to take form this year.
Do we want our physicians to be able to use their own best judgment about our care? Or shall we watch them suspend that judgment knowing their insurance reimbursements will be cut if they do not follow government protocols and "best practices"? Should we just sit back and watch the last of our freedoms waste away, or should we do something?
Our first step must be to redeem the concept of reform. In the last century, those who have advocated reform have usually defined it as more government employees, more regulations, more agencies, more spending, more taxes, more special pay-offs to the clients of political spoils systems, and more powers for government. Failures resulting from such "reform" have always been followed by calls for more government authority, spending and power.
The Federal Reserve Bank was created nearly a century ago to end recessions, depressions, unemployment and inflation. As it has failed in all of these tasks, its authority and power have grown. Now we have calls for more financial "reform" to increase its powers and those of a host of other agencies. Government creations like Fannie Mae and Freddie Mac destroyed the home mortgage market and are encouraged to intervene more. Meanwhile, the rapidly diminishing remnants of a free market take the blame.
Medicare and Medicaid have an astonishingly consistent track record of wildly exceeding spending projections and failing to fund tens of trillions of dollars in liabilities. Fraud is uncontrolled. Yet the President and Congress have successfully used this disaster as the basis for assuming control of the remainder of private insurance. (Whatever you think of your insurance company, it has to find the income to pay medical bills. Congress can only pretend to do that by borrowing or printing the money.)
That destructive course will only continue unless we transform the meaning of reform from what the government can do to what it must stop doing. We are being overcome by a towering wave of government that corrupts citizens and politicians alike, as surely as bread and circuses destroyed the Roman Republic. Before it is too late, we must reverse the tide. We must not submit to politicians who promise to take care of us if we surrender our freedom to them—we must throw them out of office.
Americans must decide whether or not they will continue to surrender their personal choices about everything—health care, the education of their children, the energy and food they need to live, and the financial system so beautifully managed by the Federal Reserve, the Securities and Exchange Commission, the Treasury Department, Fannie Mae, Freddie Mac, Congressman Barney Frank and Senator Chris Dodd.
The era of ever-diminishing freedom and ever-increasing government must be brought to an end. We must start afresh and build a new Empire of Liberty. We must fight to take America back, and that battle can start with health care—in the courts and at the ballot box. It will be a long battle, but we must begin it now and fight one step at a time, for as long as it takes, if our lives and freedoms are to survive.
A Hero For Our Times
Ridley Scott's Robin Hood: A Hero For Our Times
Forget what you know of Robin Hood--that he steals from the rich to give to the poor—because this version sets the legend upright; he is an avenger for justice.
Ridley Scott’s Robin Hood is another epic action movie—and a scathing indictment of taxation without representation, government control of wealth and religion, and abnegation of man’s rights. That the filmmakers ultimately misplace its theme—by sticking to an expository structure ala Batman Begins—puts Robin Hood slightly off its mark.
Yet it remains Mr. Scott’s best picture and the year’s most exciting movie. Far from perfect, with incoherent fight close-ups in which nothing is discernible, predictable or confusing plot points, and a tendency to overplay the script, Robin Hood is immensely watchable. Characters are intense, action is gripping, and the scope is wide and larger than life. Forget what you know of Robin Hood--that he steals from the rich to give to the poor—because this version sets the legend upright; he is an avenger for justice.
The story begins in the 12th century with a man named Robin Longstride (Mr. Crowe), who fights with King Richard the Lion-Hearted for England against France. Using fire, tar, stones, and arrows as weapons, the battles are swift and brutal. Robin is instantly identifiable as honest, brave, and intelligent. He thinks, he trades, and he owes no one, which he states as an absolute. He fights with valor.
The king notices him, which doesn’t bode well for Robin, and, when the king falls in battle, a scheme to unleash a foreign enemy from within is born—another parallel to our times—and the passionate hero steps into the fray. As the French conspire to invade England, the new king acts like a petulant welfare-statist, imposing exorbitant taxes and seizing private property. At times, Robin Hood is like a dramatization of the Obama administration’s policy to redistribute wealth. One poor villager pleads that “we have no money left to give.”
