Death By Free Lunch

By The Mogambo Guru

Tampa Bay, Florida

July’s 0.1% fall in sales at US retailers has been termed “unexpected” for some reason that I don’t understand since wages are not rising, unemployment is rising, consumer price inflation is rising, consumer debt is not rising and equity withdrawals are not increasing. So if retail sales had increased, where would the consumer have gotten the money?

The question is a good one, and in fact it caused the Big, Beautiful Mogambo Economic News Service (BBMENS) – the only inter-stellar news service in this quadrant of the galaxy – to set a new precedent in their latest news broadcast when they surprisingly changed their format from the usual overemphasis on reviews of new pornography and their popular “What in the hell is it?” sidebar where one guesses at the possible uses of various mysterious adult-themed novelties and devices.

Instead, the BBMENS began their latest newscast with the sound of ravenous wolves snarling and snapping as they ate people alive, who were themselves screaming in terror and pain, a terrifying soundtrack which then segued to “Dateline: Earth. The recent, unsettling fall in retail sales is perfectly ‘expected’ now that consumer debt is at record highs, new consumer debt is not increasing, overvalued leveraged asset prices are falling (wiping out any chance for borrowing against equity) and high unemployment is still going up at terrifying rates while consumer prices continue to rise as a function of the fall in the value of the rotting dollar, meaning that inflation in prices will soon be eating Earth people alive, as alluded to at the top of this broadcast when you heard the sound of wolves eating people alive.”

That is where the broadcast abruptly ended, I am sorry to say, immediately switching to some late-breaking news story about a possible remake of Debbie Does Dallas, this time in 3-D, which is interesting and all that, but the part of the newscast that was necessarily deleted was the most poetic part, which was, “All of these are but signposts to greater and greater catastrophes in this same sorry vein as the Earth is propelled merrily along to what The Mambo Mogambo (TMM) calls Death By Free Lunch (DBFL), a fatal condition where idiotic governments in the thrall of mindless ‘gimme gimme’ democracy and ‘gimme gimme’ fascism and ‘gimme gimme’ socialism and ‘gimme gimme’ communism obediently borrow and deficit-spend a fiat money, which is created to monstrous excess by their central banks expressly for this very purpose, to benefit their friends and themselves in the short run, but to the horrible detriment of everybody in the longer run as all this new money percolates through the economy to cause horrendous inflation in consumer prices and in the size of government, and people start screaming in outrage and anger and rioting, not because wolves are literally eating them alive, but because inflation in prices and a bankrupt, ruined economy means that they can’t feed their crying children, and all of that incessant wailing is drilling into my head like an ice-pick jammed through my ear and into my freaking brain, all because of the loathsome Federal Reserve!”

The horror of such a thing makes adrenaline squirt into my bloodstream by the seeming quart, making my thousand-horsepower brain click and whirr, causing me to suddenly remember, in vivid detail, every insult, insinuation and back-stabbing lie that anybody ever said to me, or said about me, or called my mom and told her what I did, or wrote in a letter, attached it to a brick and hurled through my window.

Hastily making a note to myself to update Mogambo Plans Of Revenge (MPOR) against all these suddenly-remembered people, my stimulated brain suddenly recoils in horror at the realization of the economic terror of the derivatives market, where so much, much, much global money is obligated in leveraged bets that the total clot of it appears to be variously estimated to be between $600 trillion and $2.5 quadrillion, an amount which makes my stomach churn into a knot, either from that weird-smelling 29-cent burrito I bought at the gas station or because of the notion that most leveraged things must be “underwater” right now since the market values of the assets, from whence the derivatives sprang, are down in value, although nobody knows it yet because there is no market or sales of these derivative things and so nobody knows what they are really worth, except in the broad sense, as in “mostly squat”, although, theoretically, they should (since they are essentially bets) sum to zero! Hahahaha!

But we were talking about sales falling, not macroeconomic stupidity on a colossal scale, and on that topic you will note that the percentage inflation in prices is actually higher than the percentage decline in sales, which means that although the consumer got less, they paid more. Gaaahhh!

And it is the concept of getting less but paying more that is so disastrous that this, then, is the perfect place to tell you that if you do NOT want to pay more to get less for all of your tomorrows, then buy gold, silver and oil right with all of your todays, including today so that the rise in their values matches the rise in the prices of everything else, and which is such an easy way to invest that you can’t help but exclaiming, “Whee! This investing stuff is easy!”

The Slow, Subsidized Death of Europe’s Carmakers

The better alternative would be to ditch loss makers and restructure.

BY NEIL WINTON

Europe’s governments have a choice as the automotive industry shudders under the impact of the worst recession since the 1930s. They can insist on reforms to make European carmakers leaner and meaner, and able to face down the looming cut-throat competition from India, China, Korea and Japan. This would mean painful job cuts and plant closures, uncomfortable pressure from unions, and, with German elections coming up in two months, risking to be voted out of office.

Or they can take the easy way out, open taxpayer coffers to bail out companies, “save” jobs in the short term, and put off the day of reckoning. No prizes for guessing what is happening. The U.S. government is not alone in propping up ailing auto manufacturers, even if Europe’s help hasn’t come quite close to the massive aid extended to General Motors and Chrysler.

In Germany, the government is prepared to lend €4.5 billion to save perennial loss-maker Opel-Vauxhall from the knacker’s yard. It has already provided the company with a short-term loan of €1.5 billion. Last year Opel-Vauxhall (and Saab, the old GM Europe) lost together €1.1 billion and is expected to lose another €2.1 billion in 2009. Meanwhile, France has lent Renault and PSA Peugeot-Citroen €3 billion each. PSA had planned to cut costs and move production and jobs from France to lower-cost Eastern Europe. It’s reasonable to assume that this plan won’t be on the agenda for some time.

The trouble is that the European industry has at least 20% overcapacity, according to investment bank Credit Suisse. The big six European mass car makers—VW, Renault, Peugeot-Citroen, Fiat, Opel-Vauxhall and Ford Europe—have all suffered from long periods of meager profits. Flooding the market with cars and offering steep price cuts to get consumers to buy them may have allowed them to make a little money in the good times. But the good times are definitely over. For the European manufacturers, the old business model is broken.

Among the mass carmakers, only Volkswagen, Europe’s market leader, and Fiat are likely to be profitable this year despite government incentives for new car purchases across the continent, including in Germany, Italy, France, Britain and Spain. Once the government subsidies expire next year, Fiat is expected to struggle again.

If Europe’s automakers have few prospects for success and steady profitability now, think how bad the situation will be once India and China join Korea and Japan in producing reliable and attractive cars at prices Europeans can’t match using their current business models.

The threat from South Korean manufacturers is about to ratchet up even higher, pushed by a combination of a new free trade agreement with the European Union and Korea’s depreciating currency. These two factors will give Korean cars a price advantage of about €2,000 per car, according to Credit Suisse. Korean brands like Hyundai and Kia have already been the major winners from the recent government incentive schemes around Europe to encourage consumers to buy new cars. These subsidies have increased the Korean share of the Western European car market to about 4% from 3% within only a few months.

This means that government handouts to national car champions will likely have to increase and become permanent if policymakers want to protect the domestic auto industry from restructuring. Despite the fact that left-wing parties are on the decline across Europe, it seems that populists of all political colors, including conservatives in Germany and France, want to save their car industry.

“We are far from a world where the post-Thatcherite British model represents the future of Europe,” says Karel Williams, who teaches political economy and accounting at Manchester University. “We are in a world where politics beats economics.”

Government help to avoid a short-term crisis may appeal to voters, but it will also impede plans to rationalize and cut overcapacity. When Europe’s car industry is tottering under the next Asian assault and is ill prepared to cope, how many of the current chancellors, presidents and prime ministers will still be in power to apologize?

