Day Ahead: Stocks Still Face Bond Market Risks

The Humanitarian Face of the State, With Fangs

Mises Daily by Llewellyn H. Rockwell, Jr.

The glorious Barack Obama, broad-minded humanitarian universalist that he is, promised to reverse the wickedness of the Bush administration, which ran a prison camp in Guantánamo Bay and kept pictures of ruthless abuse from public view to save the face of Bush.

Bush the despot!

Obama the savior!

And sure enough, after taking office, Obama did something or other toward closing that prison camp just off our shores, along with its secret military trials and abuse. How the partisans cheered on one side and booed on the other.

Except that just the other day, Obama quietly reversed himself. Now the camps must stay. After all, there are real enemies there, the "worst of the worst." The trials will still be in secret. The military will still run them, because, you know, you just can't trust those civilian courts to arrive at the right verdict.

As for those pictures of abuse, Obama can't allow those to be seen. What were they thinking? Why, for our Islamic enemies to have access to those will only give them a weapon to whip up their countries in some sort of anti-US frenzy.

Is the idea that if we do not release those pictures that the Islamic world will come to believe that the prisoners in Guantánamo and other venues are treated decently, with three square meals per day, awaiting trial by jury?

Clearly the reason for blocking the photos is not to embarrass the US state with its own people. No surprise here: the state's interest is mainly in protecting itself. That's why it does what it does.

Of course the Republicans played their appointed role as guardians of the torture power and celebrated when Obama reversed his previous position and his campaign promise. Finally he is taking his responsibility as head of state.

But how is it possible that the great humanitarian universalist reversed himself at all, even against his own promises and even to the point that the ACLU is protesting?

Well, it is all about thinking like the state. It took his administration a bit to get the hang of it in international affairs but it was just a matter of applying the logic of his domestic program, which is all-controlling.

Think of it this way. Even if Obama wanted to be another way, wanted to bring a new sense of things to government, it is not difficult to slip into the role of a despot. That is, after all, the job he campaigned for years to get and the job he now holds.

Let's say you are a health geek who is dedicated to the proposition that Americans eat too much junk food. But then you are hired as the manager of the local doughnut shop. Your first day on the job you issue mild warnings to customers that they should go easy on the double-dozen purchases.

Everyone around you thinks you are out of your mind. It only takes a few days to realize that you are in fact crazy to talk this way. The more doughnuts people buy, the better off you are and the better off your employees are. You are working against your own success by promoting other forms of eating.

Of course you change your tune!

And would that the state were like a doughnut shop. As Butler Shaffer points out in his new book Boundaries of Order, which argues that the state is unviable in our times,

every political system is nothing more than a mechanism that allows some to benefit at the expense of the many through violent takings of property…. Politics is unthinkable without property trespasses and takings.

This is why "there are no fundamental differences among major political parties: at their core, each embraces the authority of the state to regulate how property will be owned and used."

The state is driven by its own internal interests, which can only be fulfilled at the expense of society. The state operates according to the principle of violence. Violence is the ultimate bargaining tool of the state. This is true in domestic and foreign relations, whether running a health program or a prison camp.

It is particularly telling that Obama cited the grave threat that these poor slobs — who are in Guantánamo because they dared fight against the interests of the Holy American Empire — represent to all of us. As Shaffer writes,

Because of our willingness to huddle at the feet of political officials whenever we feel ourselves threatened, the state will feed us an endless supply of fear-objects with which to assure our continuing submission. This is why the well-being of the state is dependent upon the war system.

This is how I can predict only muted protests from the Left concerning Obama's betrayal. So long as he continues to expand the state in the domestic area — inflating, taxing, regulating, nationalizing — they will put up with abuses of the human rights that they claim to champion.

Guantánamo is a metaphor. How those prisoners are treated is a mere foreshadowing of how we will all be treated under the total state.

Llewellyn H. Rockwell, Jr. is chairman of the Ludwig von Mises Institute in Auburn, Alabama, editor of LewRockwell.com, and author of The Left, the Right, and the State. Send him mail. See his article archives. Comment on the blog.

