LIBERTY POST

2012-02-11T16:47:00.001-08:00

US ‘creative destruction’ out of steam

By Ed Crooks

If anybody wants a reason to feel optimistic about America, they might take a stroll through the magnificent trading floor of the Minneapolis Grain Exchange. A hundred years ago, farmers would come here and tip samples of their grain on to heavy wooden desks for merchants to assess. When that business moved on, the floor turned into a place for the open outcry trading of futures and options in hard red spring wheat.

Can America regain most dynamic labour market mantle?

By Edward Luce

In Part One of the series examining the US jobs crisis, Edward Luce says that fears persist it cannot be fixed

Last week, Barack Obama went to Osawatomie, Kansas, to kick off a more populist phase in his 2012 re-election bid. “This is a make-or-break moment for the middle class,” declared the US president, who chose the same venue that Teddy Roosevelt used in 1910 to call for a new progressive era. “I believe that this country succeeds when everyone gets a fair shot.”

The risk of a Syrian massacre. by Gideon Rachman

A few weeks ago, I heard a senior person in the Obama administration talk about the situation in Syria. One of the problems with Bashar al-Assad, he said, was that the Syrian leader was still surrounded by his father’s old cronies. But one positive development, he mused, was that it was no longer possible simply to kill 10,000 protesters in a single city, as Hafez al-Assad once did.

I wonder whether that may be too optimistic?
The reports from Syria are certainly alarming. Refugees flooding across the Turkish border. And the citizens of the rebellious town of Jisr al-Shugour, bracing themselves for a full-scale assault by the army.
I think the idea that the Syrian army could not simply kill thousands of their fellow citizens was based on two assumptions – or, perhaps, hopes. First, that in the internet age, it would be impossible to carry out bloody repression on this scale, without immediately provoking a paralysing international outcry. Second, that the development of the international doctrine of a “responsibility to protect” brutalised civilians – even within the boundaries of a sovereign state – would make Assad junior stay his hand.

Keep taking the testosterone

By Charles Wallace

High T: Lionel Bissoon (above) has seen a rise in demand for testosterone from Wall Street workers.

Until a few years ago, doctor Lionel Bissoon, who practises what he calls integrative medicine on Manhattan’s smart Upper West Side, mostly treated middle-aged women for what is politely known as cellulite. Then the financial crisis hit Wall Street and a strange thing happened: a stream of financial executives and traders began coming to him in the hope of being turned into alpha males.

False dawns and public fury: the 1930s are not so far away

By Martin Taylor

Forget the icy weather: the financial markets are signalling that spring is coming. Equities are rallying and credit spreads have narrowed. Yet look around, if you can bear to. Similarities with the interwar period – a time of persistent false dawns – are multiplying ominously.

Obama Budget Again Skips Making Hard Choices

By SEN. JOHN BARRASSO

On Monday, President Obama is scheduled to release his proposed budget for the coming year. If his past three budgets are any indication, it is unlikely anyone outside of the White House will take this budget seriously.
That's because past Obama budgets have been long on empty promises and short on real solutions. This president has consistently ignored Washington's crushing debt and passed the real costs on to future generations.
The administration has already signaled that this year's spending plan will offer more of the same: a budget that spends too much, borrows too much and taxes too much.

The decline of marriage and male wages is a problem of equality, not inequality.

By JAMES TARANTO

Former Enron adviser Paul Krugman has expanded the blog post we criticized Wednesday into a full-length column, and in doing so made explicit a predictable fallacy in his thinking. To review, Krugman's argument is that the sharp decline in marriage rates among less-affluent white Americans, documented by Charles Murray in his new book, "Coming Apart: The State of White America, 1960-2010," is "mainly about money" as opposed to "morals." Here's the meat of Krugman's argument:

Washington's Guide to the Presidency

Santorum the New Frontrunner?

Journal Columnist Jeffrey Zaslow Dies at 53

By STEPHEN MILLER and DOUGLAS BELKIN

Wall Street Journal reporter Jeffrey Zaslow was tragically killed in an automobile accident on Friday. Kelsey Hubbard spoke to Deputy Managing Editor Mike Miller about the beloved journalist, whose work touched and inspired millions of people around the world.

Jeffrey Zaslow, a longtime Wall Street Journal writer and best-selling author with a rare gift for writing about love, loss, and other life passages with humor and empathy, died at age 53 on Friday of injuries suffered in a car crash in northern Michigan.

Voters aren't bothering with the GOP, but Obama has lost their attention too.

By PEGGY NOONAN

The Romney campaign is better at dismantling than mantling. They're better at taking opponents apart than building a compelling candidate of their own. They do not seem capable of deepening his meaning, making his stands and statements more textured and interesting. He comes across like a businessman who studied the data and came up with the formula that will make the deal.

Meet the men the U.S. might release as a goodwill gesture.

The Obama Administration is pursuing peace talks with the Taliban, and as a goodwill gesture it has been leaking the news that it may pre-emptively release five of their leaders held at Guantanamo. We thought you might like to meet them.
Their identities are an open secret, and last week the White House gave a restricted briefing to a few Members of Congress to win their support. The men are among the 46 out of 171 detainees left at Gitmo that an Administration review in 2010 deemed "too dangerous to transfer but not feasible for prosecution." Two years later, these detainees are evidently no longer too dangerous.
These upstanding citizens are:
• Mohammad Fazl, around age 45, was the senior-most Taliban commander in northern Afghanistan and their deputy defense minister when captured in November 2001. He was at the Qala-i-Jangi fortress, outside the city of Mazar-i-Sharif, when hundreds of Taliban prisoners revolted against their captors in the Northern Alliance. CIA operative Johnny Michael Spann died in the melee, becoming the first American casualty of the Afghan war. A confidential annex of the Administration's 2010 review suggests that Fazl may be responsible for Spann's death.
According to his secret 2008 Gitmo file, which was published by WikiLeaks, Fazl also commanded foreign fighters in Afghanistan and "possessed vast power and financial resources."

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Guantanamo Bay, Cuba

He was close to Mullah Omar, the Taliban leader. Before 9/11, Fazl commanded troops in central Afghanistan who massacred hundreds of Hazaras, a Shiite Muslim ethnic minority. His Gitmo file also says the Iranian government suspects him of "being connected" to the killing of its diplomats in Mazar-i-Sharif in 1998.

An 'accommodation' that makes the birth-control mandate worse.

Here's a conundrum: The White House wants to impose its birth-control ideology on all Americans, including those for whom sponsoring or subsidizing such services violates their moral conscience. The White House also wants to avoid a political backlash from this blow to religious freedom. These goals are irreconcilable.
So you almost have to admire the absurdity of the new plan President Obama floated yesterday: The government will now write a rule that says the best things in life are "free," including contraception. Thus a political mandate will be compounded by an uneconomic one—in other words, behold the soul of ObamaCare.

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President Obama with HHS Secretary Kathleen Sebelious announce an adjustment to the health care bill on Friday.

Under the original Health and Human Services regulation, all religious institutions except for houses of worship would be required to cover birth control, including hospitals, schools and charities. Under the new rule, which the White House stresses is "an accommodation" and not a compromise, nonprofit religious organizations won't have to directly cover birth control and can opt out. But the insurers they hire to cover their employees can't opt out. If that sounds like a distinction without a difference, odds are you're a rational person.

Foreign-policy pundits increasingly argue that democracy and free markets could thrive without U.S. predominance. If this sounds too good to be true, writes Robert Kagan, that's because it is.

By ROBERT KAGAN

History shows that world orders, including our own, are transient. They rise and fall, and the institutions they erect, the beliefs and "norms" that guide them, the economic systems they support—they rise and fall, too. The downfall of the Roman Empire brought an end not just to Roman rule but to Roman government and law and to an entire economic system stretching from Northern Europe to North Africa. Culture, the arts, even progress in science and technology, were set back for centuries.

Many of us take for granted how the world looks today. But it might look a lot different without America at the top. The Brookings Institution's Robert Kagan talks with Washington bureau chief Jerry Seib about his new book, "The World America Made," and whether a U.S. decline is inevitable.

Modern history has followed a similar pattern. After the Napoleonic Wars of the early 19th century, British control of the seas and the balance of great powers on the European continent provided relative security and stability. Prosperity grew, personal freedoms expanded, and the world was knit more closely together by revolutions in commerce and communication.
With the outbreak of World War I, the age of settled peace and advancing liberalism—of European civilization approaching its pinnacle—collapsed into an age of hyper-nationalism, despotism and economic calamity. The once-promising spread of democracy and liberalism halted and then reversed course, leaving a handful of outnumbered and besieged democracies living nervously in the shadow of fascist and totalitarian neighbors. The collapse of the British and European orders in the 20th century did not produce a new dark age—though if Nazi Germany and imperial Japan had prevailed, it might have—but the horrific conflict that it produced was, in its own way, just as devastating.

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U.S. Navy

If the U.S. is unable to maintain its hegemony on the high seas, would other nations fill in the gaps? On board the USS Germantown in the South China Sea, Tuesday.

Sen. Rand Paul on Lou Dobbs Tonight - 2/8/12

Ron Paul At CPAC 2010 Part 2 - Ron Paul 2012!

Ron Paul At CPAC 2010 Part 1 - Ron Paul 2012!

Full Speech Rick Santorum at CPAC 2012 » The Right Scoop

Senator Marco Rubio Addresses CPAC 2012

CPAC 2012: Occupy Protesters & Anti-gay Activists

Ann Coulter Addresses CPAC Part II

Newt Gingrich Addresses CPAC Part II

10 Things That Every American Should Know About The Federal Reserve

What would happen if the Federal Reserve was shut down permanently? That is a question that CNBC asked recently, but unfortunately most Americans don't really think about the Fed much. Most Americans are content with believing that the Federal Reserve is just another stuffy government agency that sets our interest rates and that is watching out for the best interests of the American people. But that is not the case at all. The truth is that the Federal Reserve is a private banking cartel that has been designed to systematically destroy the value of our currency, drain the wealth of the American public and enslave the federal government to perpetually expanding debt. During this election year, the economy is the number one issue that voters are concerned about. But instead of endlessly blaming both political parties, the truth is that most of the blame should be placed at the feet of the Federal Reserve. The Federal Reserve has more power over the performance of the U.S. economy than anyone else does. The Federal Reserve controls the money supply, the Federal Reserve sets the interest rates and the Federal Reserve hands out bailouts to the big banks that absolutely dwarf anything that Congress ever did. If the American people are ever going to learn what is really going on with our economy, then it is absolutely imperative that they get educated about the Federal Reserve.

By The Mogambo Guru

Tampa, Florida – At my age, I have pretty much figured out that people don’t like me because they fear me.
I don’t know why, exactly, but perhaps they fear me because I am a cynical, paranoid, gold-bug old man who thinks that the Federal Reserve has turned into an evil institution by creating So Freaking Much Money (SFMM), now so that it can commit the sin of monetizing new government debt by the truckload, increasing the money supply and guaranteeing a roaring inflation that hurts the poor, and hurts the almost-poor, and hurts the not-quite-poor, and (now that I think about it) it hurts everybody, which hurts me personally because they come whining to me to give them some of MY money!

By Addison Wiggin

02/10/12 Baltimore, Maryland – Decline rates.
Seriously.
There are not very many people outside the “Peak Oil” crowd who care — heck, even know — what “decline rates” are.
Yet the “story that isn’t being told” is often where you find the best investment narratives.
“At first,” our resident energy enthusiast kicks us off with just such a tale, “the conservative approach was to estimate that the Marcellus wells would be productive for about two-three years and then the decline curve would kick in.
“Now, after three years of testing in some areas, that window is more like five years.”
After five years? Many operators will go back and refrack the wells. Those five-year wells might become 10-year wells.

By Bill Bonner

02/10/12 Delray Beach, Florida – We used to like traveling. Now, it’s a drag.
“No, we don’t want to go through your new x-ray machine,” we told the TSA guard.
“Whassa matter? It’s safe…” she replied.
“How do you know that?”
“The government said it was safe.”
“Do you believe everything the government tells you?”
“Heh…heh… Okay…” then, turning to no one in particular… “REFUSAL on 11. Male.”
We were out quickly…but the poor old woman behind us had to get up out of her wheelchair…hobble through the x-ray machine…and then they still wanted to feel her up on the other side.
You can’t be too safe, right?

By Joel Bowman

02/10/12 Buenos Aires, Argentina – Wow! That was quick!
“Greek Bailout at Risk as Party Pushes Back,” reports Bloomberg.
“Greece Plunged Into Political Turmoil Over Austerity Measures,” chimes The New York Times.
“Greek government hit by resignations,” adds the FT.
We spilled a good deal of virtual ink in yesterday’s issue casting doubt and aspersions over the validity of the Greek bailout plan. The story, we reckoned, was at best an old one…at worst an irrelevant one. Bailout or no bailout, the Greeks are broke. The rest is merely noise.
Curiously (and to their credit), markets yesterday would not be roused to action, neither by rumour, hearsay or scuttlebutt regarding the imminent, 11th hour deals “struck” between Greek Prime Minister Lucas Papademos and European Central Bank President Mario Draghi.
Instead, they held tight, patiently.

US: Charles Manson energy – by Paul Driessen

“… gleaming white wind turbines generating carbon-free electricity carpet chaparral-covered ridges and march down into valleys of Joshua trees.” This is “the future” of American energy – not “the oil rigs planted helter-skelter in [nearby] citrus groves,” nor the “smoggy San Joaquin Valley” a few miles away.

US: Our Constitution Is The Best Model A Country Could Have – Investors.com

Our Constitution is no longer respected as it once was. Nations writing new constitutions don’t see it as the prototype to be followed. All have something in common with our president.

US: Plutocrat Dems attack Romney as ‘Richie Rich’ – by Ann Coulter

Having given up on pillorying Mitt Romney for plundering his way to vast wealth — because, unfortunately, it isn’t true — the NFM (Non-Fox Media) seem to have settled on denouncing him as a rich jerk.

Postwar Rent Controls Mises Daily: by Robert L. Scheuttinger and Eamonn F. Butler

[Forty Centuries of Wage and Price Controls: How Not to Fight Inflation (1978)]

The rent that a landlord charges for his accommodation is merely an instance of a price for a commodity, like all other prices for all other commodities. And like all other prices and all other commodities, rents have been a prime target for government restrictions. The postwar experience with rent control has been particularly revealing in regard to the adequacy of controls in general.

The Fed's Quasi-Fiscal Policies Mises Daily: by David Howden

2007 are a sharp departure from the old way of performing monetary policy. In fact, it is difficult to state that the Fed is any longer in the business of traditional monetary policy — understood in the United States as aiming for low inflation and smoothed output volatility. A new breed of monetary policies better referred to as "quasi-fiscal" policies has become the norm.

Time Is Money: Capital and Interest Mises Daily: by Eugen-Maria Schulak and Herbert Unterköfler

The up-and-coming Austrian School received support from abroad even during the Methodenstreit. Léon Walras mentioned already well-known supporters of the new value theory from among the Romance countries in the preface to his Théorie de la monnaie (1886). In English publications, the subjectivist theory of value was gaining increased acceptance as well (cf. Böhm-Bawerk 1889b). The fact alone that it had been discovered at almost the same time by three authors (Walras, Menger, and Jevons) was considered by Böhm-Bawerk to be substantive evidence of its veracity (Böhm-Bawerk 1891/1930, p. 132 n. 1). In contrast, Gustav Cohn (1840–1919), an advocate of the Historical School, interpreted this brisk publishing activity to mean that the discovery of the marginal utility constituted a "meager morsel" that would have to be shared by "a number of like-minded discoverers" (Cohn 1889, p. 23).

Will Currency Devaluation Fix the Eurozone? Mises Daily: by Frank Shostak

Roubini said in Davos, Switzerland, on January 25, 2012, that tight policies are making the recession in the eurozone worse. According to Roubini what Europe needs is less austerity and more growth. In particular, the NYU professor is concerned about the deep recession in the eurozone's peripheral countries: Spain, Portugal, Greece — all are on a strict regime of austerity. For instance, in Spain the yearly rate of growth of government outlays stood at minus 12.4 percent in November against minus 15.7 percent in the month before. In Portugal the yearly rate of growth stood at minus 3.6 percent in December against minus 2.5 percent in November. In Greece the yearly rate of growth fell to 2.9 percent in December from 6.2 percent in the prior month.

A visible tightening is also observed in the two major European economies of Germany and France. Year-on-year government outlays in Germany stood at minus 1.6 percent in November versus minus 1.7 percent in October. In France the yearly rate of growth stood at minus 12.4 percent in November against minus 12.3 percent in the prior month.

2011-08-23T16:00:00.001-07:00

The Next Greece

by Daniel J. Mitchell

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America is on a path to becoming a Greek-style welfare state. Thanks to the Bush-Obama spending binge, the burden of federal spending has climbed to about 25% of national economic output, up from only 18.2% of GDP when Bill Clinton left office.

But that's just the tip of the iceberg. Because of a combination of demographic forces and poorly designed entitlement programs, federal spending could consume as much as 50% of economic output by the time the Baby Boom generation is fully retired.

One symptom of all this excessive spending is that Washington is awash in red ink. The United States is now in its third consecutive year of trillion-dollar deficits and the politicians just had to increase the nation's US$14.3-trillion debt limit.

Daniel J. Mitchell is a senior fellow at the Cato Institute, a think-tank based in Washington.

More by Daniel J. Mitchell

But it wasn't easy getting there. Just as happened with the "government shutdown" debate in March, Republicans and Democrats had fierce disagreements over the right approach. They bickered until the last minute and then finally agreed to more than US$900billion of supposed spending cuts and the creation of a "super-committee" charged with proposing another US$1.5-trillion of deficit reduction.

So which side won this fight? Republicans are bragging that they got spending cuts today, a promise of spending cuts in the future, and no tax increases. Democrats, meanwhile, are chortling that they took the debt issue off the table until after the 2012 elections, protected their favourite programs and created a super-committee that will seduce the GOP into a tax increase.

Ignore that bragging. The easy answer is that politicians of both parties were the victors and taxpayers are the ones left in the cold.

In other words, the budget deal was a victory for the political establishment.

Here's why Republicans are winners. They get to tell their Tea Party activists that they forced Obama to cut spending. It doesn't matter that federal spending will actually be higher every year and that the cuts were based on Washington math (a spending increase becomes a spending cut if outlays don't climb as fast as some artificial benchmark).

They also get to tell their anti-tax activists that they held the line. Perhaps most important, the super-committee must use the "current law" baseline, which assumes that the 2001 and 2003 tax cuts expire at the end of 2012. But why are GOPers happy about this, considering they want those tax cuts extended? For the simple reason that Democrats on the super-committee therefore can't use repeal of the "Bush tax cuts for the rich" as a revenue raiser.

This means that most Republican incumbents are well-positioned to win re-election.

Here's why Democrats are winners. Thanks to the magic of government math, despite all the talk of budget cuts, discretionary spending will be more than US$100-billion higher in 2021 than it is this year. And since defence spending in Iraq and Afghanistan presumably is winding down, this means even more money will be available for domestic programs.

In addition to telling the pro-spending lobbies that the gravy train is still on the tracks, they also get to tell the classwarfare crowd that there's an improved likelihood of higher taxes for corporate jet owners and other "rich" people. Notwithstanding GOP assertions, nothing in the agreement precludes the supercommittee from meeting its US$1.5-trillion target with tax revenue. The 2001 and 2003 tax legislation is not an option, but everything else is on the table.

This means that most Democratic incumbents are well-positioned to win re-election.

It's worth pointing out that this doesn't mean all Republicans and all Democrats are happy about the deal. The hard-core conservatives are upset that the deal is mostly smoke and mirrors on the spending side and that there may be a tax-increase trap on the revenue side.

The hard-core liberals, by contrast, are angry that there are any spending cuts, even ones based on Washington math. Moreover, they want higher tax rates on upper-income taxpayers today, not a super-committee that may or may not follow through on soak-the-rich policies in the future.

One group of people, however, unambiguously got the short end of the stick in this budget deal. Ordinary Americans are caught in the middle. They're not poor enough to benefit from the federal government's plethora of income-redistribution programs. But they're not rich enough to have the clever lobbyists and insider connections needed to benefit from the highdollar handouts like ethanol subsidies and bank bailouts.

Instead, middle-class Americans play by the rules, pay ever-higher taxes, and struggle to make ends meet while the establishment of both parties engages in posturing as America slowly drifts toward a Greek-style fiscal meltdown.

Protecting Economic Liberty

Protecting Economic Liberty: The Essential Freedom

by Doug Bandow

This article appeared in Forbes on August 15, 2011.

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"I'm from the government and I'm here to help you" has become a standard punch line. There is no greater joke when public officials limit competition in the name of protecting consumers. Such as Louisiana's now-defunct casket monopoly.

Professional licensing is routine across America. You want to be a lawyer or hairdresser? You want to be a doctor or manicurist? Get a license — from a government-backed panel dominated by your established competitors.

No one wants to be served by an incompetent, but in most cases, health and safety are not at issue. If a hair stylist gives you a bad haircut, you'll be embarrassed, nothing more.

Doug Bandow is a senior fellow at the Cato Institute. A former special assistant to Ronald Reagan, he is the author of Foreign Follies: America's New Global Empire (Xulon).

More by Doug Bandow

Even for services with greater impact the licensing process is designed to protect existing practitioners rather than consumers. Plenty of non-lawyers, such as paralegals and even legal secretaries, are capable of doing work now reserved for attorneys. However, state bar associations fiercely police the "unauthorized practice of law," which is not the same as the incompetent practice of law.

Doctors similarly create arbitrary barriers against other medical professionals caring for patients. The government should combat fraud and malpractice, not decide which provider can do which procedure.

But casket-making is a far easier case. Obviously, making a substandard coffin isn't going to hurt the corpse, let alone kill anyone. (Indeed, the state neither sets standards for casket construction nor even requires use of one for burial.) Yet Louisiana only allows licensed funeral directors to sell "funeral merchandise," including caskets.

It's not hard to see who benefits from this restriction. It certainly isn't the dead or the bereaved families of the dead. It's not the producers of "funeral merchandise." And it isn't the public.

In Louisiana the casket typically accounts for nearly a third of the cost of a funeral. It is known in the trade as a "high margin" item. In fact, some people buy coffins from Wal-mart or even online in order to save money.

The winners from the casket monopoly obviously are the funeral directors.

Everyone paying for a funeral is a victim of Louisiana's rule. Along with the Saint Joseph Abbey of Saint Benedict, established in 1889.

For years the Benedictine monks made simple caskets for their own members. Over the years they received numerous requests from others to buy similar coffins.