Europe’s car industry can choose to ditch the hopeless value destroyers and prepare for a successful future facing down the new competition or it can evade the truth, take government handouts, and prepare for a slow, subsidized death.

Mr. Winton writes the European Perspective column for Detroit News Online’s Automotive Insider.

Michael Jackson

Death of a showman

Michael Jackson made great pop records, lurid headlines and lots of money

FOR a life so extraordinary the manner of Michael Jackson’s passing on Thursday June 25th was utterly banal: a middle-aged man succumbing to an apparent heart-attack. (There was speculation that an alleged dependency on prescription painkillers may have been a contributing factor.) During his progress from child prodigy to the self-styled “King of Pop” and, more recently, an eccentric semi-recluse, no part of Mr Jackson’s private life had given any other hint of normality. But behind the mask that plastic surgeons had made of his face was a keen brain for wringing cash out of pop music—and for spending it.

Mr Jackson first performed on stage at the age of six, accompanying his four older brothers. The Jackson Five, under the strict stewardship of their manager and father, signed to Motown Records in the late 1960s and began producing a string of hit records—a sequence of success that Mr Jackson continued in a 30-year solo recording career. It is reckoned that his final tally of album sales is around 750m—the most that any artist has sold. And one of those, “Thriller”, released in 1982, became the most successful yet seen, shifting 65m units. This record may well remain unchallenged: sales of albums have suffered as pop fans these days prefer downloading individual tracks from the internet.

The length of Mr Jackson’s career ensured that he experienced, popularised and even pioneered many of the techniques that help artists to profit from their musical talents. At the beginning of his career, touring was a vital component of performers' incomes, though a shift to earning money from selling records was well under way. By its peak, in the 1980s, touring had come to be seen by the music industry as a loss-making promotional tool to shift albums.

Mr Jackson did not invent the pop promotional video, as he is sometimes credited with doing. But he took this art form to new heights with the lavishly expensive video he made in 1983 for the title track of the “Thriller” album. He brought in one of Hollywood's top directors, John Landis (best known for “The Blues Brothers”), and spent an unprecedented $500,000 on the 14-minute miniature epic. But it was money well spent: the launch of MTV, two years earlier, whose format was being copied by other broadcasters, meant that videos had rapidly become one of the most valuable tools for marketing recorded music, and more cost-effective than concert tours. The “Thriller” video was broadcast incessantly all around the world, pumping up the album's sales.

At the height of his success Mr Jackson and his team of managers made the shrewd calculation that the value of pop music was wrapped up in the publishing rights to songs just as much as in record sales. In 1985 he paid $47.5m for ATV Music, which owned the copyrights to most of the Beatles' songs. Ten years later he sold half his interest for $150m to Sony. The value of his stake was probably around $500m when he died. This was roughly equal to the upper estimates of the debts he was struggling to refinance, which he had amassed funding his increasingly bizarre style of living.

Despite his vast earnings Mr Jackson was forced to borrow huge sums against his stake in ATV and his future earnings (recently reckoned to be about $19m a year) to pay for his huge shopping sprees and the upkeep of “Neverland”, his ranch in California. Last year he announced plans for a long series of concerts in London to boost his income and pay off his creditors. Playing live has re-emerged as the way to make money from pop as falling sales, rampant piracy and digital distribution have slashed revenues from recorded music.

Despite having built himself an extravagant fun palace, with its own zoo, fairground and elaborate topiary, Mr Jackson cut an increasingly lost and lonely figure in his later years. Though twice married and with three children, his closest relationships appeared to be with a chimpanzee and a succession of young boys. The questions raised by these unusual friendships continued to hang in the air until his death. He was acquitted in a Californian court in 2005 on charges of molesting one 13-year-old boy but reportedly paid $20m out of court in 1994 to head off other allegations of child abuse.

His status as a pop genius may well always be tainted by the strangeness of the life he chose to lead. Elvis Presley, still the unchallenged King of Rock’n’Roll, is increasingly remembered for his music, as memories fade of his own unusual private life. Mr Jackson would doubtless have craved to be held in the same public awe and affection (his dynastic ambitions even stretched to a brief marriage with Lisa Marie, Presley’s only child). But, sadly, for now he will be remembered by many as “Wacko Jacko” rather than the King of Pop.

Is this the death of the dollar?

After two smugglers were stopped last week with what at first appeared to be $134bn in US state bonds, the tension and paranoia surrounding the fate of the dollar hit a new high.

Edmund Conway

Dollar obituaries are nothing new. Photo: GETTY

The dollar's fate is intertwined with that of the global economy Photo: GETTY

The dollar's fate is intertwined with that of the global economy Photo: GETTY

The dollar's fate is intertwined with that of the global economy Photo: GETTY

Border guards in Chiasso see plenty of smugglers and plenty of false-bottomed suitcases, but no one in the town, which straddles the Italian-Swiss frontier, had ever seen anything like this. Trussed up in front of the police in the train station were two Japanese men, and beside them a suitcase with a booty unlike any other. Concealed at the bottom of the bag were some rather incredible sheets of paper. The documents were apparently dollar-denominated US government bonds with a face value of a staggering $134bn (£81bn).

How on earth did these two men, who at first refused to identify themselves, come to be there, trying to ride the train into Switzerland carrying bonds worth more than the gross domestic product of Singapore? If the bonds were genuine, the pair would have been America's fourth-biggest creditor, ahead of the UK and just behind Russia. No sooner had the story leaked out from the Italian lakes region last week than it sparked a panoply of conspiracy tales. But one resounded more than any other: that the men were agents of the Japanese finance ministry, in the country for the G8 meeting, making a surreptitious journey into Switzerland to sell off one small chunk of the massive mountain of US bonds stacked up in the Japanese Treasury vaults.

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In the event, late last week American officials confirmed that the notes were forgeries. The men, it appeared, were nothing more than ambitious scamsters. But many remain unconvinced. And whether fake or otherwise, the story underlines one important point about the world economy at the moment: that the tension and paranoia surrounding the fate of the US dollar has hit a new high. It went to the heart of the big question: will the central bankers in Japan, China and elsewhere continue to support the greenback even in the wake of the worst financial crisis in modern history, or will they abandon it as America's economic hegemony dissipates?

Dollar obituaries are nothing new. The currency has been presumed dead more times than Shane Macgowan. But like the lead singer of The Pogues, the greenback has somehow withstood repeated knocks and scrapes over the years and lived on, battered, bruised and a couple of teeth the lighter, to fight another day. In the 1970s and 1980s there were plenty predicting its demise, although at that point the main challenger was the Japanese yen. And in the years preceding this crisis, economists and investors including Peter Schiff and George Soros were lining up to declare the dollar's demise as the world's reserve currency. In the late 1990s, the creation of the euro gave dollar sceptics another stick to beat the currency with, and no doubt the European currency has claimed some of the prominence in its first decade.

Now, following the collapse of the global financial system, those warnings have become louder still, and ever more difficult to dismiss – because this time around there are threatening noises coming from those who actually have the power to do something about it. First came a paper from Zhou Xiaochuan, the governor of the People's Bank of China (PBoC), a couple of months ago, positing the idea of introducing the special drawing right (SDR) – a kind of internal currency at the International Monetary Fund (IMF) – as an international reserve currency. These calls were then repeated, with more force, by the Russian president, Dmitry Medvedev, who last week declared that the world needed new reserve currencies in addition to the dollar.

And this time around, the dollar is most certainly suffering. Since 2002 its trade-weighted strength – calculated against a basket of other currencies – has fallen by more than a quarter, from 112 to 81 points. In the same period, the proportion of dollars held by reserve managers in leading central banks has also taken a dive. According to figures from the IMF, confirmed holdings of dollars in government vaults, from Beijing and Tokyo to London and Paris, fell from 71pc of reserves to 64.5pc between 2002 and 2008.