Recent Grads Face Hard Knock Times

Firms Face Tighter Tax Rules

Obama Plan Aims to Limit Use of Offshore Havens by Multinationals and the Wealthy

JOHN D. MCKINNONJESSE DRUCKER

WASHINGTON -- The Obama administration is rolling out details Monday of what aides are calling a far-reaching crackdown on offshore tax avoidance, targeting many U.S.-based multinational corporations and wealthy individuals.

President Barack Obama will flesh out a proposal included in his February budget blueprint seeking to curb the practice of parking foreign earnings in offshore tax havens indefinitely. By some estimates, $700 billion or more in U.S. corporate earnings have accumulated in overseas accounts in recent years.

Barack Obama

The plan to be announced Monday will go further. It aims to change the legal treatment of offshore subsidiaries and structures that companies have used to avoid not only U.S. taxes, but taxes in other developed countries as well.

In addition, the administration will strive to tighten rules that have encouraged thousands of Americans to open offshore bank accounts in an effort to duck U.S. taxes. The plan would increase information reporting and tax withholding as well as penalties, and make it harder for foreign account-holders to win cases in court. The administration promised new enforcement tools to crack down on tax-haven abuse.

"What we really have is a system that is in many ways broken," a senior administration official said Sunday, one that "allows people to play games...to almost completely avoid paying taxes on active foreign earnings."

The sweep of the administration's plan took some tax experts by surprise, and foreshadows potential fights with big businesses later this year over some of their most cherished breaks, particularly as Congress looks for revenue to pay for new initiatives.

"There absolutely will be" opposition from business, particularly if the administration doesn't allow a suitable adjustment period, said Phil West, a lawyer with Steptoe & Johnson LLP, who was international tax counsel for the Treasury Department under President Bill Clinton.

The president's announcement comes as he prepares to release a more detailed budget blueprint later this week. And the high-level attacks on big business follow a series of White House broadsides on corporate practices. Mr. Obama riled Wall Street last week by crafting a bankruptcy deal for Chrysler LLC that favored the United Auto Workers union over a series of lenders.

White House officials said the latest proposals simply follow through on Mr. Obama's frequent criticism that current U.S. tax rules encourage multinationals to move jobs overseas. The new tax plan also aims to increase incentives for job creation in the U.S., they said, noting that some of the money raised would be used to cover the cost of extending a soon-to-expire federal tax credit for research costs.

Many of Mr. Obama's proposals will require congressional approval. And while Democrats control both houses of Congress, many members of his own party have expressed reluctance about raising taxes, so prospects for the proposals are uncertain, even though none would take effect until 2011.

A senior Republican aide termed the proposals a "revenue grab," predicting they could end up driving more corporate operations overseas. Some or all of the changes could become fodder for broader tax reform next year.

"If rules are changed on tax deferral and we are taxed in the U.S. on non-U.S. profit, this significant additional U.S. tax cost would adversely impact our ability to invest and grow our business in the U.S....and to compete against our foreign competitors who are not subject to this U.S. tax," said John Earnhardt, a Cisco Systems Inc. spokesman.

The president's tax announcement, to be made with Treasury Secretary Timothy Geithner, is part of an administration plan to raise as much as $210 billion in extra tax revenue over the next decade, in an effort to trim budget deficits and pay for job-creation incentives and other programs.

The plan takes aim at a range of financial practices that have combined to erode the U.S. tax base in recent decades. As money has become more readily transferable -- and aggressive tax planning more widespread -- it has become easier for companies and individuals to take advantage of low taxes as well as lack of transparency in many offshore havens.

In one big change, the administration is aiming to curb a practice commonly known as "deferral," which U.S. multinationals use to shave their tax bills on their overseas operations.

Under current law, U.S. companies can defer taxes indefinitely on the many of the profits they say they have earned overseas until they "repatriate" that money back to the U.S. The administration seeks to sharply limit the tax deductions that companies taking advantage of deferral can take.

Still, the proposal is far less dramatic than what many companies had feared: a complete repeal of the deferral regime.

The proposal to be announced Monday also would clamp down on some other overseas tax-avoidance techniques that are widely used by U.S. multinationals.

The Obama administration wants to overhaul what it describes as a much-abused set of regulations known as the "check-the-box" rules. These give companies great latitude in deciding where exactly their subsidiaries should be taxed. Those rules have encouraged companies to take further advantage of low-tax haven countries with their offshore subsidiaries.

