Corrupting Expectations by Richard W. Rahn
Assume you are a scientist and have been given a major financial grant to prove that the mythical unicorn really did exist.
You know that as long as you can demonstrate some progress in showing the unicorn might have existed, your financial grant will be renewed each year, provided some other scientist does not come out with substantial evidence that the unicorn could not have existed.
Under such conditions, you would have a very strong incentive to disregard much of the evidence that the unicorn could not have existed and each year provide only the data that could demonstrate that the unicorn might have existed. You also would have a very strong incentive to attack any scientist who raised serious questions or provided evidence that the unicorn could not have existed.
It has been all too evident that many in the man-made-global-warming camp have vested interests in certain outcomes because of the government grants they receive.
You even might go so far as to refer to them with the disparaging term "unicorn deniers" and attempt to use your influence with other scientists who also are receiving grants dependent on the existence of the unicorn to try to prevent the unicorn deniers from publishing their findings in well-regarded scientific journals.
The recently released e-mails (by whistleblowers or hackers, depending on your prejudice) between some of the best-known scientists behind global warming showed that they succumbed to the all-too-human tendency to protect their turfs and pocketbooks, despite the evidence.
As an economist, not a climatologist, I have followed the debate carefully for years. It has been all too evident that many in the man-made-global-warming camp have vested interests in certain outcomes because of the government grants they receive. (This is not meant to imply that most scientists have sold their integrity for government grants.)
It has been known for a couple of hundred years that the Earth goes through regular cooling and warming cycles. The legitimate debate is about how much man-made carbon dioxide (and other greenhouse gases) contributes to the current cycle, if at all, and whether it is more cost-effective (or even possible) to try to modify climate change or just adapt to it through engineering changes (e.g., the dikes in Holland) and building at a greater distance from the shoreline.
My colleagues at the Cato Institute found many highly qualified climate scientists (hundreds of whom were willing to sign a public statement) who seriously questioned much of the "science" behind many of the legislative and other public policy demands of the global warming lobby.
Members of the media are usually quick to understand and publicize conflicts of interest for public officials when it comes to road-building contracts and the like but seem to be blind to the conflicts of interest for scientists and others who claim to be impartial scholars. The United Nations' report on climate change is considered by many in the media and the political world to be a gold-plated standard of truth when it comes to the climate-change evidence — which we now know is tainted. What the media and the political class should be doing is seeking out those highly qualified climatologists and other relevant scientific experts with no financial or other vested interests (which include grants from either governments or industries that may have an economic interest) to provide independent evaluations of the evidence and arguments from all sources.
In my own field of economics, we find an international tax-increase lobby, almost all of whose members are dependent on government grants (directly or indirectly), to be endlessly lobbying for more taxes and regulations, which increase the power of the political class. The lobby routinely ignores the evidence that almost all governments tax and spend at rates far above the welfare and growth-maximizing rates and that more taxes and bigger expenditures reduce both economic opportunity and individual liberty.
Again ignoring the evidence from almost everywhere that more government makes things worse rather than better, the proponents of higher taxes also argue that government is about the only force for good and, if government only had more money, it would manage things better and waste less.
Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.
More by Richard W. RahnSen. Judd Gregg, New Hampshire Republican, and Sen. Kent Conrad, North Dakota Democrat, have proposed a new, bipartisan commission to deal with the government deficit, and it already has 31 sponsors. The advocates know it ultimately will recommend some cuts in government spending and increases in some taxes. They are either intellectually ignorant or corrupt because the effort is focused on the deficit, which is only a residual of the real problem — excessive government spending — which neither party has the intellectual and moral courage to address seriously.
Can you think of something much more intellectually dishonest than saying health care reform will insure many millions more, will not add to the deficit, will not result in any increases in taxes for anyone but the rich and will "bend the cost curve down"? Hmmm.
Businesspeople are fined and even sent to jail for making false claims about what their goods or services will do. If false-claims standards were applied to the political class (and those who report this misinformation as fact) how many in Congress, the administration and mainstream media would be out of jail?
New War Order
New War Order
by Ted Galen Carpenter
How Panama set the course for post-Cold War foreign policy
For a fleeting moment 20 years ago, the United States had the chance to become a normal nation again. From World War II through the collapse of European communism in 1989, America had been in a state of perpetual war, hot or cold. But with the fall of the Berlin Wall, all of that could have changed. There were no more monsters to destroy, no Nazi war machine or global communist conspiracy. For the first time in half a century, the industrialized world was at peace.
Then in December 1989, America went to war again — this time not against Hitler or Moscow's proxies but with Panamanian dictator Manuel Noriega. Tensions between George H.W. Bush's administration and Noriega's government had been mounting for some time and climaxed when a scuffle with Panamanian troops left an American military officer dead. On Dec. 20, U.S. forces moved to oust and arrest Noriega. Operation Just Cause, as the invasion was called, came less than a month after the Berlin Wall fell, and it set America on a renewed path of intervention. The prospect of reducing American military involvement in other nations' affairs slipped away, thanks to the precedent set in Panama.
Odious though he may have been, Noriega was never a Soviet stooge.
How real was the opportunity to change American foreign policy at that point? Real enough to worry the political class. Wyoming Sen. Malcolm Wallop lamented in 1989 that there was growing pressure to cut the military budget and that Congress was being overwhelmed by a "1935-style isolationism." But the invasion of Panama signaled that Washington was not going to pursue even a slightly more restrained foreign policy.
That the U.S. would topple the government of a neighbor to the south was hardly unprecedented, of course. The United States had invaded small Caribbean and Central American countries on numerous occasions throughout the 20th century. Indeed, before the onset of Franklin Roosevelt's Good Neighbor Policy in the 1930s, Washington routinely overthrew regimes it disliked.
During the Cold War, however, such operations always had a connection to the struggle to keep Soviet influence out of the Western Hemisphere. The CIA-orchestrated coup in Guatemala in 1954 and the military occupations of the Dominican Republic in 1965 and Grenada in 1983 all matched that description. Whatever other motives may have been involved, the Cold War provided the indispensable justification for intervention. And for all the rhetoric about democracy and human rights that U.S. presidents employed during the struggle against communism, there was no indication that Washington would later revert to the practice of coercing Latin American countries merely, in Woodrow Wilson's infamous words, to teach those societies "to elect good men." Thus the invasion of Panama seemed a noticeable departure. Odious though he may have been, Noriega was never a Soviet stooge.
The motives that President Bush cited for the Panama intervention foreshadowed the rationales for nation-building and so-called humanitarian missions that would recur frequently over the next two decades. Among other goals, the president said, the invasion aimed to "defend democracy in Panama." He expressed hope "that the people of Panama will put this dark chapter of dictatorship behind them and move forward as citizens of a democratic Panama." Bush emphasized that "the Panamanian people want democracy, peace, and a chance for better life in dignity and freedom. The people of the United States seek only to support them in pursuit of these noble goals" — apparently with U.S. troops, if necessary.
Questions immediately arose in the media and elsewhere as to whether the Panama mission was an isolated example — or whether it was a template for a new American global strategy. Time correspondent George J. Church asked the question that was on many minds: "Does this suggest a new post-cold war foreign policy that casts the U.S. as a different kind of global policeman, acting to save democracy rather than to stop Soviet expansionism?" He noted that administration officials "affirm that Bush is showing a new willingness to use American military power to further U.S. interests that have little or nothing to do with communism."
The worrisome question was how those "U.S. interests" would be defined. An answer came less than a year later, in an area far removed from the Western Hemisphere, when Saddam Hussein invaded Kuwait. The Bush administration's initial reaction seemed surprisingly restrained. Secretary of State James Baker reportedly quipped to his cabinet colleagues that it "appeared that the sign on the [Middle East] gas station just changed," an attitude that conveyed little alarm about a possible threat to American interests. It was not clear that the president ever shared that complacency, however. He certainly didn't after a bracing conversation with British Prime Minister Margaret Thatcher, who admonished him not to "go wobbly."
The United States ultimately adopted a policy that was the antithesis of wobbly, sending more than half a million American troops to the Persian Gulf, at first to dissuade Saddam from expansionist designs he might have on Saudi Arabia, then finally to expel Iraqi forces from Kuwait. But if President Bush at times justified this large-scale military venture in language that echoed his Panama rhetoric, there were at least some tangible U.S. interests at stake, notably keeping the main global source of oil production and reserves in friendly hands. That was not even remotely the case in the next, and last, military intervention of the elder Bush's administration, where we saw the full flowering of the Panama precedent: the humanitarian mission in Somalia.
Ted Galen Carpenter is vice president for defense and foreign-policy studies at the Cato Institute.
More by Ted Galen CarpenterThat mission, launched in December 1992, confirmed what Panama had suggested: that the ideology of democracy, human rights, and nation-building had become a motive for police action anywhere in the world. America had no stake in Somalia, vital or otherwise, and administration officials made little attempt to pretend that it did. The justifications for sending more than 20,000 troops halfway around the world were purely altruistic.
The narrow object of the U.S. military intervention in East Africa was to distribute food and medical supplies to relieve Somalis long caught up in a multisided civil war. But such small-scale humanitarian goals were never realistic, and perhaps not even sincere. U.S. forces soon became entangled in Somalia's complex, chaotic politics. The involvement of the United Nations, which Bush embraced, meant that the mission would inevitably have a wider, nation-building aspect. Any reluctance that the outgoing president might have had on that score was not shared by incoming Clinton officials. The new president's spokeswoman Dee Dee Myers candidly stated, "We went in there with a clear vision of humanitarian relief and nation-building."
To that was added a murky vision of regime change. Just as the Panama invasion centered on the person of Manuel Noriega, and Saddam Hussein personified evil during the Gulf War, Somali warlord Mohamed Farah Aideed became the focus of President Clinton's — and the media's — attention. Aideed proved more elusive than Noriega: a botched attempt to arrest him led to a running firefight in the capital of Mogadishu and left 18 Army Rangers dead.
The Clinton administration ultimately withdrew U.S. forces following that bloody incident, but the president and his advisers did not lose their enthusiasm for nation-building and regime change. Indeed, Somalia was just the beginning. The following year U.S. troops landed in Haiti to restore the elected president (and populist demagogue) Jean Bertrand Aristide to office. Later, U.S. air power was brought to bear against Bosnian Serbs to influence the civil war in Bosnia. That was followed by the dispatch of ground forces to implement the Dayton Accords.