Monks typically support themselves through common trades. Saint Joseph Abbey harvested timber for income, but Hurricane Katrina badly damaged the abbey's pine forest. Starting in 2007, Saint Joseph's 36 monks followed the example of monasteries in Illinois, Indiana, Iowa, and Minnesota and started making handcrafted caskets. The coffins are both unique and less expensive than those offered by funeral homes. Moreover, the abbey stored caskets made in advance for free.

No customer complained. But a local competitor, the Mothe Funeral Homes, went to the Board of Embalmers and Funeral Directors. Leonard Dunn, the operator of Serenity Funeral Home, another nearby operation, explained: "They're cutting into our profit." So the state board, run by funeral directors, issued a "cease-and-desist" order even before the abbey sold its first casket. The board also employed an investigator to confirm that the monastery did, indeed, do what it claimed to do: sell caskets. The board threatened the monks with fines and imprisonment — up to six months in jail.

The abbey urged the state legislature to change the law, but individual funeral home directors joined with industry lobbyists to defend the coffin cartel. (Not every funeral director was on board. Darin Bordelon of LaVille Funeral Home complained that Saint Joseph's opponents were "making us all look greedy.")

The only way for the monks to avoid punishment was to abandon their religious routine, serve a year as apprentices in a licensed funeral home, and turn their monastery into a formal "funeral establishment" with embalming equipment. Just to make and sell caskets.

So the monks went to court. Taking their case was the Institute for Justice, a public interest legal organization dedicated to defending economic liberty. IJ filed suit contending that Louisiana's casket monopoly violated the 14^th Amendment.

The monks had the facts on their side. An earlier Federal Trade Commission investigation found that state-protected monopolies do not protect consumers. The agency specifically criticized states which used licensing to restrict competition in the sale of caskets. Notably, Louisiana made no effort to prevent funeral directors from selling overpriced junk coffins. It just wanted to make sure that only funeral directors could sell overpriced junk coffins.

The case also demonstrated the importance of economic liberty. Those who promote individual liberty tend to favor freedom of speech and assembly. These liberties represent freedom of conscience and promote political liberty, and are critical to the development of the human person.

However, economic liberty is no less important. Freedom is indivisible. Freedom of expression and speech is the freedom to buy a printing press, create a website, and build a television studio. Without access to the practical economic tools of liberty it is difficult to exercise the political forms of liberty.

More broadly, economic development helps create an environment and ethos more conducive to the development of democracy. People who no longer have to worry about feeding their families are more likely to acquire the instruments of liberty. They also are more likely to use them.

But there is something even more basic. Economic freedom is about earning a living and supporting oneself and one's family. Few human duties are more important.

Moreover, earning an income enables one to seek life's transcendent values. For the monks, casket-making is a means to an important end. Blocking the means interferes with the end.

Finally, for many people work is a critical aspect of their development and happiness as human beings. Obviously, some individuals allow their job to become an idol, taking over their lives. But the opportunity to freely choose one's vocation is more than just a matter of dollars and cents.

The law doesn't always reflect good policy. But in this case justice triumphed. U.S. District Court Judge Stanwood Duval ruled for the monks, explaining: "The Court finds no rational relationship between the Act and 'public health and safety.' No evidence was presented to demonstrate that requiring the purchase of caskets from licensed funeral directors aids the public welfare."

No evidence was presented because none exists.

The judge added: "Simply put, there is nothing in the licensing procedures that bestows any benefit to the public in the context of the retail sales of caskets. The license has no bearing on the manufacturing and sale of coffins. It appears that the sole reason for these laws is the economic protection of the funeral industry which reason the Court has previously found not to be a valid government interest standing alone to provide a constitutionally valid reason for these provisions."

Unfortunately, the problem of "economic protection" is far broader than just Louisiana's protection of the funeral industry. However, Judge Duval's ruling is a good start. No government should misuse its power to sacrifice everyone's economic freedom for the enrichment of a few.

It doesn't happen often, but in this case someone came from the government and actually did help people. Judge Duval recognized that respecting people's liberty is the best form of assistance. We can only hope that he is not the last government official to do so.

Obama's New New Deal and High Unemployment

FDR's New Deal, Obama's New New Deal and High Unemployment

by Jim Powell

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President Obama's New New Deal of massive government intervention was inspired by FDR's New Deal, and both have been plagued by chronic high unemployment.

In her recent New York Times column, Christina Romer noted that there was some remarkable economic expansion during the New Deal period (1933-1940), but I doubt anybody disputes that. The key question is why, despite expansion, did high unemployment persist. It averaged 17 percent.

I suggest that New Deal unemployment and related economic difficulties were unintended consequences of New Deal policies. In particular:

Jim Powell is a senior fellow at the Cato Institute in Washington DC.

More by Jim Powell

1. Federal tax revenues more than tripled, from $1.6 billion in 1933 to $5.3 billion in 1940. Excise taxes, personal income taxes, inheritance taxes, corporate income taxes, holding company taxes and "excess profits" taxes all went up. FDR introduced an undistributed profits tax. Consumers had less money for spending, and private sector employers had less money for hiring.

2. New Deal programs, intended to benefit the middle class and the poor, were mainly paid for by the middle class and the poor. This was because the biggest source of federal revenue during the 1930s was the excise tax on beer, cigarettes, soda, chewing gum, radios and other cheap pleasures disproportionately enjoyed by middle class and poor people. Until 1936, the federal excise tax generated more revenue than the federal personal income tax and the federal corporate income tax combined. Not until 1942, amidst World War II, did the federal personal income tax become the biggest source of federal revenue.

3. FDR caused uncertainty that discouraged investors from taking the risks of funding growth and jobs. Frequent tax hikes (1933, 1934, 1935, 1936) made it harder for investors to estimate the net returns of possible investments. FDR added to the uncertainty by denouncing investors as "economic royalists," "economic dictators" and "privileged princes," which amounted to threatening investors. No surprise that private investment was at historically low levels during the New Deal era.

4. The New Deal channeled government spending away from the poorest people who lived in the South. Comparatively little New Deal spending went there. Most New Deal spending went to political "swing" states in the West and East, where incomes were more than 60% higher. The decision was probably made that allocating more federal dollars to the South wouldn't yield more Democratic votes, since the South was already overwhelmingly Democratic.

5. The New Deal made it more expensive for employers to hire people. By enforcing above-market wages (National Industrial Recovery Act, Fair Labor Standards Act), introducing excise taxes on payrolls (Social Security Act) and promoting compulsory unionism (National Labor Relations Act), the New Deal increased the costs of employing people about 25% from 1933 to 1940 — a major reason why double-digit private sector unemployment persisted throughout the New Deal era.

6. The New Deal paid farmers to destroy food when millions were hungry. FDR promoted higher food prices by paying farmers to plow under some 10 million acres of crops and destroy some 6 million farm animals. The food destruction program mainly enriched big farmers, since benefits were paid on a per acre basis. This policy related farm programs meant the approximately 100 million American consumers had to pay more for food.

7. The New Deal made everything more expensive during the Depression. Americans needed bargains, but FDR signed the National Industrial Recovery Act that authorized some 450 industrial cartel codes. They forced consumers to pay above-market prices for goods and services. Moreover, FDR banned discounting by signing the Anti-Chain Store Act (1936) and the Retail Price Maintenance Act (1937).

8. FDR disrupted companies employing millions. In 1938, he authorized an unprecedented barrage of antitrust lawsuits against about 150 employers and industries. FDR had big employers tied up in court, distracting them from the urgent task of creating growth and jobs. In some cases, employers were attacked for pursuing policies that had been mandated by the National Industrial Recovery Act.

"We have never made good on our promises," FDR's Treasury Secretary Henry Morgenthau despaired in May 1939, after acknowledging that the New Deal failed to banish chronic high unemployment.

Since Obama is a great admirer of FDR's New Deal, we shouldn't be surprised that the Bureau of Labor Statistics reported fewer people are employed now and more people are unemployed now than when Obama became president in January 2009.

We need very different policies, not more of the same.

Empower the Regulated

by Richard W. Rahn

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It is widely recognized that excessive regulation is unnecessarily killing jobs. The question has been what to do about it. President Obama may inadvertently have helped lead to a solution in his debate last week with an Iowa farmer who was complaining about excessive costly regulation. In his reply to the farmer, Mr. Obama said: "[A] lot of times we are going to be applying common sense. If someone has an idea, if we don't think it's a good idea, if we don't think there is more benefit than cost to it, we are not going to do it." Nice statement, but it is untrue in all too many cases, whether the president knows it or not.

The president previously has endorsed the concept of cost-benefit analysis in regard to regulation and even has issued an executive order, as other presidents have done, to require executive departments to do cost-benefit analyses on regulations that would have a "major" (often defined as costing more than $100 million) impact. Officials often just ignore the requirement to do cost-benefit analyses with excuses such as that the regulation is not "major" (which they cannot know without doing the analysis) or that they don't have the time to do it, etc. etc. The president suggested to the farmer that he talk to the Department of Agriculture about his complaint, but reporters who tried to contact the department about the farmer's grievance got the same bureaucratic runaround and buck-passing that is characteristic of government — good luck, Mr. farmer.

Now the president is telling us he is trying to do everything possible to create jobs. Members of his administration have acknowledged that regulations that do not meet a cost-benefit test cost jobs — as everyone with a basic understanding of economics realizes. We also know from decades of experience and "public choice" theory that the regulatory agencies are unlikely to clean up their acts because they have vested interests in creating more regulations to administer — the economy be damned. Many of the cost-benefit studies that are done by these regulatory agencies are little more than jokes, with grossly incomplete and incompetent analyses. Cass Sunstein, who claims to be in favor of cost-benefit analysis, is Mr. Obama's regulatory czar. But action — or inaction — speaks louder than words. Some agencies, such as the Internal Revenue Service and Treasury, often just refuse to do serious cost-benefit analysis, yet their rulings often cost hundreds of billions of dollars and hundreds of thousands of jobs.

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

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Nancy A. Nord, a member of the U.S. Consumer Product Safety Commission (CPSC), has lists of many businesses that have been needlessly destroyed by the failure of her commission to do proper cost-benefit analysis. She has written that "these are real people who have lost real jobs and who are being forced to pay more for products with no real safety benefit."

There is a solution. First, as a matter of law, Congress should pass a requirement that before any regulation (not just major ones) is promulgated by any government department (including the IRS) or independent agency, the department or agency must have done a competent, complete and independent cost-benefit study. In order to make the law self-enforcing so it is not just ignored, any party or collection of parties who were adversely affected by the regulation would be allowed to bring suit to have it overturned if they could show that the costs of the regulation exceed its benefit (i.e., the preponderance of evidence). If the plaintiffs win, they would be entitled to have both their legal costs and the costs of their cost-benefit study reimbursed by the agency that issued the faulty regulation. Currently, in some limited circumstances, affected parties may bring suit to overturn destructive regulations. The U.S. Court of Appeals for the D.C. Circuit just struck down the Security and Exchange Commission's "proxy access rule," with Judge Douglas H. Ginsburg's devastating critique of the incompetent cost-benefit analysis by the SEC.

Despite these limited successes, the goal is to re-establish balance by making it much easier for those injured by regulations that do not meet a reasonable cost-benefit test to obtain redress. Frivolous suits should not be much of a problem because the plaintiffs would have to go to the considerable expense of funding a competent cost-benefit study and showing before going to court that the government's study was either nonexistent or flawed. One of the founding fathers of the field of law and economics, Henry G. Manne, dean emeritus of the George Mason University Law School, said he expects that my proposed solution would result in significantly more litigation; even so, he said he thinks it probably is well worth doing. Eventually, the regulatory agencies will realize that excessive regulation is costly to them, and thus they will become more responsible.

Again, the president said he is for cost-benefit analyses for regulations, and he also has said we must create more jobs. Republicans in Congress are searching for their own ways to create jobs, so requiring cost-benefit analyses for regulations should have great popular appeal. If properly drafted and explained, the requirement would be difficult for the president and the Democrats in Congress to oppose. If they are smart, they even could take credit for signing it into law.

Obamacare Heads to the Supreme Court

by Doug Bandow

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When Congress was pushing through President Barack Obama's plan to nationalize health care decision-making, legislators gave little thought to the Constitution. After all, the denizens of Capitol Hill had grown accustomed to passing whatever laws they desired, with the expectation that, if necessary, compliant courts would fashion another magical legal doctrine or two to justify Congress' action. Naturally, all of the president's men and their allies dismissed the legal cases filed against Obamacare after it became law.

However, the advocates of government-controlled medicine are no longer laughing. The Eleventh Circuit Court of Appeals last week struckdown an essential part of the legislation. This evens the score, balancing an earlier decision by the Sixth Circuit to uphold the vast expansion of federal power. In the latest case, Judge Frank Hull, a Democratic appointee, voted with Chief Judge Joel Dubina to overturn the legislation.

The substantive sections of the majority opinion in State of Florida, et al., vs. U.S. Department of Health and Human Services run roughly 150 pages, making it the longest and most detailed decision yet. As such, noted my Cato Institute colleague Ilya Shapiro, the "ruling shows that the constitutional issues raised by the healthcare reform — and especially the individual mandate — are complex, serious, and non-ideological."

Doug Bandow is a Senior Fellow at the Cato Institute and the Senior Fellow in International Religious Persecution at the Institute on Religion and Public Policy. A former Special Assistant to President Ronald Reagan, he is author of Beyond Good Intentions: A Biblical View of Politics (Crossway).

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The decision obviously will affect Americans' health care. But the more basic issue is whether there remains any limit to the reach of the federal government. The Framers viewed the national government as having important but only limited and enumerated powers. That is, Washington was an island of government authority in an ocean of individual liberty.

Over the years the courts have gutted constitutional doctrines intended to limit state power and justified almost any government action unless barred by the Bill of Rights. Indeed, the Commerce Clause, which authorizes federal regulation of commerce "among the several states," has been interpreted to largely swallow up Article 1, Section 8, which enumerates Congress's authority. The ocean became one of government power, with but a few islands of personal freedom.

However, Obamacare went further than any previous federal intrusion. In the name of regulating commerce, the law ordered people who had not entered any market to purchase a private product. If upheld, the measure would establish the principle that Americans could be forced to buy American cars to bail out the auto industry, Lehman securities to save Wall Street, and homes to revive the housing market. Whether or not the insurance mandate is good policy — and there are lots of reasons to argue that it is not — it effectively dismantles any meaningful limits on the national government.

The five federal District Court decisions so far have broken three-to-two in upholding Obamacare. Although in the majority, the former have been less than persuasive. Indeed, District Court Judge Gladys Kessler stated in her opinion that the government could regulate "mental activity" — under a constitutional provision involving "commerce."

All of these rulings were appealed. The Sixth Circuit was first to deliver its opinion, with the judges split two-to-one in favor of the president's plan to treat passivity as if it was activity. Then last week the Eleventh Circuit said no.

Twenty-six states sued the federal government, challenging several aspects of the misnamed Patient Protection and Affordable Care Act. (The law actually supersedes patient choice and bends the medical cost curve upward.)

One claim was that the legislation's dramatic expansion of Medicaid, which would impose additional costs on the states, was "coercive." Explained Judges Dubina and Hull: "[T]he coercion test asks whether the federal scheme removes state choice and compels the state to act because the state, in fact, has no other option."

Unfortunately, the states all have chosen to accept federal Medicaid dollars. With their hands greedily extended, they have been unable to convince any judge in any case that they could do nothing about the extra costs to be imposed. The Eleventh Circuit majority noted: "[S]tates have plenty of notice — nearly four years from the date the bill was signed into law — to decide whether they will continue to participate in Medicaid by adopting the expansions or not."

States might want to stay in the program without paying more, but that is not the same as being unable to pay more. Thus, observed the judges, "Medicaid-participating states have a real choice — not just in theory but in fact — to participate in the Act's Medicaid expansion" and "Where an entity has a real choice, there can be no coercion."

States should take this lesson to heart before again lining up for a federal handout.

The more important challenge was to the individual mandate. Under any serious interpretation of the meaning of "commerce" carried out "among" the states, not buying insurance does not qualify. The activity would have to cross state boundaries and, more important, actually be a commercial activity.

Under extraordinary political pressure the New Deal Supreme Court systematically denuded the Constitution of limits on government, substituting political preference for legal principle. In Wickard v. Filburn, the justices allowed the federal government to restrict a farmer from planting food for his family's personal use, ruling that intra-state non-commercial activity was the same as inter-state commerce, since the former could affect the latter.

It was a profoundly dishonest opinion, ignoring the plain meaning of the phrase as well as clear intent of those who wrote and ratified the Constitution. Had the recently rebellious Americans understood that they would end up authorizing the federal government to regulate almost every human activity with this one phrase, they would have struck it from the text or refused to ratify the document.

Still, Wickard only covered almost everything. Explained Judges Dubina and Hull in Florida v. HHS: "Nonetheless, the Supreme Court has staunchly maintained that the commerce power contains outer limits which are necessary to preserve the federal-state balance in the Constitution."

Those limits may be hard to discern, but the high court eventually enunciated them in two cases. In 1995 the majority ruled in United States v. Lopez that the Commerce Clause did not allow Congress to ban possession of a gun in a school zone since there was no commerce. In United States v. Morrison, decided in 2000, the Court overturned a penalty against gender-related violence, since there was no "economic activity." In both cases the Supreme Court recognized that accepting the government's position yielded no obvious limit to government power. Said the majority in Lopez, "[W]e are hard pressed to posit any activity by an individual that Congress is without power to regulate." The justices stepped back from that jurisprudential abyss.

After a detailed review, the Eleventh Circuit noted that Congress' latest assertion of power is unprecedented: "Even in the face of a Great Depression, a World War, a Cold War, recessions, oil shocks, inflation, and unemployment, Congress never sought to require the purchase of wheat or war bonds, force a higher savings rate or greater consumption of American goods, or require every American to purchase a more fuel efficient vehicle."

Equally important, the power being claimed through Obamacare is extraordinary. The majority added:

In sum, the individual mandate is breathtaking in its expansive scope. It regulates those who have not entered the health care market at all. It regulates those who have entered the health care market, but have not entered the insurance market (and have no intention of doing so). It is overinclusive in when it regulates: it conflates those who presently consumer health care with those who will not consume health care for many years into the future. The government's position amounts to an argument that the mere fact of an individual's existence substantially affects interstate commerce, and therefore Congress may regulate them at every point of their life. This theory affords no limiting principles in which to confine Congress's enumerated power.

The Administration makes much of the alleged uniqueness of the market and the problem of cost-shifting from the uninsured. However, the majority noted that the proffered distinctions have no constitutional relevance. Moreover, "the primary persons regulated by the individual mandate are not cost-shifters, but healthy individuals who forego purchasing insurance." This merely reaffirms the extraordinary nature of the mandate, "forcing market entry by those outside the market."

Reinforcing the Eleventh Circuit's caution in approaching the mandate was the fact that "insurance qualifies as an area of traditional state regulation." So does health care, since "a state's role in safeguarding the health of its citizens is a quintessential component of its sovereign powers." Federalism became the clincher. Stated the majority: "When this federalism factor is added to the numerous indicia of constitutional infirmity delineated above, we must conclude that the individual mandate cannot be sustained as a valid exercise of Congress's power to regulate activities that substantially affect interstate commerce."

The administration made two other unsuccessful claims to salvage the mandate. The first was that the requirement was "a necessary and proper exercise" of the commerce power. Nice try, but no cigar, said Judges Dubina and Hull.

The majority concluded that the argument the mandate is "necessary" is undermined by PPACA's own terms, with "broad exemptions and exceptions to the individual mandate (and its penalty) that impair its scope and functionality." In short, "to the extent the uninsureds' ability to delay insurance purchases would leave a 'gaping hole' in Congress' efforts to reform the insurance market, Congress has seen fit to bore the hole itself.â€

But even assuming "necessity" is not enough, the judges explained: "It would be nonsensical to suggest that, in announcing its 'larger regulatory scheme' doctrine, the Supreme Court gave Congress carte blanche to enact unconstitutional regulations so long as such enactments were part of a broader, comprehensive regulatory scheme." A law must be "proper" — that is, within the federal government's constitutional power — as well as "necessary."

The government's second claim was that the mandate, backed by a tax penalty, actually is a tax. In this case the majority didn't even say nice try. Rather, noted the opinion, "all of the federal courts, which have otherwise reached sharply divergent conclusions on the constitutionality of the individual mandate, have spoken on this issue with clarion uniformity. Beginning with the district court in this case, all have found, without exception, that the individual mandate operates as a regulatory penalty, not a tax."

It could not be otherwise. Congress declared the penalty to be a penalty, counted on no revenue from the provision, limited IRS power to enforce the penalty, and cited the Commerce Clause as the law's constitutional basis. Moreover, the fact that the Obama administration claimed the mandate was essential to its regulatory scheme demonstrated that the penalty was, in fact, a penalty enacted to back the mandate. The majority opined: "The individual mandate as written cannot be supported by the tax power."

Although the appellate court gutted Obamacare by voiding the insurance mandate, the judges did not kill the legislation. They reversed the trial court on the issue of "severability" — that is, whether the mandate can be separated from the rest of the bill. The District Court said no, since the mandate was integral to the legislation.

The Eleventh Circuit came out differently, however. The courts favor severability when possible, even when legislators fail, as in this case, to include a clause supporting severability. Thus, ruled the majority, the rest of the law stands since "the lion's share of the Act has nothing to do with private insurance, much less the mandate that individuals buy insurance."

The dissent, too, is long — over 80 pages. Judge Stanley Marcus called for a "pragmatic" decision reflecting "the undeniable fact that Congress' commerce power has grown exponentially over the past two centuries." Yet even he admitted that "the individual mandate is a novel exercise of Congress' Commerce Clause power" and that "it is surely true that there is no Supreme Court decision squarely on point dictating the result that the individual mandate is within the commerce power of Congress."

More tellingly, Judge Marcus dismissed "the parade of horribles said to follow ineluctably from upholding the individual mandate," since the supposedly "powerful limits" from Lopez and Morrison would remain. However, if these "powerful limits" do not prevent Congress from treating market inaction as market participation, they are "powerful" only in the opinion writer's mind. Affirming the individual mandate would effectively write the Article 1, Section 8 enumeration out of the Constitution.

Judge Marcus's more basic point is that doing the latter would be no big deal since "upholding the individual mandate would be far from a cosmic expansion of the boundaries of the Commerce Clause." In short, since the federal government can do almost everything that it wants already, why not let it do everything? The idea that the Constitution was created to protect individual liberty is of no matter, since most politicians (and most judges, including this one, obviously) today are not interested in protecting individual liberty.

The legal battle over Obamacare may look like just another esoteric court fight. However, the outcome will determine whether people retain the freedom to decide on their own medical treatment. The case also will decide whether any substantive powers remain beyond the federal government. Only if the judges affirm that the Constitution means what it says will our liberties be secure.