However, detecting what is really happening in the world of foreign exchange reserves is notoriously closer to an art than a science. For instance, figures from April seemed to suggest a fall in China's holdings of US Treasuries – something 'dollapocalypticists' pounced on at the time. But according to Brad Setser of the Council on Foreign Relations, the country was merely rejigging its Treasury portfolio rather than liquidating parts of it. In such an opaque world it is little wonder the conspiracy theories over those two Japanese smugglers show little sign of dissipating.

Nonetheless, for US Treasury Secretary Tim Geithner, who has inherited his predecessors' role as dollar wallah-in-chief, the currency's travails have made it all the more difficult for him to repeat the mantra that he "believes in a strong dollar" while keeping a straight face. Indeed, when he tried to insist at a university lecture in Beijing earlier this month that "Chinese financial assets are very safe," it drew floods of laughter from the audience.

He wasn't playing for laughs, but the irony of the situation is plain to see. If there were a textbook list of actions one could take to weaken a currency, the US (alongside most other developed nations) would be following it to the letter. It has cut interest rates to a whisker above zero; it has engaged in quantitative easing, pumping cash directly into the economy; it has committed to spending trillions of dollars on a fiscal stimulus package designed to pull the country out of recession; it has pledged tacitly to support its stricken banks so that no major institution is allowed to collapse. In any normal circumstances, actions like these would hammer a currency.

According to Stephen Jen of BlueGold Capital Management: "People are having second thoughts not simply because they don't like the dollar, but they are having second thoughts about whether US assets are obviously the strongest assets to own."

Like everything else, the currency's fate depends on how well the US authorities manage the crisis. The US is balanced on a knife-edge between possible Japan-style deflation as the weight of all its debts bear down on it and potential inflation as the force of all its powerful stimulus measures take root. No one knows for sure which way it will fall, but neither would be particularly good for the currency, and by extension for those who hold much in the way of dollar assets.

And China and all other major central banks which have trillions of dollars in their vaults, face something of a dilemma. Any fall in the greenback will cause the value of their investments to slide. Even if they wanted to exit, there seems no easy way of doing so without provoking some serious self-harm. Indeed, according to Olivier Accominotti, a PhD economist at Paris's Sciences Po university, the situation is not unlike that faced by France in the 1920s, as it sought to reduce its massive sterling reserves. The Bank of France found itself in a "sterling trap" in which it "could not continue selling pounds without precipitating a sterling collapse and a huge exchange loss for itself".

Neil Mellor, of Bank of New York Mellon, said: "We've got a situation where Geithner is smiling and has no choice but to stress the credibility and stability of the US financial and economic system, while the creditors [such as the Chinese] smile back and say they believe him, while at the same time giving hand signals to their reserve managers to get rid of these things."

Rather like the brinksmanship on display throughout the Cold War, it is a dilemma which applies itself to game theory. Both sides know that the dollar is set to weaken, but both could be set to suffer if they both allowed it to collapse at the same time. "If you are the Chinese it is in your interest to play the game – you've got a lot of dollars at stake – but in the long run you surely want to reduce your holdings and diversify them at the margins," says Mellor.

Still, with every passing week, the conjunction of different warning signals for the US currency seems to evolve and intensify. Recently, the alarm bell ringing most loudly has been the increase in yields on US Treasuries – a sign, some fear, of acute nervousness among institutional investors about the sheer scale of the cash the Obama administration is planning to borrow in coming years. The Federal Reserve's meeting next week is likely to be watched attentively by everyone with a stake in the game, as the central bank indicates whether it is planning to plough more dollars of newly-created cash into the economy.

But while the debate fixates on the greenback, the issues at heart here go far deeper. The dollar's fate is intertwined with that of the global economy. America is on the brink of losing its economic superpower status, which it will have to share with China at least, if not others, in the coming years. Holding such a position confers important responsibilities, none of which is more symbolic than providing the world's reserve currency – the currency against which all major commodities are denominated, and the de facto international unit of exchange in trade and finance.

It was a position enjoyed by UK sterling during the first waves of globalisation in the Victorian era and the final decades of the British Empire. Eventually, around the time of the Second World War, the dollar inherited the mantle. At first this was something enshrined in the Bretton Woods agreement of 1944, which fixed world currencies to the dollar, but although that system broke down in the 1960s and 1970s, it has remained the de facto currency of choice.

In a globalised world, with trade being carried out between hundreds of different nations by thousands of different companies, having an international standard makes sense: it enables traders to exchange goods more quickly and efficiently than they would have done otherwise. It may be invisible to us, but the vast majority of foreign exchange transactions – particularly those between smaller nations – involve the dollar. Exchange your sterling for Thai baht and you're actually swapping pounds for dollars for baht, whatever the exchange booth says. Even the much-vaunted exchange arrangements by the Brazilian and Chinese are designed not to disrupt these foundations, but merely to smooth things over for importers and exporters.

But a by-product of the dollar's dominance has been the skewing of the world's monetary system. By dint of having this blessed position, the US has been able to finance ever-larger current account and fiscal deficits, with both the government and the public borrowing from overseas, at cheap rates of interest. It has been able to sell US Treasuries at interest rates that other countries can only dream of because of this position as reserve currency. It has had a captive consumer – both because its government bonds are something of a safe haven and because those wishing to peg their currencies against the dollar and enhance their trade flows have little choice but to buy US Treasuries.

And this mutated international monetary system that has evolved since the 1960s is largely responsible for the crisis into which the world has tipped. Because it was able to borrow off other countries at such low rates without enduring the market punishment – in other words higher interest rates – America was able to build up massive current account deficits which poured a record amount of debt throughout its economy, which manifested itself in the financial crisis.

Indeed, as Mervyn King said in a speech earlier this year: "At the heart of the crisis was the problem identified but not solved at Bretton Woods – the need to impose symmetric obligations on countries that run persistent current account surpluses and not just on countries that run deficits. From that failure stemmed a chain of events, no one of which alone appeared to threaten stability, but which taken together led to the worst financial crisis any of us can recall."

When the PBoC's Zhou referred to the SDRs he was not merely questioning the dollar's pre-eminence. He was indicating something far more radical – that China supports plans for a new Bretton Woods-style agreement to manage the flows of cash around the world. At that seminal conference in 1944, John Maynard Keynes's original idea, which was watered down by Harry Dexter White of the US Treasury, was for an international reserve currency, Bancor, fixed against a basket of 30 currencies, and that countries would be penalised if their current accounts swung too far into surplus or deficit. It is an idea which is now being dusted off from history books by officials in finance ministries around the world, including in China.

Such a radical shake-up would cause earthquakes in the currency markets, a prospect which perhaps makes it unlikely. So in the absence of such a deal, how is the dollar's role likely to evolve in the coming years? The short answer is that no one should expect it to lose its reserve currency status any time soon. It took around half a century for Britain to cede this position to the US, even after being overtaken in true economic might.

One possibility is that the SDR may be used increasingly as a means of denominating assets in accounts, but this is something which would take place gradually, over a course of some years. But even if that is a bridge towards a multi-polar world, in which other currencies vie with the dollar for influence, it will take some time – perhaps 30 years or more, according to Stephen Jen. "People should look at history," he said, referring to sterling's pre-eminence in the first part of the 20th century. "There's a real incumbency advantage."

Jim O'Neill, chief economist at Goldman Sachs, sees the next few years as something of a "vacuum period".

"The BRIC countries [Brazil, Russia, India and China] are becoming so much more important, while the G7, including the US declines, which raises issues about the degree of dominance of the dollar. The problem is that the currencies of the BRICS are the ones that matter, but they won't let you export or use their currencies.