This was the new norm — there may no longer have been a global menace to contend against, but dictators and warlords now had to be overthrown or hemmed in to ensure democracy and human rights. Virtually no one in the Clinton administration argued that Bosnia was essential to the security and well-being of the United States. Although Secretary of State Warren Christopher made a feeble attempt to justify intervention on the basis of general American security concerns — much as canal security and the wider implications for the drug war had been invoked in the Panama invasion — even he did not seriously argue that a parochial conflict could trigger another world war. Instead, he asserted, "This is an important moment for our nation's post-Cold War role in Europe and the world. It tests our commitment to the nurturing of democracy and the support of environments in which democracy can grow and take root." The U.S. was now responsible for guaranteeing order everywhere, not only in our relative "backyard" of Latin America but from the Middle East to the Horn of Africa to the Balkans.
The United States had assumed an identity as leader and defender of the free world during the Cold War. After the fall of European communism, the whole world was "free" — or should have been, in the eyes of our foreign-policy elites. There was no systematic challenger to U.S. power, and the only thing standing in the way of universal prosperity and democracy was the occasional Third World strong man. The Cold War itself had never been about democracy or human rights — not really — but it became an incubator for this new ideology. After the Berlin Wall fell, the war against the Noriegas of the world could begin — and it provided a convenient pretext for maintaining U.S. military power at Cold War levels. There was a new world to order, after all.
Operation Just Cause was a catalyst for Washington's new role not only as worldwide policeman, but as global armed social worker. There was a time two decades ago when empire could have been forsaken. But instead of coming home, we went to Panama City.
Making Criminals out of All Americans
by Gene Healy
Michael Drebeen, a deputy solicitor general in the Obama administration, had a rough morning last Tuesday. He argued two Supreme Court cases back to back, defending a notoriously vague federal criminal statute — and the justices worked him over vigorously.
The 1988 law at issue aims at public corruption and corporate misconduct, but sweeps far too broadly, criminalizing schemes to "deprive another of the intangible right of honest services."
If that language seems a little, well, intangible to you, you're not alone. Hurling hypotheticals, the justices strained to find a limiting principle that could prevent the law from covering an employee reading a racing form on the clock (Stephen Breyer) or calling in sick to go to a ballgame (Antonin Scalia). Of some 150 million workers in the United States, Breyer told Drebeen, "I think possibly 140 million of them would flunk your test."
There are now more than 4,000 federal crimes, spread out through some 27,000 pages of the U.S. Code.
The court's struggle with the "honest services" statute points toward a larger issue: the burgeoning problem of overcriminalization. It's for good reason that our Constitution mentions only three federal crimes (treason, piracy, and counterfeiting).
The Founders viewed the criminal sanction as a last resort, reserved for serious offenses, clearly defined, so ordinary citizens would know whether they were violating the law.
Yet over the last 40 years, an unholy alliance of big-business-hating liberals and tough-on-crime conservatives has made criminalization the first line of attack — a way to demonstrate seriousness about the social problem of the month, whether it's corporate scandals or e-mail spam.
At one point on Tuesday, Breyer protested: "I thought there was a principle that a citizen is supposed to be able to understand the criminal law." Good luck with that.
There are now more than 4,000 federal crimes, spread out through some 27,000 pages of the U.S. Code. Some years ago, analysts at the Congressional Research Service tried to count the number of separate offenses on the books, and gave up, lacking the resources to get the job done. If teams of legal researchers can't make sense of the federal criminal code, obviously, ordinary citizens don't stand a chance.
You can serve federal time for interstate transport of water hyacinths, trafficking in unlicensed dentures, or misappropriating the likeness of Woodsy Owl and his associated slogan, "Give a hoot, don't pollute." ("What are you in for, kid?" your new cellmate growls.) Bills currently before Congress would send Americans to federal prison for eating horsemeat or selling goods falsely labeled as "Native American."
Gene Healy is a vice president at the Cato Institute and the author of The Cult of the Presidency.
More by Gene Healy"Is that the system we have, that Congress can say, nobody shall do any bad things?" an exasperated Scalia asked Drebeen. The system we have comes pretty close, unfortunately. And a federal criminal code that covers everything delegates to prosecutors and the police the power to pick their targets at will, leaving everyone at risk.
But bringing sanity back to federal criminal law is too big a task for the court alone to handle. What's needed is a comprehensive culling of the federal code.
In May 2001, Rep. Donald Manzullo, R-Ill., introduced a bill to create a commission to sunset unnecessary and constitutionally dubious federal crimes. That bill would have been a hard sell in any era, but the events of September 11 ensured it wouldn't get a proper hearing. This year, Sen. Jim Webb, D-Va., has had to fight to get a narrower criminal justice reform bill on the calendar.
Fighting overcriminalization is a hard sell, politically. No one wants to be tarred as "soft on crime." But decades of reflexive criminalization have brought us vague laws, an impenetrable federal criminal code, and a passel of headline-grabbing federal prosecutors who threaten the rule of law. Surely, fixing that is worth some political risk.
Criminal justice reform will be difficult, but then, most things worth doing are.
Obama vs. the Banks
Obama vs. the Banks
by Gerald P. O'Driscoll Jr.
Why make risky loans when you can exploit the Fed-Treasury interest rate spread?
Over the weekend, President Barack Obama went on the offensive against Wall Street for not lending more to Main Street. On CBS's 60 Minutes, the president declared, "I did not run for office to be helping out a bunch of fat cat bankers on Wall Street." He was joined on the Sunday morning circuit by his chief economic adviser, Lawrence Summers, who echoed the message of intimidation.
Wall Street fat cats are always a convenient political target, but bankers are responding to the incentives generated by the economic policies of the Treasury and the Federal Reserve. First and foremost is the Fed's policy of near-zero interest rates.
What this means is that banks can raise short-term money at very low interest rates and buy safe, 10-year Treasury bonds at around 3.5%. The Bernanke Fed has promised to maintain its policy for "an extended period." That translates into an extended opportunity for banks to engage in this interest-rate arbitrage.
Has recent experience taught the leaders of large financial institutions the need to curb their risk appetite? Not really.
Why would a banker take on traditional loans, which even in good times come with some risk of loss? In today's troubled times, only the best credits will be bankable. Meanwhile, financial institutions are happy to service their new, best customer: the U.S. Treasury. That play on the yield curve is open to banks of all sizes.
The Fed's policy makes sense if the goal is restoring bank profitability by generating cash flow. It is a terrible policy if the goal is fueling small business, the engine of economic growth and job creation. Large, nonfinancial corporations have access to banks. They can also tap the public credit markets and have access to internally generated funds. Not so for small business, which depends heavily on banks for credit.
Since the financial crisis began, the Fed has worked in tandem with the Bush/Paulson Treasury and now with the Obama/Geithner Treasury. One must assume its policies have the administration's approval. That puts the administration's policies at war with its stated goals. Larry Summers is a first-rate economist and must understand the economic incentives those policies have created. In short, the weekend interviews, along with the president's meeting with bankers on Monday, was political theater.
While the public is upset with $10 million to $20 million banker bonuses, public policy should focus on what is generating them. The largest banks have had their risk appetites whetted. They are not looking to traditional lending, but to proprietary trading and a renewed commitment to innovative financial products. But as Obama adviser and former Fed Chairman Paul Volcker noted, financial products such as credit default swaps and collateralized debt obligations brought the economy to the brink of disaster. It is excessive risk-taking by Wall Street that is generating the profits from which the bonuses are being paid. Curb the former and you curb the latter without government planning of banker pay.
Has recent experience taught the leaders of large financial institutions the need to curb their risk appetite? Not really. The lesson they have learned is that presidents of both parties, the Fed and Congress will come to their rescue when they get in trouble. Under a vague set of ideas, scarcely a theory, some banks are viewed as too big to fail. They will be propped up, bailed out and generally protected from the consequences of their own bad decisions. That generates incentives to engage in excessively risky activities.
Gerald P. O'Driscoll, a senior fellow at the Cato Institute, was formerly a vice president at the Dallas Federal Reserve Bank and a vice president at Citigroup.
More by Gerald P. O'Driscoll Jr.A few bankers lost their jobs or quit in the aftermath of the financial crisis, but that small risk is evidently one most of Wall Street's fat cats will accept. Mr. Obama may not have run for president in order to reward them, but that is the effect of his policies.
Sending scarce resources to major banks in the form of funds from the Troubled Asset Relief Program (TARP), ultra-low interest rates, and the Fed's targeted credit schemes has diverted needed capital from real, productive activity. Now the politicians feel the public's anger and are complaining about the lack of lending and the size of executive compensation. If Congress wanted banks to lend and to limit pay packages, it should have put those in as conditions in the TARP legislation.
The TARP was hastily arranged, poorly designed and badly executed. Nonetheless, Congress acted in haste and now gets to repent at leisure. Meanwhile, the totality of the policies to aid the major financial institutions is delaying the recovery of the broader U.S. economy and the hiring of its unemployed workers.
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Who are the Real "Fat Cat" Innkeepers?
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
The story of the virgin birth – Joseph, Mary and Jesus – is told often at this time of the year. The book of Luke tells us that Mary and Joseph traveled to Bethlehem because Caesar Augustus decreed a census should be taken. Mary delivered the baby after arriving in Bethlehem and “placed [baby Jesus] in a manger, because there was no room for them in the inn.”
Conventional wisdom assumes that Mary and Joseph were somehow mistreated by a greedy, evil capitalist innkeeper. This hearsay is repeated in just about every play, skit or sermon on the subject, with nothing to back it up.
The Bible does not name an innkeeper. There is no record of anyone complaining at the time, nor apparently were Mary and Joseph charged for the use of the stable. The town was overflowing because of the census, which was ordered for the purposes of taxation. Small towns all over were packed as people returned to their ancestral homes. In other words, the problem, if you can call it that, was caused by the unintended consequences of government policy.
The fact that this narrative about the greedy innkeeper has become conventional wisdom is a testament to how successful government has been in tarnishing the reputation of business people. But one could easily argue that the innkeeper was generous to a fault. Faced with an over-booked hotel, he offered his stable to a young, pregnant, road-weary couple – possibly free of charge. The stable existed because he had built it and accumulated the assets in it, including the manger.
If you listen to the politicians, today’s innkeepers are insurance companies making “obscene profits,” doctors who “make a lot more money if [they] take this kid’s tonsils out,” and “Fat Cat” bankers. Add oil company executives to the mix and we have the makings of a Charles Dickens novel on a grand scale – with Ebenezer Scrooges everywhere.
To make an obvious point, all this perceived evil is supposedly done by people who somehow find themselves in a position to mistreat others at will. The fact that they work for banks or insurance companies does not obfuscate this point. It is people who do evil, if it is being done, not institutions. And this brings up an important point. If you run into an evil person – whether they are on their own, or they work at a for-profit or a not-for-profit organization, or if they work for government, they are still evil.