Well Worth the Money

Well Worth the Money

by David Boaz

Two weeks ago the House of Representatives announced that it would end its nearly 200-year-old page program. What with new technology and all, there just isn't much need any longer to employ teenagers to take phone messages and carry documents from one member of Congress to another. The program costs $5 million a year, which isn't much in a $3.8 trillion federal budget, but taxpayers should appreciate any elimination of an unnecessary program.

The Washington Post published remembrances from former pages. One outraged response was titled "Well worth the money."

Well, it would be, wouldn't it? For those who benefited from it, it is indeed well worth the money. But, as with all government programs, the beneficiaries weren't paying for it. Did the program do the taxpayers much good? Yes, in the days when members of Congress needed a way to get documents to one another, the page program may well have been an efficient use of resources. But times change; technology has eliminated a lot of jobs in the private sector, and there's no reason to think it shouldn't have the same impact in the public sector. Cynics point out that pages were mostly the children of people with good political connections. And then they make better connections: The writer who thought the program was "well worth the money" now runs a company that boasts of having made more than 500 million political robocalls over the past 30 years. So we all owe something to the page program!

David Boaz is the executive vice president of the Cato Institute. He is the author of Libertarianism: A Primer, the editor of The Libertarian Reader and other books, and the author of the entry on libertarianism in Encyclopaedia Britannica.
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But this is just a tiny example of a much bigger problem: every government program is "well worth the money" to its beneficiaries. And the beneficiaries are typically the ones who lobby to create, expand, and protect it. When a program is threatened with cuts, newspapers go out and ask the people "who will be most affected" by the possible cut. They interview farmers about whether farm programs should be cut, library patrons about library cutbacks, train riders about rail subsidy cuts. And guess what: all the beneficiaries oppose cuts to the programs that benefit them. You could write those stories without going out in the August heat to do the actual interviews.

Economists call this the problem of concentrated benefits and diffuse costs. The benefits of any government program — Medicare, teachers' pensions, a new highway, a tariff — are concentrated on a relatively small number of people. But the costs are diffused over millions of consumers or taxpayers. So the beneficiaries, who stand to gain a great deal from a new program or lose a great deal from the elimination of a program, have a strong incentive to monitor the news, write their legislator, make political contributions, attend town halls, and otherwise work to protect the program. But each taxpayer, who pays little for each program, has much less incentive to get involved in the political process or even to vote.

And so we get bailouts for the Chrysler Corporation in 1979 and for Wall Street in 2008, a protective tariff for Harley-Davidson in 1982, higher-than-necessary wages for public employees, sugar and ethanol subsidies that benefit Archer-Daniels-Midland, farm subsidies, and thousands more programs with beneficiaries who know exactly who they are. When the Pentagon decided to cancel a program to build new presidential helicopters — after the price ballooned from $6.8 billion to $13 billion — an 11-year-old girl in Owego, New York, where Lockheed Martin had planned to build the helicopters, wrote a letter to President Obama that became "a voice for her shaken community":

Lockheed is the main job source in Owego. If you shut down the program, my mom may lose her job and a lot of other people too... . Owego will be a ghost town. I've lived here my whole life and I love it here! Please really, really think it over.

This girl loves her family and her home town. And we can't expect her to understand what $13 billion means to the American taxpayers. To the girl and her mom, the new helicopter is "well worth the money." But after all the beneficiaries of all the programs lobby to keep them going, we end up with a $3.8 trillion budget and a $1.5 trillion federal deficit.

For an unusually candid view of what it means to direct federal dollars to particular areas, we might turn to an advertisement in the Durango, Colorado, Herald in 1987, which touted the Animas-La Plata dam and irrigation project and made explicit the usual hidden calculations of those trying to get their hands on federal dollars:

Why we should support the Animas-La Plata Project: Because someone else is paying the tab! We get the water. We get the reservoir. They get the bill.

In the private sector, the voluntary sector of the economy, we know that something is "well worth the money" if people are willing to spend their own money on it. In government, politicians work to separate the payment of taxes from the receipt of specific services. We're not asked "will you pay $100 right now for farm subsidies and $4000 for Medicaid and $1600 for the wars in Iraq and Afghanistan and $130 for a new presidential helicopter and ... ?"

If we did get such a question, we might well decide that lots of government programs were not "well worth the money" to the people who would be paying the money.

And by the way, I said above that taxpayers would appreciate the elimination of even a small spending program. But House leaders said that they "will work with Members of the House to carry on the tradition of engaging young people in the work of the Congress." So chances are, taxpayers won't actually see even that $5 million savings. That's life in the taxpaying business.

For Global Health, China Must Liberalize

For Global Health, China Must Liberalize

by James A. Dorn

Chinese officials have been highly critical of the U.S. debt buildup and the political wrangling in Washington that has failed to resolve the debt crisis.

But China could well turn that leery eye inward to find policies that are preventing financial markets from functioning in a healthy manner — and which may yet spread the next serious malady to global financial markets.

One problem is that China is the largest holder of U.S. Treasury securities, with more than $1 trillion invested. Without China's large appetite for U.S. debt, Congress would have been more constrained in its deficit spending, and U.S. growth would have been more robust.

The challenge for both China and the U.S. is to restore the balance between the state and the market — to maximize freedom and minimize coercion.

China now holds more than $3 trillion in official foreign exchange reserves, the result of large trade surpluses and inward foreign investment. However, China is a net exporter of capital via the purchase of Treasuries and other government securities. The large accumulation of dollars is the result of an exchange-rate policy designed to undervalue the yuan.

Which brings us to the second major problem: if the Chinese currency were allowed to freely float, there would be no massive buildup of official reserves. Traders, not communist party members, would determine the exchange rate. Adjustment would occur spontaneously via voluntary decisions, not via central plans.

A more flexible exchange rate and a fully convertible yuan would increase the range of choices open to people, expand the private sector, and increase popular pressure for political reform.

The legacy of central planning still haunts the banking sector. Lending, interest rates, and the major banks themselves are all controlled by the state. Even more ominous is that most of the lending is to state-owned enterprises. Investment decisions are therefore heavily politicized, and corruption is rampant.

Stimulus spending allowed China to escape the 2008-09 global financial crisis, but the rapid expansion of bank credit, as well as off-balance sheet lending, has led to excess money growth and an inflation rate of more than 6 percent. UBS data show that China's bank credit, including off-balance sheet loans, now stands at about 180 percent of GDP, up sharply from 2008.

If the economy slows, nonperforming loans could swell. The excess credit could turn into a debt crisis. That crisis could be compounded by a bursting of the Treasury bond bubble, once the Federal Reserve begins to increase interest rates, or once markets think the Fed will inflate and reduce the real debt burden.

China needs to tame domestic inflation and further liberalize its economy. Yet, there is strong political pressure to continue to peg the yuan at an artificially low rate and "sterilize" the newly minted yuan — that is, drain off excess yuan by selling central bank bills, increasing reserve requirements, and setting tighter lending quotas.

Price controls and capital controls are also being used to suppress inflation and to limit private choices. But as long as China is trapped in its export-led development model, with financial repression, the hoard of foreign exchange reserves will grow and most of those reserves will be lent to the U.S government, not to private enterprise.

The reality is that both China and the U.S. are growing the state sector at the expense of the private sector. Crony capitalism, not market liberalism, is now the norm.

James A. Dorn is vice president for academic affairs and a China analyst at the Cato Institute in Washington, D.C.
More by James A. Dorn

For China to become a global financial center and achieve financial harmony, there must be privatization of the banking system, capital freedom, flexible exchange rates, market-based interest rates, and a rule of law that assigns responsibility to private individuals, not the state.

The mispricing of credit/risk and monetary manipulation plague both China and the U.S. Beijing is right to criticize U.S. policymakers for creating fiscal and monetary uncertainty. But what Beijing wants is more, not less government control, while the solution to the problem of creating economic and social harmony is less government.

With a rule of law and limited government, voluntary exchanges in private free markets would increase individual sovereignty and wealth, while promoting the general welfare. That concept of spontaneous order is now foreign to most politicians. Politics and "legal plunder" have trumped what the great French liberal Frederic Bastiat called the "law of liberty."

The challenge for both China and the U.S. is to restore the balance between the state and the market — to maximize freedom and minimize coercion. Rebalancing can then be market-directed, economic relations normalized, and politics put in its proper place.

2011-08-04T18:02:00.001-07:00

Oil Heads for Biggest Weekly Decline Since May, Wiping Out Gains for Year

By Margot Habiby and Ben Sharples -

Oil fell in New York, heading for the biggest weekly decline in three months, as investors bet that signs of a slowing economy in the U.S. indicate fuel demand will falter in the world’s biggest crude-consuming nation.

Futures slid as much as 0.6 percent after slumping 5.8 percent yesterday. Oil erased this year’s gains as reports showed a rise in jobless claims last week and a drop in consumer confidence to the lowest in more than two months. A Labor Department report today may show that the U.S. failed to create enough jobs in July to reduce unemployment, according to a Bloomberg News survey.

“What you’re looking at here is concerns about what demand is going to be doing because of the economy,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington. “The result of all this could be slower growth and the result of slower growth is less oil demand.”

Crude for September delivery dropped as much as 50 cents to $86.13 a barrel in electronic trading on the New York Mercantile Exchange and was at $86.35 at 9:11 a.m. Sydney time. The contract yesterday tumbled $5.30 to $86.63, the lowest settlement since Feb. 18. Prices are down 9.8 percent for the week and 5.5 percent in 2011.

Brent oil for September settlement fell $5.98, or 5.3 percent, to $107.25 on the London-based ICE Futures Europe exchange yesterday. The European benchmark contract settled at a $20.62 premium to U.S. futures, compared with a record $22.67 close on Aug. 2.

U.S. Economy

U.S. stocks plunged, driving the Standard & Poor’s 500 Index to the biggest decline since February 2009. The S&P 500 decreased 4.8 percent to an eight-month low of 1,200.07 at the 4 p.m. close in New York.

Applications for jobless benefits decreased 1,000 in the week ended July 30 to 400,000, the Labor Department said yesterday in Washington. Economists forecast 405,000 claims, according to the median estimate in a Bloomberg News survey.

A Labor Department report today may show that U.S. payrolls rose by 85,000 workers after an 18,000 increase in June that was the smallest this year, according to the median forecast of 88 economists surveyed by Bloomberg News. The jobless rate probably held at 9.2 percent after rising in each of the previous three months.

The Bloomberg Consumer Comfort Index was minus 47.6 in the week to July 31, the lowest since May, compared with minus 46.8 the prior period. Confidence among women fell to the lowest level since October 2009, while Americans making more than $100,000 a year were the most pessimistic since November 2009.

U.S. crude oil stockpiles climbed for a second week in the seven days to July 29, according to an Energy Department report on Aug. 3. Inventories increased 950,000 barrels to 354.9 million, the report shows.

Probability of Economic Recession Has Increased

Treasury Yields Evoke Eisenhower Era

Treasury Yields Evoke Eisenhower Era on Concern Global Economy Is Stalling

By John Detrixhe

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The Dow Jones industrial average plunged more than 300 points and erased its gains for the year as investors grew more concerned about economic weakness in the U.S. and Europe. Photographer: Jin Lee/AP

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A trader stands outside the New York Stock Exchange during afternoon trading on August 4, 201. Photographer: Mario Tama/Getty Images

Treasury bond yields are plunging to levels seen in the 1950s on concern the two-year recovery in the world’s largest economy is stalling.

Yields on benchmark 10-year U.S. notes are about 4.3 percentage points below the average over the past 49 years and almost where they were when President Dwight D. Eisenhower began his administration in 1953. The yield, which dropped to 2.40 percent today in New York, reached a record low of 2.04 percent in December 2008 during the global financial crisis.

Investors are piling into Treasuries after the European Central Bank resumed bond purchases and made more cash available to banks to keep the region’s debt crisis from spreading and the Japanese and Swiss central banks sought to protect their economies against declines in the dollar and euro. The Standard & Poor’s 500 Index had its biggest drop since 2009 and markets worldwide have tumbled since a July 29 report showing gross domestic product climbed less than an earlier estimate in the second quarter renewed speculation the Federal Reserve will have to resort to more stimulus measures to avert another recession.

“It’s a clear cut panic,” said Colin Robertson, the managing director of fixed-income in Chicago at Northern Trust Corp., which oversees $300 billion. “Along with European debt concerns, market participants are focusing on the perceived much higher likelihood of a double-dip recession in the U.S.”

Bill Auction

Yields on 10-year notes dropped 21 basis points, or 0.21 percentage point, to 2.41 percent at 4:38 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in May 2021 rose 1 28/32, or $18.75 per $1,000 face amount, to 106 6/32.

Two-year note yields fell eight basis points to a record low of 0.25 percent. The yields on 10-year notes fell to within 2.16 percentage points of two-year securities, the narrowest since November.

“There’s this fear of stall speed,” said Mohamed El- Erian, chief executive and co-chief investment officer at the world’s biggest manager of bond funds, said in an interview on Bloomberg Television yesterday. “If a plane’s not going fast enough, it ends up by coming down.”

Rates on one-month bills traded at negative 0.005 percent and the Treasury sold $20 billion of 10-day cash management bills at zero percent as investors were willing to lend the government money for free in exchange for the promise of getting back their principal.

Stocks Stumble

“It’s signaling a flight to safety,” said Ethan Harris, head of developed-markets economic research at Bank of America Merrill Lynch in New York, on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “Even with the Treasury market as a weakened safe-haven market, it still gets the safe haven money.”

The S&P 500 fell 4.8 percent, dropping more than 10 percent drop from its April 29 peak. The MSCI All-Country World Index slid 4.3 percent. Oil plunged 6.2 percent to $86.27 a barrel as all 24 commodities tracked by the S&P GSCI Index declined. Gold futures retreated from a record.

“It’s a general fear environment,” George Strickland, a managing director at Santa Fe, New Mexico-based Thornburg Investment Management Inc., which oversees about $84 billion, said in a phone interview.

The U.S. faces a 50 percent chance of a return to recession, said Martin Feldstein, a Harvard University professor and a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, said Aug. 2 on Bloomberg Television.

Eisenhower Era

The 10-year yield remained below 3 percent from the third quarter of 1953 through the second quarter of 1956, and dipped below that level again in 1958 as Eisenhower grappled with an economy that fell into a 10-month recession in 1953, an eight- month contraction in 1957 and another 10-month slowdown in 1960.

Bond yields began a 20-year climb after the end of the last Eisenhower recession in 1961, reaching a peak at 15.8 percent in 1981 as Fed Chairman Paul Volcker raised the central bank’s target rate for overnight loans between banks to 20 percent to contain surging inflation.

Signs of an economic slowdown have emerged as the federal government begins moving to rein in deficits. President Barack Obama signed legislation on Aug. 2 that threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years. The compromise defers decisions on the nation’s finances to a bipartisan panel of lawmakers and may reduce government deficits only modestly while slowing economic growth.

Payroll Report

“If there’s a 50-50 chance of recession risk, then you have to think there’s a 50-50 risk of deflation, then yields should be even lower than today,” said Chris Low, chief economist at FTN Financial in New York.

Payrolls climbed by 85,000 workers after an 18,000 increase in June that was the smallest this year, according to the median forecast of 86 economists surveyed by Bloomberg News before a Labor Department report Aug. 5. The jobless rate held at 9.2 percent after rising in each of the previous three months.

The unraveling economy and unemployment higher than 9 percent may spur Fed officials to consider steps to shore up the recovery when they meet at Jackson Hole, Wyoming in August. Fed Chairman Ben S. Bernanke first signaled the central bank may undertake additional bond purchases, known as quantitative easing, or QE2, at the Economic Policy Symposium a year ago.

QE3 Speculation

“The Fed’s hurdle for QE3 is lower at this point than it was at the end of June at their last meeting,” Tom Higgins, global macro strategist in Boston at Standish Mellon Asset Management Co., which oversees about $85 billion in fixed-income assets, said in a telephone interview. “That we can go into a recession and come out into a recovery in normal business cycle fashion is less likely, and the reason is that the Fed has fewer tools to address the downturn and Congress is currently tightening fiscal policy.”

Interest-rate futures signal traders are pushing back expectations for when the Fed raises its target for overnight loans between banks to 2013. The Federal Open Market Committee has kept its target rate for overnight loans in a range of zero to 0.25 percent since December 2008.

ECB purchases of Irish and Portuguese bonds haven’t stamped out investor concern on the 21-month crisis spreading to Italy and Spain, whose yields soared to euro-era highs this week. European officials are trying to put a firewall around Europe’s third and fourth-largest economies to avoid them being forced into seeking external aid.

‘Inkling of Growth’

The yen dropped by the most since October 2008 against the dollar after Japan sold its currency to stem gains that threaten the nation’s economic recovery. The Swiss central bank unexpectedly cut interest rates yesterday and said it will increase the supply of francs to money markets to curb the “massively overvalued” currency.

Investors have snapped up the yen and the franc as signs emerge that the global economy is slowing, said Boris Schlossberg, director of research at online currency trader GFT Forex in New York.

“To a great extent this is all a function of weak dollar policy and also a function of slowing U.S. fundamentals,” Schlossberg said in a telephone interview. “The market needs to perceive that the U.S. has an inkling of growth.”

World Market Rout Is a Loud No-Confidence Vote in Global Leadership

World Market Rout Is a Loud No-Confidence Vote in Global Leadership: View

By the Editors

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Photographs by: Scott Eells, Prashanth Vishwanathan, Tim Boyle; Illustration by Bloomberg View

Global markets have issued a vote of no confidence in the management of the world’s two largest economies, the U.S. and the euro area. To regain credibility, leaders on both sides of the Atlantic need to recognize the magnitude of the crisis they face.

The outlook reflected by the market rout is not encouraging, coming as it does after European and U.S. officials thought they were doing enough to fix their similar -- and overlapping -- fiscal problems. The U.S. is growing at a rate too slow to withstand a serious shock, and that shock could easily come from Europe’s resurgent financial crisis. So far, politicians’ efforts have been far too timid to convince the world that they have the situation under control.

This week’s deal to raise the U.S. debt ceiling is a case in point. Given the exceedingly weak recovery, the U.S. government should stand ready to provide more stimulus. To prevent larger deficits from harming its credit standing, the U.S. must also convince investors that it is capable of putting its long-term finances on a sustainable path.

Instead, partisan brinkmanship has undermined confidence. The deal that Congress and the White House ultimately struck doesn’t come close to solving the government’s long-term problems, but threatens spending cuts that could weigh heavily on economic growth in the short term.

Lacking Urgency

Europe’s leaders have also lacked urgency. Markets need to see that German Chancellor Angela Merkel, French President Nicolas Sarkozy and other officials can rise above national politics to fix the euro area’s glaring flaws, which include the lack of a unified fiscal authority. Instead, a series of half- measures has mainly served to exacerbate the crisis, allowing its spread to the large economies of Spain and Italy and to banks that hold Europe’s sovereign debt.

Thursday’s moves in the markets gave a taste of how costly politicians’ dithering can be. The drop in world stock markets represents hundreds of billions of dollars in lost value. Italy’s cost of borrowing, as measured by the yield on its 10- year government bond, rose to a new euro-era high of 6.18 percent.

What needs to be done? Europe’s leaders should demonstrate that they stand together, ready to do what it takes to restore confidence. This would involve issuing jointly backed euro bonds to replace most or all of the debts of struggling governments, and simultaneously recapitalizing banks that would suffer losses from debt restructurings. It also would include setting up a finance ministry with enough taxation power to service the euro bonds and provide stimulus to weaker economies.

Consumer Demand

In the U.S., the government must be prepared to boost consumer demand, and that means putting people back to work. Ideally, a comprehensive plan to fix the country’s long-term finances could be combined with a shorter-term stimulus. President Barack Obama is already promising to pivot from debt talks to a national jobs program. But having just completed punishing negotiations over spending cuts, he has very little hope of finding new money -- and little time to waste.

Barring a major new stimulus program, some steps can be taken. Obama could ask Congress to quickly adopt a jobs tax credit, renew clean energy tax breaks and temporarily waive federal environmental, labor and other requirements that delay public works programs, all moves that would put workers back on private payrolls.

Job Sharing

The president could ask Congress to allow states to channel some of their federal unemployment compensation into job-sharing programs, which have worked well in Germany and a few American states. He could encourage Fannie Mae and Freddie Mac to allow homeowners who are current on their mortgages, but who owe more than their houses are worth, to refinance into lower-rate loans, thus freeing up more cash to spend.

When the Federal Reserve meets on Aug. 9, it should signal that it’s ready to do its part, too. Among the stimulative tools at its disposal: Pledging to hold onto the U.S. Treasury bonds it has accumulated in its quantitative-easing programs, and to reinvest the proceeds from any maturing securities in government debt. It could announce that it plans to keep its key interest rate near zero for a longer, more defined period. It could lower the 0.25 percent interest rate it pays banks that park excess reserves at the central bank, to prompt more lending and investing. And it could replace the shorter-term securities it holds on its $2.9 trillion balance sheet with longer-term ones, to push down those rates as well.

Ultimately, markets may force politicians and policy makers to implement all these measures and more. The world will be much better off if they find the will to get ahead of the curve.

Japan Stocks Plunge

Japan Stocks Plunge Most Since March Amid Global Equities Rout

By Akiko Ikeda and Shani Raja

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Pedestrians walk past an electronic stock board outside a securities firm in Tokyo on Aug. 2, 2011. Photographer: Kiyoshi Ota/Bloomberg

Japanese stocks plunged the most in more than four months as concern the economy is faltering sparked a global equities rout that drove the Standard & Poor’s 500 Index to its worst slump since February 2009.

Sony Corp., which makes half of its sales in the U.S. and Europe, tumbled 5.1 percent. Toyota Motor Corp., the world’s largest carmaker, retreated 4 percent. Mitsubishi Corp., Japan’s No. 1 trading company, sank 4.7 percent as commodity prices dropped.

The Nikkei 225 Stock Average fell 4.1 percent to 9,266.50 as of 9:07 a.m. in Tokyo, dropping the most since March 15. All 225 members of the Nikkei declined. The broader Topix index plunged 3.8 percent to 794.71.

“It’s a panic attack,” said Prasad Patkar, who helps manage the equivalent of $1.7 billion at Sydney-based Platypus Asset Management Ltd. “There was an expectation that resolution of the U.S. debt-ceiling issue would trigger a relief rally. It looks like everyone forgot about the weakness in the underlying economy.”

Debt Crisis: White House-Wall St. Calls

What Can the Fed Do Now to Lift Economy?

Are We in a Liquidity Trap?

Stocks Plummet as Fear Grips Wall St

Tax Reform's Moment?