The Church is complicit except for a beekeeper named Friar Tuck (Mark Addy) who does what he pleases and regards merriment as rightly within everyone’s domain. Tuck is one of many individualists in a place called Nottingham who resist the government’s confiscation of wealth. A spirited woman named Marion (Cate Blanchett) resides there, too, defending her land, scowling at robbers, sending them scurrying back into the woods. Living with her blind father-in-law (Max von Sydow) and struggling to survive, she’s a brave, bold person herself.
Enter Robin Hood, not yet known by that name, riding into Nottingham to deliver a message and keep a promise. The nobleman father-in-law has an idea to save his property from the government and it co-exists with Robin’s goal to lay low. The band of merry men—Little John among others—are never far away, letting off steam by cavorting with the ladies and imbibing what Friar Tuck has to offer.
As the plot to invade England escalates at the hands of a dastardly villain (Mark Strong)—think Rahm Emanuel on a horse with a sword—the looting, sanctioned by the King’s new policy to raise taxes, begins in earnest. “Pay or burn,” tax collectors demand upon arrival in Nottingham, where a puny-minded sheriff (Matthew Macfadyen) follows orders. The government exterminates those who resist.
This is not Grandpa’s Robin Hood. There’s no frivolity, little derring-do, and no speeches about the evil of making money. Instead, there’s a tea party afoot, born of a handsome hero who thinks and remains calm in a crisis and wields a bow and arrow with precision. He has flashbacks to childhood in Nottingham and his acts of rebellion become necessary for him to live and be left alone. What drives him are the words on a sword: “Rise and rise again until lambs become lions.”
Amid gallant rescues, blazing battles, and bolts of lightning cutting the gray sky in the distance, this is the civilized world in turmoil, with Robin Hood leading the nation toward liberty and enlightenment. He deals in contracts—neither having faith nor initiating force—and, when foreign invaders make their presence known, he steps up to speak out and call for a “charter of rights” establishing “liberty by law”. Neither a prince nor a thief; this Robin Hood is a man of reason.
Marion, who resists him, equals him. When the government comes to steal her wealth, dictating—right out of Obama’s red book—that “no one should have 4,000 acres” Marion snaps in reply: “5,000 acres.” No little woman depending on others to defend her property, she knows how, when, and why to use a weapon.
The power-lust of religion meets the power-lust of the state and, as England becomes a God-state, Robin Hood assumes his well-deserved role as outlaw, legend, hero to the oppressed. With strong characters, stunning conflicts, and Russell Crowe playing Robin Hood just right, getting there is half the fun.
He Was Supposed to Be Competent
The spill is a disaster for the president and his political philosophy.
By PEGGY NOONAN
I don't see how the president's position and popularity can survive the oil spill. This is his third political disaster in his first 18 months in office. And they were all, as they say, unforced errors, meaning they were shaped by the president's political judgment and instincts.
There was the tearing and unnecessary war over his health-care proposal and its cost. There was his day-to-day indifference to the views and hopes of the majority of voters regarding illegal immigration. And now the past almost 40 days of dodging and dithering in the face of an environmental calamity. I don't see how you politically survive this.
The president, in my view, continues to govern in a way that suggests he is chronically detached from the central and immediate concerns of his countrymen. This is a terrible thing to see in a political figure, and a startling thing in one who won so handily and shrewdly in 2008. But he has not, almost from the day he was inaugurated, been in sync with the center. The heart of the country is thinking each day about A, B and C, and he is thinking about X, Y and Z. They're in one reality, he's in another.
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President Obama promised on Thursday to hold BP accountable in the catastrophic Gulf of Mexico oil spill and said his administration would do everything necessary to protect and restore the coast.
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The American people have spent at least two years worrying that high government spending would, in the end, undo the republic. They saw the dollars gushing night and day, and worried that while everything looked the same on the surface, our position was eroding. They have worried about a border that is in some places functionally and of course illegally open, that it too is gushing night and day with problems that states, cities and towns there cannot solve.