"Until we see another five years' of evidence over whether China is a more consumer-driven economy, becoming bigger and bigger, and whether the euro can have a successful second decade, the dollar looks set to remain dominant."

China has made some hints about loosening its hold over the yuan in recent months, but these are only early manoeuvres. A second step would be to allow the yuan to become a part of the SDR – whose own value is determined by those of a basket of currencies including the dollar, pound and euro. As Jen adds, there are certain prerequisites any contender to the crown of world reserve currency needs in its pocket.

"We have to ask this question: is Russia going to provide asset market that will be as liquid, reliable property rights, the rule of law, currency convertibility and so on? Will we see the same from the likes of China? Their task is very daunting."

Referring to the forged Treasury bonds picked up on the Japanese smugglers on the Swiss border, he adds: "There is a message here: we haven't heard much about anyone counterfeiting roubles. That is probably telling you something."

The Death and Life of Health 'Reform'

A glimpse of a future without nationalized health care.

• By HOLMAN W. JENKINS, JR.

The following is a draft of a speech titled "The Obama Years: A Reappraisal" that mysteriously was never delivered at the 2070 national meeting of the Institute of Advanced Obamalogy:

So it came to pass in the waning days of the health-care wars that Democrats learned the American people really didn't want a nationalized health-care industry.

The Obama administration's "public option," which all knew to be a vote for a government takeover, proved a drink too stiff for four or five Democratic senators whose re-election was not in the bag.

President Obama applauded himself for achieving "85% of what we set out to accomplish." But pundits and wonks were in despair. They retreated to their watering holes and cried into their Stoli martinis. The cause of their lives was over. A once-in-a-generation opportunity had been muffed. Without a massive bill in Congress, with many titles and subtitles and subchapters, they moaned, there was no hope for fixing all that ailed the American health-care system.

M.E. Cohen

But politics went on, and while the armies of wonkdom mourned, three little-known congressmen (Eric Paul, Ryan Cantor and Kemp Newtley) discovered an unexpected public enthusiasm for a flat tax.

Through incessant Twittering over the heads of the media, they persuaded millions of voters they'd be better off with lower rates even if it meant giving up tax-free employer provided health insurance. It didn't hurt, either, that the wailing of insurance and medical lobbyists was over-the-top -- convincing voters that the tax benefit really was just a form of corporate welfare disguised as a mostly illusory benefit for individuals.

Though the realization was slow in dawning, policy experts would eventually rediscover what they had known all along (but had conveniently forgotten in order to lend their voices to "solutions" that required ever more government spending) -- that tax reform, in the American context, is health-care reform.

And, lo, it proved true, as 100 million intelligent, well-educated employees of Corporate America were allowed to see for the first time what "tax free" health insurance was really costing them. They saw how it distorted their behavior and caused them to allocate far more of their incomes to the medical-industrial complex than they would have chosen for themselves.

Eyes newly opened, they demanded cheaper insurance options, covering fewer services (cancer wigs, family counseling, in-vitro fertilization), and opted for plans with higher deductibles and co-pays in return for much lower monthly rates.

Because consumers were now spending their "own" money on health care, doctors and hospitals found it necessary to publish and even advertise their prices. A hospital that specialized in heart surgery, performing thousands of procedures a year, found it had both the highest quality and lowest cost -- and now marketed itself as such. Ditto specialists in cancer, diabetes and other conditions.

For the first time, Americans spent less and got more. Spending fell overnight by 13%, which happened to be exactly what economists had predicted if the price tags were restored to health care and consumers were allowed to see clearly what they were getting (or not getting) for their money. As predicted, too, spending thereafter rose only in line with incomes.

What's more, many fewer people remained voluntarily uninsured now that health insurance was no longer a gold-plated extravagance affordable only by those in the top brackets who could slough off 40% of the cost on other taxpayers. Existing programs for the needy, in turn, could be downsized and revamped into voucher programs. The federal budget benefited twice over -- from fewer claimants and from medical care that was less costly. Fiscal wreck was avoided.

In truth, President Obama had been little involved to this point. Following his early domestic "successes," he was spending more and more time abroad sharing his matchless eloquence with previously unblessed audiences from Ulan Bator to Ouagadougou.

A highly symbolic moment, however, came when Mr. Obama, who had put on weight in office and now tipped the scales at nearly 300 pounds, returned from a speaking tour on the virtues of nonproliferation to audiences in the Islamic Republic of Palau. Having overindulged in local delicacies, he was surprised when the White House medical office handed him a Wal-Mart debit card and sent him to a nearby Wal-Mart supercenter boasting "Everyday Low Prices on Gastric Bypass Surgery."

Emerging afterward to the usual crowd of ululating network reporters and bloggers, Mr. Obama pronounced himself entirely pleased and satisfied with the "success of my health-care reforms."

And so it came to pass that historians and Obamalogists would count health-care reform among the incomparable triumphs of the Obama administration, and lost to history would be the names of Eric Paul, Ryan Cantor and Kemp Newtley.

Death, taxes & Obamacare

Death, taxes & Obamacare: Poster contest, Round Two

By Michelle Malkin

We kicked off the Obamacare poster contest yesterday with some fantastic entries — spearheaded by Scott G. at Ah, Shoot.

Readers have risen to the challenge! Here’s round two. Vote on your favorite. Print ‘em out. Spread the word. Counter the ACORN/SEIU mob taking to the streets to take over your health care. Resistance must be met not just in the halls of Congress, but in your neighborhoods, at the grocery store, in your car window, everywhere at the grass-roots level:

From reader Rachael in Kentucky:

From reader Kyle:

From reader Mike:

From our friend Leo Alberti:

From American Elephant:

From reader Scott:

From reader Flynn:

From reader Erin F.:

From John at Verum Serum:

From reader Anon:

From Nice Deb:

From reader Tennessee Dave:

And from Violetbird, who writes:”Here’s my attempt - great idea, btw! As our government has shown, there’s nothing like images to get the message home.”

South Korean politics

Death of a leader

A former president of South Korea, Roh Moo-hyun, jumps off a cliff and kills himself

THE home of the former South Korean president, Roh Moo-hyun, in the tiny village of Bongha, is surrounded by picturesque wooded hills. In the spring fire swept across the hills, blackening them. At the same time, in April, Mr Roh’s reputation was being tarnished as he admitted to graft. Since then Mr Roh, whose elder brother is in prison after being convicted of bribery, had been expecting prosecutors to bring charges. But rather than face more public humiliation Mr Roh committed suicide on Saturday May 23rd by jumping off a cliff.

In a note the 62 year old said that he “made the life of too many people difficult”. He requested that his family burn his body and erect a simple grave stone to mark his life. “Isn’t life and death one?” asked the former president. Responding to the news, the justice ministry announced that it would stop the investigation into Mr Roh and his family.

Corruption scandals have haunted every South Korean president. The children of Kim Dae-jung and Kim Young-sam went to jail for graft. Former presidents Chun Doo-hwan and Roh Tae-woo went to prison after it was found they had solicited hundreds of millions of dollars from the country’s biggest business groups.

Mr Roh was thought to be different. He had campaigned all his political life against corruption. When he left office at the end of his five-year presidential term last year, he went back to his home village, enhancing his reputation as a man of the people.

The son of poor farmers, Mr Roh had studied for the bar and then become a practising lawyer, becoming known as a people’s champion after defending students who had been arrested for protesting against Chun Doo-hwan, a dictatorial leader. Mr Roh gave up his law practice for politics in the mid 1980s, serving in the National Assembly, where he campaigned against corruption.

That caught the attention of South Korea’s best known political figure, Kim Dae-jung. In 1997 Mr Roh organised Mr Kim’s successful presidential campaign. Five years later, Mr Roh surprised perhaps even himself in the race to be president by defeating the favoured establishment candidate, a former Supreme Court Chief Justice Lee Hoi-chong. He did so by appealing to the modest aspirations of the poor, middle class and university students.