Where else is the growth going to come from?

STEPHEN MOORE

'Let's go with the radical approach." That's what then-Senate Finance Committee Chairman Bob Packwood exclaimed to his top tax aide during a legendary two-pitchers-of-beer lunch at Washington's Irish Times in the spring of 1986. They were trying to figure out how to save Ronald Reagan's dream of a sweeping tax overhaul that appeared dead in the Senate. That lunch changed history.

By going "radical," Mr. Packwood meant a wholesale restructuring of the tax system. His plan was to slash the 50% top tax rate to 28%—which was far lower than even the 35% rate Reagan had proposed—terminate all but the most sacred deductions, and go to war with the high-powered corporate lobbyists on K Street. And miracle of miracles, "radical" carried the day in one of the most improbable legislative victories in a generation. A majority of Republicans and Democrats in both houses voted for imposing the lowest tax rates since the 1920s. This was Congress at its very best.

Is it time for another 1986 moment? When I asked that question to the people who could make it happen, they were hardly encouraging. "No way. It won't happen," says Wisconsin Republican and House Budget Committee Chairman Paul Ryan. "There's not enough time and the debt rules would make us raise taxes," he points out. Other naysayers complained that the war between the two parties has made the atmosphere in Washington too poisonous.

But don't be so sure. What everyone inside and outside the Beltway wants to know, given the recent economic funk, is: Where will the growth come from? Certainly not from another round of failed Keynesian spending blowouts. The White House's lame call for an infrastructure bank this week is merely a stimulus redux, and Republicans have seen enough "shovel ready projects" to last two lifetimes. Nor will Republicans, in an era of $1.5 trillion deficits, get very far pitching pro-growth tax rate cuts, a la Reagan 1981, without major offsetting loophole closings. This omelet is going to require cracking some eggs.

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Time & Life Pictures/Getty Images

Rep. Dan Rostenkowski (left) with Sen. Bob Packwood, June 1, 1986.

There are other reasons to think the stars might finally be aligning for another 1986 triumph. Last year the White House tax-reform commission headed by former Fed Chairman Paul Volcker denounced the corporate income tax structure and warned that the "growing gap between the U.S. corporate tax rate [39%, a combination of state average and federal rates] and the corporate tax rates of most other countries [25%] generates incentives for U.S. corporations to shift their income and operations to foreign locations." Treasury Secretary Tim Geithner was even more succinct when he said earlier this year: "Everybody who looks at the current system says we can do better than this." Amen.

Meanwhile, everyone seemed to miss the political breakthrough by the much-maligned bipartisan Gang of Six, which proposed to end tax loopholes and lower the top income tax rate to between 23% and 29%. For the first time since 1986 we have Democrats—even liberals like Dick Durbin of Illinois—endorsing lower tax rates and finally acknowledging that soaking the rich with confiscatory taxes is an economic loser. "We understand getting these rates down is an important economic goal," says Democrat Mark Warner of Virginia, another one of the six.

Mr. Warner is right on the economics. In the early 1990s, Dale Jorgenson, then-chair of Harvard's economics department, calculated $1 trillion of economy-wide efficiency gains from the 1986 tax reforms—and that was when a trillion was still a lot of money.

There's an old saying that when dollar bills are lying on the sidewalk, someone picks them up. The big question is whether Barack Obama has the good sense to do that on tax reform. It may save his presidency.

Junking the tax code is one of his last chances to pour growth hormones into a sickly economy and get jobs back before November 2012. For their part, Republicans could use a tax restructuring to tap the Laffer Curve growth effects of lower rates. There's no reason for the GOP to defend special-interest favors in the tax code doled out to the housing industry, nonprofits, the municipal bond sellers, and the green-energy lobby. The value of trading in all those undeserved favors for a 25% tax rate would be enormously positive, and by growing the economy, would lower the deficit.

I asked Jeffrey Birnbaum, the co-author of the indispensable book on the 1986 Tax Reform Act, "Showdown at Gucci Gulch," how good policy managed to triumph over the legions of special interests. "Tax reform was like a Phoenix," he explained. "Every time it seemed dead, someone pulled it out of the ashes." Could it happen again? "Well back then," he replied, "people in both parties understood the income tax was broken and unfair." How is that different from today?

Mr. Moore is a member of the Journal's editorial board.

Stocks Nose-Dive

Stocks Nose-Dive Amid Global Fears

Weak Outlook, Government Debt Worries Drive Dow's Biggest Point Drop Since '08

TOM LAURICELLA

Stocks spiraled downward Thursday as investors buckled under the strain of the global economic slowdown and the failure of policy makers to stabilize financial markets.

The selling began in Europe and continued in the U.S., where stocks plunged from the opening bell. The Dow Jones Industrial Average posted its worst point drop since the financial crisis in December 2008, falling 512.76 points, or 4.31%, to 11383.68. Oil and other commodities were also hammered. Even gold was a safe haven no more as prices fell. Tokyo's market slid on Friday morning, falling more than 4% in early trading.

Stocks plunged, driving the Dow Jones Industrial Average down more than 500 points, as investors worried about the global economy and Europe's debt crisis. Paul Vigna has details.

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Downward Dow

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"I'm just sorry to see my retirement going to hell," said Robert Slocomb, an 82-year old retired Kodak optical engineer in Rochester, N.Y. Mr. Slocomb blamed the government's handling of the economy for the stock market's woes.

In the first half hour of trading Thursday the Dow lost 1.3% and by noon the widely followed benchmark was down more than 2.7%. Most of the selling appeared to be from longer-term stock investors, rather than hedge funds, which have mostly been in a defensive mode for the last several months.

For a time during the afternoon stocks stabilized with traders wondering if bargain hunters had come on the scene. But the selloff soon resumed.

Wall Street firms had little appetite for holding stocks and other riskier investments on their books, and their traders dumped stocks into the closing bell. The Dow lost more than 155 points in the last hour of trading.

Some traders said the plunge put the market more in sync with the state of the U.S. economy. "The market sold off 500 points, it's not a crash, it's a small correction," said Stephen Holden, a floor trader at the new York Stock Exchange. "It's overdue…I think there's more to go."

"In this environment, no one wants to catch a falling knife," said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management.

Volume on stock exchanges has spiked in recent days, a sign that more investors are piling into selling. For much of the year, volume had been weak as many investors stood on the sidelines. Some 7.5 billion shares changed hands in NYSE composite trading, the highest since May of last year, when investors were also fretting about European debt and the U.S. economy.

The Chicago Board Options Exchange Volatility Index, known as the "fear gauge," broke above 30 for the first time since March 16, rising 35% to 31.66. A higher reading suggests increased volatility in markets, and nervousness among investors. Still, that's a far cry from the depths of the 2008 crisis, when the so-called VIX almost reached 100.

Investors have grown frustrated with efforts by policy makers to deal with the challenges posed by big overhangs of corporate and consumer debt. "Their solutions are too late and no one is taking a longer-term, more-considered approach to problems," said Benjamin Segal, head of global equities at asset manager Neuberger Berman.

In the U.S., investors fear the economy could be heading for a double-dip recession. The Federal Reserve is seen as limited in its ability to provide yet another shot in the arm. Interest rates are already essentially at zero and two rounds of quantitative easing, in which the Fed pumped $2.3 trillion into the financial markets, failed to get the U.S. economy strong enough to stand on its own. Meanwhile, given the push to trim deficits, significant economic stimulus from the U.S. government is seen as unlikely. "You look at monetary and fiscal policy and it's very hard to find a powerful lever that somebody can pull," said Mr. Richards of RBS.

Investors have been equally underwhelmed by the official response to the European debt crisis. That was the case on Thursday when the European Central Bank outlined steps to shore up confidence in European banks in the face of deteriorating conditions in the bond market.

The ECB also conducted purchases of bonds, traders said, but that may have backfired. Traders said the ECB bought Irish and Portuguese bonds, but didn't appear to buy bonds from Italy or Spain, countries which are seen as most at risk from the spreading crisis.

The ECB's efforts came on the heels of the steps by the Swiss National Bank and Bank of Japan to halt the rise of the Swiss franc and Japanese yen, respectively. Investors weren't convinced that either moves will have much long-term success. "There's the idea that they are pushing against a string," says Robert Lynch, head of currency strategy for the Americas at HSBC.

Debt Deal is a Blank Check

By: Peter Schiff |

By supposedly compromising to raise the debt ceiling, Congress and the President have now paved the way for ever higher levels of federal spending. Although, the nation was spared the trauma of borrowing restrictions, the actual risk of default existed solely in the minds of Washington politicians. But the real crisis is not, nor has it ever been, the debt ceiling. The crisis is the debt itself. Economic Armageddon would not have resulted from failure to raise the ceiling, but it will come because we succeeded in raising it. This outcome falls along the lines that I had forecast (See my commentary, "Don't Be Fooled by Political Posturing" from July 9th).

Both parties are now pretending that the promised cuts in spending outweigh the increase in the debt limit. But the $900 billion in identified cuts are spread over a decade and are skewed toward the end of that period. There are an additional $1.4 trillion in cuts that the plan assumes will be identified by a bi-partisan budget committee. But similarly empowered panels in the past have almost never delivered on their mandates.

More importantly, none of these "cuts" are actually binding. There is plenty of time for future Congresses to reverse what was so laboriously agreed to over the past few weeks. My guess is renewed economic weakness will be used to justify ultimate suspension of the cuts. In addition, most of the spending reductions were already scheduled to take effect before this agreement. So what did we really get?

The Congressional Budget Office currently projects that $9.5 trillion in new debt will have to be issued over the next 10 years. Even if all of the reductions proposed in the deal were to come to pass, which is highly unlikely, that would still leave $7.1 trillion in new debt accumulation by 2021. Our problems have not been solved by a long shot.

Essentially, the structure announced today allows both political parties to talk about reform without actually changing anything. To underscore that point, the deal involves less than $25 billion in immediate cuts! This is less than a rounding error in a $3.8 trillion dollar budget. This is politics as usual.

Even these estimates are based on rosy economic assumptions that have no chance coming to fruition. For example, for the current fiscal year, Washington estimates GDP growth at 4%. But actual growth for the first half of 2011 is below 1%! If our government is over-estimating our current year's growth by a factor of 4, how accurate could their forecasts be ten years into the future? A more honest assessment of likely economic performance would reveal future budget deficits spiraling out of control.

Some might say that the primary goal of this deal was to avoid the dreaded credit rating downgrade. Unfortunately, the deal addresses none of the ratings agencies' stated grievances. If they fail to follow through on their downgrade warnings, the rating agencies will lose whatever credibility they have left. For political reasons, the downgrades may not come right away, but they are inevitable. But as has happened so often in the past, by the time the tardy downgrades arrive, the market will have likely already rendered its verdict.

The debt ceiling itself merely represents a self-imposed limit on US borrowing. Since Congress can vote to raise the limit, its existence has been more of a political nuisance than an actual barrier. The operative factor is not how much we allow ourselves to borrow, but how much our creditors are willing to lend. That type of ceiling can't be raised by an Act of Congress. Once our creditors come to the conclusion that they have lent beyond our capacity to repay, they will be very reluctant to lend more. As trillions in short-term Treasuries mature, the dwindling pool of buyers will demand higher rates of return to compensate them for the risk. But our government is in no condition to afford those higher rates without gutting the rest of the budget.

Last week, it was revealed that despite Obama's warnings that a default would immediately occur if the debt ceiling were not raised, the administration had already agreed to prioritize interest payments to avoid default. Such preferential treatment is only possible because current interest rates are so low and debt service represents only about 10% of total revenue. When the pool of willing lenders evaporates, net interest payments could quickly consume more than 50% of federal revenue. This is particularly true since rising rates will also plunge the economy into a recession that will substantially reduce revenues - even as debt payments surge.

At that point, prioritizing interest payments would mean deep sacrifices in the rest of the federal budget - including Social Security, Medicare, and the Armed Forces. The question then becomes: will US politicians really be willing to take the political heat that would emerge from prioritizing interest payments to foreign creditors over payments to American voters?

I expect that as soon as our creditors decide that they are no longer willing to lend to us at ultra-low rates of interest, we will refuse to repay what they have already lent.

Besides default or major cuts to domestic spending, inflation provides the only other means for the government to deal with this intractable crisis. Because of its political palatability, inflation is, in fact, the most likely outcome. Once we go down that path, we risk high inflation turning into hyperinflation, which would decimate the remainder of our economy. So, as our leaders congratulate themselves for saving the nation, the reality is that they may have just sold it down the river.

Get Rich, Pay Lower Taxes, Boost Federal Revenue

Get Rich, Pay Lower Taxes, Boost Federal Revenue: Amity Shlaes

By Amity Shlaes -

Amity Shlaes

To clean out and start over right.

That’s the great impulse that Americans act on each spring. We tell ourselves there’s nothing wrong with this process repeating annually. In religion, the cycle is always there: sin, repent, purge. These days the impulse gets its most vivid individual expression in the realm of personal health: “sin, repent, spinning class.” Or “sin, repent, detox drink.” The worse the year, the greater the repentance required.

Spring also brings a collective impulse to reform. That usually gets expressed in a resolve to make the tax code more progressive. Some of the demand for more progressivity is revenue-related. The government needs the money, or thinks it does.

But some of progressive reform is just the annual expression of that spring impulse to make life clean, fair and right. To “maintain or increase the progressivity of the tax code” is, for example, one of the recommendations being quoted right now from the report by President Barack Obama’s bipartisan National Commission on Fiscal Responsibility and Reform.

Ritual isn’t always logical, however. It can be destructive, precisely because it repeats. Too much sin-and- repentance, and even we don’t believe ourselves any more. Too many detoxes, and you’re poisoning yourself.

Nowhere is this clearer than in the case of tax progressivity.

Graduated Rates

The first modern expression of the progressive impulse came in the springs of the early part of the last century, when the Treasury Department fashioned the Form 1040. The tax formula was progressive, with a graduated rate structure going from 1 percent to 7 percent. Since only a few people paid federal income tax, that rate structure was a model of progressivity.

But of course it wasn’t. Making the code progressive felt good to lawmakers, just the way the detox does. World War I and its costs strengthened the general mood of sacrifice. So they made the code even more progressive, taking the top rate up all the way into the 70s.

The results taught lawmakers a quick lesson. Raise the rates too high, and you get a perverse result: less money from the rich than you expect. Lower the rates, and the rich pay a greater share of the taxes. Treasury Secretary Andrew Mellon found that when he cut rates down to 25 percent, he got the most revenue of all.

But logic couldn’t always suppress instinct. Each year, lawmakers felt that need to demonstrate they were increasing progressivity even more than they felt the need to get an optimal result. Each year that need had to find expression. Within a generation the top rate was back in the 70s, reaching 91 percent in the 1950s. This proved inefficient. Taxpayers found ways around the statutory rates. Again, the reform didn’t work.

Progressive Outcomes

In more recent springs, both Democrats and Republicans have developed a compromise repentance to accommodate some reality. The lawmakers discovered, as Mellon had, that by talking about helping the poor, but keeping the actual top rates lower, they got an outcome that was splendidly progressive.

In 1980, the top 1 percent of earners paid 19 percent of income taxes, and the bottom half of earners paid 7.1 percent. A decade later, with a lower maximum rate, the top 1 percent paid 25 percent of taxes, while the bottom earners paid just 5.8 percent. By 2008, top earners paid 38 percent of taxes, the bottom half 2.7 percent.

What about today? It might make sense to cut taxes even more, down to, say, a top rate of 20 percent. Then the rich would pay all the taxes. And there would be more revenue, as foreigners came in.

Burden of Rich

But here tax sanctimony gets in the way of tax reform. In a progressive rate structure, the rich almost always get bigger tax cuts, because their rates are higher to begin with. So their cuts sound unfair. The more progressive a tax structure, the more unfair its dismantlement appears.

The reality is that this year in tax terms, the U.S. isn’t a sinner. The country is already clean. The very rich shoulder far more of the collective burden than their share in the population warrants.

Yet in his recent debt speech, Obama clearly wanted to make the point that the rich don’t pay their share of the collective costs of government, whatever the data showed. So he retreated to another datum: the share of individual income that a taxpayer gives up in taxes.

“At a time when the tax burden on the wealthy is at its lowest level in half a century,” the president said, “the most fortunate among us can afford to pay a little more.”

World of Problems

That ratio is indeed lower than at some other points. You can find a way to make America look like a sinner even if it isn’t sinning. Tax increases may be appropriate as a last, worst resort. But we are not at the last, worst moment this spring.

Why then did Obama ignore the record of lower rates bringing more revenue? Because there’s a lot wrong in the world, starting with the federal debt, and continuing on to joblessness, war in Libya, and Japan’s nuclear crisis. So the general urge to purge is greater, and it’s being channeled into tax sanctimony. But that doesn’t mean this particular ritual is worth honoring.

(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations and author of “The Forgotten Man: A New History of the Great Depression,” is a Bloomberg News columnist. The opinions expressed are her own.)

Balanced-Budget Bill Fails Fiscal Test

Balanced-Budget Bill Fails Fiscal Test: Stephen L. Carter

By Stephen L. Carter

About Stephen L Carter

Stephen L. Carter is a professor of law at Yale, where he teaches courses on contracts, professional responsibility, ethics in literature, intellectual property and the law and ethics of war.

More about Stephen L Carter

At a Washington event in the early 1990s, I happened to find myself seated beside an official fairly high in the White House of George H.W. Bush. We got to chatting, and he waxed poetic about a constitutional amendment requiring the federal government to balance its annual budget.

He even had a new draft in his pocket, words he had scribbled on a cocktail napkin. I don’t recall the precise language, but his version was short, and began something like this: “Except in time of war, the federal government shall not ..."

A free and frank exchange of views ensued.

Fast-forward to today: Republican lawmakers want a quick vote on a balanced-budget amendment (or BBA, as the cognoscenti, I am sad to report, are now calling it). This is an understandable demand given Congressional Budget Office estimates of near trillion-dollar deficits into the near future.

Yet, while I remain skeptical of objections that the amendment would lead to fiscal disaster, I do think its opponents are right on the merits. The amendment is a poorly designed cure for a disease of complex causes.

The American tradition of deficit spending goes back to the Revolutionary War, when the colonies financed their rebellion with borrowed money. Shortly after the constitutional system replaced the Articles of Confederation, the federal government took on the debts incurred by the states, an act that sent the new nation’s debt soaring, by most estimates, to a third or more of GDP.

Founding Fiscal Hawks

That era had its own fiscal hawks, and providing a way to pay down the debt was hotly debated at the constitutional convention. In 1798, Thomas Jefferson wished the Constitution had “an additional article taking from the federal government the power of borrowing.”

The founders’ bills were paid off just in time to start the whole merry-go-round again when the Civil War broke out. Although some historians attribute the Union victory to its superior creditworthiness -- the South faced far higher borrowing costs -- the accumulated debt nearly bankrupted the winning side, and took another half century to retire.

Abraham Lincoln himself wondered how the U.S. would ever pay back the money borrowed to finance the Civil War, fretting that the conflict “has produced a national debt and taxation unprecedented, at least in this country.”

And in the late years of the 19th century, a worried Congress adopted laws restricting the purposes for which the self-governing territories of the West could take on debt, limiting their borrowing to no more than 1 percent of the value of taxable property within their borders.

It was inevitable that the worries would eventually lead to efforts to amend the Constitution. The first came in 1936, when Representative Harold Knutson, a Minnesota Republican, introduced an amendment to limit federal borrowing. It and its successors have all failed, although several proposals in the 1980s and 1990s passed in one chamber of Congress.

Beyond political support, however, the real problem with a balanced-budget amendment is that it would fail to do what its supporters claim: Keep the nation’s fiscal house in order.

Consider Section 1 of a current bill: “Total outlays for any fiscal year shall not exceed total receipts for that fiscal year, unless three-fifths of the whole number of each House of Congress shall provide by law for a specific excess of outlays over receipts by a rollcall vote.”

Sounds impressive, until one parses it. We all think we know what a fiscal year is, but legislatures have redefined the term constantly for budgeting purposes. To take the most obvious example, the federal fiscal year begins on Oct. 1. But until 1976, the federal fiscal year began on July 1, and Congress has often extended the fiscal year through a continuing resolution. Businesses are allowed in some circumstances to use a 53-week fiscal year.

Subject to Manipulation

Some experts argue that the fiscal year should be 18 months to allow for smoother budgeting. In short, the amendment is built on a concept both ill-defined and subject to manipulation.

Likewise, consider the rule that outlays must not exceed receipts. Another section defines “total receipts” as “all receipts of the United States Government except those derived from borrowing” -- in essence, taxes, tariffs and fees. “Total outlays” are “all outlays of the United States Government except for those for repayment of debt principal.”

Here’s a quick and easy way for a future Congress to game those definitions: Set up an independent, nonprofit, nongovernmental corporation that issues bonds, for the avowed purpose not of raising revenue but of giving Americans a place to invest their money safely. We might call our new agency the Federal National Bond Association, or Fannie Bae.

Fannie Bae’s bonds would not be quite as cheap as Treasuries, but as Treasuries would no longer exist, these would presumably be the next best thing, because of their implicit federal guarantee. Most of the money Fannie Bae raised in the market would then be turned over to the Treasury, which would place it in a trust fund. (A small part would be kept to run Fannie Bae.) The funds are now just like Social Security -- a “receipt” within the meaning of the amendment -- and “outlays” may therefore rise by that amount.

Now, you might protest that the establishment of Fannie Bae would seem to vitiate the purpose of the amendment. But the federal government gets around constitutional provisions all the time. (Remember the congressional power to declare war?)

Maybe the courts would strike down Fannie Bae, but to imagine them doing so is to accept the likelihood that federal judges would have final say over fiscal policy. As Walter Dellinger, a solicitor general in the Bill Clinton administration, warned recently in the New York Times, “the process of enforcing” such an amendment “would be uncertain and perilous.”

Counting the Receipts

Although one is tempted to respond that this quality, alas, does not differentiate the proposed amendment from any other provision of the Constitution, the more provisions we add, the greater the possibilities for, let us say, unpredictable interpretations.

Furthermore, for the amendment to operate, someone -- presumably the Congressional Budget Office -- would have to figure out each year what the total receipts and total outlays probably will be. Every corporation has to do the same thing, but the prospect of such review proved too much for even the fiscal watchdogs of the Wall Street Journal editorial board: “We doubt the historic 1981 Reagan tax cuts within the Kemp- Roth bill, once subjected to Congress’s revenue-neutrality accountants, could have survived the balanced budget mandate.”

This objection hints at the biggest problem with the proposed amendment: It seeks to enshrine as fundamental law a single theory about the relation of fiscal policy to the operation of the U.S. economy. And this would be a grave mistake.