The administration also wants to toughen rules governing the tax credits that the U.S. grants companies to offset taxes they pay to foreign governments. That system has become the subject of elaborate gaming, U.S. tax officials say.

Overall, the deferral proposal would raise about $60.1 billion through 2019, according to the administration's estimates. Unlike a similar proposal in the House, it wouldn't affect research deductions, a likely victory for some industries such as pharmaceuticals. The reform of check-the-box rules would raise about $86.5 billion through the same period. The changes in foreign-tax-credit rules would raise about $43 billion. The changes to crack down on individual bank accounts would raise $9 billion.

The current U.S. rules for corporations carry enormous benefits for companies. Unlike most deferred taxes, those stemming from foreign earnings don't cut into a company's bottom line as long as they are considered "permanently reinvested" overseas.

The result can have a huge impact on a company's bottom line. The pharmaceutical and technology industries are particular beneficiaries.

Charter Schools Always Face a Financial Struggle

These public schools don't get public money for their facilities.

KEVIN FERRIS

Philadelphia

As I walked the halls of First Philadelphia Charter School for Literacy recently with the school's CEO Stacey Cruise-Clarke, I was struck as she reprimanded a student for "yelling." I hadn't heard a thing.

First Philadelphia Charter

Students at the First Philadelphia Charter School for Literacy.

In the school's cavernous facility there are 30 classrooms, a performance art center, a gym, a literacy center, and nearly 700 students in uniform. It is an oasis in a city that witnesses thousands of assaults in its public schools each year and has engaged in a running debate over whether to arm school security guards. The charter school was founded nearly seven years ago, and is very lucky to own its facilities.

Typically, banks are reluctant to lend to charters because they have little collateral, no long-term funding, and a five-year license to operate that may not be renewed. That is the reality that will confront President Barack Obama if he tries to make good on his promise to expand charter schools. These schools serve a public good, but they are also risky borrowers.

What's more, while charters receive per-pupil funding from the state, they aren't given start-up money to buy or lease classroom space -- one of the misguided restrictions put on charters that hamper their growth. The president may want more charters -- see, for example, his March 10 speech, where he called for increasing the number of charters in states that imposed limits -- but is he willing to do more to help charters cover capital costs? At the moment, private organizations step in to fill the void in public funding for these public schools.

First Philadelphia is doing well now. But back in 2002, when its charter was approved only weeks before school was to start, it was no sure thing that the doors would open. The founder, Gerald L. Santilli, and his staff were only able to admit the first class thanks to a loan to lease classroom space from the Reinvestment Fund, a community development financial institution (CDFI) in Philadelphia that has provided $167 million in financing to 54 charter schools.

CDFIs grew out of efforts decades ago by national religious groups -- including Catholic nuns who put up their retirement money -- to pool resources and offer loans to pay for projects that benefit communities. By the 1990s, CDFIs were well-established lenders for affordable housing, supermarkets and small businesses. They also lent money to child-care centers. Initially, these loans were a private, faith-based initiative to help worthwhile organizations. But they are grounded in the economic realities of lending.

"If you're going to borrow retirement money from nuns, first, you better do something important, something with real impact. Second, you better pay them back," says Mark Pinsky, president and CEO of Opportunity Finance Network, a consortium of CDFIs in Philadelphia. Mr. Pinsky told me that the "culture of discipline" these incentives created has resulted in more than $30 billion in lending over the last three decades, with about 1% of overall loans reported as a loss.

The difference between CDFIs and conventional lenders, Mr. Pinsky told me, is "We're profitable, but not profit-maximizing. . . . We'll make a concession on net earnings to ensure a loan succeeds, helping a borrower more than a bank could."

Charters were a natural for this type of hand-holding, almost intrusive, lender. The hand-holding seems to pay off. Fund president Jeremy Nowak reports only a few late payments and no losses in 11 years of charter-school lending. The market became successful enough to start attracting banks -- until two years ago when the bottom fell out with the credit crisis. Mr. Pinsky estimates it could be another five years before banks lend to charter schools again.