Many seem to believe that government is necessary to protect people from all this evil. Very few stop and wonder if this line of thought makes any sense. After all, if it is people who are evil then we should want to make sure that no one has absolute power and authority over others.
In a capitalist system, free market competition does that. No business can force you to buy their service or product. You have choices. But government is a different story. It has the power of the law behind its demands. Whether you want to or not, you must pay into Social Security. And the new healthcare bill says you must have insurance, or face fines and punishment.
Pure socialism forces people to follow the state, that’s why there are guards at the borders of North Korea and the shores of Cuba to keep people from leaving. But the writers of the US Constitution made sure there were “checks and balances” in the system. Three branches of government and elections. So if enough people believe national healthcare will increase the odds that every new child will eventually be born in a manger, they can always throw the bums out and start over again. To some, this may not be as good as having a savior, but it sure gives those who are fearful of big government some real hope at this time of the year.
Reason.tv: ObamaCare and Mission Creep—Why health care reform will end up covering much more than you think.
From the war in Iraq to the space station, government programs almost always end up costing much more than they were supposed to. They also usually end up doing more than they were supposed to. Would ObamaCare be any different?
Some say ObamaCare would lead to death panels, even euthanasia classes. Now supporters of President Obama's health care overhaul are fighting back against such charges. And the president himself warns: "If you misrepresent what's in this plan, we will call you out."
But you don't have to side with those who warn of euthanasia classes to recognize that government programs often end up doing all kinds of things that weren't in politicians' original plans. Call it mission creep. Politicians pass a program, and then the scope of the program grows and changes.
It's happened with everything from state-level health insurance plans to the Troubled Asset Relief Program. TARP's original mission was spelled out in its name—the government would purchase troubled assets from financial institutions. However, just over a year later TARP's mission has exploded, and billions in TARP funds have gone to bail out General Motors, Chrysler, and struggling homeowners. TARP money may even fund another stimulus.
Kern County's Monstrous D.A.
Farewell to Ed Jagels, a man who put 25 innocent “child abusers” in prison.
In October, Jagels told the Bakersfield Californian that after 26 years in office, he won't be running for reelection in 2010. Good riddance to him. You'd be hard pressed to find a law enforcement official anywhere in the country who better embodies the worst excesses of America's sharp turn toward law-and-order crime policy over last 30 years. From expanding the death penalty to eroding the rights of the accused to jacking up prison populations to formulating crime policy around sports metaphors, Jagels created a high-profile position by backing just about every bad crime policy in a generation.
But if history dispenses justice more honorably than Ed Jagels ever did, the boyish-looking D.A. will be most remembered for his role ruining countless lives in perhaps the most shameful of the Reagan-era "tough on crime" debacles: the coast-to-coast sex abuse panic of the 1980s.
Jagels began his career as an assistant district attorney in Kern County, then took over his boss's position in 1982 after winning a controversial election against state Superior Court Judge Marvin Ferguson. The election swung in Jagels’ direction during a debate with Ferguson, when an anti-crime activist revealed the contents of a confidential file in the judge’s ruling on a child custody case which led to the girl being killed by her stepfather. According to a subsequent grand jury report, the file was illegally lifted from the county courthouse by Colleen Ryan, one of Jagels’ fellow assistant D.A.s. Jagels had run on a vigorous anti-crime platform, and wasted no time clearing the D.A.'s office's old guard, re-staffing it with younger prosecutors more in line with his philosophy. Needless to say, he never investigated Ryan for stealing the court file. She went on to become a judge.
At about the same time Jagels took office, Bakersfield (the Kern County seat) was in the midst of a strange scandal. Rumors had circulated for years that older, well-connected men among Bakersfield's political, law enforcement, and business elite were involved in sex rings with underage teen boys. The "Lords of Bakersfield" rumors gained traction after several young gay men in the community were murdered in the early 1980s, and the accused were given relatively light sentences. Jagels did make sex crimes a priority during his first years in office, but he had little interest in the Lords of Bakersfield. Indeed, the notoriously tough on crime prosecutor took a pass, going easy when the alleged boyfriend of one of his assistant D.A.s kept getting arrested on drug charges. Jagels' subordinate was later murdered by the young man's father.
Instead, Jagels set his sights on Kern County's lower middle class. Relying on suggestive police and social worker interrogations of children, Jagels' office put 26 people behind bars on felony child sex abuse charges in the 1980s and ‘90s. Of those 26 convictions, 25 have since been overturned.
The details were lurid, and bore striking similarity to the fantastical stories that were springing from similar cases all over the country, from Florida to Massachusetts to Washington State. Parents were accused of having sex with their own children, of forcing young siblings to have sex with each other, of inviting neighbors over for adult-child orgies. When the national panic began to include stories of cult activity and Satan worship, Jagels' and the Kern County Sheriff's Department managed to locate that sordid activity in Bakersfield, too. Now children began telling investigators they had been forced to drink blood; they were hung from ceilings naked and beaten; infants were sodomized, murdered, and cannibalized. There was never any physical evidence to back the accusations. The photos the children alleged the accused to have taken during the acts never surfaced. The bodies of the murdered babies were never found. In one case a child alleged to have been murdered was found alive and healthy, living with her parents.
Many of Jagels' victims are profiled in the moving 2008 documentary Witch Hunt. They aren't limited to the people he put in prison. Particularly wrenching are the interviews with children who made the false accusations. They're now adults, and have carried unfathomable guilt and remorse. Some of these children put their parents in prison for a decade or more. In one scene, a man who falsely accused his neighbor of molesting him as a child breaks down in tears as he explains how due to fear and guilt, he's never been able to bathe his own son.
But when some of these child accusers came forward as adults to recant their testimony and demand the release of the people they helped wrongly put in prison, Jagels and his deputies called them liars in court.
Witch Hunt includes footage of Jagels stating with isn't-it-obvious mockery that children simply don't lie about these sorts of things. Except that they do, especially when they're led and guilted into lying by adult authority figures. Jagels' victim Jeff Modahl was released in 1999 after serving 15 years for molesting his own daughters. One piece of evidence key to his release was an audio tape that surfaced in the late 1990s of a police interview with one of the girls. In it, the interviewers clearly lead the girl, drop in suggestions, and repeat questions until they get affirmative answers. Modahl's lawyers also found a medical exam performed on Modahl's daughter showing none of the physical evidence that should have been present if the allegations had been true. Neither the report nor the tape were turned over to Modahl's lawyers for his trial. His daughter has since recanted her testimony and helped win her father's release. She says in the movie that she's battled addiction problems her entire life to bury the guilt she feels for putting him in prison.
In 1986, a grand jury released a blistering report on the sex abuse prosecutions, accusing Kern County officials of fostering a "presumption of guilt" and bringing charges on little more than hunches. California Attorney General John Van de Kamp released a report in September of the same year reaching the same conclusions. But no Kern County official was ever fired or disciplined, and the prosecutions continued. Jagels continued to get elected. So far, Kern County has paid out more than $9 million in wrongful conviction settlements.
In his 1999 book Mean Justice, Pulitzer Prize-winning journalist Edward Humes noted that by Jagels’ second term, the D.A. had tripled the number of prosecutorial misconduct complaints of his predecessor. He was regularly berated by appellate courts for withholding exculpatory evidence and for his courtroom behavior, admonishments Jagels seemed to relish. Bakersfield had gone from a blue-collar town of farmers and oil workers to the poster city for the lock 'em up movement. Residents touted the city's mock slogan: "Come for vacation, leave on probation."
Jagels’ influence has leaked across county borders. Over the course of his career he has been a leading voice in formulating and pushing the policies that have overpopulated California's prisons. He boasts that he's pursued the state’s controversial "three strikes and you're out" policy more aggressively than any prosecutor in the state, though as one anti-three strikes activist group points out, since the law was implemented Kern County's crime rate has dropped at a significantly slower rate than jurisdictions such as San Francisco County, where three strikes isn't enforced. Jagels was also at the fore of 1990’s Proposition 115, which made significant pro-prosecution changes to pre-trial hearings and the discovery process. More recently, Jagels weighed in on the medical marijuana debate, recommending that all dispensaries in Kern County be prohibited. He also led the effort to get three anti-death penalty justices removed from the California Supreme Court, an ironic twist, given that Ed Jagels and his 25 false convictions is a walking argument against the death penalty.
Perhaps the most troubling thing about Ed Jagels' career is that not only have the legal and political systems in California never sanctioned him for his monstrous behavior, he's been regularly rewarded for it. He has served as both president and director of the powerful California District Attorneys Association (CDAA), and on a number of blue ribbon panels charged with advising state officials on crime policy. Upon Jagels' retirement announcement, Scott Thorpe, the current head of the CDAA, told the Associated Press that Jagels is a "prosecutor's prosecutor," a remarkable and revealing statement of that organization's commitment to justice. Jagels is also listed as a crime policy advisor to Meg Whitman, a leading candidate for the California GOP's 2010 gubernatorial nomination.
Given his history, the obituary for Jagels' career ought to describe a rogue, renegade prosecutor long ago shunted to the fringe by colleagues embarrassed by his continuing reelection. Instead, as a former subordinate recently told the Bakersfield Californian, "Prosecutors from around the state seek and respect his advice on almost every issue of public safety."
And that's the problem. Bad actors like Jagels aren't shunned. They're venerated. Peers seek their counsel. And the same justice system so eager to mete out accountability to the accused continues to fail to hold accountable the people we entrust to run it.
All the President's Mendacity
Don't believe Obama's rhetorical hype
Sure, adding another trillion-dollar entitlement program to our $12 trillion of debt may seem like a counterintuitive way to stave off economic ruin, but who are we to argue? The president's got smarts.
And as is the case with so many issues, Obama adorned his rhetoric with sharp warnings of calamity should he fail, fabricated consensus to buttress his case and a promise of rapture should he succeed.
You'll remember it was Obama who cautioned that failure to pass the stimulus boondoggle would "turn a crisis into a catastrophe." He claimed that a failure to act on cap and trade will lead us to "irreversible catastrophe" and that a failure to pass a government-run health care system will mean "more Americans dying every day."
It's like living the Old Testament. Scary.
Holy burning bushes! Did you know that everyone—and I mean everyone—agrees with the president? Obama stressed this week that you can "talk to every health care economist out there and they will tell you that ... whatever ideas exist in terms of bending the cost curve and starting to reduce costs for families, businesses and government, those elements are in this bill."
Not "some" or "most" or "Peter Orszag on a two-day bender" but "every" health care economist in the entire world would tell you as much.