In microeconomics, the theory of supply and demand is rigorously worked out and often tested. Despite soft spots, it remains the heart of every introductory economics class, precisely because it is concise, understood and essentially correct.

Macroeconomics is of a very different character. It is a field rich with theories difficult to test. One difficulty is trying to model the entire economy, and no matter how many variables are held constant, there is always something important unaccounted for. This helps to explain why economists are all over the map. Keynesians and supply-siders alike can all present data favoring their theories. That is why politicians and the economists whose work they rely on should approach the subject, as Harvard economist N. Gregory Mankiw has put it, with humility.

So the balanced-budget amendment, whatever its political popularity, possesses the following difficulties: It is poorly written and easy to circumvent; it invites judicial control of the appropriations process; and it pretends to know more than we can confidently say we do about how the economy works. For an amendment to the Constitution, those are just too many deficits.

Spanish-Language El Clasificado

Spanish-Language El Clasificado Balances Print Growth With Online Push

By Karen E. Klein -

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Martha de la Torre and Joe Badame run El Clasificado, the largest free, weekly Spanish- language classified print publication in the U.S., reaching more than 1.5 million people. Photographer: Pablo Scarpellini/El Classificado via Bloomberg

Growing up in East Los Angeles, Martha de la Torre spoke South American-influenced Spanish, which often elicited playground taunts from her classmates, mostly Mexican- Americans. Midway through elementary school, she swore she’d never speak Spanish again, except to her Ecuadorean grandmother.

Today she runs El Clasificado, the largest free, weekly Spanish- language classified print publication in the U.S., reaching more than 1.5 million people. It’s the flagship title of the thriving 130-employee publishing company de la Torre and her husband, Joe Badame, started 23 years ago for Southern California’s Latino population.

In June, the couple rebranded, changing their company’s name from El Clasificado to EC Hispanic Media to reflect the growth of their five online editions as well as their geographic expansion into the agricultural heart of Central California. With 2010 revenue of $16.3 million, the business is on track to hit $19 million this year, de la Torre says.

“El Clasificado is a marvelous niche product,” says Peter M. Zollman, founding principal of marketing firm Advanced Interactive Group in Altamonte Springs, Fla., which publishes Classified Intelligence Report. “It takes a long time to win [the Hispanic market’s] trust and loyalty, but once you have it, you keep it.” While online sales for classifieds in the U.S. have more than doubled to about $6 billion since 2006, Zollman says, the overall industry has shrunk to about $15 billion, half its 2006 total, due to the economic downturn and the collapse in classified revenue at most daily newspapers.

Bloomberg contributor Karen E. Klein spoke recently to de la Torre and Badame, an Italian-American who speaks even less Spanish than his wife, about their strategy for future expansion. Edited excerpts of their conversation follow.

Karen E. Klein: So many print publications have seen their readership and distribution decline over the past decade. Is that happening to El Clasificado?

Martha de la Torre: For years, we’ve been in fear of print disappearing just like everyone else. We ended 2010 principally a print company. Print ads account for 98 percent of our revenues. But we’ve also moved into digital, which accounted for about 1 percent of our revenue in 2010. Year-to-date, digital ads have grown to about 5 percent of our total revenue.

Joe Badame: We’re not going away from print. Our print revenues increased close to 16 percent last year and our print circulation is up 10 percent from 2010 to 2011. The demographics are working in our favor.

Q: The latest immigration data have shown that fewer Mexicans are emigrating due to improved opportunities in Mexico and the economic downturn in the U.S. How will that affect your success as a Spanish-language company?

Badame: It will have a long-term effect on us, maybe five to 10 years out. But we have such a big market of Hispanics here already; there are about 35 million in California and we’re still at 455,000 circulation so we haven’t come close to saturating the market. And the birth rates are much higher, so we don’t expect it to have a huge impact immediately.

De la Torre: When we started out, I always thought El Clasificado would stop existing around 2005. I was wrong.

Q: Have you found that your readers are migrating online?

De la Torre: Digital is attractive to a lot of Latinos who have a little more education and income and are outside of densely Hispanic markets.

Digital allows us to find additional niches, like the insurance company or lawyer who will advertise online. The problem is that our print reps are not interested in selling digital ads because they can still sell print and it’s more lucrative. An average digital sale might be $100 a week, where a print account will average $500 to $1,000 a week. Online is also harder to explain to our clients, who are very focused on print and not as advanced technologically.

Badame: A lot of our clients don’t believe that our readers are online. But our online traffic results for El Clasificado are showing that we have 6 million page views a month, from 400,000 unique visitors, with 20 percent of them coming through mobile devices.

De la Torre: I was at one of our biggest clients a year ago and they said, “Our customers are not online.” But I started doing keyword searches and I showed them that they are getting online now. So we gave them a free online classified so they could try it out. We’re putting all our efforts forward. We operate from fear and always look to the future, continually trying to recognize where our weaknesses could be.

Q: Both of you have financial backgrounds. How did you become entrepreneurs?

De la Torre: We were both CPAs, we met at Arthur Young & Co. in 1983 and started dating in 1985. I specialized in banking and the oil and gas industry and then I started getting requests to do due diligence on Hispanic media companies. I was alarmed at how much money was being spent on these companies that weren’t very impressive.

So I started thinking about doing something like the PennySaver [a free weekly classified publication] but for Latinos. I made a business plan but I didn’t want to be an entrepreneur. I hoped someone would come along to run the thing so I could do what I do best, which was be a financial person.

But we started the company in 1988 after Joe raised money from our friends and family. We got married in 1991. Joe kept his day job to keep us afloat for all the years we didn’t take salaries. He joined us full-time in 2000.

Badame: We hit bottom in 1992 due to the recession, and ever since we’ve grown every year from 8 percent to 35 percent. Even during this last recession, we were growing by 16 to 17 percent.

Q: What changes did you make?

De la Torre: One major thing is that we changed our distribution model. My business plan was based on a bulk-mail, home-delivery model. We stuck to that for three or four years -- until we almost went bankrupt.

Q: Why did you stay with something that wasn’t working?

De la Torre: It took us a long time to finally get it. It was the early ‘90s, we were in recession and it seemed like nothing worked. It was hard to figure out what was going wrong.

My mother and father were distributing our magazines in local Hispanic stores. So we tried putting distribution racks in about 150 small business locations, and we finally realized we were getting better results that way because Latino shoppers go to the market every day for fresh food. Today we have close to 22,000 locations where we drop 15 to 400 magazines each.

Badame: We started dropping magazines at a location and then we’d sit in our car and watch what happened for a couple of hours. We realized that with home delivery, we were giving the magazine to people who might not want it. They might just throw it away. When it’s sitting in a rack, only the people who want to read it actually pick it up.

Q: What’s next for EC Hispanic Media?

De la Torre: For 2011, we’re going to do more geographical expansion and focus on more training and hiring. We’re also adding some new products and hope to have new online revenue to add to the 5 percent we’re currently getting from online.

Badame: We have a short-term goal to ramp up revenues to $50 million within five years and a long-term plan to hit $100 million in the next 10 years. We can get to $50 million by 2016 if we maintain our historical [average annual] growth rate of 20.8 percent. The more experience we have, the smaller the numbers seem to look to us. Those numbers would have been huge, and unobtainable, to us years ago.

Oil Erases 2011’s Gains on Economy Concern

By Mark Shenk and Yi Tian -

Crude oil wiped out all of its gains for 2011 and natural gas traded below $4 for the first time since April in New York as concern the global economy is weakening sent raw materials prices tumbling around the world. Photographer: Andrew Harrer/Bloomberg

All 24 commodities on the Standard & Poor’s GSCI Index declined slipped, as a rout in equities drove the Standard & Poor’s 500 Index to its worst nine-day slump since March 2009. Silver dropped 6 percent, gold retreated from a record and wheat slumped the most since June.

“There’s a lot of pessimistic news on the macro-economic front and that’s hitting commodities,” said Michael Wittner, the head of oil-market research at Societe Generale SA in New York and the fourth-most-accurate forecaster for West Texas Intermediate oil among 26 analysts ranked by Bloomberg in the past eight quarters. “If the economy continues to slow, demand for oil will take a hit.”

U.S. consumer confidence dropped last week to the lowest level in more than two months, paced by growing dissatisfaction among women and high earners, a report today showed. The Bloomberg Consumer Comfort Index was minus 47.6 in the period to July 31, the lowest level since May, compared with minus 46.8 the prior week.

Consumer spending dropped in June for the first time in almost two years as savings climbed, Commerce Department figures showed earlier this week. The U.S. economy grew less than forecast in the second quarter after almost stalling at the start of the year, another report from the agency showed.

Commodity Slump

The S&P’s GSCI Index of 24 raw materials fell 3.7 percent to 647.1, the lowest level since June 27. The index is up 2.4 percent this year after being as much as 20 percent higher on April 11.

Crude oil for September delivery declined $5.15, or 5.6 percent, to $86.78 a barrel at 2:24 p.m. on the New York Mercantile Exchange. Futures touched $86.04, the lowest level since Feb. 18 on an intraday basis. Brent for September settlement dropped $5.59, or 4.9 percent, to $107.64 a barrel on the London-based ICE Futures Europe exchange.

“There’s a growing realization that we may be facing a double dip or at least very anemic growth,” said Chip Hodge, who oversees a $9 billion natural-resource bond portfolio as senior managing director at Manulife Asset Management in Boston. “Until the economy shows signs of life, there’s nothing to turn this around.”

Stocks Fall

The Standard & Poor’s 500 Index fell 3.7 percent to 1,213.58 and the Dow Jones Industrial Average declined 3.4 percent to 11,490.81.

The dollar rose 1.4 percent to $1.412 against the euro, from $1.4323 yesterday. A stronger U.S. currency reduces the appeal of dollar-denominated raw materials as an investment.

“Fear and panic are good words to describe what we’re seeing today,” said Chris Barber, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts. “Anytime markets move this hard there’s been a change in sentiment.”

Copper fell $182, or 1.9 percent, to $9,353 a metric ton on the London Metal Exchange, bringing the drop this year to 2.6 percent. Aluminum fell for 1.7 percent to $2,482 a ton, the seventh consecutive decline and the longest losing streak since January 2009.

“Sentiment has taken its turn for the worse at the moment,” said Gayle Berry, an analyst at Barclays Capital in London. “The markets are very worried about what the implications of fiscal austerity mean for the trajectory of economic growth, and therefore for metals demand.”

Silver Slides

Silver for immediate delivery dropped 5.1 percent to $39.5675 an ounce, the biggest decline since May 11. Platinum fell 3.1 percent to $1,726 an ounce and palladium dropped 5 percent to $756 an ounce, erasing gains for the year. Both metals are used in catalysts to remove exhausts in automobiles, and are more dependent on economic growth than gold.

Gold was little changed at $1,661.43 an ounce after climbing to a record $1,681.72 an ounce earlier today. Prices are up 17 percent this year.

Agriculture was the second-worst sector today after energy. Wheat fell 3.4 percent to $7.245 a bushel on the Chicago Board of Trade. Soybeans declined 1.8 percent to $13.4875 a bushel and corn dropped 1.9 percent to $6.9925 a bushel.

“The world economy is struggling, and that is slowing demand,” Don Roose, the president of U.S. Commodities Inc. in West Des Moines, Iowa, said in a telephone interview.

U.S. Stocks Plunge in Biggest Retreat Since 2009

By Rita Nazareth -

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Traders work on the floor of the New York Stock Exchange on Aug. 4, 2011. Photographer: Jin Lee/AP

Play Video

Aug. 4 (Bloomberg) -- Barton Biggs, managing partner and co-founder of Traxis Partners LP, talks about today's decline in the U.S. stock market. He speaks with Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Play Video

Aug. 4 (Bloomberg) -- Barry Knapp, head of U.S. equity strategy at Barclays Capital, talks about the equity and Treasury markets. Knapp, speaking on Bloomberg Television's "InBusiness With Margaret Brennan," also discusses the outlook for the U.S. economy. (Source: Bloomberg)

Play Video

Aug. 4 (Bloomberg) -- Dan Ammann, chief financial officer of General Motors Co., talks about the company's second-quarter profit reported today and business strategy. The largest U.S. automaker said net income almost doubled to $2.52 billion, or $1.54 a share, on rising U.S. sales. Ammann speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

U.S. stocks plunged, driving the Standard & Poor’s 500 Index to the biggest decline since February 2009, as concern the global economy is weakening prompted a global rout.

Only three out of 500 stocks in the benchmark measure of American equities rose. Losses exceeded 10 percent for 13 of the companies including Alpha Natural Resources Inc. (ANR) and Gap Inc. (GPS), which fell after the retailer’s sales missed estimates. All 10 S&P 500 groups slumped, led by losses topping 5.3 percent for material, energy and industrial shares. Chevron Corp. (CVX) and Alcoa Inc. (AA) fell more than 5.7 percent as Japan sold its currency, driving down commodities priced in the dollar.

The S&P 500 dropped 4.8 percent to an eight-month low of 1,200.08 at 4 p.m. in New York. It has retreated 11 percent since July 22, the biggest loss over the same amount of time since March 9, 2009, when the bull market began. The Dow Jones Industrial Average retreated 512.61 points, or 4.3 percent, to 11,383.83 today, erasing its 2011 gain.

“It’s unbelievable,” David Joy, Boston-based chief market strategist at Ameriprise Financial Inc., said in a telephone interview. His firm oversees $693 billion in assets. “The emotional aspect of this is ticking higher. It’s left everybody with this mindset that things are not good. The situation in Europe is getting everyone concerned. We had the impact of the Japan intervention in the currency market. The flight-to-quality trade is going to pick up.”

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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U.S. Department of Defense Contract Awards

U.S. Department of Defense Contract Awards for Aug 01, 2011

Here’s Today’s Department of Defense Contract Awards

ARMY

Oshkosh Corp., Oshkosh, Wis., was awarded a $904,184,088 firm-fixed-price contract. The award will provide for the modification of an existing contract to procure 6,963 Family of Medium Tactical Vehicles. Work will be performed in Oshkosh, Wis., with an estimated completion date of June 30, 2013. The bid was solicited through the Internet, with three bids received. The U.S. Army Contracting Command, Warren, Mich., is the contracting activity (W56HZV-09-D-0159).

Hellfire Systems, L.L.C., Orlando, Fla., was awarded a $159,018,990 firm-fixed-price contract. The award will provide for the procurement of 3,097 Hellfire missiles in containers; 16 Hellfire II guidance test articles; and engineering, equipment, and production services. Work will be performed in Orlando, Fla., with an estimated completion date of Sept. 30, 2014. One sole-source bid was solicited, with one bid received. The U.S. Army Contracting Command, Redstone Arsenal, Ala., is the contracting activity (W31P4Q-11-C-0242).

Wilhelm Commercial Builders, Inc., Annapolis Junction, Md., was awarded a $49,999,999 firm-fixed-price indefinite-delivery/indefinite-quantity task-order contract. The award will provide for the construction services for the Baltimore-Washington corridor with availability to be utilized throughout the continental United States. Work location will be determined with each task order, with an estimated completion date of July 29, 2016. The bid was solicited through the Internet, with nine bids received. The U.S. Army Corps of Engineers, Baltimore, Md., is the contracting activity (W912DR-11-D-0017).

Olin Corp., East Alton, Ill., was awarded a $29,372,473 firm-fixed-price with economic price adjustment contract. The award will provide for the procurement of 5.56mm, 7.62mm, and .50 small caliber ammunition. Work will be performed in East Alton, Ill., with an estimated completion date of March 31, 2017. The bid was solicited through the Internet, with two bids received. The U.S. Army Contracting Command, Rock Island, Ill., is the contracting activity (W52P1J-11-C-0038).

Okland Construction, Inc., Salt Lake City, Utah, was awarded a $22,282,136 firm-fixed-price contract. The award will provide for the design and construction of the Aerospace Maintenance and Regeneration Group hangar at Davis-Monthan Air Force Base, Tucson, Ariz. Work will be performed in Davis-Monthan Air Force Base, with an estimated completion date of July 18, 2013. The bid was solicited through the Internet, with 15 bids received. The U.S. Army Corps of Engineers, Los Angeles, Calif., is the contracting activity (W912PL-11-C-0007).

Delfasco, L.L.C., Afton, Tenn. (W15QKN-11-D-0198), and Conco, Inc., Louisville, Ky. (W15QKN-11-C-0192), were awarded a $19,859,690 firm-fixed-price indefinite-delivery/indefinite-quantity multiple-award-task-order contract between two contractors. The award will provide for the facilities, personnel and equipment for the manufacture of the PA 117 container. Work location will be determined with each task order, with an estimated completion date of July 11, 2020. Four bids were solicited, with four bids received. The U.S. Army Contracting Command, Picatinny Arsenal, N.J., is the contracting activity.

AAI Corp., Hunt Valley, Md., was awarded an $18,682,819 cost-plus-fixed-fee contract. The award will provide for the engineering services in support of the Shadow 200 unmanned aircraft system. Work will be performed in Hunt Valley, Md., with an estimated completion date of May 31, 2013. One bid was solicited, with one bid received. The U.S. Army Contracting Command, Redstone Arsenal, Ala., is the contracting activity (W58RGZ-11-C-0103).

Alliant Lake City Small Caliber Ammunition Co., L.L.C., Independence, Mo., was awarded a $7,968,389 firm-fixed-price contract. The award will provide for the production base support projects at Lake City Army Ammunition Plant. Work will be performed in Independence, Mo., with an estimated completion date of Sept. 30, 2012. One bid was solicited, with one bid received. The U.S. Army Contracting Command, Rock Island, Ill., is the contracting activity (DAAA09-99-E-0002).

BWAY Corp., Atlanta, Ga., was awarded a $7,366,564 firm-fixed-price with economic price adjustment contract. The award will provide for the procurement of 797,986 M2A1 ammunition containers in support of various contracts for small caliber ammunition production. Work will be performed in Atlanta, Ga., with an estimated completion date of April 26, 2013. The bid was solicited through the Internet, with two bids received. The U.S. Army Contracting Command, Rock Island, Ill., is the contracting activity (W52P1J-09-C-0030).

AIR FORCE

Lockheed Martin Corp., Archbold, Pa. (FA8213-11-D-0008), and Raytheon Missile Systems of Tucson, Ariz. (FA8213-11-D-0007), are being awarded a $475,000,000 firm-fixed-price contract for Paveway II laser-guided bomb computer control groups (seekers) and GBU-12 air foil groups (tail kits). The Ogden Air Logistics Center/GHGKA, Hill Air Force Base, Utah, is the contracting activity.

The University of Dayton Research Institution, Dayton, Ohio, is being awarded a $24,510,000 cost-plus-fixed-fee, firm-fixed-price, cost reimbursement contract to provide testing, evaluation, and the incidental research and development of advanced polymer materials, equipment and processes, and to provide for the operation and maintenance of the Coatings Technology Integration Office, Special Test and Research facilities, and Erosion facilities at Wright-Patterson Air Force Base, Ohio, where work will be performed. The Air Force Research Laboratories/PK, Wright-Patterson Air Force Base, Ohio, is the contracting activity (FA8650-11-D-5602).

ITT Industries, Inc., Systems Division, Cape Canaveral, Fla., is being awarded a $13,465,960 cost-plus-award-fee contract modification for Spacelift Range System contract support for increased depot level software maintenance for the operationally accepted Range Standard Architecture System, to include the transition and ongoing sustainment of range standard architecture for both the Eastern and Western ranges. Work will be performed at Patrick Air Force Base, Fla., and Vandenberg Air Force Base, Calif. The Space and Missile Systems Center Space Logistics Group/PK, Peterson Air Force Base, Colo., is the contracting activity (F04701-01-C-0001, P00693).

Planning Professional, Ltd., Allen, Texas, is being awarded a $12,418,640 firm-fixed-price, indefinite-delivery/indefinite-quantity contract for event planning services in support of the Air Force Reserve Command Yellow Ribbon Program. Work will be performed at Allen, Texas; Summerfield, N.C.; and Twinsburg, Ohio. The Headquarters Air Force Reserve Command/A7KA, Robins Air Force Base, Ga., is the contracting activity (FA6643-11-D-0004).

BAE Systems, Nashua, N.H., is being awarded a $9,000,000 firm-fixed-price contract for one Autonomous Real-Time Ground Ubiquitous Surveillance-Imaging System with options for two additional systems. The Air Force Materiel Command, Aeronautical Systems Center, 645th Aeronautical Systems Group/WIJK, Wright-Patterson Air Force Base, Ohio, is the contracting activity (FA8620-11-G-4029 0008).

Chugach Management Services, J.V., Anchorage, Alaska, is being awarded an $8,811,927 firm-fixed-price contract for civil engineering management services. Work will be performed at Kirtland Air Force Base, N.M. The Air Force Nuclear Weapons Center/PKOC, Kirtland Air Force Base, N.M., is the contracting activity (FA9401-11-C-0010).

NAVY

General Electric Aircraft Engines, Lynn, Mass., is being awarded a $71,484,930 modification to a previously awarded firm-fixed-price contract (N00019-06-C-0088) to exercise an option for the supplemental engine requirement to procure (18) F414-GE-400 engines and (18) F414-GE-400 engine device kits. The F414-GE-400 engine powers the F/A-18E/F Super Hornet aircraft. Work will be performed in Lynn, Mass. (44.8 percent); Madisonville, Ky. (18.1 percent); Evandale, Ohio (14.1 percent); Hooksett, N.H. (10.4 percent); Rutland, Vt. (3.9 percent); Dayton, Ohio (2.2 percent); Jacksonville, Fla. (1.5 percent); Muskegon, Mich. (1.4 percent); Terre Haute, Ind. (1.4 percent); Bromont, Canada (1.2 percent); and Asheville, N.C. (1 percent). Work is expected to be completed in July 2013. Contract funds will not expire at the end of the current fiscal year. The Naval Air Systems Command, Patuxent River, Md., is the contracting activity.

Raytheon Co., Network Centric Solutions, Marlborough, Mass., is being awarded a $67,030,102 indefinite-delivery/indefinite-quantity, cost-plus fixed-fee/cost-plus incentive-fee/firm-fixed-price hybridcontract for the procurement of highly specialized engineering services to meet the Navy’s Satellite Communications Program requirements to include, but not limited to, the following systems produced by Raytheon: Extremely High Frequency (EHF); Super High Frequency (SHF) WSC-6 (v)5/7; Global Broadcast Service (GBS); Submarine High Date Rate (SUB HDR); and Navy Multiband Terminal (NMT). Work will be performed in Marlborough, Mass. (84.49 percent), Chula Vista, Calif. (13.51 percent), and Sterling, Va. (2 percent). Work is expected to be completed by August 2016. Contract funds will not expire at the end of the current fiscal year. This contract was not competitively procured because Raytheon Co., Network Centric Solutions, is the sole manufacturer and current maintainer of the EHF, SHF (AN/WSC-6 (v)5/7), GBS, SUB HDR, and NMT systems and is the only source that possesses the detailed knowledge and unique expertise necessary to provide the required engineering services without substantial duplication of cost to the government that is not expected to be recovered through competition. The Space and Naval Warfare Systems Command, San Diego, Calif., is the contracting activity (N00039-11-D-0045).