His term as president was tumultuous. The business community saw him as a leftist maverick intent on re-distributing wealth by imposing progressive taxes. At one point he was impeached, accused of corruption, although he was not convicted.

Mr Roh, troubled by abuse of the highest office by his predecessors, sought to institute more checks and balances on the president and more forms of oversight. He continued the “Sunshine Policy” of Kim Dae-jung, which called for engagement of North Korea. He sought to deepen social, political and economic contacts with Pyongyang, the Northern capital, to the disquiet of Washington. Meetings with the American leader were never relaxed, and although a free-trade agreement was signed between the two countries, and despite the presence of many American troops in South Korea, the alliance grew testy. In October 2007 Mr Roh went to Pyongyang, against the advice of George Bush’s White House. North Korea had exploded a nuclear bomb in 2006 and Washington did not want its ally shaking hands or signing agreements with the Northern dictator, Kim Jong-il.

Mr Roh’s efforts while in office to re-distribute wealth were reversed by his successor, Lee Myung-bak, a former boss of the Hyundai Group. Mr Lee has also cooled relations with North Korea. South Korean tourist groups no longer travel across the heavily armed inter-Korean border. The future of the Kaesong Industrial Complex in North Korea, a joint venture between southern capital and northern labour, is in doubt following a series of capricious demands by Pyongyang. North Korea has said it will not return to six-party talks on ending its nuclear-weapons programme.

In his retirement Mr Roh criticised his successor’s policies towards North Korea. At his village he began to reclaim some of his former popularity. His home become popular among tourists and the former president would often greet holidaymakers at his front gate. But in April, on his website under the heading, “I Apologise”, Mr Roh said that he had requested, received and used money from a businessman. He said that he had a “debt to repay”. Mr Roh may have accepted at least $6m and numerous gifts through family members and former aides. In time his reputation may recover somewhat, but locals are unimpressed. ”Before this incident I thought he was a clean president and I respected him. I have changed my mind”, says Park Song-deuk, a resident of Mr Roh’s village.

The Death of Democratic Capitalism?

The Death of Democratic Capitalism?

LARRY KUDLOW

Will a state-directed economy really produce strong growth?

How far will the Obama administration move to assert regulatory control over key sectors of the economy? Are we moving away from democratic capitalism, and toward some sort of corporatist state-directed economy? That could be the biggest stock market and economic-growth issue facing us today.

Stocks plunged almost 300 points on Monday over new fears of bank nationalization. On Tuesday shares recovered about 100 points after Treasury man Tim Geithner testified that repayment of TARP loans would be okay in some cases. But Geithner added that the decision to let banks repay the federal government will largely depend on the credit needs of the broader economy.

So while some investors believe Tim Geithner backed away from the prospect of government-controlled banks, it’s really not clear that he did so.

The issue at hand is the possible conversion of the TARP money now held by banks in the form of non-voting preferred stock into common stock with full voting rights. White House and Treasury officials have spoken of this possibility in recent days, and it plainly raises the issue of government ownership and backdoor nationalization of the banks -- or at least the major banks.

To wit, Goldman Sachs and JPMorgan look to be recovering their health. They want to de-TARP, and perhaps Geithner will let them. But if he doesn’t, these institutions might be forced to convert their preferred TARP shares into common stock, thereby giving Team Obama tremendous sway over their operations. As for the less-healthy big banks, one suspects the government will increase its 36 percent ownership in Citigroup and take a new ownership position in Bank of America.

The results of the government’s economic “stress tests” -- due early next month -- will complicate these calculations. And at the end of the day I think Team Obama will interpret the stress tests in whatever manner serves its larger purpose, which I suspect is backdoor nationalization.

Just to confuse matters more, the congressional strings attached to TARP might not only apply to the banks, but could apply to participants in TALF and PPIP -- the new government-lending programs designed to detoxify bank balance sheets. I don’t know this is the case, but it could well be the case.

This is why most private investors have stayed away from the two early TALF auctions. And JPMorgan CEO Jamie Dimon says his bank won’t play in PPIP because “we’ve learned our lesson.” He calls TARP a “scarlet letter.” But what he’s really saying as America’s leading banker is that he doesn’t want his bank or shareholders to be run by the government.

An old friend e-mailed me this week about how to characterize Obama’s economic interventions into the banking and auto sectors (with health care next on the list). He says it’s not really socialism. Nor is it fascism. He suggests its state capitalism. But I think of it more as corporate capitalism. Or even crony capitalism, as Cato’s Dan Mitchell puts it.

It’s not socialism because the government won’t actually own the means of production. It’s not fascism because America is a democracy, not a dictatorship, and Obama’s program doesn’t reach way down through all the sectors, but merely seeks to control certain troubled areas. And in the Obama model, it would appear there’s virtually no room for business failure. So the state props up distressed segments of the economy in some sort of 21st-century copy-cat version of Western Europe’s old social-market economy.

So call it corporate capitalism or state capitalism or government-directed capitalism. But it still represents a huge change from the American economic tradition. It’s a far cry from the free-market principles that governed the three-decade-long Reagan expansion, which now seems in jeopardy. And with cap-and-trade looming, this corporate capitalism will only grow more intense.

This is all very disturbing. For three decades supply-siders like me and my dear friend Jack Kemp talked about democratic capitalism. This refers to the small business that grows into the large one. It means necessary after-tax incentives are being provided to reward Schumpeterian entrepreneurship, innovation, and risk-taking.

At the center of this model is the much-vaunted entrepreneur who must be supported by a thriving investor class that will provide the necessary capital to finance the new economy. But also necessary for the Schumpeterian model is a healthy banking and financial system that will provide the necessary lending credit to finance new ideas.

Do we truly believe that raising tax rates on investors and moving to some sort of government-controlled banking system will sufficiently fund the entrepreneur and sustain democratic capitalism? Do we really believe that a federal-government-directed economic system will generate a sufficient supply of capital and credit to produce a strong economy?

I doubt it.

Death of a Civilization

by David Deming

Over the past several years we have learned that small groups of people can engage in mass suicide. In 1978, 918 members of the Peoples' Temple led by Jim Jones perished after drinking poisoned koolaid. In 1997, 39 members of the Heaven's Gate cult died after drugging themselves and tieing plastic bags around their heads. Unfortunately, history also demonstrates that it is possible for an entire civilization to commit suicide by intentionally destroying the means of its subsistence.

In the early nineteenth century, the British colonized Southeast Africa. The native Xhosa resisted, but suffered repeated and humiliating defeats at the hands of British military forces. The Xhosa lost their independence and their native land became an English colony. The British adopted a policy of westernizing the Xhosa. They were to be converted to Christianity, and their native culture and religion was to be wiped out. Under the stress of being confronted by a superior and irresistible technology, the Xhosa developed feelings of inadequacy and inferiority. In this climate, a prophet appeared.

In April of 1856, a fifteen-year-old girl named Nongqawuse heard a voice telling her that the Xhosa must kill all their cattle, stop cultivating their fields, and destroy their stores of grain and food. The voice insisted that the Xhosa must also get rid of their hoes, cooking pots, and every utensil necessary for the maintenance of life. Once these things were accomplished, a new day would magically dawn. Everything necessary for life would spring spontaneously from the earth. The dead would be resurrected. The blind would see and the old would have their youth restored. New food and livestock would appear in abundance, spontaneously sprouting from the earth. The British would be swept into the sea, and the Xhosa would be restored to their former glory. What was promised was nothing less than the establishment of paradise on earth.