This sort of exaggeration reminds us of another whopper the president unloaded. While promoting the stimulus plan in January, he claimed that "there is no disagreement that we need action by our government, a recovery plan that will help to jump-start the economy."
No disagreement whatsoever ... until the Cato Institute found 200 economists from major universities across the country who did have a disagreement—and judging from the stimulus plan's impressive impotence, perhaps Obama should have lent them an ear.
So when Obama says that "whatever ideas exist" to help with cost are featured in the health care bills, let's chalk it up to his propensity to exaggerate, embellish or worse.
What about re-importation of pharmaceuticals developed and manufactured in the United States—available now more cheaply abroad? Is that an idea that exists? (Drug companies, a group that Obama regularly condemned before cutting a sweetheart deal, made sure that idea was DOA.)
What about balancing tax codes so that those with employee-provided health insurance and those with individual health insurance can benefit from the same benefits? Does that idea exist? You don't even need a staff of researchers to find economists who say it does.
What about opening up health insurance markets beyond state lines to create competition and more access? What about tort reform to end frivolous lawsuits? What about expanding health savings and flex accounts instead of killing them?
Let's concede that there might be a number of ideas—both on the left and the right—that haven't been embraced. Still, the most misleading assertion of the president is that his focus is on bending the cost curve in the right direction—or that it's even a goal. The prevailing objective of health care "reform" has been to expand coverage to the uninsured and to throw federal control on everyone. Cost has proved to be largely irrelevant—other than being a political consideration.
Of course, ignoring the substantive ideas of the ideological opposition is not, in and of itself, new for presidents or politicians. But Obama's fondness for creating imaginary consensus and offering false choices to the American people has been something to behold.
Reliving the Crash of '29
Reliving the Crash of '29
[First published in Inquiry, November 12, 1979]

A half-century ago, America — and then the world — was rocked by a mighty stock-market crash that soon turned into the steepest and longest-lasting depression of all time.
It was not only the sharpness and depth of the depression that stunned the world and changed the face of modern history: it was the length, the chronic economic morass persisting throughout the 1930s, that caused intellectuals and the general public to despair of the market economy and the capitalist system.
Previous depressions, no matter how sharp, generally lasted no more than a year or two. But now, for over a decade, poverty, unemployment, and hopelessness led millions to seek some new economic system that would cure the depression and avoid a repetition of it.
Political solutions and panaceas differed. For some it was Marxian socialism — for others, one or another form of fascism. In the United States the accepted solution was a Keynesian mixed-economy or welfare–warfare state. Harvard was the focus of Keynesian economics in the United States, and Seymour Harris, a prominent Keynesian teaching there, titled one of his many books Saving American Capitalism. That title encapsulated the spirit of the New Deal reformers of the '30s and '40s. By the massive use of state power and government spending, capitalism was going to be saved from the challenges of communism and fascism.
One common guiding assumption characterized the Keynesians, socialists, and fascists of the 1930s: that laissez-faire, free-market capitalism had been the touchstone of the US economy during the 1920s, and that this old-fashioned form of capitalism had manifestly failed us by generating, or at least allowing, the most catastrophic depression in history to strike at the United States and the entire Western world.
Well, weren't the 1920s, with their burgeoning optimism, their speculation, their enshrinement of big business in politics, their Republican dominance, their individualism, their hedonistic cultural decadence, weren't these years indeed the heyday of laissez-faire? Certainly the decade looked that way to most observers, and hence it was natural that the free market should take the blame for the consequences of unbridled capitalism in 1929 and after.
Unfortunately for the course of history, the common interpretation was dead wrong: there was very little laissez-faire capitalism in the 1920s. Indeed the opposite was true: significant parts of the economy were infused with proto–New Deal statism, a statism that plunged us into the Great Depression and prolonged this miasma for more than a decade.
In the first place, everyone forgot that the Republicans had never been the laissez-faire party. On the contrary, it was the Democrats who had always championed free markets and minimal government, while the Republicans had crusaded for a protective tariff that would shield domestic industry from efficient competition, for huge land grants and other subsidies to railroads, and for inflation and cheap credit to stimulate purchasing power and apparent prosperity.
It was the Republicans who championed paternalistic big government and the partnership of business and government while the Democrats sought free trade and free competition, denounced the tariff as the "mother of trusts," and argued for the gold standard and the separation of government and banking as the only way to guard against inflation and the destruction of people's savings. At least that was the policy of the Democrats before Bryan and Wilson at the start of the 20th century, when the party shifted to a position not very far from its ancient Republican rivals.
The Republicans never shifted, and their reign in the 1920s brought the federal government to its greatest intensity of peacetime spending and hiked the tariff to new, stratospheric levels. A minority of old-fashioned "Cleveland" Democrats continued to hammer away at Republican extravagance and big government during the Coolidge and Hoover eras. Those included Governor Albert Ritchie of Maryland, Senator James Reed of Missouri, and former Solicitor General James M. Beck, who wrote two characteristic books in this era: The Vanishing Rights of the States and Our Wonderland of Bureaucracy.
But most important in terms of the depression was the new statism that the Republicans, following on the Wilson administration, brought to the vital but arcane field of money and banking. How many Americans know or care anything about banking? Yet it was in this neglected but crucial area that the seeds of 1929 were sown and cultivated by the American government.
The United States was the last major country to enjoy, or be saddled with, a central bank. All the major European countries had adopted central banks during the 18th and 19th centuries, which enabled governments to control and dominate commercial banks, to bail out banking firms whenever they got into trouble, and to inflate money and credit in ways controlled and regulated by the government. Only the United States, as a result of Democratic agitation during the Jacksonian era, had had the courage to extend the doctrine of classical liberalism to the banking system, thereby separating government from money and banking.
Having deposed the central bank in the 1830s, the United States enjoyed a freely competitive banking system — and hence a relatively "hard" and noninflated money — until the Civil War. During that catastrophe, the Republicans used their one-party dominance to push through their interventionist economic program. It included a protective tariff and land grants to railroads, as well as inflationary paper money and a "national banking system" that in effect crippled state-chartered banks and paved the way for the later central bank.
The United States adopted its central bank, the Federal Reserve System, in 1913, backed by a consensus of Democrats and Republicans. This virtual nationalization of the banking system was unopposed by the big banks; in fact, Wall Street and the other large banks had actively sought such a central system for many years. The result was the cartelization of banking under federal control, with the government standing ready to bail out banks in trouble, and also ready to inflate money and credit to whatever extent the banks felt was necessary.
Without a functioning Federal Reserve System available to inflate the money supply, the United States could not have financed its participation in World War I: that war was fueled by heavy government deficits and by the creation of new money to pay for swollen federal expenditures.
One point is undisputed: the autocratic ruler of the Federal Reserve System, from its inception in 1914 to his death in 1928, was Benjamin Strong, a New York banker who had been named governor of the Federal Reserve Bank of New York. Strong consistently and repeatedly used his power to force an inflationary increase of money and bank credit in the American economy, thereby driving prices higher than they would have been and stimulating disastrous booms in the stock and real-estate markets. In 1927, Strong gaily told a French central banker that he was going to give "a little coup de whiskey to the stock market." What was the point? Why did Strong pursue a policy that now can seem only heedless, dangerous, and recklessly extravagant?
Once the government has assumed absolute control of the money-creating machinery in society, it benefits — as would any other group — by using that power. Anyone would benefit, at least in the short run, by printing or creating new money for his own use or for the use of his economic or political allies.
Strong had several motives for supporting an inflationary boom in the 1920s. One was to stimulate foreign loans and foreign exports. The Republican party was committed to a policy of partnership of government and industry, and to subsidizing domestic and export firms. A protective tariff aided inefficient domestic producers by keeping out foreign competition. But if foreigners were shut out of our markets, how in the world were they going to buy our exports? The Republican administration thought it had solved this dilemma by stimulating American loans to foreigners so that they could buy our products.
A fine solution in the short run, but how were these loans to be kept up, and, more important, how were they to be repaid? The banking community was also confronted with the curious and ultimately self-defeating policy of preventing foreigners from selling us their products, and then lending them the money to keep buying ours. Benjamin Strong's inflationary policy meant repeated doses of cheap credit to stimulate this foreign lending. It should also be noted that this policy subsidized American investment banks in making foreign loans.
Among the exports stimulated by cheap credit and foreign loans were farm products. American agriculture, overstimulated by the swollen demands of warring European nations during World War I, was a chronically sick industry during the 1920s. It had awakened after the resumption of peace to find that farm prices had fallen and that European demand was down. Rather than adjusting to postwar realities, however, American farmers preferred to organize and agitate to force taxpayers and consumers to keep them in the style to which they had become accustomed during the palmy "parity" years of the war. One way for the federal government to bow to this political pressure was to stimulate foreign loans and hence to encourage foreign purchases of American farm products.
The "farm bloc," it should be noted, included not only farmers; more indirect and considerably less rustic interests were also busily at work. The postwar farm bloc gained strong support from George N. Peek and General Hugh S. Johnson; both, later prominent in the New Deal, were heads of the Moline Plow Company, a major manufacturer of farm machinery that stood to benefit handsomely from government subsidies to farmers. When Herbert Hoover, in one of his first acts as president — considerably before the crash — established the Federal Farm Board to raise farm prices, he installed as head of the FFB Alexander Legge, chairman of International Harvester, the nation's leading producer of farm machinery. Such was the Republican devotion to "laissez faire."
But a more indirect and ultimately more important motivation for Benjamin Strong's inflationary credit policies in the 1920s was his view that it was vitally important to "help England," even at American expense. Thus, in the spring of 1928, his assistant noted Strong's displeasure at the American public's outcry against the "speculative excesses" of the stock market.
The public didn't realize, Strong thought, that "we were now paying the penalty for the decision which was reached early in 1924 to help the rest of the world back to a sound financial and monetary basis." An unexceptionable statement, provided that we clear up some euphemisms. For the "decision" was taken by Strong in camera, without the knowledge or participation of the American people; the decision was to inflate money and credit, and it was done not to help the "rest of the world" but to help sustain Britain's unsound and inflationary policies.
Before the World War, all the major nations were on the gold standard, which meant that the various currencies — the dollar, pound, mark, franc, etc. — were redeemable in fixed weights of gold. This gold requirement ensured that governments were strictly limited in the amount of scrip they could print and pour into circulation, whether by spending to finance government deficits or by lending to favored economic or political groups. Consequently, inflation had been kept in check throughout the 19th century when this system was in force.