Oceaneering International, Inc., Chesapeake, Va., is being awarded a $47,429,395 modification to previously awarded contract (N65540-05-D-0012) to provide continuing Subsafe engineering and technical services to support submarine, Subsafe, and Level I material work onboard Seawolf (SSN 21) class, Los Angeles (SSN 688) class, Ohio class (SSBN), and Virginia class submarines. Work will be performed in Puget Sound, Wash. (60 percent), Norfolk, Va. (30 percent), and Pearl Harbor, Hawaii (10 percent), and is expected to be completed by May 2014. Contract funds in the amount of $15,000,000 dollars will expire at the end of the current fiscal year. The Naval Surface Warfare Center, Carderock Division, Ship Systems Engineering Station, Philadelphia, Pa., is the contracting activity.

Toyon Research Corp.*, Goleta, Calif., is being awarded a $12,109,000 indefinite- quantity/indefinite-delivery contract for the procurement of various antennas and ancillary parts, which are integrated into communication jamming pods and electronic warfare laboratories, spares, and the incidental engineering required to fabricate, modify and/or maintain the antenna and feed assemblies. Work will be performed in Goleta, Calif., and is expected to be completed in August 2014. Contract funds will not expire at the end of the current fiscal year. This contract was not competitively procured pursuant to FAR 6.302-1. The Naval Air Warfare Center Weapons Center, China Lake, Calif., is the contracting activity (N68936-11-D-0027).

Lockheed Martin Maritime Systems and Sensors, Moorestown, N.J., is being awarded a $8,657,273 cost-plus-fixed-fee modification to previously awarded contract (N00024-10-C-5124) to exercise options for fiscal 2011 technical and engineering support and related operation and maintenance of the Navy’s Combat Systems Engineering Development Site and technical engineering support of the SPY-1A test lab and Naval Systems Computing Center. Work will be performed in Moorestown, N.J., and is expected to be completed by October 2011. Contract funds will not expire at the end of the current fiscal year. The Naval Sea Systems Command, Washington Navy Yard, D.C., is the contracting activity.

SoBran, Inc.*, Dayton, Ohio, is being awarded an $8,453,652 modification to a previously awarded time-and-material, indefinite-delivery/indefinite-quantity contract (N68936-05-D-0042) to provide 308,072 hours of logistics production support for the Fleet Readiness Center Southeast, Jacksonville. Work will be performed in Jacksonville, Fla. (95 percent), Oceana, Va. (3 percent), and Beaufort, S.C. (2 percent). Work is expected to be completed in May 2012. Contract funds will not expire at the end of the current fiscal year. The Naval Air Warfare Center Training Systems Division, Orlando, Fla., is the contracting activity.

Raytheon Co., Tucson, Ariz., is being awarded a $7,351,328 modification to previously awarded contract (N00024-11-C-5448) for three refurbished and upgraded rolling airframe missile MK 49 Mod 3 Guided Missile Launch Systems with associated hardware for LHA 7 and LCS 5. Work will be performed in Tucson, Ariz., and is expected to be completed by March 2013. Contract funds will not expire at the end of the current fiscal year. The Naval Sea Systems Command, Washington, D.C., is the contracting activity.

Pathfinder Systems, Inc.*, Arvada, Colo., is being awarded a $6,717,214 cost-plus-fixed-fee contract for a Phase III Small Business Innovation Research (SBIR) project under Topic N03-190 forthe Phase III operational prototype Marine Common Aircrew Trainer (MCAT) prototype two. This SBIR Phase III project will implement a baseline configuration upgrade based on the previously delivered MCAT prototype one and will build upon previously demonstrated and delivered Phase II simulation technologies. Work will be performed in Arvada, Colo. (95 percent), and the Naval Air Station Miramar, Miramar, Calif. (5 percent), and is expected to be completed in August 2013. Contract funds will not expire at the end of the current fiscal year. This Phase III contract was not competitively procured pursuant to FAR 6.302-5. The Naval Air Warfare Center Training Systems Division, Orlando, Fla., is the contracting activity (N61340-11-C-0021).

Raytheon Co., Tucson, Ariz., is being awarded a $6,693,470 modification to previously awarded contract (N00024-07-C-5437) for engineering and technical services in support of the MK15 Phalanx Close-In-Weapon System. The Phalanx Close-In Weapon System is a fast reaction terminal defense against low- and high-flying, high-speed maneuvering anti-ship missile threats that have penetrated all other ships’ defenses. The Phalanx Close-In Weapon System is an integral element of the fleet defense in-depth concept and the Ship Self-Defense Program. Operating either autonomously or integrated with a combat system, it is an automatic terminal defense weapon system designed to detect, track, engage, and destroy anti-ship missile threats penetrating other defense envelopes. Phalanx Close-In Weapon System is currently installed on approximately 187 Navy ships and is in use in more than 20 foreign militaries. This effort includes the governments of Japan and Saudi Arabia (1 percent) under the Foreign Military Sales Program. Work will be performed in Tucson, Ariz., and is expected to be completed by April 2012. Contract funds in the amount of $200,000 will expire at the end of the current fiscal year. The Naval Sea Systems Command, Washington, D.C., is the contracting activity.

DEFENSE LOGISTICS AGENCY

Meggitt Polymers, Rockmart, Ga., was awarded a firm-fixed-price, indefinite-delivery/indefinite-quantity, requirements type contract with a maximum $9,500,706 for aircraft fuel tanks. There are no other locations of performance. Using service is Air Force. The date of performance completion is July 2017. The Defense Logistics Agency Procurement Operations, Warner Robins, Robins Air Force Base, Ga., is the contracting activity (SPRWA1-11-D-0016).

General Petroleum*, Rancho Dominquez, Calif., was issued a line item modification on the current contract SP0600-11-D-0360/P00002. Award is a fixed-price with economic price adjustment contract with a maximum $6,920,760 for marine gas oil. Other location of performance is San Francisco, Calif. Using services are Army, Navy, Air Force, Marine Corps and federal civilian agencies. The date of performance completion is April 30, 2015. The Defense Logistics Agency Energy, Fort Belvoir, Va., is the contracting activity.

2011-07-15T16:33:00.001-07:00

EN RIESGO DE SUSPENSIÓN DE PAGOS

Standard&Poor's cierra el cerco sobre la deuda de EEUU

La agencia afirma que hay bastantes posibilidades de que degrade la deuda del país en los próximos meses.

Standard & Poor's situó hoy la deuda estadounidense "bajo vigilancia con perspectiva negativa", e indicó que hay un 50 por ciento de posibilidades de que la degrade en los próximos tres meses.

El anuncio de Standard & Poor's se suma al emitido el miércoles por otra de las grandes agencias mundiales de calificación, Moody's, que colocó bajo revisión la calificación "Aaa" de la deuda de Estados Unidos, ante la posibilidad de que no se logre un acuerdo que eleve el límite de endeudamiento del país antes del 2 de agosto. "El debate político sobre la posición fiscal de Estados Unidos y el asunto relacionado del techo de la deuda del Gobierno estadounidense, en nuestra opinión, no ha hecho más que complicarse", indicó Standard & Poor's en un comunicado.

De no lograr un acuerdo bipartidista en los próximos días, la agencia considera que el país no podría alcanzarlo "en varios años", lo que resulta "inconsistente con una calificación 'Aaa', dada la trayectoria esperada de la deuda en los próximos años.

John Chambers, director gerente de Standard & Poor's, comunicó la decisión de la agencia en una reunión privada con el líder de la mayoría demócrata en el Senado, Harry Reid, y a funcionarios de la Cámara de Comercio de EEUU y del Foro de Servicios Financieros.

Toque de atención

El subsecretario del Tesoro para finanzas domésticas, Jeffrey Goldstein, consideró la medida un nuevo toque de atención sobre la urgencia de que republicanos y demócratas encuentren cuanto antes un acuerdo que evite que el país entre en suspensión de pagos por primera vez en su historia. "La acción de hoy de S&P demuestra lo que el Gobierno de (Barack) Obama lleva diciendo un tiempo: que el Congreso debe actuar expeditamente para evitar un incumplimiento de las obligaciones nacionales, y para trazar un plan de reducción del déficit creíble y que tenga un apoyo bipartidista", dijo Goldstein en un comunicado.

Si el Congreso y el Gobierno finalmente llegan a un acuerdo antes del 2 de agosto, S&P "revisará los detalles" de ese plan en los 90 días siguientes para determinar si, en su opinión, "es suficiente para estabilizar la dinámica de la deuda de Estados Unidos a medio plazo", según el comunicado de la agencia.

Obama alentó a los líderes republicanos y demócratas del Congreso a esforzarse para llegar a un acuerdo en las próximas 24 a 36 horas, para evitar exponerse a la fecha límite en la que caduca el anterior tope de la deuda, de 14,29 billones de dólares.

El presidente, cuya propuesta inicial estaba ligada a una ambiciosa reducción del déficit valorada en unos 4 billones de dólares en los próximos diez años, sigue abogando por el "acuerdo más amplio posible", pero está ahora más dispuesto a aceptar un plan más modesto, con un recorte de unos 2 billones de dólares.

Sin embargo, la propuesta de Obama, que incluye concesiones demócratas como los recortes a la Seguridad Social, sigue contemplando subidas de impuestos, algo que los republicanos aseguran que no aceptarán.

David Ogilvy's Lesson for Libertarians

by Michael Cloud

"A good advertisement is one which sells the product without drawing attention to itself," wrote advertising legend David Ogilvy.

Good advertisements persuade people to buy and use the product. Bad advertisements convince people that the ad was clever or funny or interesting.

Good advertisements create an ever-growing number of customers. Bad advertisements leave sales stagnant, but they win advertising industry awards.

David Ogilvy's insight is equally true of libertarian speakers and talk show guests.

Good libertarian speakers win people to liberty. Slick libertarian speakers convince the audience that they are clever or interesting.

Good libertarian TV and radio talk show guests sell the audience on libertarianism. Slick libertarian guests sell the audience on them.

Good libertarian spokespeople leave the audience excited about liberty. Slick libertarian spokespeople leave the audience excited about them.

Do you want the audience jazzed about the product: liberty? Or the advertisement: the speaker?

Do you want new supporters of freedom? Or fans of the speaker?

Do you want the audience embracing and advancing liberty? Or embracing and promoting the speaker?

Why is this important to you? Why is this important to libertarianism?

Because your choice will determine whether we grow the libertarian movement, whether we advance the libertarian cause -- or whether we promote the careers of slick libertarian personalities who do NOT increase our numbers or advance our cause.

Because your choice will determine whether we make America more free -- or an ambitious libertarian personality more famous.

Because your choice will either push liberty forward or hold it back in America.

When you support and promote spokespeople who put liberty first, we will get more libertarians and more liberty.

Michael Cloud is author of the acclaimed book Secrets of Libertarian Persuasion, available exclusively from the Advocates.

Should You Oppose the "Redistribution of Wealth?"

by Michael Cloud ShareThis

"These government programs and policies take us closer to -- or are -- the redistribution of wealth," say pundits, bloggers, and talk radio hosts. Then they expose and explain and attack the "redistribution of wealth."

Some bring light to the subject. Others just heat.

Will you empty your mind of all you know and believe about "the redistribution of wealth?" Will you look at the matter with fresh eyes and an open mind?

Will you "examine your premises," as Ayn Rand wisely counseled?

Ask: What is the redistribution of wealth?

First, the meaning of the key words: "wealth" and "redistribution."

"Wealth" means all goods, services, or information that have economic value. Usually money or goods.

To understand "redistribution," we need to first grasp the meaning of "distribution."

"Distribute" means to deliver, disperse, spread, give out, or hand out. "Distribution" means the act of distributing or condition of being distributed.

"Redistribute" means to distribute again. "Redistribution" is the act of distributing again or the condition of being distributing again.

Wealth is first distributed when each of us earns or produces it.

Every transfer afterwards is redistribution.

When you barter, you redistribute wealth.

When you buy or sell, you redistribute wealth.

When you give or receive gifts or charity, you redistribute wealth.

When you borrow or loan money, you redistribute wealth.

Every voluntary transfer of wealth is redistribution. A free market is a mechanism for voluntary redistribution of wealth.

But there is also the involuntary, coerced, forced redistribution of wealth.

Armed robbery is a coerced transfer of wealth.

Burglary is, too.

Embezzlement and fraud are coerced transfers of wealth.

So is extortion.

I support each person's right to freely choose, to voluntarily redistribute his own wealth.

I oppose the criminal, coercive, involuntary redistribution of a person's wealth.

Don't you? Isn't this the litmus test for being a libertarian?

I'd wager that most of the critics of the redistribution of wealth would agree with you and me -- up to this point.

But then they'd add, "I'm talking about the GOVERNMENT'S redistribution of wealth."

Okay.

Every tax transfers money from the man or women who earned it to the government.

Every tax redistributes wealth. Then the government again redistributes the wealth to government contractors, government employees, politically-privileged special interests, and other beneficiaries.

Every government mandate on private citizens and private businesses redistributes wealth.

Many government laws and regulations redistribute wealth.

So, do these critics oppose ALL "government redistribution of wealth?" All taxes? All government spending?

Or, are they just against certain KINDS of "government redistribution of wealth?" Or for certain purposes? Or for certain individuals or groups?

Or, are they only against these KINDS or these PURPOSES when "the other political party" controls the White House, Senate, or House of Representatives?

Some critics are engaging in self-serving, misleading propaganda.

But many largely agree with the libertarian principle. Not totally. But mostly.

If they examine their premises, many will reject the phrasing and framing of the two-edged slogan. They will find better concepts and language to oppose Big Government -- to endorse and advocate individual liberty, personal responsibility, and small government.

Michael Cloud is author of the acclaimed book Secrets of Libertarian Persuasion, available exclusively from the Advocates.

Put a Ceiling on Overregulation

Make regulatory reform part of the big deal.

By John Berlau, Clyde Wayne Crews

After months of saying it wanted a “clean” hike in borrowing authority, the Obama administration now proclaims it wants to do something “big” in a debt-ceiling package just as its self-imposed deadline is approaching. On NBC’s Meet the Press this Sunday, Treasury Secretary Tim Geithner said the president wanted to do the “biggest, most substantial deal possible, the deal that’s going to be best for the economy.”

GOP leaders should take up this challenge and put on the bargaining table something big that would also be a boost the economy: curbing overregulation that’s crushing economic growth.

With the economy teetering, leaders of both parties realize that long-term issues must be addressed in a debt-ceiling package. The American people agree and so, seemingly, do the markets. While the bond market has registered barely a hiccup to news about the debt-ceiling talks, stocks and other financial instruments continue to drop after the release of dismal growth and employment statistics.

Yet when it comes to the foundations of the U.S. economy, neither party is using the debt-ceiling talks to address the proverbial elephant in the room. In this case, it’s a trillion-dollar elephant that is stomping all over new business formation and job growth.

Taxes and spending are of course very important. House Speaker John Boehner is right to insist that debt reduction come from spending cuts rather than net tax hikes. It is more than reasonable for congressional leaders to shape most of the package to their liking, because the Constitution explicitly makes approval of new borrowing a prerogative of Congress, not the presidency.

But the problem here is that GOP leaders aren’t exercising this prerogative to deal with the vital issue of overregulation. Even if the GOP got all the spending cuts it is asking for, with no increase in taxes, Americans would still face the hidden tax of overregulation.

Even the Obama administration itself has pledged — in its rhetoric — to rein in regulation. “If they are not providing the kind of benefits in terms of the public health, and clean air and clean water, and worker safety that have been promised, then we should get rid of some of those regulations,” Obama said in his press conference on Monday following up on his calls earlier this year for repealing “outdated regulations that stifle job creation.”

This language sounds strikingly similar to language in the House GOP’s “Plan for America’s Job Creators” unveiled in May, which states: “We must remove onerous federal regulations that are redundant, harmful to small businesses, and impede private sector investment and job creation.”

Yet, amazingly, even though both parties now want the debt-ceiling package to address issues of economic growth — all the more so, in the wake of Friday’s dismal employment numbers — no one has put measures to rein in regulation on the table. Since both Obama and GOP leaders are saying that overregulation is a barrier to job creation, it’s time to make regulatory curbs part of the debt-ceiling negotiations. As Sen. Olympia Snowe (R., Maine), not generally known as an anti-government Tea Party stalwart, wrote recently in Politico, “One of the most effective ways government can spur job creation is to pass substantial regulatory reforms — immediately.”

A debt-ceiling deal to spur growth without adding to our fiscal woes must contain measures to halt and reverse the mounting regulatory burden. The Competitive Enterprise Institute’s annual study “Ten Thousand Commandments” found that the Federal Register, which spells out all the new regulation the government has issued, stands — as of the end of 2010 — at an all-time-record high of 81,405 pages. Meanwhile, the sheer number of regulations in the pipeline at the end of 2010 stood at 2,439, a 19 percent increase from 2009.

In 2010, the Obama administration issued more than 90 rules that regulatory agencies figure will cost the economy at least $100 million apiece. A single provision of the 2010 Dodd-Frank financial overhaul — the pending rule on new collateral requirements for derivatives — could cost U.S. manufacturers and other firms as much as $1 trillion in lost capital and liquidity, according to an estimate by the International Swaps and Derivatives Association. The Atlantic magazine finance columnist Daniel Indiviglio largely agrees with ISDA’s calculation, arguing that the cost “would certainly be in the hundreds of billions.”

This and other pending regulations have attracted bipartisan criticism. Democrats have joined Republicans in expressing objections to the Federal Communications Commission’s “net neutrality” mandates on Internet providers, the Department of Education’s “gainful employment” regulations on for-profit colleges, and the Environmental Protection Agency’s plans to regulate carbon dioxide as a pollutant under the Clean Air Act — a backdoor cap-and-trade scheme that Time has called “the most far-reaching environmental regulatory scheme in American history.”

The ideological gulf between Obama and the GOP on many of these regulations is indeed wide, and it may be unrealistic to address all these edicts in a debt-ceiling deal. Still, since both Obama and the GOP recognize that regulation can be a barrier to growth, the debt-ceiling package can set a framework to put constraints on regulatory agencies and hold them more accountable to Congress and the courts. At the very least, any hike in borrowing authority should be conditioned on passage of major elements of bills pending in Congress to reform the regulatory process. The GOP should give the Obama administration the chance to back up at least some of its rhetoric on overregulation.

First, a debt-ceiling deal should include passage of the Freedom Act sponsored by Senator Snowe. This bill received the support of 53 senators — including six Democrats — when voted on in June. The act would, among other things, give small business more access to the courts to challenge rules.

Current rules requiring agencies to minimize costs for smaller firms lack teeth, because firms are required to “exhaust” time- and money-consuming challenges before agencies before they can get judicial review. This can be next to impossible for firms that have trouble securing money for day-to-day operations, let alone a costly lawsuit. The Freedom Act would make this process easier for smaller entrepreneurs by allowing suits to be filed as soon as a rule is proposed.

And where Snowe’s bill would give the courts more oversight over regulations, the REINS Act would do the same for Congress. It would require that major rules scored as costing the economy $100 million or more be affirmatively approved by both houses of Congress.

The bill, a part of the House GOP’s job-creation plan, has been praised by such respected scholars as New York Law School professor David Schoenbrod and Case Western Reserve University professor Jonathan Adler. Adler writes in the current issue of the policy journal Regulation that “requiring congressional approval before economically significant rules may take effect ensures that Congress takes responsibility for major regulatory policy decisions.” Noting that the REINS Act designs a streamlined procedure for approval of regulations that is not subject to filibuster, Adler compares the bill to legislation creating “fast-track trade authority or base closing” procedures and argues that it will likely not delay “needed regulatory initiatives.”

Meanwhile, Sen. Mark Warner’s (D., Va.) “one-in, one-out” proposal for balancing new regulations by getting rid of old ones at least helps put a “ceiling” on today’s regulatory enterprise. It belongs on the table too.

Sober reflection indicates that ours is an age in which we need, not politicians who come to Washington merely to “get things done,” but leaders who recognize when it’s time to get things “undone.” Balancing the budget may address our fiscal woes. But to resolve the current “ceiling” we suffer on job creation, we must reduce the “regulatory budget” of costly mandates faced by entrepreneurs.

The Shadow Science of Economics

by John Derbyshire

Bodrum, Turkey

I spent the Memorial Day weekend as a guest of Professor Hans-Hermann Hoppe’s Property and Freedom Society at their annual conference in Bodrum, Turkey. It was a wonderfully relaxing break, for which I am very much obliged to the good professor, his charming wife, and their co-organizers. I gave a talk about China and got to see some of Turkey (a country that was new to me), and I listened to some interesting and instructive lectures.

The PFS exists to help promote the economic and political libertarianism of Ludwig von Mises and Murray Rothbard. I was in Bodrum because Prof. Hoppe was kind enough to invite me, not because I am a particularly dogmatic disciple of those gents. I approve of them and their doctrines in a vague, general sort of way, as I approve of anything much to the right of the statist elephantiasis dominant in the modern West and which looks to be sailing into some great crisis in the near future.

On the other hand I have issues with libertarianism—with free trade, for instance, and with the open-borders dogma that too many libertarians (though not all the ones at Bodrum, perhaps not even a majority) cling to with religious zeal.

If I had to be marooned on a desert island with an economist, I’d much prefer it to be someone from the Austrian School, merely for their devotion to liberty; but like other economists, the Austrians seem to be uninterested in the crooked-timber aspect of human nature. (I might exempt some behavioral economists from that observation, but as Nikolay Gertchev demonstrated in his talk at Bodrum, the Austrians look askance at behavioral economics. The title of Nikolay’s forceful address was “Psychology Ain’t Economics.”)

“Human nature, and a true understanding thereof, precedes everything in the human world.”

I have never read anything by an economist—though I confess I have read far too little in the field—or heard any lecture by an economist that did not leave me thinking, “If this guy’s fundamental assumptions about human nature were true, human history would have been utterly different.”

Still, I suppose someone has to do economics, and the Austrians do it closer to my own political tastes than any others. There was even something calming about listening to their airy abstractions there at Bodrum. I came away feeling about the Austrian school somewhat the same way I feel about the Anglican Church: unable to assent wholeheartedly to the doctrines, but sympathetic at some deep level and wishing them well.