And now we have a videotape metaphor for all the public's fears: that clip we see every day, on every news show, of the well gushing black oil into the Gulf of Mexico and toward our shore. You actually don't get deadlier as a metaphor for the moment than that, the monster that lives deep beneath the sea.
In his news conference Thursday, President Obama made his position no better. He attempted to act out passionate engagement through the use of heightened language—"catastrophe," etc.—but repeatedly took refuge in factual minutiae. His staff probably thought this demonstrated his command of even the most obscure facts. Instead it made him seem like someone who won't see the big picture. The unspoken mantra in his head must have been, "I will not be defensive, I will not give them a resentful soundbite." But his strategic problem was that he'd already lost the battle. If the well was plugged tomorrow, the damage will already have been done.
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The original sin in my view is that as soon as the oil rig accident happened the president tried to maintain distance between the gusher and his presidency. He wanted people to associate the disaster with BP and not him. When your most creative thoughts in the middle of a disaster revolve around protecting your position, you are summoning trouble. When you try to dodge ownership of a problem, when you try to hide from responsibility, life will give you ownership and responsibility the hard way. In any case, the strategy was always a little mad. Americans would never think an international petroleum company based in London would worry as much about American shores and wildlife as, say, Americans would. They were never going to blame only BP, or trust it.
I wonder if the president knows what a disaster this is not only for him but for his political assumptions. His philosophy is that it is appropriate for the federal government to occupy a more burly, significant and powerful place in America—confronting its problems of need, injustice, inequality. But in a way, and inevitably, this is always boiled down to a promise: "Trust us here in Washington, we will prove worthy of your trust." Then the oil spill came and government could not do the job, could not meet the need, in fact seemed faraway and incapable: "We pay so much for the government and it can't cap an undersea oil well!"
This is what happened with Katrina, and Katrina did at least two big things politically. The first was draw together everything people didn't like about the Bush administration, everything it didn't like about two wars and high spending and illegal immigration, and brought those strands into a heavy knot that just sat there, soggily, and came to symbolize Bushism. The second was illustrate that even though the federal government in our time has continually taken on new missions and responsibilities, the more it took on, the less it seemed capable of performing even its most essential jobs. Conservatives got this point—they know it without being told—but liberals and progressives did not. They thought Katrina was the result only of George W. Bush's incompetence and conservatives' failure to "believe in government." But Mr. Obama was supposed to be competent.
Remarkable too is the way both BP and the government, 40 days in, continue to act shocked, shocked that an accident like this could have happened. If you're drilling for oil in the deep sea, of course something terrible can happen, so you have a plan on what to do when it does.
How could there not have been a plan? How could it all be so ad hoc, so inadequate, so embarrassing? We're plugging it now with tires, mud and golf balls?
More on The Gulf Oil Spill
* Opinion: Obama's Blowout Preventer
* On Doomed Rig, 'Nobody in Charge'
* BP's Decisions Set Stage for Disaster
* BP Assesses 'Top Kill' Effectiveness
* Spill Tops Valdez Disaster
* Interactive: Victims: Faces and Profiles
What continues to fascinate me is Mr. Obama's standing with Democrats. They don't love him. Half the party voted for Hillary Clinton, and her people have never fully reconciled themselves to him. But he is what they have. They are invested in him. In time—after the 2010 elections go badly—they are going to start to peel off. The political operative James Carville, the most vocal and influential of the president's Gulf critics, signaled to Democrats this week that they can start to peel off. He did it through the passion of his denunciations.
The disaster in the Gulf may well spell the political end of the president and his administration, and that is no cause for joy. It's not good to have a president in this position—weakened, polarizing and lacking broad public support—less than halfway through his term. That it is his fault is no comfort. It is not good for the stability of the world, or its safety, that the leader of "the indispensable nation" be so weakened. I never until the past 10 years understood the almost moral imperative that an American president maintain a high standing in the eyes of his countrymen.