But world war ruptured all that, just as it destroyed so many other aspects of the classical-liberal polity. The major warring powers spent heavily on the war effort, creating new money in bushel baskets to pay the expense. Inflation was consequently rampant during and after World War I and, since there were far more pounds, marks, and francs in circulation than could possibly be redeemed in gold, the warring countries were forced to go off the gold standard and to fall back on paper currencies — all, that is, except for the United States, which was embroiled in the war for a relatively short time and could therefore afford to remain on the gold standard.
After the war, the nations faced a world currency breakdown with rampant inflation and chaotically falling exchange rates. What was to be done? There was a general consensus on the need to go back to gold, and thereby to eliminate inflation and frantically fluctuating exchange rates. But how to go back? That is, what should be the relations between gold and the various currencies?
Specifically, Britain had been the world's financial center for a century before the war, and the British pound and the dollar had been fixed all that time in terms of gold so that the pound would always be worth $4.86. But during and after the war the pound had been inflated relatively far more than the dollar, and thus had fallen to about $3.50 on the foreign-exchange market. But Britain was adamant about returning the pound, not to the realistic level of $3.50, but rather to the old prewar par of $4.86.
Why the stubborn insistence on going back to gold at the obsolete prewar par? Part of the reason was a stubborn and mindless concentration on saving face and British honor, on showing that the old lion was just as strong and tough as before the war. Partly, it was a shrewd realization by British bankers that if the pound were devalued from prewar levels England would lose its financial preeminence, perhaps to the United States, which had been able to retain its gold status.
So, under the spell of its bankers, England made the fateful decision to go back to gold at $4.86. But this meant that Britain's exports were now made artificially expensive and its imports cheaper, and since England lived by selling coal, textiles, and other products, while importing food, the resulting chronic depression in its export industries had serious consequences for the British economy. Unemployment remained high in Britain, especially in its export industries, throughout the boom of the 1920s.
To make this leap backward to $4.86 viable, Britain would have had to deflate its economy so as to bring about lower prices and wages and make its exports once again inexpensive abroad. But it wasn't willing to deflate since that would have meant a bitter confrontation with Britain's now-powerful unions. Ever since the imposition of an extensive unemployment-insurance system, wages in Britain were no longer flexible downward as they had been before the war. In fact, rather than deflate, the British government wanted the freedom to keep inflating, in order to raise prices, do an end run around union wage rates, and ensure cheap credit for business.
The British authorities had boxed themselves in: They insisted on several axioms. One was to go back to gold at the old prewar par of $4.86. This would have made deflation necessary, except that a second axiom was that the British continue to pursue a cheap credit, inflationary policy rather than deflation. How to square the circle? What the British tried was political pressure and arm-twisting on other countries, to try to induce or force them to inflate too. If other countries would also inflate, the pound would remain stable in relation to other currencies; Britain would not keep losing gold to other nations, which endangered its own jerry-built monetary structure.
On the defeated and small new countries of Europe, Britain's pressure was notably successful. Using their dominance in the League of Nations and especially in its Financial Committee, the British forced country after country not only to return to gold, but to do so at overvalued rates, thereby endangering those nations' exports and stimulating imports from Britain. And the British also flummoxed these countries into adopting a new form of gold "exchange" standard, in which they kept their reserves not in gold, as before, but in sterling balances in London.
In this way, the British could continue to inflate; and pounds, instead of being redeemed in gold, were used by other countries as reserves on which to pyramid their own paper inflation. The only stubborn resistance to the new order came from France, which had a hard-money policy into the late 1920s. It was French resistance to the new British monetary order that was ultimately fatal to the house of cards the British attempted to construct in the 1920s.
The United States was a different situation altogether. Britain could not coerce the United States into inflating in order to save the misbegotten pound, but it could cajole and persuade. In particular, it had a staunch ally in Benjamin Strong, who could always be relied on to be a willing servitor of British interests. By repeatedly agreeing to inflate the dollar at British urging, Benjamin Strong won the plaudits of the British financial press as the best friend of Great Britain since Ambassador Walter Hines Page, who had played a key role in inducing the United States to enter the war on the British side.
Why did Strong do it? We know that he formed a close friendship with British financial autocrat Montagu Norman, longtime head of the Bank of England. Norman would make secret visits to the United States, checking in at a Saratoga Springs resort under an assumed name, and Strong would join him there for the weekend, also incognito, there to agree on yet another inflationary coup de whiskey to the market.
Surely this Strong–Norman tie was crucial, but what was its basic nature? Some writers have improbably speculated on a homosexual liaison to explain the otherwise mysterious subservience of Strong to Norman's wishes. But there was another, and more concrete and provable, tie that bound these two financial autocrats together.
That tie involved the Morgan banking interests. Benjamin Strong had lived his life in the Morgan ambit. Before being named head of the Federal Reserve, Strong had risen to head of the Bankers Trust Company, a creature of the Morgan bank. When asked to be head of the Fed, he was persuaded to take the job by two of his best friends, Henry P. Davison and Dwight Morrow, both partners of J.P. Morgan & Co.
The Federal Reserve System arrived at a good time for the Morgans. It was needed to finance America's participation in World War I, a participation strongly supported by the Morgans, who played a major role in bringing the Wilson administration into the war. The Morgans, heavily invested in rail securities, had been caught short by the boom in industrial stocks that emerged at the turn of the century. Consequently, much of their position in investment-banking was being eroded by Kuhn, Loeb & Co., which had been faster off the mark on investment in industrial securities.
World War I meant economic boom or collapse for the Morgans. The House of Morgan was the fiscal agent for the Bank of England: it had the underwriting concession for all sales of British and French bonds in the United States during the war, and it helped finance US arms and munitions sales to Britain and France. The House of Morgan had a very heavy investment in an Anglo-French victory and a German-Austrian defeat. Kuhn, Loeb, on the other hand, was pro-German, and therefore was tied more to the fate of the Central Powers.
The cement binding Strong and Norman was the Morgan connection. Not only was the House of Morgan intimately wrapped up in British finance, but Norman himself — as well as his grandfather — in earlier days had worked in New York for the powerful investment banking firm of Brown Brothers, and hence had developed close personal ties with the New York banking community. For Benjamin Strong, helping Britain meant helping the House of Morgan to shore up the internally contradictory monetary structure it had constructed for the postwar world.
The result was inflationary credit, a speculative boom that could not last, and the Great Crash whose 50th anniversary we observe this year. After Strong's death in late 1928, the new Federal Reserve authorities, while confused on many issues, were no longer consistent servitors of Britain and the Morgans. The deliberate and consistent policy of inflation came to an end, and a corrective depression soon arrived.
There are two mysteries about the Great Depression, mysteries having two separate and distinct solutions. One is, why the crash? Why the sudden crash and depression in the midst of boom and seemingly permanent prosperity? We have seen the answer: inflationary credit expansion propelled by the Federal Reserve System in the service of various motives, including helping Britain and the House of Morgan.
But there is another vital and very different problem. Given the crash, why did the recovery take so long? Usually, when a crash or financial panic strikes, the economic and financial depression, be it slight or severe, is over in a few months or a year or two at the most. After that, economic recovery will have arrived. The crucial difference between earlier depressions and that of 1929 was that the 1929 crash became chronic and seemed permanent.
What is seldom realized is that depressions, despite their evident hardship on so many, perform an important corrective function. They serve to eliminate the distortions introduced into the economy by an inflationary boom. When the boom is over, the many distortions that have entered the system become clear: prices and wage rates have been driven too high, and much unsound investment has taken place, particularly in capital-goods industries.
The recession or depression serves to lower the swollen prices and to liquidate the unsound and uneconomic investments; it directs resources into those areas and industries that will most-effectively serve consumer demands — and were not allowed to do so during the artificial boom. Workers previously misdirected into uneconomic production, unstable at best, will, as the economy corrects itself, end up in more secure and productive employment.
The recession must be allowed to perform its work of liquidation and restoration as quickly as possible, so that the economy can be allowed to recover from boom and depression and get back to a healthy footing. Before 1929, this hands-off policy was precisely what all US governments had followed, and hence depressions, however sharp, would disappear after a year or so.
But when the Great Crash hit, America had recently elected a new kind of president. Until the past decade, historians have regarded Herbert Clark Hoover as the last of the laissez-faire presidents. Instead, he was the first New Dealer.
Hoover had his bipartisan aura, and was devoted to corporatist cartelization under the aegis of big government; indeed, he originated the New Deal farm-price-support program. His New Deal specifically centered on his program for fighting depressions. Before he assumed office, Hoover determined that should a depression strike during his term of office, he would use the massive powers of the federal government to combat it. No more would the government, as in the past, pursue a hands-off policy.
As Hoover himself recalled the crash and its aftermath,
The primary question at once arose as to whether the President and the federal government should undertake to investigate and remedy the evils.… No President before had ever believed that there was a governmental responsibility in such cases.… Presidents steadfastly had maintained that the federal government was apart from such eruptions … therefore, we had to pioneer a new field.
In his acceptance speech for the presidential renomination in 1932, Herbert Hoover summed it up:
We might have done nothing.… Instead, we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action.… No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times.
The massive Hoover program was, indeed, a characteristically New Deal one: vigorous action to keep up wage rates and prices, to expand public works and government deficits, to lend money to failing businesses to try to keep them afloat, and to inflate the supply of money and credit to try to stimulate purchasing power and recovery. Herbert Hoover during the 1920s had pioneered the proto-Keynesian idea that high wages are necessary to assure sufficient purchasing power and a healthy economy. The notion led him to artificially raising wages — and consequently to aggravating the unemployment problem — during the depression.
As soon as the stock market crashed, Hoover called in all the leading industrialists in the country for a series of White House conferences in which he successfully bludgeoned the industrialists, under the threat of coercive government action, into propping up wage rates — and hence causing massive unemployment — while prices were falling sharply. After Hoover's term, Franklin D. Roosevelt simply continued and expanded Hoover's policies across the board, adding considerably more coercion along the way. Between them, the two New Deal presidents managed the unprecedented feat of making the depression last a decade, until we were lifted out of it by our entry into World War II.
If Benjamin Strong got us into a depression and Herbert Hoover and Franklin D. Roosevelt kept us in it, what was the role in all this of the nation's economists, watchdogs of our economic health? Unsurprisingly, most economists, during the depression and ever since, have been much more part of the problem than of the solution. During the 1920s, establishment economists, led by Professor Irving Fisher of Yale, hailed the 20s as the start of a "New Era," one in which the new Federal Reserve System would ensure permanently stable prices, avoiding either booms or busts.