Back home in New York, I checked through the mail that had arrived in my absence. It included my subscription copy of The Economist. Page 87, “The Future of Mobility”:

Immigration is unpopular in rich countries because people overestimate its costs and underestimate its benefits. An influx of unskilled migrants may drag down the wages of unskilled natives, but this effect is “very small at most, and may be irrelevant”, according to a number of different studies.

Really? According to a number of different different studies, that is not true. So what is the non-economist to think? Perhaps the same thing he finds himself thinking when surveying the list of recent Nobel Prize winners in economics and noticing that for every large opinion that has won a Nobel, the contrary opinion has also won one. Real sciences don’t work like that.

And then (going back to The Economist):

The next big wave of migration will come from Africa.

Oh. The Economist article (it is actually a book review) is illustrated with a photograph of some young black African men, presumably the leading edge of that “next big wave.”

I suppose the Economist reviewer would be shocked speechless to know that some large majority of Europeans and Americans, presented with that picture, imagine not fresh, keen young workers coming to help ease their labor shortage. Instead, in their wicked human hearts, they see sowers of discord, destroyers of civil peace, inmates of penitentiaries, carriers of disease, agents of social and economic entropy, and consumers of welfare.

That’s economics for you—and economists, and The Economist. The world of their imagination is a cool, well-lit world in which thoughtful human beings, responding to rational incentives, move along paths defined by elegant mathematical formulas. It is a shadow world, a dream of perfection. It resembles, but only as shadows resemble objects, the grimy, gamy, half-mad world of actual humanity—the substance of human affairs.

The human beings who populate the economist’s—certainly The Economist’s—imagination are mere tokens. They have no allegiance to nation, faith, family, or the huge old inbred extended families we call races. Still less do they exhibit features so evident to those of us who live outside great universities: pride, stubbornness, folly, misplaced loyalty, and the occasional irresistible urge to cut off one’s nose to spite one’s face. They are not biological entities at all.

Economics can have a future, if the human race does. It will not be a container of large truths, though, unless it somehow incorporates facts about human nature that the earthier human sciences—genetics, paleoanthropology, evolutionary biology, neurophysiology, and psychometrics—are only beginning to wrestle into submission.

Until it is willing to do this, and actually can do it, economics will be a discipline of shadows, not substances. Worse yet, it will continue to be a plaything of ideologues, as it has so disastrously been in the past. Human nature, and a true understanding thereof, precedes everything in the human world.

What is anarcho-capitalism?

1. What is anarcho-capitalism?

Anarcho-capitalism is the political philosophy and theory that

the State is an unnecessary evil and should be abolished, and
a free-market private property economic system is morally permissible.

Part one is simply the definition of "anarchism," and part two is soft propertarianism, known more generally as "a free market" or "laissez-faire." Let's look more closely at each of the two parts of our definition. Moral permissibility is a "minimum" position. Almost all anarcho-capitalists believe also that a laissez-faire economic system is generally better than alternatives. Some strong propertarians, such as objectivists, go further and claim that laissez-faire is the only moral economic system.

A typical dictionary definition^Pf of anarchism is: "The theory or doctrine that all forms of government are oppressive and undesirable and should be abolished."^Pf This definition follows the etymology of the word: "Anarchism" is derived from the Greek αναρχία meaning "without archon" (ruler, chief, or king.) This is the core meaning of the term - against the State. This means against it in principle, as an institution, not merely against certain policies or personnel.

Murray Rothbard coined the term "anarcho-capitalist" in the winter of 1949 or 1950. "My whole position was inconsistent [...], there were only two logical possibilities: socialism, or anarchism. Since it was out of the question for me to become a socialist, I found myself pushed by the irresistible logic of the case, a private property anarchist, or, as I would later dub it, an anarcho-capitalist."^Pf

Some prefer the term "market anarchism" to avoid the negative connotations some people have with "capitalism."

2. Why should one consider anarcho-capitalism?

First, there is the issue of self-ownership, as the abolitionists called it, or moral autonomy as the philosophers call it. Is your life your own moral purpose? Do you owe anyone obedience regardless of consent? In natural rights language: Do you have rights - moral claims to freedom of action? If you answer yes to any of these questions, then logic leads you to the position of philosophical anarchism.

The defining mark of the state is authority, the right to rule. The primary obligation of man is autonomy, the refusal to be ruled. It would seem, then, that there can be no resolution of the conflict between the autonomy of the individual and the putative authority of the state. Insofar as a man fulfills his obligation to make himself the author of his decisions, he will resist the state's claim to have authority over him. That is to say, he will deny that he has a duty to obey the laws of this state simply because they are the laws. In that sense, it would seem that anarchism is the only political doctrine consistent with the virtue of autonomy." - Robert Paul Wolff, In Defense of Anarchism.

A second more utilitarian reason is the dismal record of States. Considering all the war, genocide, slavery, and repression perpetrated by States through history, might humanity do better without this barbaric institution? As the young Edmund Burke wrote in the world's first anarchist essay (before he went conservative):

These Evils are not accidental. Whoever will take the pains to consider the Nature of Society, will find they result directly from its Constitution. For as Subordination, or in other Words, the Reciprocation of Tyranny, and Slavery, is requisite to support these Societies, the Interest, the Ambition, the Malice, or the Revenge, nay even the Whim and Caprice of one ruling Man among them, is enough to arm all the rest, without any private Views of their own, to the worst and blackest Purposes; and what is at once lamentable and ridiculous, these Wretches engage under those Banners with a Fury greater than if they were animated by Revenge for their own proper Wrongs - Edmund Burke, A Vindication of Natural Society.

That was written in 1756, long before modern weapons of mass destruction and long before 170 million civilian people were murdered by their own governments in the 20th century. That's just civilian deaths perpetrated by their own governments; it doesn't count the deaths due to enemy States, deaths of soldiers, dislocated refugees, and so on. To quote Rothbard, "If we look at the black record of mass murder, exploitation, and tyranny levied on society by governments over the ages, we need not be loath to abandon the Leviathan State and ... try freedom."

3. Do anarcho-capitalists favor chaos?

No. Anarcho-capitalists believe that a stateless society would be much more peaceful, harmonious, and prosperous than society under statism. We see life under States as chaotic - the insanity of war and the arbitrariness of government regulation and plunder. Anarcho-capitalists agree with the "father of anarchism" Pierre Proudhon: "Liberty is not the daughter but the mother of order," and his contemporary Frederic Bastiat, who wrote of the "natural harmony" of the market, that "natural and wise order that operates without our knowledge." ("Economic Harmonies")

4. Isn't anarcho-capitalism utopian?

No. Anarcho-capitalists tend to be pragmatic, and argue that, no matter how good or bad man is, he is better off in liberty. If men are good, then they need no rulers. If men are bad, then governments of men, composed of men, will also be bad - and probably worse, due to the State's amplification of coercive power. Most anarcho-capitalists think that some men are okay and some aren't; and there will always be some crime. We are not expecting any major change in human nature in that regard. Since utopianism by definition requires a change in human nature, anarcho-capitalism is not utopian.

Tea Party Confusion

By Tibor Machan

The idea that politicians should sign a pledge to promote personal morality is contrary to the avowed Tea Party commitment to small government. If you want the government to have a restricted scope, you should stick to the US Declaration as your guide: Government is instituted so as to secure our rights! It is not instituted, at least in the American political tradition, so as to be our moral police!

This is the kind of inconsistency that will bode very ill for the Tea Party and the Republicans. It is just like the liberals’ inconsistency of preaching choice in the abortion debate but loving to take it from us in nearly everything else. Obama care comes to mind which commands people to buy health insurance and is, thus, anything but pro choice. And what about coercing us all to buy green light bulbs?

Who are these people, imposing their standards of right conduct on the rest? Both sides of the political spectrum are still wedded to their tyrannical ways. No wonder so few people vote.

Here is the pledge Tea Party Republican Rep. Michell Bockmann wants candidates to sign:
“Therefore, in any elected or appointed capacity by which I may have the honor of serving our fellow citizens in these United States, I the undersigned do hereby solemnly vow* to honor and to cherish, to defend and to uphold, the Institution of Marriage as only between one man and one woman. I vow* to do so through my:
Personal fidelity to my spouse.
Respect for the marital bonds of others.
Official fidelity to the U.S. Constitution, supporting the elevation of none but faithful constitutionalists as judges or justices.
Vigorous opposition to any redefinition of the Institution of Marriage – faithful monogamy between one man and one woman – through statutory-, bureaucratic-, or court-imposed recognition of intimate unions which are bigamous, polygamous, polyandrous, same-sex, etc.
Recognition of the overwhelming statistical evidence that married people enjoy better health, better sex, longer lives, greater financial stability, and that children raised by a mother and a father together experience better learning, less addiction, less legal trouble, and less extramarital pregnancy.
Support for prompt reform of uneconomic, anti-marriage aspects of welfare policy, tax policy, and marital/divorce law, and extended “second chance” or “cooling-off” periods for those seeking a “quickie divorce.”
Earnest, bona fide legal advocacy for the Defense of Marriage Act (DOMA) at the federal and state levels.
Steadfast embrace of a federal Marriage Amendment to the U.S. Constitution which protects the definition of marriage as between one man and one woman in all of the United States.
Humane protection of women and the innocent fruit of conjugal intimacy – our next generation of American children – from human trafficking, sexual slavery, seduction into promiscuity, and all forms of pornography and prostitution, infanticide, abortion and other types of coercion or stolen innocence.
Support for the enactment of safeguards for all married and unmarried U.S. Military and National Guard personnel, especially our combat troops, from inappropriate same-gender or opposite-gender sexual harassment, adultery or intrusively intimate commingling among attracteds (restrooms, showers, barracks, tents, etc.); plus prompt termination of military policymakers who would expose American wives and daughters to rape or sexual harassment, torture, enslavement or sexual leveraging by the enemy in forward combat roles.
Rejection of Sharia Islam and all other anti-woman, anti-human rights forms of totalitarian control.
Recognition that robust childbearing and reproduction is beneficial to U.S. demographic, economic, strategic and actuarial health and security.
Commitment to downsizing government and the enormous burden upon American families of the USA?s $14.3 trillion public debt, its $77 trillion in unfunded liabilities, its $1.5 trillion federal deficit, and its $3.5 trillion federal budget.
Fierce defense of the First Amendment?s rights of Religious Liberty and Freedom of Speech, especially against the intolerance of any who would undermine law-abiding American citizens and institutions of faith and conscience for their adherence to, and defense of, faithful heterosexual monogamy.”

Some of this is of course redundant–anyone who takes the oath to defend the US Constitution has made many of these pledges, namely, those that involve protection of individual rights. But many of them are meddling pieces of political posturing as the citizenry’s moral guide, as our nannies, just as Al Gore wants to be our moral guide vis-a-vis global warming or other environmental issues.

One thing is for sure: anyone who signs this would not be a supporter of limited government, the sort Tea Party folks are proud to claim to be.

Why U.S. Leaders Deceive Their Own People

by Ted Galen Carpenter

Professor John Mearsheimer's latest book, Why Leaders Lie, provides a number of intriguing insights and surprising conclusions. Perhaps his most unexpected conclusion is that leaders lie to foreign leaders far less frequently than is generally assumed. Indeed, he contends that leaders lie to their own people more than they do to foreign counterparts. He does, however, concede that less blatant forms of deception, such as "spinning" and "concealment" are pervasive in international politics.

Two other conclusions ought to be deeply troubling to populations in democratic countries, and especially so to Americans. One is that officials in democratic political systems are more likely to deceive their own people — even engaging in outright lies — than officials in autocratic systems. His reasoning on that point is solid, and he provides compelling evidence to support his case. Mearsheimer's thesis is that democratic leaders are much more dependent than autocrats on public support for foreign policy initiatives, especially when an initiative includes going to war. If the available evidence is weak that a major security threat exists, but political leaders believe that taking military action is in the national interest, a powerful incentive exists to inflate the threat to gain badly needed public support.

A second, related part of his thesis is that political leaders are much more inclined to lie involving wars of choice rather than wars of necessity. Again, there are ample historical examples supporting his argument.

Ted Galen Carpenter, senior fellow of foreign policy studies at The Cato Institute, is the author of Smart Power: Toward a Prudent Foreign Policy for America, as well as other books on international affairs.

More by Ted Galen Carpenter

If Mearsheimer is correct, Americans must face the troubling realization that U.S. leaders will be unusually prone to engage in lying as well as milder forms of deception to gull their own populations. Not only is the United States a long-standing democracy, but it is the nation since World War II that is most inclined to embark on wars of choice — often involving issues that have little or no connection to genuine American security interests. The list of U.S. military interventions just in the post-Cold War era — Panama, Somalia, Haiti, Bosnia, Kosovo, Iraq (twice), and the extended mission in Afghanistan — is definitive testimony to that tendency.

America's status as a democracy and a country inclined to wage wars of choice is a deadly combination that creates an overwhelming incentive for political leaders to use whatever techniques of threat inflation are necessary to stampede an otherwise skeptical public into supporting the latest dubious military crusade. The potential corrosive effect on America's political institutions and values are all too apparent. At a minimum, Americans ought to be on guard and doubly skeptical when an administration's spin machine goes into action making the case that Lower Slobovia's mistreatment of Upper Slobovians really, truly poses a dire security threat that only U.S. military action can prevent. The American people have heard such a refrain — and believed it — far too often for the health of the Republic.

Federal Spending Doesn't Work

by Chris Edwards

Despite ongoing federal deficits of more than $1 trillion a year, many liberals are calling for more government spending to "create jobs." At the same time, liberals are opposing budget cuts because that would supposedly hurt the economic recovery. And then there is the perennial problem of Democrats and Republicans defending spending on their particular favored programs.

With all these forces arrayed against budget sanity, it's time to take a back-to-basics look at the role of government spending in the economy.

Federal spending has soared over the past decade. As a share of gross domestic product, spending grew from 18 percent in 2001 to 24 percent in 2011. The causes of this expansion include the costs of wars, growing entitlement programs, the 2009 stimulus bill and rising spending on discretionary programs such as education.

The reality is that Washington is very bad at trying to micromanage short-term economic performance.

New projections from the Congressional Budget Office show that without reforms spending will keep rising for decades to come. The CBO's "alternative fiscal scenario" shows spending growing to 34 percent of GDP by 2035. Thus, the federal government is on course to gobble up almost twice as much of the U.S. economy 24 years from now as it did just a decade ago.

America is becoming a big-government nation

Sadly, America is rapidly becoming a big-government nation. Data from the Organization for Economic Cooperation and Development compares spending by all levels of government among its 31 high-income member countries. This year, government spending in the United States hit 41 percent of GDP, meaning that more than 4 out of every 10 dollars that we produce is consumed by our federal, state and local governments.

We used to have a substantial government size advantage compared to other countries. But Figure 1 shows that while government spending in the United States was about 10 percentage points of GDP smaller than the average OECD country in the past, that gap has now shrunk to just 4 points. A number of high-income nations — such as Australia — now have smaller governments than does the United States.

This is very troubling because America's strong growth and high living standards were historically built on our relatively small government. The ongoing surge in federal spending is undoing this competitive advantage that we have enjoyed in the world economy.

CBO projections show that federal spending will rise by about 10 percentage points of GDP between now and 2035. If that happens, governments in the United States will be grabbing more than half of everything produced in the nation by that year. That would doom future generations of Americans to unbearable levels of taxation and a stagnant economy with fewer opportunities.

Government spending doesn't stimulate

There is renewed talk in Washington about further spending measures to try and stimulate the weak economy. That idea is remarkably naïve and misguided. It is now more than two years after passage of the $821 billion stimulus package in 2009, and it is obvious that that effort was a hugely expensive Keynesian policy failure.

The Obama administration's attempt to pump up "aggregate demand" in the economy simply hasn't worked. In Keynesian theory, the total amount of deficit spending is the amount of "stimulus" delivered to the economy. Well, we've had deficit spending of $459 billion in 2008, $1.4 trillion in 2009, $1.3 trillion in 2010 and $1.4 trillion in 2011.

Yet despite that enormous deficit-spending stimulus, U.S. unemployment remains stuck at more than 9 percent and the recovery is very sluggish compared to prior recoveries. Indeed, the current recovery appears to be slower than any since World War II, according to a recent Joint Economic Committee study.

Obama administration economists had claimed that the Keynesian "multipliers" from government spending are large, meaning that spending would give a big boost to GDP. But other economists have found that Keynesian multipliers are actually quite small, meaning that added government spending mainly just displaces private-sector activities. Stanford University economist John Taylor took a detailed look at GDP data over recent years, and he found little evidence of any benefits from the 2009 stimulus bill. Any "sugar high" to the economy from recent increases in government spending was at best very small and short-lived.

The reality is that Washington is very bad at trying to micromanage short-term economic performance. Its failed stimulus actions have just put the nation further into debt, which will harm our long-term prosperity. Harvard University's Robert Barro calculated that any short-term benefit that the 2009 stimulus bill may have provided is greatly outweighed by the future damage caused by higher taxes and debt.

The government's leaky bucket

Let's take a look at how government spending damages the economy over the long run. Spending is financed by the extraction of resources from current and future taxpayers. The resources consumed by the government cannot be used to produce goods in the private marketplace. For example, the engineers needed to build a $10 billion government high-speed rail line are taken away from building other products in the economy. The $10 billion rail line creates government-connected jobs, but it also kills at least $10 billion worth of private jobs.

Indeed, the private sector would actually lose more than $10 billion in this example. That is because government spending and taxing creates "deadweight losses," which result from distortions to working, investment and other activities. The CBO says that deadweight loss estimates "range from 20 cents to 60 cents over and above the revenue raised." Harvard University's Martin Feldstein thinks that deadweight losses "may exceed one dollar per dollar of revenue raised, making the cost of incremental governmental spending more than two dollars for each dollar of government spending." Thus, a $10 billion high-speed rail line would cost the private economy $20 billion or more.

The government uses a "leaky bucket" when it tries to help the economy. Former chairman of the Council of Economics Advisors, Michael Boskin, explains: "The cost to the economy of each additional tax dollar is about $1.40 to $1.50. Now that tax dollar … is put into a bucket. Some of it leaks out in overhead, waste and so on. In a well-managed program, the government may spend 80 or 90 cents of that dollar on achieving its goals. Inefficient programs would be much lower, $0.30 or $0.40 on the dollar." Texas A&M economist Edgar Browning comes to similar conclusions about the magnitude of the government's leaky bucket: "It costs taxpayers $3 to provide a benefit worth $1 to recipients."

The larger the government grows, the leakier the bucket becomes. On the revenue side, tax distortions rise rapidly as tax rates rise. On the spending side, funding is allocated to activities with ever lower returns as the government expands. Figure 2 illustrates the consequences of the leaky bucket. On the left-hand side, tax rates are low and the government initially delivers useful public goods such as crime reduction. Those activities create high returns, so per-capita incomes initially rise as the government grows.

As the government expands further, it engages in less productive activities. The marginal return from government spending falls and then turns negative. On the right-hand side of the figure, average incomes fall as the government expands. Government in the United States — at more than 40 percent of GDP — is almost certainly on the right-hand side of this figure.

In his 2008 book, Stealing from Ourselves, Professor Browning concludes that today's welfare state reduces GDP — or average U.S. incomes — by about 25 percent. That would place us quite far to the right in Figure 2, and it suggests that federal spending cuts would substantially increase U.S. incomes over time.

All the official projections show rivers of red ink for years to come unless federal policymakers enact major budget reforms. Unless spending is cut, the United States is headed for economic ruin. We need to cut entitlements, domestic discretionary programs and defense spending, as Cato has detailed at www.DownsizingGovernment.org.

Chris Edwards is editor of Cato Institute's Downsizing Government.org.

More by Chris Edwards

Cutting spending would boost the economy because many federal programs have very low or negative returns. Many programs cause severe economic distortions. Other programs damage the environment and restrict individual freedom. And the federal government has expanded into hundreds of areas that would be better left to state and local governments, businesses, charities and individuals.

With the upcoming debt-limit vote, fiscal conservatives in Congress have a real chance to start turning the tide. If they don't stick to their guns, the "life, liberty and pursuit of happiness" we celebrate this July 4 will become meaningless as Washington usurps an ever larger share of our incomes and our economy.

Tim Pawlenty: The Latest Dangerous Neoconservative

by Doug Bandow

Republicans have spent a decade as the party of war. In fact, since President George W. Bush abandoned his call for a "humble foreign policy" the country has not been at peace. Now former Minnesota Gov. Tim Pawlenty has unabashedly raised the neoconservative banner.

President Bill Clinton famously wished to be a wartime leader, but ordering 78 days of high-altitude bombing of Serbia doesn't count. When he left office Americans were not in combat, other than undertaking episodic air and missile strikes to enforce the "no fly" zone over Iraq. Looking back, those were the good ole days.

Unfortunately, this relative peace ended with 9/11. Rather than limit his response to targeting al-Qaeda, President Bush launched two nation-building crusades.

Doug Bandow is a senior fellow at the Cato Institute. A former special assistant to Ronald Reagan, he is the author of Foreign Follies: America's New Global Empire (Xulon)

More by Doug Bandow

The first, in Afghanistan, is nearing its tenth year with little success to show. As the attack on the Intercontinental Hotel demonstrates, even the capital of Kabul is not safe.

The second, in Iraq, generated a new terrorist franchise and turned an entire nation into a charnel house. Over time, U.S. military operations spread into Pakistan and Yemen, and today qualify as "hostilities" by any definition except that used by the Obama administration.

President Barack Obama has initiated his own war, in Libya, for largely discredited humanitarian claims. Nevertheless, the GOP's most avid cheerleaders for war, Senators John McCain and Lindsey Graham, have pressed for escalation in North Africa. Sen. Graham also has proposed military action against Syria.

Four years ago advocates of permanent war dominated the Republican presidential race. Rudy Giuliani was perhaps the most hawkish but least informed candidate. The other GOP presidential candidates, other than Rep. Ron Paul, also advocated pursuing the American imperium, irrespective of cost. Even Mitt Romney, who presented himself as a responsible businessman, sounded like a neocon bot.

Sen. McCain ended up as the Republican presidential nominee and his hawkish mien defined the GOP fall campaign. He even urged confrontation with nuclear-armed Russia in its conflict with the country of Georgia — which started the conflict. Had McCain won the election, no one knows how many additional wars Washington now would be fighting.

But reality has made a reemergence in Republican ranks. Rep. Paul has been joined by another ideological libertarian, former New Mexico Gov. Gary Johnson. Former Utah Gov. Jon Huntsman has expressed skepticism of the Afghan war. And the newly refurbished Mitt Romney has taken several carefully choreographed steps away from the neocon cry of "Afghanistan forever."