Mr. Obama himself, when running for president, made much of Bush administration distraction and detachment during Katrina. Now the Republican Party will, understandably, go to town on Mr. Obama's having gone before this week only once to the gulf, and the fund-raiser in San Francisco that seemed to take precedence, and the EPA chief who decided to cancel a New York fund-raiser only after the press reported that she planned to attend.
But Republicans should beware, and even mute their mischief. We're in the middle of an actual disaster. When they win back the presidency, they'll probably get the big California earthquake. And they'll probably blow it. Because, ironically enough, of a hard core of truth within their own philosophy: When you ask a government far away in Washington to handle everything, it will handle nothing well.
Apple's Second Date with History
Whose phone strategy is smarter in the long run—Apple's or Google's?
By HOLMAN W. JENKINS, JR.
Apple almost went out of business 14 years ago, and many would have blamed what seemed one of the seminal business blunders in history.
Bill Gates was chatting with students at Stanford at the time and recalled letters he'd written to Steve Jobs begging him to allow cloning of Apple hardware. Had Mr. Jobs complied, Apple's operating system might have become the de facto universal standard, the one everybody wrote software for—a role that fell to Windows instead.
If you think missing out on the riches that Microsoft created for its shareholders was an error, Mr. Jobs erred. Then again, the Web came along to take the deathly sting out of the battle of the operating systems, and Apple resurrected itself as a maker of tasty computing devices for a segment of the public that valued tastiness.
Historical analogies are one of the cheapest in the columnist's bag of tricks, and a temptation usually to be resisted. But here goes: Isn't Steve Jobs replaying the gamble that almost broke Apple?
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Whose phone strategy is smarter in the long run—Apple's or Google's?
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Google may not be Microsoft, exactly: For one thing, Google is giving away its smartphone operating system, known as Android, for free. Nor will the battle yield a similar winner-take-all outcome. But otherwise the effects are likely to be the same.
Because Mr. Jobs insists on keeping software and hardware under tight control, Google's platform is the one that will benefit from competition among multiple handset makers, producing lower prices and faster innovation, including a flurry of soon-to-arrive tablets and a variety of new devices aimed at niches (say, with a focus on navigation or texting).
Likewise, because Mr. Jobs insists on vetting all applications that run on his phones via the iTunes App Store, you'll need an Android phone to capture the full benefit of openness to the Web. Soon, Android users can expect their available services and apps permanently to outstrip those available to iPhone users through the App store.
Now, as then, the full stakes are only dimly perceived even by the participants. Then, it turned out to be the PC's world-wide adoption as the indispensable productivity tool. Today the term "smartphone" is scarcely adequate to describe a future in which individuals, wherever they go, whatever they do, will always have constant, instant access to the resources of the global "cloud."
Here, another Google advantage is likely to manifest itself over time. It makes its money from advertising (and from collecting data it can sell to advertisers) and its customers reciprocate by wanting services for free, which means advertising-supported.
In contrast, Apple makes its money from hardware sales, and by strong-arming its way to a share of users' telecom subscriber fees and infotainment purchases—all of which could be ripe to be competed away in a dynamic cloudphone marketplace.
The dangers of Google's approach? With so many different Android phones floating around and with so much openness to the Web, the search giant risks delivering a crummy, fragmented, even disastrous user experience, with security leaks, viruses and customer service that fails when needed most.
For Apple, the immediate danger is overreach, undermining its ability to deliver an ineffably superior user experience that just pleases. Apple has decided it needs an advertising strategy. It will need a TV strategy, especially after Google last week announced a version of Android to bring the cloud cornucopia to the biggest, best screen yet. Apple may also find it needs a strategy to compete in search. It certainly will need a strategy to make sure its infotainment offerings through iTunes don't fall behind in price and variety what Android users can get through their browsers.