Nongqawuse told this story to her guardian and uncle, Mhlakaza. At first, the uncle was skeptical. But he became a believer after accompanying his niece to the spot where she heard the voices. Although Mhlakaza heard nothing, he became convinced that Nongqawuse was hearing the voice of her dead father, and that the instructions must be obeyed. Mhlakaza became the chief prophet and leader of the cattle-killing movement.

News of the prophecy spread rapidly, and within a few weeks the Xhosa king, Sarhili, became a convert. He ordered the Xhosa to slaughter their cattle and, in a symbolic act, killed his favorite ox. As the hysteria widened, other Xhosa began to have visions. Some saw shadows of the resurrected dead arising from the sea, standing in rushes on the river bank, or even floating in the air. Everywhere that people looked, they found evidence to support what they desperately wanted to be true.

The believers began their work in earnest. Vast amounts of grain were taken out of storage and scattered on the ground to rot. Cattle were killed so quickly and on such an immense scale that vultures could not entirely devour the rotting flesh. The ultimate number of cattle that the Xhosa slaughtered was 400,000. After killing their livestock, the Xhosa built new, larger kraals to hold the marvelous new beasts that they anticipated would rise out of the earth. The impetus of the movement became irresistible.

The resurrection of the dead was predicted to occur on the full moon of June, 1856. Nothing happened. The chief prophet of the cattle-killing movement, Mhlakaza, moved the date to the full moon of August. But again the prophecy was not fulfilled.

The cattle-killing movement now began to enter a final, deadly phase, which its own internal logic dictated as inevitable. The failure of the prophecies was blamed on the fact that the cattle-killing had not been completed. Most believers had retained a few cattle, chiefly consisting of milk cows that provided an immediate and continuous food supply. Worse yet, there was a minority community of skeptical non-believers who refused to kill their livestock.

The fall planting season came and went. Believers threw their spades into the rivers and did not sow a single seed in the ground. By December of 1856, the Xhosa began to feel the pangs of hunger. They scoured the fields and woods for berries and roots, and attempted to eat bark stripped from trees. Mhlakaza set a new date of December 11 for the fulfillment of the prophecy. When the anticipated event did not occur, unbelievers were blamed.

The resurrection was rescheduled yet again for February 16, 1857, but the believers were again disappointed. Even this late, the average believer still had three or four head of livestock alive. The repeated failure of the prophecies could only mean that the Xhosa had failed to fulfill the necessary requirement of killing every last head of cattle. Now, they finally began to complete the killing process. Not only cattle were slaughtered, but also chickens and goats. Any viable means of sustenance had to be destroyed. Any cattle that might have escaped earlier killing were now slaughtered for food.

Serious famine began in late spring of 1857. All the food was gone. The starving population broke into stables and ate horse food. They gathered bones that had lay bleaching in the sun for years and tried to make soup. They ate grass. Maddened by hunger, some resorted to cannibalism. Weakened by starvation, family members often had to lay and watch dogs devour the corpses of their spouses and children. Those who did not die directly from hunger fell prey to disease. To the end, true believers never renounced their faith. They simply starved to death, blaming the failure of the prophecy on the doubts of non-believers.

By the end of 1858, the Xhosa population had dropped from 105,000 to 26,000. Forty to fifty-thousand people starved to death, and the rest migrated. With Xhosa civilization destroyed, the land was cleared for white settlement. The British found that those Xhosa who survived proved to be docile and useful servants. What the British Empire had been unable to accomplish in more than fifty years of aggressive colonialism, the Xhosa did to themselves in less than two years.

Western civilization now stands on the brink of repeating the experience of the Xhosa. Since the advent of the Industrial Revolution in the late eighteenth century, Europe and North America have enjoyed the greatest prosperity ever known on earth. Life expectancy has doubled. In a little more than two hundred years, every objective measure of human welfare has increased more than in all of previous human history.

But Western Civilization is coasting on an impetus provided by our ancestors. There is scarcely anyone alive in Europe or America today who believes in the superiority of Western society. Guilt and shame hang around our necks like millstones, dragging our emasculated culture to the verge of self-immolation. Whatever faults the British Empire-builders may have had, they were certain of themselves.

Our forefathers built a technological civilization based on energy provided by carbon-based fossil fuels. Without the inexpensive and reliable energy provided by coal, oil, and gas, our civilization would quickly collapse. The prophets of global warming now want us to do precisely that.

Like the prophet Mhlakaza, Al Gore promises that if we stop using carbon-based energy, new energy technologies will magically appear. The laws of physics and chemistry will be repealed by political will power. We will achieve prosperity by destroying the very means by which prosperity is created.

While Western Civilization sits confused, crippled with self-doubt and guilt, the Chinese are rapidly building an energy-intensive technological civilization. They have 2,000 coal-fired power plants, and are currently constructing new ones at the rate of one a week. In China, more people believe in free-market economics than in the US. Our Asian friends are about to be nominated by history as the new torchbearers of human progress.

Italy's earthquake

Death in the mountains

From The Economist

Silvio Berlusconi announces reconstruction plans after an earthquake kills over 200 people in Italy

THE earthquake that struck the Abruzzo region soon after 3.30am on Monday April 6th was a gruesome reminder of how vulnerable Italy is to natural disasters. The tremors were felt as far away as Naples and damaged the ancient Caracalla baths in Rome.

L’Aquila, high up in the Apennine mountains that form the backbone of Italy, was a few miles from the epicentre. By the following day, when most of its population had fled, it looked like a city that had been extensively shelled. Almost the only sounds were those of house alarms, ambulance sirens and rescue workers’ earth movers. The deployment of heavy machinery after more than 24 hours of painstakingly restrained digging and prodding indicated that, in most places, the rescuers had given up hope of finding survivors.

It is Italy’s most lethal earthquake for almost 30 years. More than 200 people have died and over 1,000 are injured. And, in perhaps the biggest challenge for Silvio Berlusconi’s government, around 17,000 were left homeless.

Mr Berlusconi seemed fully aware of the dangers and opportunities that accompany disasters. His reaction was vigorous. He cancelled a trip to Moscow, rushed to the area and toured it in a helicopter. The following day he returned to announce that tents to accommodate 14,000 people had been made ready and said that he intended to divert to L’Aquila and the surrounding area some of the money set aside for construction projects as part of Italy’s response to the economic crisis. In particular he said he would like to build the first of a batch of new towns alongside L’Aquila for those whose homes were beyond repair. The town could be ready in two years, he said.

Locally, the news was greeted with as much scepticism as hope. Italy has a record of botching recovery programmes. The performance of the authorities following the last big earthquake, in Umbria and Le Marche 12 years ago, is encouraging. By last September, 92% of houses that been damaged had been made habitable again. But what haunts the survivors of the latest disaster is the Irpinia earthquake of 1980. It was the prelude to scandalous waste and corruption. Cash was diverted to the Camorra, the Neapolitan mafia, and even today some of the victims are still living in what was intended as temporary accommodation.

Death, Taxes And A Very Bad Budget

Death, Taxes And A Very Bad Budget

By INVESTOR'S BUSINESS DAILY

Budget: Hidden in a footnote deep in the budget is a resurrection of the death tax. If you think this only affects rich people handing down their silver spoons to spoiled children, you're sadly mistaken.

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Part of the Bush tax cuts was a provision that would wind down the estate tax from its existing 55% to 45% in 2009 and then to zero in 2010.

The estate tax had taken the majority of a dead person's estate valued at over $3.5 million for an individual or $7 million for a couple.

Like the rest of the tax cuts, it was temporary. The estate tax repeal, unless made permanent, would rise like Dracula from the grave in 2011 to once again wreak havoc with those seeking to pass on their success to their heirs.

For the Obama administration, a year without an estate tax is a terrible thing to waste.

If you actually read the budget, which few do, particularly congressmen, you find this footnote on Page 127: "(T)he estate tax is maintained at its 2009 parameters."