His network has supported about $5 billion in lending nationwide over the past two years -- part of that in charters -- but even he expects that he won't hit that number again in the near future. "I don't see liquidity past this year," he told me. "Unless the credit markets loosen up, we'll be constrained in what we do."

With 1.4 million students in 4,600 schools nationwide, charters have proven themselves to be safe, academically sound alternatives to their troubled public-school counterparts. Substantial waiting lists at many charters attest to the demand for more. And with a little help getting started, charters can thrive.

Speeches from Mr. Obama may lend rhetorical support for new charters, but financing these start-up public schools takes money, and that depends on healthy credit markets and willing lenders. First Philadelphia was able to renew its charter in 2007 and, with a credit history it earned over its first five years with an unconventional loan, it has secured regular bank financing. The next First Philadelphia will need similar help.

Mr. Ferris is an assistant editor and columnist at The Philadelphia Inquirer.

No easy way to put a face on the stay-at-home recession

No easy way to put a face on the stay-at-home recession

By John Lloyd

It is what the “phoney war” of 1939 in western Europe must have been like: warnings of terrible events to come but nothing much changed. When will the crisis become visible? How will it be represented to us and to future generations?

We are familiar with images of the last time, the depressed and hungry 1920s and 1930s. They tell a story of working-class misery – men hanging about at corners, queuing in bread lines, riding in boxcars, marching in protest from Jarrow in the north of England to London, a vivid but futile month-long pilgrimage of the unemployed.

Women, grim-faced, with hungry and ragged children; farmers, dispossessed, driving overloaded jalopies to search for work or sitting on sagging wooden porches, staring stonily at the camera. The more sinister of the old photographs from Europe show men not just hopeless but also marching, organised in proto-military columns by the mushrooming parties of the extreme right and (less successfully) the extreme left.

It is almost unimaginable that any of that will come back in these shapes. Not many till the soil now, and they will not be the worst hit. The industrial working class still exists and it is now seeing jobs disappear; but it is much less numerous. The dispossessed working and middle classes are not setting up tent cities in parks.

In pictures that The New York Times invited readers to send in to illustrate the current crisis, no strong image arrests the attention. A young couple in Detroit, without jobs, sit amid piles of beer cans, litter and audio equipment in an untidy apartment: it looks like many youthful homes. In Chicago, two young men fix cars in an “informal” repair shop on the street: they cannot afford a garage, but what is new for young men starting out? In Barcelona, an Indian immigrant holds up a sign demanding €135,000 he claims from a construction company: the image is puzzling rather than pathetic. Every one of these pictures may contain desperation: it just does not look like it, the way it did.

Life and work today is more privatised and individualised. More people live alone, work alone, eat alone. Look for the number of men and women of all ages eating alone in cheap restaurants as a sign of the hardening times – though a half-hour with a Big Mac and a Sprite is hardly misery incarnate. The rich – once-rich? – countries have safety nets thicker than at any time in the past, and though these vary greatly in generosity, even in western Europe, they allow people to scrape by with help from their friends or, more often, family.

Indeed, we may see a reversal of the individualised life: an acceleration of the already observably growing habit of the young staying on with their parents, an “Italianisation” of young man- and womanhood, with a family extended into old age and young middle age gathered round the kitchen table, each with their slice of takeaway pizza and glass of Valpolicella.

A television, of course, will stand in the corner. We have become media-saturated societies since the last depression. Almost everyone in the developed world has a television or a large share in one; increasing numbers have vast choice. We have subscribed to packages of programmes and, where unavoidable, paid a licence fee to the public broadcaster: these will be among the last things to be cut.

We can watch the news and current affairs programmes, which spare no effort to tell us how bad things are and how much worse they will get. More likely, we will search for entertainment, fantasy, sex and “reality” of a quite different kind from what we may be experiencing. Picture a couple, of working age, searching the channels for something diverting at four in the afternoon: there’s desperation for you.

Will there be protests? Certainly – but judged by recent experience, these will be more outré, probably more violent, than the march from Jarrow to London. Sir Fred Goodwin, former chief executive of the Royal Bank of Scotland and for a time chief British hate figure of the crisis, had his windows and Mercedes smashed last week. The bosses of the US insurance company AIG have been tailed – including to their homes – by protesters holding signs accusing them of destroying savings and jobs.