That's a plateful for a company that, until recently, could focus almost entirely on perfecting the interface between its customer and the underlying electronics. But history has dealt Apple one break the second time around. Its earlier battle with Microsoft was winner-take-all thanks to an historical accident—the failure of the Web to introduce itself a bit earlier and blow up what a Microsoft judge called the "applications barrier to entry."
Apple this time understands (we hope) that it isn't playing for all the marbles, but can build a very nice business on just those customers who crave a premium service tightly controlled by the wonderful Mr. Jobs, even if it means paying a bit more and forgoing access to a lot of Web goodies that might not work so well in favor of a smaller number that work really well.
Still, we'd rather be Google. Why? Because Google can fail at everything but as long as it keeps its search box at the center of our digital lives, the ad gusher will continue to flow.
The People Who Borrow
The People Who Borrow
[Excerpted from chapter 6 of Debt: Private and Public, Good and Bad, 1938]
Good debt is, as we have seen, an essential part of our financial foundations; without it the purposes of commerce could not be accomplished. The business of supplying us all with our daily needs necessitates some means of exchanging a present sacrifice for a future benefit, a process or transaction that is essentially individualistic in its nature. Broadly speaking no other sort of debt existed before 1914. The figures, even then impressive enough, of government debts represented a mere fraction of the mass of personal debt which made the trade and intercourse of the world possible and easy.
Where before 1914 a government would owe a hundred million, there would be some thousands of millions owing by the private individuals living under that government. Of all these millions every sixpence depended absolutely upon a personal signature, all of them were backed by goods or services, personal belongings, or personal earning power, and all of them therefore possessed such qualities and such defects as, we shall see, are wholly absent from the new sort of debt, public debt, about which we are here concerned.
Rather an impressive picture comes up to the mind when looking at the money markets of the world in 1914 and noticing the astronomical figures of the dealings in London, Paris, New York, Berlin, and elsewhere, if it is remembered that behind every fraction in these figures was some very personal little problem. The security and smooth working of the whole were due to the fact that there were reputations to be lost, bankruptcy to be faced, personal degradation or personal success hanging on every transaction however large or however small.
The man with little credit and the firm or institution with cast-iron credit were each accommodated on appropriate terms without difficulty, and the varied interests of each were properly cared for. There was no shadow of trouble in carrying on the work of the world insofar as that work involved the transfer or movement of money from one individual to another on any part of the earth's surface.
The picture is worth reconstructing in these days when we have entered a new world, and the old has almost disappeared. There is a good deal of talk about revolutions. In our capacity as politicians we are proud or worried about the way in which we have improved or altered all sorts of things: the widening of the franchise, the status of woman, or whatever it may be. We think of Russia when we talk of revolutions and are inclined to attach an importance to the substitution of one tyranny for another, which is of very minor consequence compared with the substitution of one financial system for another by the new habit of piling up public debt. The greatest of all the revolutions has proceeded almost silently in our very midst, and the great majority of those who are quite prepared to talk glibly about world affairs are simply and wholly ignorant of much more important things going on day by day under their very noses.
It is usual to talk of public debt in connection with the War,[1] because it was the war that started this great revolution. In the autumn of 1914 there were politicians, economists, and financiers who comforted us with the assurance that the war would be over by Christmas, for the simple reason that our money would be exhausted by then. Those people knew nothing of the possibilities of public debt, which, invented out of the necessities of the war, have continued to be our undoing ever since. The most active of the public securities of the stock markets is still called "war loan," a little fact which lends color to the theory that our burden of debt is part of the price of the war. It is all the more necessary therefore to have it clearly in our minds that only about one-third of the present public debt is due to the military and naval expenditure upon the war, and that the other two-thirds must be charged to our postwar enthusiasm for doing all sorts of original things in original ways.
Since 1914, public debt has increased out of knowledge. Sums which would have been regarded as in the realms of fancy prior to this new fashion have been raised by governments or authorities all over the world. We should in all humility recognize that we led the way, and that it was our example which encouraged many a small nation to proceed to its own destruction.