Unfortunately, the Fisherites, in their quest for stability, failed to realize that the trend of the free and unhampered market is always toward lower prices as productivity rises and mass markets develop for particular products. Keeping the price level stable in an era of rising productivity, as in the 1920s, requires a massive artificial expansion of money and credit. Focusing only on wholesale prices, Strong and the economists of the 1920s were willing to engender artificial booms in real estate and stocks, as well as malinvestments in capital goods, so long as the wholesale price level remained constant.
As a result, Irving Fisher and the leading economists of the 1920s failed to recognize that a dangerous inflationary boom was taking place. When the crash came, Fisher and his disciples of the Chicago School again pinned the blame on the wrong culprit. Instead of realizing that the depression process should be left alone to work itself out as rapidly as possible, Fisher and his colleagues laid the blame on the deflation after the crash and demanded a reinflation (or "reflation") back to 1929 levels.
In this way, even before Keynes, the leading economists of the day managed to miss the problem of inflation and cheap credit and to demand policies that only prolonged the depression and made it worse. After all, Keynesianism did not spring forth full-blown with the publication of Keynes's General Theory in 1936.
We are still pursuing the policies of the 1920s that led to eventual disaster. The Federal Reserve is still inflating the money supply and inflates it even further with the merest hint that a recession is in the offing. The Fed is still trying to fuel a perpetual boom while avoiding a correction on the one hand or a great deal of inflation on the other.
In a sense, things have gotten worse. For while the hard-money economists of the 1920s and 1930s wished to retain and tighten up the gold standard, the "hard-money" monetarists of today scorn gold, are happy to rely on paper currency, and feel that they are boldly courageous for proposing not to stop the inflation of money altogether, but to limit the expansion to a supposedly fixed amount.
Those who ignore the lessons of history are doomed to repeat it — except that now, with gold abandoned and each nation able to print currency ad lib, we are likely to wind up, not with a repeat of 1929, but with something far worse: the holocaust of runaway inflation that ravaged Germany in 1923 and many other countries during World War II. To avoid such a catastrophe we must have the resolve and the will to cease the inflationary expansion of credit, and to force the Federal Reserve System to stop purchasing assets, and thereby to stop its continued generation of chronic, accelerating inflation.
Krugman Falls into the Keynesian Accounting Trap

It's one thing to criticize Paul Krugman for his views on Austrian economics, but only a brave soul would have the temerity to question Krugman's discussion of the Keynesian approach to international trade, right? Since Krugman is the world's most famous living Keynesian, and he won the Nobel (Memorial) Prize for his work on trade theory, accusing him of a basic error on this score would be akin to telling Madonna she knows nothing of pop music.
Even so, in a recent blog post Krugman's advocacy for deficit spending leads him to commit a basic fallacy when discussing economic output and trade. What's really ironic is that Krugman has previously exposed this particular fallacy when others made it! That the master Keynesian was vulnerable to such a naïve mistake justifies the Austrian warning that focusing on equations of aggregate variables is the wrong approach in economics.
Krugman's Goof on Trade Theory
A Washington Post editorial had called for lowering trade barriers as a way to stimulate the US economy and create jobs. Krugman thought this was a nonsolution:
There are a lot of good things you can say about international trade. But it does not, repeat not, do anything to alleviate a shortage of overall demand. Yes, if you liberalize trade countries will export more. But they will also import more. If you're worried about C+I+G+X−M, it's a wash, because X and M rise equally.
Which makes this WaPo editorial on things Obama should be doing about jobs truly bizarre. Even if the proposed trade deals with Korea and Colombia were remotely big enough to bear mentioning in the context of the crisis — which they aren't — they wouldn't be job creation measures.
Now, I am not here to defend or reject so-called "free-trade agreements" that consist of hundreds or even thousands of pages of minute trade regulations. But Krugman isn't rejecting the WaPo suggestion on that score; he is accepting the basic premise that the deals truly would liberalize the flow of goods across borders, and he is arguing that the Keynesian "national accounting identity" equation [Y = C + I + G + (X − M)] shows that freer trade won't create jobs.
I have read Krugman's post a few times to make sure I'm not missing something, but I must confess I think he is committing a very basic error. Specifically, he is confusing the Keynesian accounting identity with a causal theory of how changes in one of the variables lead to changes in the other variables. It is particularly ironic that Krugman has made this mistake, since he shredded it when someone else made the same mistake (in a different context).
A final note before I dissect Krugman's error: In this article I am conceding the basic Keynesian framework, just for the sake of argument. Elsewhere I have shown that the entire notion of trying to artificially "create jobs" through government programs is a bad idea, because recessions are the market's way of reallocating resources after an unsustainable boom. But in order to isolate Krugman's particular mistake, I want to correct him using the standard Keynesian approach.
The Keynesian National Income Accounting Identity
The Keynesian view says that one way to measure total economic output (Y) is to add up total spending on consumption (C), investment (I), government purchases (G), and net exports (X − M). This leads to the equation:
Y = C + I + G + (X − M)
To repeat, this is not a "theory" of the macroeconomy, it is a truism of accounting. Because goods are diverse, the only way to aggregate them in order to come up with a figure like "total output" is to add up their money prices. So if "total output" is just the total amount of money that producers are receiving, then this number must be the same as the total amount of money that purchasers are spending. That's why the left side of the equation must equal the right side.
The first three components are straightforward enough, but the "net exports" component is a bit tricky. The idea here is that domestic consumption and investment expenditures need to be adjusted for international trade, in order to isolate the output that was actually produced domestically. That's why imports (M) — which are so labeled to avoid confusion with investment — are subtracted on the right side. It's not that an import per se destroys output, but rather that if an American buys a TV (consumption) or a forklift (investment) that was actually produced abroad, then we need to subtract out that expenditure from C or I because it does not reflect output produced in the United States.
On the other hand, if foreigners are spending money on consumption or investment goods produced within the United States, then this spending on US exports (X) needs to be added, because the first three components (C, I, and G) wouldn't have already captured it since they only look at domestic expenditures.
Now that we understand the logic behind the Keynesian macroaccounting identity, we can illustrate Krugman's basic mistake.
Krugman Confuses a Tautology With Causality
The huge danger in focusing on this equation is that it very often misleads people into thinking that the way to increase output is to try to raise one of the variables on the right side. But this is a fallacy! It's correct that the accounting identity must always be true, but it can remain in balance if a different variable on the right side falls.
For example, Keynesians often invoke this equation to argue that increases in government spending are necessary to "fill the gap" when private consumption and investment are below "potential GDP." They are naively assuming that boosting G on the right side of the equation will necessarily lead to an increase in Y on the left side. But that relies on the Keynesian theory of how the macroeconomy works; it doesn't follow from the identity itself. No, the identity is equally consistent with a Chicago School–type argument that says boosting G will simply lead to a dollar-for-dollar drop in C or I, leaving output Y unchanged.
In our present context, Krugman has argued that lowering trade barriers will (in general) raise X and M equally, and so this can't possibly change the left side of the equation.[1] But that is wrong; it assumes that domestic consumption and investment spending will not themselves be influenced by the reduced trade barriers. Since the standard case for free trade restson the demonstration that it will increase per capita income, it is simply amazing that Krugman failed to realize this before firing off his blog post.
So Would Cutting Off All Trade Leave World Output the Same?!
To make the fallacy crystal clear, we can reverse Krugman's argument. Suppose governments around the world proposed to completely seal their borders and eliminate trade altogether. If Krugman is right, that should have no effect whatsoever on world output, and hence on the amount of workers necessary to produce all those goods and services.
It's true, every country's export sector would be devastated, but this fall in X would be exactly counterbalanced by a fall in M. Or more accurately, the countries with a trade deficit would see their output rise, but the countries with a trade surplus would see their output fall. There is no trade deficit for the world as a whole, so the two effects would cancel across all countries.
We'll close with a numerical example to drive home the point, and to show that Krugman is wrong even within the Keynesian framework. To repeat, I'm not merely arguing in this article that Krugman's Keynesian logic "must be crazy," since it "proves" that liberalizing trade can't help an economy mired in recession. No, I'm saying that the standard Keynesian tools do allow us to express that liberalizing trade can in fact help in a recession, but Krugman, in his zeal to attack the WaPo editorial, abused his own tools.
Imagine a small but productive island nation, similar to Hong Kong, which has an enormous export sector. Its Keynesian parameters have the following values:
C = $74 billion
I = $10 billion
G = $15 billion
X = $100 billion (exports)
M = $99 billion (imports)
Thus the GDP of our island nation is $100 billion, which is consumption plus investment plus government spending, plus the $1 billion in net exports.
Y = C + I + G + (X − M)
100 = 74 + 10 + 15 + (100 − 99)
Now suppose that a rival nation surrounds the island with warships and completely seals it off from international trade. According to Krugman's logic, we should expect GDP to fall 1 percent, down to $99 billion. Now some of the islanders might say, "Huh?! How the heck are we supposed to even eat if we lose our access to the world economy? We have no oil or other natural resources, and we import most of our food. If we can't trade, our cars and trains will come to a standstill and everyone will have to cut meat out of his diet."
Krugman would laugh at such medieval, verbal reasoning. He would patiently explain to the frightened islanders that the numbers don't lie. Yes the economy would lose $100 billion in exports, throwing all those people out of work, but domestic consumers would have to switch their demands away from the $99 billion they previously spent on foreign goods. Net exports only contributed $1 billion to GDP before the blockade, so the complete cessation of trade wouldn't have much of an impact. Right?
No, of course that's not right. After the blockade is put into place, we ask macroeconomists (before they starve) to tabulate the national accounting identity one last time. This is what they report:
C = $15 billion
I = $0 billion
G = $5 billion
X = $0 billion (exports)
M = $0 billion (imports)
Rather than the 1 percent drop Krugman had forecasted, GDP actually fell a shocking 80 percent, down to $20 billion. No businessperson in his right mind is investing in this environment; the government has had to slash its spending because of the collapse in revenues; and consumers have scaled back their purchases to an extreme austerity budget. The island is devastated by the naval blockade. Duh! Of course it is: that's why warring countries blockade each other.
In closing, let me reiterate: The Keynesian accounting identity is still true. Output is now $20 billion, and, yep, the math checks out — adding up the new variables yields $20 billion.
Y = C + I + G + (X − M)
20 = 15 + 0 + 5 + (0 − 0)
Where Krugman's logic failed was his assumption that changes in trade barriers would only affect X and M, leaving C, I, and G the same. That assumption is wrong.
In the real world, erecting higher trade barriers will reduce economic output in both countries, whereas reducing trade barriers will lead to greater output. For a country mired in recession, new trade opportunities raise the productivity of labor and allow unemployed workers to be integrated back into the economy more quickly than they otherwise would be. If the government wants to stimulate job creation, cutting trade barriers is a good idea.