The result has been much wailing and gnashing of teeth in the neoconservative camp, and especially by Senators McCain and Graham. In their view, anyone who fails to endorse killing foreigners in at least five different countries or believes that Americans cannot afford to forever police the globe is an "isolationist."

Now candidate Pawlenty has taken up the cry of "war now, war forever" with his speech to the Council on Foreign Relations. Naturally, it took him little time to toss the "I" word at his primary opponents: "parts of the Republican Party now seem to be trying to out-bid the Democrats in appealing to isolationist sentiments."

The talk was long on rhetoric but short on reality. Candidate Pawlenty obviously is a true believer in Washington's ability to run the world. The U.S. president need only speak with sufficient firmness — unlike Barack Obama, naturally — and the world will come to heel.

Pawlenty focused on the struggle of Arab peoples against authoritarian governments, many long supported by the United States: "We can help steer events in the right direction." He complained that the Obama administration stood by as an election was stolen in Iran only "to see the Green Movement crushed." He decried the reduction in foreign aid as "a lack of support" for democracy in Egypt. Declared Pawlenty: "I called for Assad's departure on March 29; I call for it again today."

As for policy, Pawlenty called for more American micro-management in more countries:

"We must do more than monitor polling places."
We must use foreign aid "to build good allies."
"We must insist that our international partners get off the sidelines and do the same."
We must tell new government "the truth," that "economic growth and prosperity are the result of free markets and free trade."
We must "commit America's strength to removing Qaddafi."
"We should press new friends to end discrimination against women, to establish independent courts, and freedom of speech and the press."
"We must insist on religious freedoms for all."
"We need to tell the Saudis what we think."
"We need to be frank about what the Saudis must do to insure stability in their own country. Above all, they need to reform and open their own society."
"We need to encourage opponents of the [Syrian] regime by making our own position very clear, right now. Bashar al-Assad must go."
We must "hasten the fall of the mullahs" in Iran.
We should keep the military option against Tehran on the table.
"Peace will only come if everyone in the region perceives clearly that America stands strongly with Israel."
"I would ensure our assistance to the Palestinians immediately ends if the teaching of hatred in Palestinian classrooms and airwaves continues."
"I would recommend cultivating and empowering moderate forces in Palestinian society."
We must seek "victory" like "in the 1980s."

It's an impressive litany, and most of the sentiments are reasonable or at least defensible. But most are sentiments, not policies. And certainly not realistic policies. Nor are any of the points new. Unfortunately, none so far has worked. Because most people, irrespective of how friendly, will not allow Washington to run their lives. They want to govern themselves.

Of course, foreign aid should be used to build "good allies." Like giving billions of dollars to Hosni Mubarak year in and year out. He was a "good ally." Moreover, with his overthrow has come rising hostility to Israel and religious minorities. Does Pawlenty believe that all we have to do is "insist" that the newly democratic Egyptians adopt our liberal values and all will be well?

Of course, the Saudi ruling family should be encouraged to reform. Does Pawlenty believe that the Saudi royals run a quasi-totalitarian state because they have never considered the benefits of reform? That all we have to do is tell the Riyadh autocrats that empowering women and freeing religious minorities would be good for the country, and the regime will act?

Why didn't Presidents Roosevelt, Truman, Eisenhower, Kennedy, Johnson, Nixon, Carter, Reagan, Bush, Clinton, Bush, and Obama realize how easy it was?

Naturally, Pawlenty closed with the usual rhetorical boilerplate used to justify an American imperium. It is wrong "for the Republican Party to shrink from the challenges of American leadership." "Weakness in foreign policy costs us and our children much more than we'll save in a budget line item." "America already has one political party devoted to decline, retrenchment, and withdrawal." "Our enemies in the War on Terror, just like our opponents in the Cold War, respect and respond to strength." Of course. All the U.S. government has to do is stand strong for "the ideals of economic and political freedom of equality and opportunity for all citizens" and all will be well.

Patriotism is the last refuge of the scoundrel said Samuel Johnson, and so it is today. What current politician does not believe in the traditional values which have animated the American republic? What presidential candidate does not want to ensure U.S. security in a dangerous world? What national leader wants America and Americans to be isolated from and uninvolved in the world?

The challenge is how to best promote those values and best ensure that security. America as empire — constantly bombing, hectoring, invading, lecturing, occupying, and instructing other states — is not.

Today the U.S. is involved in the equivalent of five wars: Iraq, Afghanistan, Yemen, Pakistan, and Libya. Americans have not enjoyed peace for more than a decade, and if Tim Pawlenty has his way, would not enjoy peace for years if not decades to come.

The costs are high. Some 6000 Americans have died and tens of thousands of Americans have been wounded in Afghanistan and Iraq alone, and the human toll continues to climb. In Iraq perhaps 200,000 civilians died in the violent aftermath to the U.S. invasion; millions of people were pushed into internal or external exile; the historic Christian community was ravaged. The financial cost continues to rise. Washington is effectively bankrupt, with a $14 trillion national debt, trillions more in unfunded federal retirement liabilities, and more than $100 trillion in unfunded Social Security and Medicate obligations. Yet America has doubled military spending, adjusted for inflation, over the last decade. The U.S. now spends more, in real terms, than at any point in the Cold, Korean, and Vietnam wars, and accounts for roughly half of the globe's military outlays.

Finally, every new bombing run, invasion, and occupation creates more enemies, and thus encourages more terrorism. Better calibrated responses relying on Special Forces, drones, intelligence, and international cooperation are less costly, more effective, and less likely to trigger blowback.

Far from being an early neocon, Ronald Reagan was a master of restraint. He used force only three times — in Grenada, Libya, and Lebanon. All were limited actions, and in the latter case Reagan responded to the bombing of the Marine Corps barracks by pulling out U.S. forces rather than launching a nation-building campaign. He recognized that the stakes in Lebanon were no where near the cost of expanding the conflict.

Ultimately, advocates of limited government and individual liberty must choose between empire and freedom. Perpetual intervention and conflict have been among the most important political fertilizers for the growth of the Leviathan state.

Tim Pawlenty has endorsed war and Big Government. Let us hope his competitors decide differently.

Why U.S. Leaders Deceive Their Own People

Why U.S. Leaders Deceive Their Own People

by Ted Galen Carpenter

Professor John Mearsheimer's latest book, Why Leaders Lie, provides a number of intriguing insights and surprising conclusions. Perhaps his most unexpected conclusion is that leaders lie to foreign leaders far less frequently than is generally assumed. Indeed, he contends that leaders lie to their own people more than they do to foreign counterparts. He does, however, concede that less blatant forms of deception, such as "spinning" and "concealment" are pervasive in international politics.

Two other conclusions ought to be deeply troubling to populations in democratic countries, and especially so to Americans. One is that officials in democratic political systems are more likely to deceive their own people — even engaging in outright lies — than officials in autocratic systems. His reasoning on that point is solid, and he provides compelling evidence to support his case. Mearsheimer's thesis is that democratic leaders are much more dependent than autocrats on public support for foreign policy initiatives, especially when an initiative includes going to war. If the available evidence is weak that a major security threat exists, but political leaders believe that taking military action is in the national interest, a powerful incentive exists to inflate the threat to gain badly needed public support.

A second, related part of his thesis is that political leaders are much more inclined to lie involving wars of choice rather than wars of necessity. Again, there are ample historical examples supporting his argument.

Ted Galen Carpenter, senior fellow of foreign policy studies at The Cato Institute, is the author of Smart Power: Toward a Prudent Foreign Policy for America, as well as other books on international affairs.
More by Ted Galen Carpenter

If Mearsheimer is correct, Americans must face the troubling realization that U.S. leaders will be unusually prone to engage in lying as well as milder forms of deception to gull their own populations. Not only is the United States a long-standing democracy, but it is the nation since World War II that is most inclined to embark on wars of choice — often involving issues that have little or no connection to genuine American security interests. The list of U.S. military interventions just in the post-Cold War era — Panama, Somalia, Haiti, Bosnia, Kosovo, Iraq (twice), and the extended mission in Afghanistan — is definitive testimony to that tendency.

America's status as a democracy and a country inclined to wage wars of choice is a deadly combination that creates an overwhelming incentive for political leaders to use whatever techniques of threat inflation are necessary to stampede an otherwise skeptical public into supporting the latest dubious military crusade. The potential corrosive effect on America's political institutions and values are all too apparent. At a minimum, Americans ought to be on guard and doubly skeptical when an administration's spin machine goes into action making the case that Lower Slobovia's mistreatment of Upper Slobovians really, truly poses a dire security threat that only U.S. military action can prevent. The American people have heard such a refrain — and believed it — far too often for the health of the Republic.

How to Get Real Spending Cuts

How to Get Real Spending Cuts

by Michael D. Tanner

It is getting close to "crunch time" in the debate over raising the debt ceiling. Much of the debate continues to focus on whether Republicans will accept tax hikes as part of the package, and how big the debt-reduction package will be. All sorts of numbers are being tossed out: $4 trillion over twelve years? $6 trillion over ten years? $3 trillion over two years?

But focusing on dollars — even trillions of dollars — may be setting Republicans up for a fall.

After all, we've heard promises of spending cuts before. Remember the deal over the continuing resolution that kept the government open back in April? That deal was supposed to include $61 billion in spending cuts, but, in reality, it was crammed full of gimmicks such as counting savings from spending that hadn't occurred in the previous year or not funding programs that actually didn't exist. In the end, the actual reduction in spending was less than $8 billion.

Budget history is flush with promises of cuts some day in the future — but some day never actually comes.

And President Obama, in his most recent budget proposal, counted interest savings and the elimination of tax breaks ("spending in the tax code") as reductions in spending. They might show up that way on a balance sheet, but that sort of budget cutting does very little to reduce the size and burden of government — which is what this debate should really be about.

Republicans must also ask when those spending cuts will occur and how will they be enforced. Budget history is flush with promises of cuts some day in the future — but some day never actually comes. This is especially true when budget savings are anticipated not from actually eliminating programs, but from making government "more efficient." For example, the Obama administration claims that the health-care-reform law will ultimately save some $500 billion in Medicare spending. But even Medicare's own actuaries don't believe those savings will ever occur.

Now, the administration is reportedly offering another $340 billion in Medicare and Medicaid cuts as part of a budget deal. But because the administration continues to resist any changes in the structure of the program, those savings are likely to be as ephemeral as the Obamacare cuts.

And speaking of those Obamacare cuts, the health-care law "double counted" those Medicare savings by routing them through the so-called Medicare Trust Fund. This type of "trust-fund accounting" allowed the administration to "extend the life of Medicare" and reduce the program's unfunded liabilities, even as the savings were actually spent elsewhere. Will the debt-ceiling deal include similar smoke and mirrors?

Michael Tanner is a senior fellow at the Cato Institute and coauthor of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.
More by Michael D. Tanner

That is why Republicans should not get hung up on seeking any particular amount of spending cuts. The dollar amount matters far less than getting the structural and institutional changes that will actually bring down the size, cost, and intrusiveness of government in the future.

Republicans should push hard for a balanced-budget amendment to the Constitution — and not one that simply requires a balanced budget, but one that includes meaningful spending limitations. If they can't get the two-thirds vote that such an amendment would require, they should at least insist on a statutory spending cap. Republicans should also insist on fundamental structural changes to Medicare, Medicaid, and Social Security.

In the end, this is not really a debate about budgeting or the size of the national debt. It is a debate about whether we will have a limited constitutional government or a European-style social democracy. Winning that debate will not be a question of whether there is an agreement to cut $2 trillion over ten years rather than $1.5 trillion. If Republicans get an extra $500 billion in cuts on paper, but leave the structures of big government in place, they will find out down the road that nothing has really changed.

Stocks Advance Behind Energy, Tech Shares

By Nikolaj Gammeltoft -

U.S. House Speaker John Boehner (R-OH), right, listens as U.S. House Majority Leader Eric Cantor (R-VA), center, answers questions during a press conference on a balanced budget amendment at the U.S. Capitol July 14, 2011 in Washington, DC. Photographer: Win McNamee/Getty Images

U.S. stocks rose, trimming the Standard & Poor’s 500 Index’s weekly loss, as gains in energy and technology shares were enough to overcome concern that an impasse over raising the federal debt limit is putting the nation’s top credit rating in jeopardy.

Google Inc. (GOOG) jumped 13 percent after reporting sales that beat predictions, a sign that it’s making progress expanding beyond search advertising. Petrohawk Energy Corp. (HK) rallied 62 percent as BHP Billiton Ltd. agreed to buy the oil and gas company for $12.1 billion in cash. Gauges of energy stocks and technology companies advanced at least 1.5 percent. Clorox Co. (CLX) rose 8.9 percent after Carl Icahn offered to buy the company.

The S&P 500 rose 0.6 percent to 1,316.14 at 4 p.m. in New York. The gauge fell 2.1 percent this week. The Dow Jones Industrial Average added 42.61 points, or 0.3 percent, to 12,479.73 today.

“There’s a lot more company-specific issues driving stocks now, even though there’s still macro uncertainty about the debt negotiations in Washington and the European crisis,” Jeffrey Coons, president of Manning & Napier Advisors Inc. in Fairport, New York, said in a telephone interview. His firm manages $44 billion.

Stocks lost their gains this morning amid concern negotiations toward raising the U.S. debt ceiling are failing to progress. House Speaker John Boehner, a Republican from Ohio, told reporters that his party wouldn’t accept any tax increases as they work with President Barack Obama on a deal to lower deficits and possibly raise the U.S. debt limit. Moody’s Investors Service and S&P said this week that they may cut the federal government’s credit rating if the issue isn’t resolved.

Higher Rates

Obama said a failure to raise the U.S. debt limit would trigger a default on the nation’s obligations that could drive up interest rates for everyone in the country.

“We could end up with a situation where interest rates rise for everyone,” he told a Washington press conference. In effect, it would be “a tax increase for everybody.”

The S&P 500 rallied 93 percent from its low in March 2009 through yesterday as the Federal Reserve used large-scale asset purchases to buoy the economy and companies posted earnings that beat analysts’ estimates. Of the 13 S&P 500 companies that have posted results so far this earnings season, 11 have beaten forecasts for per-share profit.

Stocks fell from their highs of the day after the Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 63.8 in July from 71.5 the prior month. The gauge was projected to rise to 72.2, according to the median forecast of 62 economists surveyed by Bloomberg News. Estimates for the confidence measure ranged from 75 to 68. The index averaged 89 in the five years leading up to the recession that began in December 2007.

Stress Tests

Stocks briefly extended their advance after the European Banking Authority said eight banks failed the European Union stress tests with a combined capital shortfall of 2.5 billion euros ($3.5 billion).

Agricultural Bank of Greece SA, Austria’s Oesterreichische Volksbanken AG and Spain’s Banco Pastor SA were among the failures. The companies were found to have insufficient reserves to maintain a core tier 1 capital ratio of 5 percent in the event of an economic slowdown, the European Banking Authority said. All banks tested in Italy, Germany and the U.K. passed.

“The stress test results are coming in pretty much as expected, at least at the headline level,” E. William Stone, who helps oversee about $110 billion as chief investment strategist at PNC Wealth Management in Philadelphia, said in a telephone interview. “Everybody is waiting for more news on the U.S. debt ceiling and more about the EU sovereign debt situation, and nobody wants to get too far on one side or the other ahead of the weekend.”

Google, Clorox

Google soared 13 percent to $597.62, its biggest gain since October 2008. Sales, excluding revenue passed on to partner sites, rose to $6.92 billion. That topped the $6.57 billion average estimate of analysts surveyed by Bloomberg.

Clorox advanced 8.9 percent to $74.55, its highest price since at least 1980. Icahn, a billionaire, offered to buy the maker of the namesake bleach for about $10.2 billion in a move designed to draw out other potential bidders.

Petrohawk Energy rallied 62 percent to $38.17. BHP Billiton, the world’s largest mining company, agreed to buy the company for about $12.1 billion in cash in its biggest acquisition, betting natural gas demand will gain in the U.S.

Chesapeake Energy Corp. (CHK) climbed 9.1 percent to $32.96. The natural-gas driller would be worth $58 a share should it be taken over based on the valuation of the Petrohawk acquisition, Ticonderoga Securities LLC said in a note.

Energy Stocks

Energy companies rose 2.3 percent, the most among 10 industries in the S&P 500. Technology stocks added 1.6 percent as a group.

Ralcorp Holdings Inc. (RAH) fell 0.7 percent to $86, dropping for a sixth straight day. The maker of Raisin Bran cereals and private-label food brands plans to spin off Post Foods after failing to sell the unit to rival foodmakers or private-equity firms.

Flir Systems Inc. (FLIR) fell the most in the S&P 500, slumping 9.9 percent to $28.92. The maker of night-vision cameras used by U.S. combat forces reported second-quarter profit excluding some items of 35 cents a share, trailing the average analyst estimate by 4 cents, according to Bloomberg data.

Is Obama a One-Termer?

Republicans have a golden opportunity to break Barack Obama's presidency, ensuring he will be a one-termer. Mr. Obama has backed himself into a corner on the debt-limit talks; the GOP can smash his re-election prospects if they have the will—and intelligence—to do it.

Mr. Obama has asked that the nation's $14.3 trillion debt-ceiling be raised, and he knows that cannot be done without support from House Republicans. Moreover, along with Treasury Secretary Timothy F. Geithner, Mr. Obama warns that fiscal Armageddon is coming unless the ceiling is lifted before Aug. 2—the date Mr. Geithner claims the United States begins defaulting to its debtors.

Mr. Obama seeks a "grand bargain": a debt reduction package that includes $1 trillion in tax increases to accompany entitlement spending cuts, including Social Security and Medicare. He wants to go big. His target is to slash $4 trillion over 10 years. He has repeatedly vowed to veto any "small" debt-limit increase—one that keeps America paying its bills until a more comprehensive agreement is ratified. In other words, Mr. Obama has issued an ultimatum to congressional Republicans: either break your 2010 campaign pledge not to raise taxes or else be blamed for the debt-limit debacle. As he put it, it's time to "eat our peas." The president is playing Russian roulette with the economy and our nation's future.

Yet, he has badly played his weak hand. Mr. Obama has committed a fatal mistake: overreach. The president has issued a public ultimatum that either must be upheld or he must back down from. Either way, it is Mr. Obama's political credibility that threatens to be shattered.

House Speaker John Boehner is holding all the cards. Mr. Boehner should insist on a small deal—lifting the debt ceiling accompanied with corresponding spending reductions. Every debt dollar raised should be coupled with a dollar cut. Hence, the package pays for itself. More importantly, it places Mr. Obama in a no-win situation. House Republicans will pass legislation that raises the debt-limit. Therefore, they cannot be blamed for any economic fallout should America default. Mr. Obama can veto it, which means he will be solely responsible for the fiscal calamity. Or he can sign it—publicly standing down from his earlier threats. Thus, he will be denuded among his liberal supporters and the larger electorate, and shown to be a weak leader whose words mean nothing.

Either way, it will be his Waterloo: the effective end of his presidency.

AOL Touts Masturbation Huffington-Style

America Online is now endorsing masturbation. Recently, AOL posted an item on its general page discussing how men often fake orgasms, and that they should engage in masturbation to help "discover what stimulates you." Apparently, women aren't the only ones faking it in the bedroom.

The fact that AOL would even run a lewd story like this—never mind give it top billing—reveals the change in editorial content since its merger with the far left Huffington Post. The liberal website, founded by Arianna Huffington, was acquired by AOL in February for a stunning $315 million. Moreover, the deal made Ms. Huffington the editor-in-chief of AOL's 1,200-member newsroom. AOL's stories are starting to reflect her radical views—undermining its credibility as a respectable Internet news source.

This is what now passes for informative news at AOL? Under Ms. Huffington's leadership, the popular website has become a pimp for the sexual revolution. It is peddling the Playboy philosophy, hoping to make it mainstream. Perversion and moral indecency are packaged as part of a "healthy lifestyle." What's next: the benefits of bestiality, polygamy or oral sex?

Ms. Huffington is frittering away the hard-won reputation of AOL and dragging it into the journalistic gutter.

Beck's Swan Song

Glenn Beck, the radio host and former FOX News talking head, apparently needs to capitalize one last time on his dwindling fame. His solution: publish a redundant book on the Federalist Papers.

In "The Original Argument" (Threshold Editions, 430 pages), Mr. Beck seeks to translate and adapt the Federalist Papers for contemporary readers. Therefore, many of its passages—written in 18th-century English prose—are updated to be more understandable and, hopefully, relevant. The book contains footnotes explaining the historical events or references of the time. There are short summaries of key arguments, as well as one-paragraph nuggets on the essays seeking to apply their wisdom to today's problems. "The Original Argument" is really a version of the "Federalist Papers for Dummies."

But do we really need another work on the Constitution, or the Federalist Papers for that matter? The subject has become a cottage industry. There have been countless volumes written on the topic. Mr. Beck argues that the Federalist Papers are "boring" to read and arcane, thereby there is a need for his book. This is false—and puerile. I (along with millions of students) had no trouble reading the essays in college years ago. The same held true for the Bible, Shakespeare, Plato and all the other canons of Western civilization. Hence, will Mr. Beck be coming out with his adaptation of the Bible anytime soon—maybe one for those of his Mormon faith.

Mr. Beck has cynically positioned himself as a so-called leader of the Tea Party. His rise to fame and fortune has been based on one giant gimmick: the wannabe constitutionalist professor, eye glasses and chalk-board in hand, preaching about the evils of progressivism. Yet, Mr. Beck is really a phony: He has placed Vaseline near his eyes so he could cry on cue about the suffering caused by President Obama's socialist policies. Mr. Beck is the court jester of the conservative movement.

He is a modern-day P.T. Barnum, whose act has finally worn thin. His ratings at FOX dropped dramatically. He had become overexposed—the speaking tours, the countless books and novels, the metamorphosis into a self-help guru preaching personal empowerment and bogus uplift. He is now leaving the stage, launching his own Internet-based television network (GBTV). My prediction: it will flop. Just like "The Original Argument," Mr. Beck has nothing new or meaningful to say. This is a non-book by a non-author.

LIBERTY POST

The decline of marriage and male wages is a problem of equality, not inequality.

By JAMES TARANTO

By STEPHEN MILLER and DOUGLAS BELKIN

Voters aren't bothering with the GOP, but Obama has lost their attention too.

By PEGGY NOONAN

Meet the men the U.S. might release as a goodwill gesture.

An 'accommodation' that makes the birth-control mandate worse.

Foreign-policy pundits increasingly argue that democracy and free markets could thrive without U.S. predominance. If this sounds too good to be true, writes Robert Kagan, that's because it is.

By ROBERT KAGAN

Friday, February 10, 2012

By The Mogambo Guru

By Addison Wiggin

By Bill Bonner

By Joel Bowman

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