We have seen anarchists avid to confront bankers in the City of London midweek, and able to meet only the police. Workers in Grenoble took their executives hostage and held them for 24 hours while torturing their ears with rock music in protest at a closure of the Caterpillar plant there. In Paris, François-Henri Pinault, head of the PPR luxury group, was trapped in his car for an hour by workers in his Conforama furniture subsidiary, also protesting against layoffs. “It’s the nature of social dialogue in our country,” Olivier Labarre, a human resources executive, was quoted as saying: it may be exportable.

Perhaps with such thoughts in mind, executives are seeking the kind of help they might once have scorned. Jane Haynes, a psychotherapist who has just published a memoir of the couch – Who Is It That Can Tell Me Who I Am? – told an interviewer this past week: “The credit crunch has made so many people flee to me.” That might be the image of our present bad times: a tearful corporate boss, clad in Gucci (one of M. Pinault’s brands) lying on a couch, a box of Kleenex at his side.

GM, Chrysler Face Some Messy Surgery

JEFFREY MCCRACKEN

With talk of applying the nation's bankruptcy laws to General Motors Corp. and Chrysler LLC in a "surgical" way, the Obama administration has painted a picture of a smooth process that would efficiently clear away much of the auto makers' debt and other ills.

But the recent history of big bankruptcies -- including those of major airlines and auto-parts supplier Delphi Corp. -- suggests the effort will be messier than advertised, especially given the political stakes involved and the complexity of Detroit's problems.

The administration's leading plan would use bankruptcy filings to relieve the auto makers of their biggest burdens, including bond debt and retiree health-care costs, according to people familiar with the matter.

The plan would, in effect, split the assets of the two companies into "good" and "bad" components, leaving the "bad" assets and obligations of both auto makers behind in bankruptcy court.

A "good" GM and a "good" Chrysler would be created from brands and assets deemed to have more value, and proceeds from the sale of those companies would be used to pay off creditors.

The "good" GM would emerge much more quickly from court protection than the "bad" one, spending three to six months there, in a best-case scenario, said one person familiar with the plan.

But rarely has a company as big or as encumbered as GM or Chrysler entered bankruptcy proceedings or tried to navigate the process under the intense public scrutiny the two auto makers are sure to face.

GM alone has $177 billion in liabilities, including $29 billion in unsecured bond debt. Chrysler has $7 billon in secured debt. Both companies have hundreds of thousands of employees and retirees all over the country and multibillion-dollar obligations for retiree health care.

"The No. 1 risk is the parties can't agree to a consensual deal. The government takes away a lot of its leverage by admitting they won't let these companies liquidate," said Peter Kaufman, president of the investment bank Gordian Group, which advises corporate clients on restructurings.

The case of Delphi, one of the world's largest auto-parts makers, shows the obstacles and delays a company can encounter in the bankruptcy process. Delphi, a former GM unit, filed for protection from creditors under Chapter 11 of the Bankruptcy Code in October 2005, and received billions of dollars in support from GM to buy out union workers and fund pensions and retiree health costs.

Delphi originally planned to be out of bankruptcy court by early 2007. But slower-than-expected talks with its unionized labor force and the advent of the credit crisis have kept Delphi in bankruptcy for more than 800 days.

If GM and Chrysler pursue the administration's bankruptcy plan, as most of the two auto makers' insiders now expect, the process most likely wouldn't involve what is often called a prepackaged bankruptcy. In such cases, a company's creditors have already approved concessions and a plan of reorganization before the company enters bankruptcy.

Instead, the process is expected to resemble a prearranged filing, in which there is a less-formal agreement among the parties about concessions. The prearranged route is riskier because constituents can back out if they feel the company's situation or operating environment have changed radically, bankruptcy experts say. For example, if the economy worsens, sales suffer further or a key supplier collapses, bondholders or other creditors could pull out of a deal.

Another unknown is the likely reaction of the two companies' dealer networks. State franchise laws give auto dealers strong protections if auto makers breach their contracts, making it expensive to close them.