Farewell, Richard Posner
[A Failure of Capitalism: The Crisis of '08 and the Descent into Depression • By Richard Posner • Harvard University Press (2009) • 368 pages]

With his latest book, A Failure of Capitalism, Richard Posner has lived up to his oft-maligned reputation as a provocateur. Coming from a man who is the founder of the law-and-economics movement and an elected member of the Mont Pelerin Society, the sensational declaration that capitalism has failed will surely raise eyebrows. But Posner's musings, besides being premature, too often reek of false starts and gross prevarications.
We libertarians should commend Posner, one of the most original thinkers of our time, for his longstanding rejection of groupthink and for his refusal to conform to hackneyed ideologies. Nevertheless, we must also bid him farewell. This latest book, a career about-face, will do little to help those affected by the crisis. It will even hurt them further.
Posner suggests that, rather than euphemize, we call a spade a spade: the financial downturn is a depression, not merely a crisis. He insists on the unpalatable term "depression" because the current troubles far exceed any modest slump of recent decades and have precipitated government intervention unrivaled since the Great Depression. Posner is probably right on this score.
He's often right in his critique of the housing bubble as well, even if he fails to fully account for government's role in subprime mortgage loans: hyping home ownership, slashing interest rates, channeling artificial demand into the housing industry, and so on. Posner's thesis — that the depression represents a market failure brought on by deregulation — pivots on the myth that regulators actually regulate rather than serve the interests of leviathan beneficiaries (i.e., their cronies and themselves).
As for this latter point, Posner does acknowledge, among other things, that the SEC was bound up with agents of the private-securities industry despite its obligation to enforce federal security laws. All the same, he does not adequately deal with this problem or even the related problems involving government-sponsored enterprises (e.g., Fannie, Freddie, and the like) that privilege the interests of the elite few at the expense of the many. Simply put, Posner ignores corporatism. I have neither the time nor space to undertake this issue here. For further reading, I recommend Thomas E. Woods's Meltdown, a short, well-reasoned book that is accessible to the layperson (like me).
Posner's proposal that "we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails" seems quixotic at best. For an intelligent government (were there such a thing) would minimize rather than increase state impositions on the economy and would allow resources to flow from declining to expanding industries according to natural market forces.
Fraught with references to, and implicit endorsements of, Keynesian economics — the power of which, Posner claims, lies in its "simple, commonsense logic" — this book is a statist tour de force. Mario J. Rizzo has written at length about Posner's Keynesian conversion. Suffice it to say that Posner argues on the one hand that government can prevent depressions, and on the other hand that government failed to curb the recent economic downturn. This disjuncture begs the question: would more government bureaucracy and regulation have brought about a timelier and more coherent response? Is it not risky to put so much stock in something with such a volatile track record?
Posner submits that "conservatives," a strikingly vague term that he leaves undefined, argue that government triggered the crisis with "legislative pressures on banks to facilitate home-ownership by easing mortgage requirements and conditions." True, many self-described conservatives take this position. But Posner, apparently trying to cast these "conservatives" as hypocritical, indicts former President Bush for pushing homeownership as part of a compassionate-conservative agenda.
That Posner casts President Bush as the face of "conservative economics" (an oddly misleading category in itself) is not only telling but also, quite frankly, preposterous. For Bush — who championed massive government bailouts long before Obama — was hardly conservative in any small-government sense. He ran up budget deficits far greater than his predecessors, led us into two costly wars, and doubled the national debt. In light of these big-government flops, it seems outrageous for Posner to claim that "the way was open for a doctrinaire free-market, pro-business, anti-regulatory ideology to dominate the Bush Administration's economic thinking."
Posner achieves his goal of a "concise, constructive, jargon- and acronym-free, non-technical, unsensational, light-on-anecdote, analytical examination," but his hurried analysis is fatally flawed. Small wonder that his book has received little attention. Most likely dashed off on a tight deadline, it reads like several blog posts carelessly cobbled together (Posner admits in the preface that he's incorporated several blog posts).
Although we cannot fault him for the time sensitivity of his project, we can and should point out where the rush has taken its toll. At one point, for instance, Posner claims that the Democrats scored with the American public by bailing out the auto industry; shortly thereafter, he claims that the American public opposed the auto-industry bailout. In moments like this, Posner, having his cake and eating it too, disappoints over and over again.
Apparently flirting with supporters of both major political parties, he equivocates ad nauseam by spelling out a putatively conservative argument, a putatively liberal argument, and then his own argument, a convenient cherry-picking of the two. As another gesture toward mass audiences, he eschews footnotes and criticizes the economics profession — which he dubs an elite group of academics and finance theorists — for its apparent laxity and ineptitude. Posner's newfound populism, though, is unconvincing.
Even sympathetic readers will quickly tire of Posner's cocky rhetoric. Posner is — to the best of my knowledge — a magnanimous person with a genuine concern for the lives of millions of Americans, but his book, if heeded, will only exacerbate current conditions.
The Mont Pelerin Society declares that its members "see danger in the expansion of government." If Posner still shares this view, he has a funny way of showing it.
Rich-country debt
Playing Ponzi
The legacy of the financial crisis will continue for some years yet in advanced economies
IN 2009, the G20—a group of the world’s largest economies—edged out the G8 as the pre-eminent forum for tackling the world’s economic ills. Advanced economies, which aggressively stimulated demand and are forecast to experience weak GDP growth next year, contrast starkly with the G20’s developing countries. After some gentle fiscal stimulus, these countries are on track for strong growth next year. The IMF forecasts that gross government debt among advanced economies will continue to rise until 2014, reaching 114% of GDP, compared to just 35% for developing nations. With governments struggling to rein in their finances, rating agencies are becoming increasingly twitchy; rich countries such as America and Britain are fearful of losing their hallowed triple-A status.

America's health-care bill
America's health-care bill
Nearer and nearer
A procedural vote in America's Senate brings Barack Obama's health-care reforms closer

IT NOW looks certain that Barack Obama will get what he wanted for Christmas—a health-care reform bill passed out of the Senate, probably just a few hours before Santa begins his rounds. Republicans, who have been fighting tooth-and-nail to block passage of the bill seem to have given up the fight, and have given warning instead that this will be a wish that he comes to regret.
Shortly after 1am on Monday December 21st, the health bill cleared the first, and the most difficult, of the procedural hurdles it has to leap in order to secure passage through the Senate. Technically only a motion to end debate on a “manager's amendment” put together by the Senate's majority leader, Harry Reid, what the vote really represented was a crucial exercise in nose-counting. The result was a vote on precisely partisan lines, with all 40 Republicans opposed, and all 58 Democrats plus the two independents who are grouped with them voting in favour. Since 60 votes is the precise number needed to avoid a filibuster, there was no room for error whatsoever, the reason why the procedural motion had taken so long. But with all 60 members of the “Democratic caucus” now signed up, the final vote, on Christmas Eve, looks like a formality.
From the point of view of the Democrats, this victory has come at a high price. The health bill has been stripped of something very dear to many of then: a “public option” of a government-backed insurance scheme that would compete with private insurers in order, supposedly, to keep costs down and guarantee access. The version of the bill already passed by the House of Representatives does contain just such a public option, one of several reasons why final passage of a reconciled bill is still a way off. Some Democrats hope, however, that a public option can be added later on, after the initial bill has gone into effect.
Still, the Senate version does tick most Democratic boxes; it obliges everyone to have health-insurance, and sets out a generous system of subsides to help the uninsured obtain coverage, along with a system of government-regulated exchanges that should encourage competition among private insurers. It fines employers who do not offer health cover to their workers. And it makes it illegal for insurers to refuse people coverage on the basis of pre-existing medical conditions, as well as putting strict limits on the way that premiums are allowed to increase with age. The hope is that tens of million of Americans currently without coverage will now be able to get it, and many tens of millions more, who have insurance but fear losing it through redundancy or ill-health, will have those worries lifted from their shoulders.
Republicans, however, hate the bill, mostly on the ground of cost. The advertised price-tag of the Senate bill is a bit under $900 billion over the next ten years, but Republicans contend that the numbers will be much higher than that, as the cost of subsidies has been underestimated and predicted savings will not materialise. Even at the stated number, this is a large bill at a time when America is running huge deficits that it urgently needs to tackle. The Senate bill is "paid for", but only in the sense that it provides for large charges on the most expensive private insurance policies, and because it factors in deep cuts to Medicare the health-insurance scheme for the elderly. Republicans say these will never be enacted. Past history provides them with evidence to back up that claim.
Less politically involved observers also note that it is unprecedented for such a substantive and expensive bill to have been forced through Congress on such a narrow vote. The bill passed the House on a margin of just five votes, and in the Senate it has no safety margin. With no bipartisan support at all, Democrats will be held solely responsible if the reform turns out to be a disappointment. Some studies have suggested that private insurance premiums could rise substantially in response to the new burdens being placed on insurers.
Completion of work on the bill is by no means a formality, though it does now look more or less certain that the Senate will vote the bill out before Christmas. The next difficulty will come in producing a single “reconciled” version from the very different bills that the Senate and House have produced; that reconciled bill then has to go back for final clearance by both chambers. The public option is one big stumbling block. It is clear that the Senate cannot pass any version of a bill that contains a public option, so the House will have to give ground, which is going to require a lot of presidential arm-twisting in January. And the two bills are funded in very different ways, one with a tax on the rich, the other with an insurance-policy surcharge. As of today though, health-care reform, expensive and imperfect though it is, is looking a lot more likely.
Historic Health Vote Looms
Historic Health Vote Looms
Estimated 30 Million to Get Insurance, Firms Face New Taxes; Christmas Eve Clash
GREG HITT JANET ADAMY
WASHINGTON—The Democratic-controlled Senate, voting 60-40, swept aside Republican objections and moved to close off debate on health overhaul legislation, marking a milestone moment for President Barack Obama's most pressing domestic initiative.
All 58 Democrats and two independents voted to approve the first -- and most crucial -- of three motions needed to break off action, as the Senate entered a fourth week of debate on the bill. All Republicans voted no.
The roll call, which began shortly after 1 a.m. Monday, was effectively a test vote for the sweeping bill. The action made clear the White House has enough votes to ensure passage -- likely on Christmas Eve -- of the broadest health legislation in a generation. The measure would ensure that some 30 million Americans will gain insurance coverage over the next decade, while taxes will rise on groups ranging from medical-device makers to customers of tanning salons.