After 20 years of this orgy of borrowing we have the dubious satisfaction of noticing that most of the money borrowed has been lost, wiped out by bankruptcy, written off by currency depreciations, repudiated by revolutions, or in some other way cleaned off the slate. Germany disposed of the whole of her public debt by currency manipulation, and at the time there were those who would have had us believe that by so doing Germany was reaping an advantage. It is not quite so easy at this length of time to understand the nature of that supposed advantage.
France has reduced her public debt to one-sixth of the amount she borrowed, again very easily, by juggling with the value of the franc. Other countries have taken the simpler course of refusal to pay, and while their debts remain on paper the paper itself is in many cases of more value than the debt.
It is almost only in sterling that a public debt remains in the minds of the public as a good, or fairly good, debt. Our pound has lost some of its value, and the good money lent to the government in say 1914 will be paid back, if at all, in money of a slightly lower value. But it remains true, thanks to the financial flair, the experience, the reputation, and the character of the British Empire and its money machine that British public debt is almost the only government security which a serious lender will consider today. America takes a definite second place, for she has thought it wise in her newfound enthusiasm for governmental activities to adopt the age-old device of the devaluation of her currency, and has mutilated her dollar just as effectively as the powers of old with shears and chisels chipped little bits off their coins.
Remembering our glance at the structure of commercial and civilizing debt, the first thing that strikes us in examining this mass of public debt is the absolute and total absence of anything in the nature of personal responsibility about it. Behind this conglomeration of figures there is nowhere a shred of personal quality. There is nobody's name on the back of the bill, and the drawer himself has no personal stake in it.
A couple of illustrations from the national field may help emphasize this point. In a moment of anxiety in the war, Mr. Winston Churchill[2] did one of the silliest things in the whole of the silly record of that period when by a stroke of the pen he gave a 12.5 percent increase in wages to the engineers. In a matter of a few months the engineers were back on a level with the rest of the population, for all our prices adjusted themselves, and something like 12.5 percent went on to everything. That simple bit of folly was responsible for a substantial part of our burden of debt. The calculation is beyond the wit of man but to put it at £500 million is a certain understatement.
Nobody suggests that Mr. Winston Churchill should be punished personally for this ghastly blunder, but had Mr. Churchill, instead of being a minister of the Crown, been a mere chairman of one of the big banks, had he in the same careless and silly way accepted an alteration in the general rate of interest and upset the personal finance of everybody else, Mr. Churchill as a bank chairman would long since have been in discredited retirement, and his word or view would count for nothing in the business world. By contrast the politician can actually get credit and reputation out of failure and may even win a prominent place in history if only his failures are sufficiently spectacular.
A still more serious case is that of Dr. Christopher Addison[3] who, in response to socialistic clamor against profits, arranged to buy our war supplies on a newfangled basis of cost plus commission. The credulous Socialists were pleased to think that despised employers were thus robbed of their profits and given in their place a modest commission.
The arrangement was typical of much of our political improvement. It sounded well. Persons with no experience of buying and selling or of bookkeeping were able to talk about it and able to claim credit for it. The effect, however, was to open the flood gates of extravagance, and Dr. Addison must in that respect be charged with an even larger proportion of the war debt than is properly debited to Mr. Churchill. Neither of them will be asked to accept a shred of personal responsibility or discomfort in respect of transactions which have loaded the rest of us for generations to come with onerous obligations.
For the purpose of the lay reader, and it is of course with the layman in finance that we are here concerned, it will be more convenient if we consider the problem of local public debt. There is no difference whatever in essential characteristics between the debt of the parish council and the debt of the Commonwealth of Australia. The figures in the latter case have more [zeroes] at the end of them, but both debts in their origin, character, manner of creation, chances of repayment, and all other essential respects are identical. A very important part of the debt burden is nearly £2 billion borrowed by our local authorities, and most of it borrowed since the war. Having in mind the strictly personal character of debt as we noticed it prior to 1914, remembering how personal wellbeing hung on every fraction of it, it will be seen that this new local debt is absolutely devoid of any such quality.