The first Bush tax cut has been, in effect, repealed — part of the age of "fairness" we now all inhabit.

We are determined to keep or raise the capital gains tax, for example, even though to do so would lose revenues. As President Obama said when it was explained to him, we should still do it in the name of fairness.

It is the same with what many call the death tax. You can't take it with you, but the government can take it from you in the name of fairness and spreading the wealth, your wealth, around.

Some say the death tax only affects the very, very rich. But that's not the point. It's still their money.

What exactly is fair about a tax that taxes everything twice? Those who make good have already paid taxes in many forms accumulating that wealth.

Why should they be taxed because they worked hard, became successful, and want to pass on the fruits of their labor to their children?

While dubbed the "Paris Hilton" tax, the death tax hurts everybody.

"By and large, the death tax is borne by people who own small businesses, who haven't had the benefit of big corporate lawyers and big corporate accounting offices to prepare them for paying this tax," says William Beach, a senior fellow in economics at the Heritage Foundation.

"People who aren't wealthy, who may have built up value in land over generations and many family farms find themselves in situations where they've got to sell the farms in order to pay the taxes," says House Minority Leader John Boehner, R-Ohio.

In an economy that is starved for capital, the death tax is dangerous. Even Obama's top economic adviser, Larry Summers, said in a study he co-authored in 1980: "The evidence presented indicates that intergenerational transfers account for the vast majority of aggregate U.S. capital formation."

Two of President Clinton's chief economic advisers, Joseph Stiglitz and Alicia Munnell, have written extensively on the impact of the death tax on capital formation.

The Joint Economic Committee has calculated that the death tax has reduced the stock of capital by $847 billion, money that can't be used to expand or start businesses or hire more people.

A new study by the American Family Business Foundation, written by economist Douglas Holtz-Eakin, finds that the death tax is responsible for lowering overall employment by 1.5 million jobs. It takes capital out of the productive hands of entrepreneurs' descendants and heirs and into the unproductive hands of government.

The death tax is about class envy, every bit as much as was the famous luxury tax of the 1990s, meant to punish yacht buyers. Remember that one?

It only succeeded in punishing yacht builders and the workers they employed, not yacht owners, and when the damage to jobs was surveyed, it had to be repealed.

As has been said, families shouldn't be required to visit the undertaker and the tax collector on the same day.

We doubt that those who said give us liberty or give us death meant death to be a taxable event.

Night of the Living Death Tax

Obama's budget quietly resurrects it in 2010.

Lawrence Summers, President Obama's chief economic adviser, declared recently that "Let's be very clear: There are no, no tax increases this year. There are no, no tax increases next year." Oh yes, yes, there are. The President's budget calls for the largest increase in the death tax in U.S. history in 2010.

The announcement of this tax increase is buried in footnote 1 on page 127 of the President's budget. That note reads: "The estate tax is maintained at its 2009 parameters." This means the death tax won't fall to zero next year as scheduled under current law, but estates will be taxed instead at up to 45%, with an exemption level of $3.5 million (or $7 million for a couple). Better not plan on dying next year after all.

This controversy dates back to George W. Bush's first tax cut in 2001 that phased down the estate tax from 55% to 45% this year and then to zero next year. Although that 10-year tax law was to expire in 2011, meaning that the death tax rate would go all the way back to 55%, the political expectation was that once the estate tax was gone for even one year, it would never return.

And that is no doubt why the Obama Administration wants to make sure it never hits zero. It doesn't seem to matter that the vast majority of the money in an estate was already taxed when the money was earned. Liberals counter that the estate tax is "fair" because it is only paid by the richest 2% of American families. This ignores that much of the long-term saving and small business investment in America is motivated by the ability to pass on wealth to the next generation.

The importance of intergenerational wealth transfers was first measured in a National Bureau of Economic Research study in 1980. That study looked at wealth and savings over the first three-quarters of the 20th century and found that "intergenerational transfers account for the vast majority of aggregate U.S. capital formation." The co-author of that study was . . . Lawrence Summers.

Many economists had previously believed in "the life-cycle theory" of savings, which postulates that workers are motivated to save with a goal of spending it down to zero in retirement. Mr. Summers and coauthor Laurence Kotlikoff showed that patterns of savings don't validate that model; they found that between 41% and 66% of capital stock was transferred either by bequests at death or through trusts and lifetime gifts. A major motivation for saving and building businesses is to pass assets on so children and grandchildren have a better life.

What all this means is that the higher the estate tax, the lower the incentive to reinvest in family businesses. Former Congressional Budget Office director Douglas Holtz-Eakin recently used the Summers study as a springboard to compare the economic cost of a 45% estate tax versus a zero rate. He finds that the long-term impact of eliminating the death tax would be to increase small business capital investment by $1.6 trillion. This additional investment would create 1.5 million new jobs.

In other words, by raising the estate tax in the name of fairness, Mr. Obama won't merely bring back from the dead one of the most despised of all federal taxes, and not merely splinter many family-owned enterprises. He will also forfeit half the jobs he hopes to gain from his $787 billion stimulus bill. Maybe that's why the news of this unwise tax inc

Death Of The Dollar?

Death Of The Dollar?

Economics: Markets were shocked when Treasury Secretary Tim Geithner said he's "quite open" to the idea of replacing the dollar as the world's reserve currency. No wonder. Both the world and the U.S. would be worse off.

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The idea of replacing the dollar, ardently pushed by China and Russia, seems to be linked to the world's current economic crisis, which many blame on the U.S. Both China and Russia have been accumulating hundreds of billions of dollars in reserves, and are feeling a bit, well, overexposed as a result.

With a few days to go before President Barack Obama travels to London for the G-20 financial meetings, the United Nations has its own ideas on this subject. In a report released Friday, it suggests replacing the buck with something like the International Monetary Fund's SDR — a quasi-currency based on a basket of currencies.

To be sure, there would be some advantages to this. For one, countries that trade with the U.S. would no longer have to stockpile dollar-based assets. They'd have the SDR-like currency instead.

And the U.S. would be less burdened running monetary policy for the rest of the world, letting us focus more on U.S. policy.

So much for the benefits. The list of drawbacks is a lot longer.

For example, the dollar will inevitably fall as other countries sell off their dollar-based assets. Witness the selling stampede set off by Geithner's ill-considered remarks.

If the dollar stays weak, it will boost inflation pressures in the U.S., and make it harder for us to finance our debt in global markets. It's always better to pay for something in your own currency.

Then there's the question of faith: Who wants a world currency managed by the same people — the IMF — who failed to foresee our current crisis, and who let the 1997-1998 Asian financial and Russian ruble panics turn into a world financial meltdown?

Worse, the desire for a dollar alternative suggests other nations are alarmed at the jaw-dropping levels of spending contained in President Obama's 10-year budget, which will boost U.S. debt from 40% of GDP now to 80% by 2019 and cause interest rates to soar.

Seeing this mess, other countries worry we'll just inflate our way out of this mess simply by printing more money and making the dollar worthless. They recall we did this before — in the 1970s.

Abandoning the greenback would mark a final step in the dismantling of the post-WW II monetary order, with the dollar as its anchor. This is just what Russia and China — and the U.N. — want.

Wherever the dollar reigns supreme, U.S. diplomacy carries maximum clout. By delinking the world from the dollar, China, Russia and others hope to shrink our political and cultural influence.

Obama would be wise not to listen to his Treasury chief and oppose a new global currency.

The Death of De Gaulle

The mother of all Gallic temper tantrums is over as France gets set to rejoin NATO command.

The mother of all Gallic temper tantrums is over -- and a mere 43 years to the month after Charles de Gaulle booted the American GIs who liberated France, and the NATO alliance that kept it free, out of the country.