The more than 2,000-page Senate bill needs to be reconciled with House-passed legislation, but is likely to form the core of any final bill presented to President Obama for his signature.
With the vote looming, Senate Minority Leader Mitch McConnell (R., Ky.) urged "Democrats to put party loyalty aside" and join with Republicans in derailing the bill. "It's not too late," he said, warning Democrats they would pay a price for moving the bill. "The impact of this vote will long outlive this one frantic, snowy weekend in Washington."
Democrats accused Republicans of engaging in scare tactics and insisted the legislation – while not popular in opinion polls – would meet an urgent national need. "We're going to move forward," said Sen. Tom Harkin (D., Iowa). "We're not going to vote fear. We're going to vote hope."
Months in the making, the Senate bill would sharply expand Medicaid -- the federal-state health program for the poor -- and create tax subsidies to help low- and middle-income people comply with a new mandate to carry insurance.
The Senate bill would generally leave the existing employer-based health-insurance system intact. Americans who already have coverage on the job wouldn't be likely to see big immediate changes. Larger companies would be required to pay a fee to the government if they didn't offer affordable insurance to employees and if the employees later sought government help paying for insurance.
Last-minute additions toughened restrictions on insurers. Starting next year, they would be barred from denying coverage to children with pre-existing conditions. As before, that provision would apply to adults starting in 2014. The bill would create a national exchange, or marketplace, where individuals and small businesses could buy insurance.
To pay for the program, the measure would impose cuts of some $480 billion over a decade in payments to providers of Medicare, the federal health program for the elderly and disabled. The provision is at the core of Republican objections. The bill also would impose new fees of billions of dollars a year on insurers, medical-device makers, pharmaceutical makers and others. And it would establish a tax on insurers offering high-value health policies.
Another late change would hit customers of indoor tanning salons, who would pay a 10% tax. That replaced a proposed tax on cosmetic surgery, which was projected to raise about $5 billion over a decade. The Senate bill doesn't directly affect income taxes.
The Congressional Budget Office estimated the bill would cost $871 billion over a decade and leave 31 million fewer people uninsured than if current law were in place -- although 23 million Americans, many on the edges of society, would still be uninsured. It projected the bill would hold federal deficits to $132 billion less than they otherwise would be over a decade, owing to new taxes and other changes.
If the Senate bill passes and goes to a conference committee with the House, as expected, the House is likely to do most of the reconciling. That's because Senate Majority Leader Harry Reid -- after battling for weeks to get the minimum number of votes needed to avert a Republican filibuster -- has little room to maneuver. The House passed its version on Nov. 7 on a 220-215 vote.
President Obama hopes to sign a final bill before his State of the Union address after the first of the year so he can turn to other issues, in particular the economy and jobs, in a bid to boost support for Democrats in the 2010 elections.
A flurry of weekend deal making amid a December snowstorm locked in the final elements of the Senate bill and got the support of the last Democratic holdout, Ben Nelson of Nebraska. He won a tightening of rules to ensure that no federal money allocated under the bill is used to fund abortions, and got more money for his state in the Medicaid program.
Democratic leaders also threw in $10 billion in spending on community health centers, a nod to liberals. The agreements set the stage for Monday's key procedural vote.
The issue is likely to define the battle lines of the 2010 midterm elections, given the partisan nature of the Senate vote.
Republicans said the legislation would impose big costs on government and taxpayers, and they denounced Mr. Nelson. Sen. Tom Coburn (R., Okla.), speaking on the Senate floor Sunday as the chamber spent a third weekend in a row tackling health care, labeled the Nebraskan's deal the "full Nelson." He added: "It's a shame the only way we can come to a consensus in this country is to buy votes."
Asked about Republican charges that Nebraska received special attention, Sen. Nelson said he was simply trying to deal with the potential budget problems the Medicaid expansion would create for his state. "I didn't ask for a special favor here. I didn't ask for a carve-out," he said on CNN's "State of the Union." He added the state's governor complained "publicly he's having trouble with the budget."
In the coming negotiations, the House will almost certainly be forced to give up the government-run insurance plan that is part of its bill. The idea failed in the upper chamber after centrists including Connecticut independent Joseph Lieberman drew a line in the sand against it.
The final bill is also likely to embrace a version of the Senate's proposed tax on high-value insurance plans, rather than add a surtax on the wealthy, as the House wanted.
Speaker Nancy Pelosi (D., Calif.) and House Majority Leader Steny Hoyer (D., Md.) said they intend to reconcile the bills and send final legislation to the president as soon as possible.
Polls show dwindling support for the Democrats' health-insurance overhaul. Yvonne Rankin, a 42-year-old Batesville, Ark., resident who is uninsured, said she initially liked the Democrats' health proposals because she thought they would give her access to affordable insurance.
She said she began changing her mind about six weeks ago when she heard about the Medicare-payment cuts, since her mother relies on the program.
"I just don't know what's going to be in it for me," said Ms. Rankin, a student who identified herself as an independent.
Democrats moved over the weekend to shore up support among lawmakers and the public, releasing a 383-page amendment to their Senate bill that included proposals meant to help small businesses. For small employers, the amendment moved up the effective date of new health-insurance tax credits by one year to 2010. The amendment requires insurers to spend at least a minimum percentage of their revenue on health-care services, effectively limiting profits.
Republicans demanded the amendment be read aloud in full on the Senate floor. Throughout Saturday, clerks took turns reading to a nearly empty chamber, in a gesture Republicans hoped would dramatize the closed-door dealings by Democrats.
The American Hospital Association came out in support of the bill Sunday, saying it likes how the bill expands coverage and provides more competition for insurers. However, the group said it wants to lessen the payment cuts hospitals face under the bill and is concerned the bill unfairly penalizes hospitals for readmitting patients.
The American Medical Association, which has backed some earlier versions of the health overhaul, held off on endorsing the Senate bill. But association President J. James Rohack said he was pleased the bill addressed issues the AMA had raised, including the tax on cosmetic surgery.
Insurers have opposed the Senate health bill. They say it would raise premiums by bringing more ill people into the system while letting healthy people stay uninsured if they pay a relatively small fine. "There have been some modest improvements," said WellPoint Inc.'s chief of strategy, Brad Fluegel. "The individual coverage requirement is stronger and the pilot programs on cost containment have been accelerated. But at its core it will still wind up increasing costs"
Republicans and their allies exhorted supporters to rally against the bill. Texas Sen. John Cornyn, who heads the campaign arm of Senate Republicans, pressed supporters to lobby "moderate Democrats to oppose" the bill.
Commentary by Kevin Hassett
Dec. 21 (Bloomberg) -- The revelation that climate scientists at the University of East Anglia manipulated data and conspired to corrupt the peer-review process has been very bad news for those hoping to enact laws to limit greenhouse gas emissions.
A December poll by CBS News and the New York Times found that only 37 percent of Americans now think global warming is a very serious problem and should be one of the highest priorities for government leaders, a whopping 15 percentage point drop since 2007. While the poll report attributes the drop to the economic decline during the intervening two years, it’s safe to assume the scandal known as Climategate contributed to the change in public perception.
Such statistics surely are frustrating for climate scientists. The vast majority of them assert that the stolen e- mails did nothing to upend the balance of the literature, which still tilts heavily toward a consensus that warming is a big, man-made problem.
The public’s skepticism toward the scientists is part of a bigger problem, one that threatens the fabric of our culture. Academe has been so politicized, and so radically disconnected from the population, that ordinary citizens no longer trust anything that it produces -- even science.
The sad fact is that explicit or implicit political litmus tests are far more important than science at universities and so-called peer-reviewed journals. Universities may pay lip service to “diversity,” but diversity of thought is taboo.
Damning Survey
A 2007 survey of more than 1,400 professors by sociologists Neil Gross of Harvard University and Solon Simmons of George Mason University is as damning an indictment of an organization as you are ever likely to see.
The authors compiled the political affiliation and beliefs of the professors, who were asked to identify themselves along a spectrum from very liberal to very conservative. Across all fields, 44 percent identified themselves as liberal or very liberal, while 9.2 percent identified themselves as conservative or very conservative.
Strikingly, the data were even more tilted in the physical and biological sciences. There, 45.2 percent of professors identified themselves as liberal, while only 8 percent said they were conservative.
The authors dug deeper than many previous studies and established some startling findings.
In the social sciences, 24 percent of professors identified themselves as liberal “radicals” and 18 percent as Marxists. Only 4.9 percent of social scientists identified themselves as “conservative.”
Marxists Everywhere
So there are almost five times as many self-identified liberal radicals on our faculties, and more than three times as many Marxists as there are conservatives. Last I checked, Marxism has been utterly discredited. Yet there are still Marxists everywhere, poisoning the minds of our children. Conservatives, on the other hand, are a rarity.
While there isn’t enough data to address the question, it is safe to assume that no other profession is so tilted. In a society about evenly split between liberals and conservatives, achieving such a bias requires serious effort. It doesn’t happen by accident.
If you want to run conservatives out, you need to discourage dissertations that might reach conservative conclusions. You need to shun young students if their work questions liberal orthodoxy. You need to control the academic journals, rejecting papers submitted by identifiable conservatives.
Political Bias
You need to celebrate work that supports the political bias of Democrats. If your research shows that higher minimum wages are terrific, an endowed chair is yours for the taking. Question whether a higher minimum wage might cause higher unemployment, and find your place on the bread line.
For years, I have watched the economic community act this way. The hacked East Anglia e-mails confirm that exactly this type of conspiracy is in place. They show climate experts plotting how to keep the lid on research that didn’t support the prevailing view on global warming. In one e-mail, Michael Mann of Penn State University proposed boycotting an academic journal because it had published an article that provided evidence contrary to global warming canon.
Small wonder that our academic system can no longer claim the authority necessary to drive policy. The distrust that the academic community has rightly earned is devastating for society. We have lost the only institution that could deliver the widely acknowledged facts upon which rational policy could be based.
Fire Political Professors
If Americans can no longer trust anything, even science, then it is time for radical reform, starting with the elimination of tenure. When professors abandon science and take up politics, ask them to leave.
Second, universities and journals should engage in informal affirmative action for conservatives. While it is hard to say exactly how many conservatives it might take to ease concerns of bias, a safe place to start might be to make sure you have more conservatives than Marxists.
Finally, the spirit of open debate should be assiduously enforced, even on issues such as climate. Universities should teach students how to think, not what to believe. Debate is a necessary part of that process.
Such reforms are, of course, unlikely. So you can bet that policies will continue to fail if they rely on faith in science.
(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He was an adviser to Republican Senator John McCain of Arizona in the 2008 presidential election. The opinions expressed are his own.)
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