"You could also have lawsuits between shareholders who will fight over the valuations of fixed assets or intangibles. The parties have the right to be heard, to prepare experts, to do depositions, to get on the schedule. That drags things out for weeks, for months," said one person familiar with the situation at GM. "There are suppliers and dealers and other claimants we don't even know about."

If GM goes the bankruptcy route, its path may resemble that of Italian dairy giant Parmalat SpA, which entered bankruptcy in December 2003 amid an accounting scandal. The company reorganized in bankruptcy, separating bad assets, old debt and old claims from a "new" Parmalat that exited bankruptcy court in April 2005, about 15 months later.

Many of the "bad" assets were eventually liquidated, but lawsuits between the company, creditors and lenders lingered until 2007.

The Democratic Party Could Face an Internal Civil War

'Gentry' and 'populist' factions square off on energy and the environment.

JOEL KOTKIN

This is the Democratic Party's moment, its power now greater than any time since the mid-1960s. But do not expect smooth sailing. The party is a fractious group divided by competing interests, factions and constituencies that could explode into a civil war, especially when it comes to energy and the environment.

Broadly speaking, there is a long-standing conflict inside the Democratic Party between gentry liberals and populists. This division is not the same as in the 1960s, when the major conflicts revolved around culture and race as well as on foreign policy. Today the emerging fault-lines follow mostly regional, geographical and, most importantly, class differences.

Gentry liberals cluster largely in cities, wealthy suburbs and college towns. They include disproportionately those with graduate educations and people living on the coasts. Populists tend to be located more in middle- and working-class suburbs, the Great Plains and industrial Midwest. They include a wider spectrum of Americans, including many whose political views are somewhat changeable and less subject to ideological rigor.

In the post-World War II era, the gentry's model candidate was a man such as Adlai Stevenson, the Democratic presidential nominee who lost twice to Dwight D. Eisenhower. Stevenson was a svelte intellectual who, like Barack Obama, was backed by the brute power of the Chicago machine. After Stevenson, the gentry supported candidates such as John Kennedy -- who did appeal to Catholic working class voters -- but also men with limited appeal outside the gentry class, including Eugene McCarthy, George McGovern, Gary Hart, Bill Bradley, Paul Tsongas and John Kerry.

Hubert Humphrey, a populist heir to the lunch-pail liberalism of Harry Truman (and who was despised by gentry intellectuals) missed the presidency by a hair in 1968. But populists in the party later backed lackluster candidates such as Walter Mondale and Dick Gephardt.

Bill Clinton revived the lunch-pail Democratic tradition; and the final stages of last year's presidential primaries represented yet another classic gentry versus populist conflict. Hillary Clinton could not match Barack Obama's appeal to the gentry. Driven to desperation, she ended up running a spirited populist campaign.

Although peace now reigns between the Clintons and the new president, the broader gentry-populist split seems certain to fester at both the congressional and local levels -- and President Obama will be hard-pressed to negotiate this divide. Gentry liberals are very "progressive" when it comes to issues such as affirmative action, gay rights, the environment and energy policy, but are not generally well disposed to protectionism or auto-industry bailouts, which appeal to populists. Populists, meanwhile, hated the initial bailout of Wall Street -- despite its endorsement by Mr. Obama and the congressional leadership.

Geography is clearly a determining factor here. Standout antifinancial bailout senators included Sens. Byron Dorgan of North Dakota, Tim Johnson of South Dakota, and Jon Tester of Montana. On the House side, the antibailout faction came largely from places like the Great Plains and Appalachia, as well as from the suburbs and exurbs, including places like Arizona and interior California.

Gentry liberals, despite occasional tut-tutting, fell lockstep for the bailout. Not one Northeastern or California Democratic senator opposed it. In the House, "progressives" such as Nancy Pelosi and Barney Frank who supported the financial bailout represent districts with a large concentration of affluent liberals, venture capitalists and other financial interests for whom the bailout was very much a matter of preserving accumulated (and often inherited) wealth.

Energy and the environment are potentially even more explosive issues. Gentry politicians tend to favor developing only alternative fuels and oppose expanding coal, oil or nuclear energy. Populists represent areas, such as the Great Lakes region, where manufacturing still plays a critical role and remains heavily dependent on coal-based electricity. They also tend to have ties to economies, such as in the Great Plains, Appalachia and the Intermountain West, where smacking down all new fossil-fuel production threatens lots of jobs -- and where a single-minded focus on alternative fuels may drive up total energy costs on the farm, make life miserable again for truckers, and put American industrial firms at even greater disadvantage against foreign competitors.