Next week, President Nicolas Sarkozy formally brings France back into the alliance's integrated military command and co-hosts the North Atlantic Treaty Organization's 60th anniversary summit. In so doing Mr. Sarkozy will start to bury de Gaulle's spirit and the legacy of "French exceptionalism."

In practice, the reversal of de Gaulle's March 7, 1966 order merely puts French officers back inside NATO military headquarters. But as one of the few European countries with a military able to project force, France has taken an active part in NATO missions in Afghanistan and the Balkans.

The symbolic import of Mr. Sarkozy's decision is lost on neither the French left nor some in his own Gaullist camp, who loudly opposed it. From the moment de Gaulle gave allied troops and NATO headquarters few weeks' notice, forcing the quick relocation to an abandoned hospital in Brussels, France's raison d'être has been to trip up American power while standing under its security umbrella. Jacques Chirac, born before the war, practiced what the General preached, most memorably in 2003 in the trans-Atlantic spat over Iraq.

As a younger man, Mr. Sarkozy doesn't carry the same hang-ups about World War II and the U.S. to the Elysée Palace. He made his intentions clear last June, announcing the change in French NATO policy alongside President Bush. The French continue to voice strong opinions about all kinds of things at odds with stated American policy. But Mr. Sarkozy has brought a long-overdue maturity to French relations with its oldest ally -- the U.S. -- and the rest of the world.

The Death Cries of the Salvador Right

Blaming Chávez

The Death Cries of the Salvador Right

By NIKOLAS KOZLOFF

Facing a serious electoral debacle in advance of Sunday’s presidential election, and recognizing that it cannot win the election based on practical ideas, the right-wing ARENA (or Nationalist Republican Alliance) party has launched an ugly campaign to link leftist FMLN (Farabundo Marti National Liberation Front) candidate Mauricio Funes with Venezuelan President Hugo Chávez.

There are many similarities between ARENA’s position and the Republican Party prior to the November, 2008 election. Like the GOP, ARENA has now been entrenched in power for a long time. To many Salvadorans, ARENA seems like a colossal dinosaur mired in the past. Founded by right wing death squad leader Roberto D’Aubuisson, held to be one of the instigators of the assassination of Archbishop Oscar Romero in 1980, ARENA is still fervently anti-Communist. ARENA, whose colors are red, white and blue, models itself on the U.S. Republican party but is even more explicitly nationalist. The hymn of the party touts El Salvador as the tomb where “the Reds will die.”

While such heated rhetoric may have appealed to some in the midst of the country’s bloody civil war between the right and left in the 1980s, ARENA now looks increasingly bereft. Salvadorans want practical solutions to the country’s intractable social problems and are hardly in the mood for more of the same anachronistic Cold War rhetoric.

Even if ARENA were to run a novel and innovative campaign however, the party would still face a huge uphill battle. ARENA has been in power now for twenty years. During this time the small Central American nation has descended into violent lawlessness with robbery and homicide rates flying off the charts. ARENA candidate Rodrigo Ávila, the country’s former head of national police, has pledged to combat violent crime. Only Funes however has said he would purge elements of the police force linked to organized crime.

Adding to Ávila’s worries, ARENA has mismanaged the economy. In recent years, the party has eagerly followed Washington’s dictates by privatizing social services and public utilities. The outgoing administration of Antonio Saca signed the Central American Free Trade Agreement (CAFTA) with the United States, but the deal has not led to social harmony. The country is still plagued by extreme inequality while 37 per cent of Salvadorans live in poverty and can’t pay high food prices. This fuels the crime wave which has proven so worrying to poor Salvadorans.

Funes is hardly what one might call a fire breathing leftist. A former media commentator, he seeks to remake the FMLN into a pragmatic political party. At rallies, he doesn't sing the party's anthem or wear its traditional red colors, preferring to campaign in a crisp white guayabera shirt. It’s a symbolic move designed to contrast himself with many in the party who still wear fatigues and brandish pictures of Che Guevara and Soviet flags at campaign rallies.

Meanwhile he has bent over backwards to placate the U.S. and has met with State Department officials as well as members of Congress, reassuring them that he is no radical. In addition, Funes has declared that El Salvador should not scrap use of the dollar by returning to its previous currency, the colón. Funes says that “dollarization” and the adoption of the Central American Free Trade Agreement in 2006 have had negative effects such as inflation and unfavorable competition for small-scale farmers but that it is too late to scrap these policies.

To listen to the Salvadoran right you’d think Funes was leading El Salvador on the march towards Stalinist dictatorship. While campaigning near the Honduran border recently, Ávila claimed that the Funes campaign was being funded by Venezuela’s Hugo Chávez. “There's a saying that ‘Whoever pays the mariachi decides what song is going to be played,’” Ávila remarked. “And that's going to happen with them,” he added. “No matter what they say, what they do, their campaign is being financed by Venezuela.”

Funes himself denies having any political links with the Chávez government and has said that Venezuela will not meddle in Salvadoran internal affairs if he wins the presidential election. Furthermore, the FMLN leader has distanced himself from some of the more enthusiastic pro-Chávez members of his party. Despite Funes’s disavowals however, ARENA has continued to press on with its hysterical red baiting even though the rightist party has no proof that Funes has received financial support from Chávez.

Both Funes and Chávez, said outgoing President Antonio Saca, were trying to spread “totalitarian projects” and wanted to “stick their noses” in anti-democratic practices. It was “no secret” Saca added hyperbolically, that the FMLN received “its ideological nourishment from Havana” and its economic nourishment “from some other place.” In yet another ridiculous and over the top aside, Saca declared “I am sure that there’s some kind of working group in Venezuela which seeks to take over El Salvador.”

As evidence of the supposed Chávez-FMLN conspiracy, ARENA points to Chávez’s Bolivarian Alternative for the Americas (known by its Spanish acronym ALBA). The plan, initiated by Chávez several years ago, seeks to counteract corporately driven free trade schemes backed by Washington and to promote barter trade and solidarity amongst left wing Latin American countries. Chávez himself has been a rather bombastic critic of CAFTA, remarking that ARENA was “making deals with the devil, the devil himself.”

As a party, the FMLN has historically opposed CAFTA and U.S.-backed free trade while approving of Chávez’s barter schemes. El Salvador does not produce oil, and in 2006 FMLN mayors set up a joint venture energy company with Venezuela called ENEPASA. The initiative is designed to provide less expensive fuel to El Salvador’s drivers. The oil is sold by gas stations bearing a special non-corporate, “white flag” emblem.

When FMLN mayors signed the agreement in Caracas, Chávez suggested that money the Salvadoran municipalities saved on energy could be used to subsidize public transport and food prices. Under the terms of the agreement, cities pay 60 per cent of their fuel bill within 90 days. The rest may be paid in barter for agricultural and other locally made products or in cash over a 25-year period.

While it’s certainly true that Venezuela has increased its diplomatic and political visibility in El Salvador over the last few years, ARENA’s claims about Chávez’s insidious designs are uproarious. Since the inception of the ENEPASA deal, Venezuela has only sent modest amounts of diesel to El Salvador. Moreover, it’s not clear whether Venezuela can continue to sell discounted oil to the FMLN. In years past, Chávez has been able to increase his geopolitical standing throughout the region by providing cheap oil to poor and impoverished nations. But now, with world oil prices falling, Venezuela may be forced to curtail its ALBA program.

As an issue, Venezuela is a red herring in Sunday’s Salvadoran election. But that hasn’t stopped ARENA from launching a full frontal assault on Funes for having alleged political ties to another foreign power. It’s a sign of political desperation from a party bereft of any coherent ideas about how to solve El Salvador’s enduring social and economic problems.

Nikolas Kozloff is the author of Revolution! South America and the Rise of the New Left (Palgrave-Macmillan, 2008)