A bill of exchange concerned with the transfer of a cargo of figs from Asia Minor to Manchester carried on the face of it the reputation and solvency, for what either was worth, of some Turk in Smyrna and an importing house in Manchester. Although the document was dealt with as part of the millions of the money market of London, it was in the last resort dependent upon the various individuals whose names appeared on the back as well as on the face of it. But this public debt of the parish council has come into being without any of these safeguards. The only backing it possesses is a vague and curious notion called the public credit, a credit that, as we are beginning to see, simply does not now exist.
When the financial revolution of the last 20 years begins to have its effects the politicians will have some pungent things to say about this public credit. In the careless manner of the postwar period we have hurried along with a new slogan on our lips, and public credit has seemed to us to be quite a good idea. A little later we shall have time to think it over, and it will dawn upon us that the credit of the state is only the sum of the credit of all the individuals who compose the state. When we have completed the process of destroying the credit of those individuals the state will have no credit left. There was a public credit at a time when the individuals were left in their own responsibility with resources which could, in case of need, be commandeered by the state. We are approaching the stage when, those resources having been collected by the state and the state having spent them, the phrase "the public credit" will be full of bitter disillusionment.
Let us consider the way in which these public debts are created and the people who create them. For the sake of simplicity let us go back to the least important of our local authorities, whose accounts will show only a few score of thousands of money borrowed upon the credit of the public.
We are entitled to ask who it was who arranged these debts and what were their qualifications for dealing with matters of such importance. The first point that strikes us is that these local authorities are composed of "temporary" councilors. There is not a man or woman in public affairs whose tenure of office extends beyond five years. A member of Parliament may, although he seldom does, last for five years, and the local councilor cares for his ward for three.
Here we touch perhaps one of the most important points in the discussion, for it must be remembered that debt is a deal in futures. The future is the essence of a good debt. That future in the case of a proper commercial debt will be in the care of the man who borrowed the money. No such safeguard is thought to be necessary with public debt. The councilor who authorizes the loan will be out of office long before any question of repayment arises.
Further consideration of this aspect of the matter drives the financial mind to desperation. The temporary councilor will not be dismissed from his office because of his bungling in finance, but for altogether different reasons. He may even be a good judge of a money transaction. He may understand the best ways of arranging the details of a debt, but just at the critical moment in the life of an important financial scheme he will be dismissed from his office because the electors do not like his views on licensing or some other question.
The director of a company, thanks to the Limited Liability Acts,[4] is relieved of ultimate personal responsibility for the whole of his folly, but his position is a very different one from that of a councilor, who from the moment he starts to the moment he finishes never has any suggestion attached to him of personal responsibility for anything.[1] This is not the place to discuss the position of women in public affairs. It may however be noted in passing that women have taken a full and equal share in local administration during a period which has been characterized more than in any other way by this debt phenomenon.
Every man, woman, and child in Great Britain is responsible for something like £50 of local as distinguished from national debt, and that has happened side by side with the revolution in the status of woman. A knowledge of finance and facility in dealing with large-scale business matters may in course of time come to woman, just as in perhaps another century it will come to the American nation. We are not here concerned with that argument, but the fact that hitherto woman has not had a share in the working of the money machinery of the world, and is therefore without experience of these matters, is not in dispute.
Glancing at the old debt picture and the one which confronts us today, the next big point that emerges is the presence of our friends the Socialists. This £2 billion of local public debt is very largely due to Socialist influences. To be fair the responsibility is not direct. Most of the money has been spent by woolly brained Conservatives who fondly imagined that they were defeating Socialism by stealing the Socialists' program. But this much at least is obvious. If a council is considering a proposal for borrowing a large sum, the Socialist will vote for that proposal, if he is a good Socialist, quite apart from its particular merits. He is, in obedience to his faith, committed to the destruction of capitalism, and is therefore bound to vote for the borrowing of any sum, however vast, for any purpose however futile, knowing that by so doing he is knocking another nail into the coffin of the hated system.
When the Socialist is convinced that the proposal is wise and good in itself, that view will be strengthened if he is one of those very exceptional Socialists who really understand socialism. He will delight in the knowledge that he can kill two birds with one stone, carry out his beneficent purpose of a park or a swimming pool, and at the same time do something towards the hastening of the Marxian heaven. In the realms of higher finance those super-Socialists, who call themselves planners, welcome every million added to the burden of debt, because it increases the pressure under which they hope we may be reduced to the adoption of one or other of their many brands of imported panaceas.
Side by side with the Socialist on the local authority there will sit the squire or his wife, and here we come across one of the most curious of the undercurrents of the postwar financial revolution. The squire's resources have been greatly diminished by the weight of modern taxation: his ability to perform all his traditional functions has thus been curtailed, and he will often unthinkingly vote for raising money to relieve himself of social obligations which he finds harder than ever to maintain and, by so doing, make more certain than ever of his eventual extinction as a factor in society.
The parson who occupies the next seat to the squire's wife is a poor man, sorely troubled with the way in which the sources of charity are drying up, and will similarly be driven to support the Socialist in the raising of a loan to take over work formerly considered to be the function of the church. So far as he can see, for why should a parson be expected to understand finance, he is merely getting his good works out of the other tap.
This council (we cannot go through the personal history of each of its members) will contain its proper proportion of black sheep. Mankind has its good and bad qualities. There are black sheep in every grade, and the modern notion that the acts of a council have, as such, better moral foundation than the acts of the stock exchange is of course nonsense, so that a proportion of the debt of the council will be due to the persuasion of people who have something to make out of it. This is a subject of its own and will one day become a front-page subject in the newspapers. Under the skilful guidance of the Fabians,[5] we have for half a century been beguiled with the iniquities of the black sheep of capitalism, but the next half century is very likely to see a change in the fashion, and our skilful purveyors of the details of all sorts of dirty work will turn their attention to the curious doings to be discovered up the backstairs of many of our town halls.
This is quite natural, as these people with all their virtues and all their faults are elected by a free democracy, and on the whole they represent the rest of us in our proper proportions. They do some good things and some silly things just like the rest of us. To the best of their ability they follow current opinion for what it is worth. If they make mistakes, they are mistakes which would be made by the rest of us under majority rule. They are the working evidence of a democratic system which is, or should be, very precious to us, and in that way they represent our hope as a nation and embody our chances of holding our place in the world.
It is not therefore any part of our present purpose to criticize what they do in so far as they are concerned with our own personal comfort or discomfort, and our own personal money and responsibility. Debt, however, concerns the future and is the biggest of all the many questions in public affairs, yet the only question which is hardly in the mind of the elector. A loan may be described as the receipt of an immediate benefit in consideration of a promise of a future sacrifice. In the light of that definition it is obvious that our local council has for 20 years past been accepting immediate benefits and thoughtlessly, but nonetheless criminally, leaving the question of the ultimate sacrifice for the future to consider.
In discredited Victorian times we laid it down by law that a local authority could borrow for a maximum period of 30 years. In these more expansive times that healthy rule has been removed, and we can see by the prospectuses of local loans, appearing in the newspapers from day to day, how money is borrowed for 60, sometimes 80 years ahead, to be spent upon purposes which must be exhausted in much shorter periods.
Whereas we of this generation are not called upon to part with a penny in respect of the ideas of our grandfathers, our grandchildren will be faced with the necessity of paying rates and taxes in respect of our current notions of what is proper. That limitation deliberately placed by us upon future generations will of course diminish the ability of those generations to carry out their own ideas, which, it is fair to imagine, may be rather different from the ideas entertained by us.
Here we come across another of the great social changes of recent times. The 19th century was filled with enthusiasm for passing on to the future something better, for leaving behind rather more than it inherited, for providing for the children of the next generation. The 20th century, with a wholly different point of view says, without a blush, "We ourselves will have a better standard of living, we don't care where it comes from, and seeing that our children and their children have done nothing for us, to hell with posterity."
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