In the coming years, Mr. Obama's "green agenda" may be a key fault line. Unlike his notably mainstream appointments in foreign policy and economics, he's tilted fairly far afield on the environment with individuals such as John Holdren, a longtime acolyte of the discredited neo-Malthusian Paul Ehrlich, and Carol Browner, who was Bill Clinton's hard-line EPA administrator.

These appointments could presage an environmental jihad throughout the regulatory apparat. Early examples could mean such things as strict restrictions on greenhouse gases, including bans on new drilling and higher prices through carbon taxes or a cap-and-trade regime.

Another critical front, not well understood by the public, could develop on land use -- with the adoption of policies that favor dense cities over suburbs and small towns. This trend can be observed most obviously in California, but also in states such as Oregon where suburban growth has long been frowned upon. Emboldened greens in government could use their new power to drive infrastructure spending away from badly needed projects such as new roads, bridges and port facilities, and toward projects such as light rail lines. These lines are sometimes useful, but largely impractical outside a few heavily traveled urban corridors. Essentially it means a transfer of subsidies from those who must drive cars to the relative handful for whom mass transit remains a viable alternative.

Priorities such as these may win plaudits in urban enclaves in New York, Boston and San Francisco -- bastions of the gentry class and of under-35, childless professionals -- but they might not be so widely appreciated in the car- and truck-driving Great Plains and the vast suburban archipelago, where half the nation's population lives.

If he wishes to enhance his power and keep the Democrats together, Mr. Obama will have to figure out how to placate both his gentry base and those Democrats who still see their party's mission in terms that Harry Truman would have understood.

Mr. Kotkin is a presidential fellow in urban futures at Chapman University and executive editor of www.newgeography.com. He is finishing a book on the American future.

Post-Post-9/11 Looks Just Like Pre-World War II

Democracies are averting their eyes from the threats we face.

• By BRET STEPHENS

After 9/11, historians and pundits rushed to give a new era a suitable name. My favorite was Norman Podhoretz's, who called it "World War IV." In doing so, he recast the Cold War as World War III while putting the attacks in a century-long context of the global struggle between democratic and totalitarian forces.

But the election of Barack Obama and the financial crisis have now ushered us into the post-post-9/11 world, and this era, too, needs a name. Let's call it "the Locarno Restoration."

Locarno, a picturesque Swiss town on the shores of Lake Maggiore, was the site of a series of treaties signed in 1925 between France, Germany, Britain, Italy and Belgium. They ostensibly guaranteed the post-World War I borders on Germany's western frontier with France and Belgium, but agreed that Germany's eastern frontiers could be subject to revision. They also paved the way for Germany's membership in the League of Nations.

Though now mostly forgotten, the Locarno Treaties were, as Henry Kissinger once wrote, "greeted with exuberant relief as the dawning of a new world order." For the rest of the 1920s, people spoke of "the spirit of Locarno," which meant, in effect, that personal good will begat good political results, whatever the underlying facts. The foreign ministers of Germany, France and Britain each won a Nobel Peace Prize for their efforts -- proving, if nothing else, that the Nobel committee was in the grip of fools long before the prize went to Jimmy Carter.

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Of course Locarno failed. It failed in part because it implicitly acknowledged that Germany would not have to honor the terms (however invidious) of the Versailles Treaty, in part because it exposed the limits of how far Britain and France were willing to go to guarantee the peace in Europe, and in part because it betrayed smaller powers, particularly Poland, whose parliamentary democracy was soon overthrown in a coup d'état.

Above all, Locarno failed because it combined wishful thinking with political weakness in a way that was bound to be tested and exploited by the fascist powers. If the 1930s were, per W.H. Auden's line, a "low, dishonest decade," it was mainly because the 1920s were so high-mindedly self-deceived.

We are in a similar state today.

As in the 1920s, we have emerged (if only partially), from several years of war -- scarcely anticipated, earnestly begun, bravely fought, often badly waged and, at least in the case of Iraq, ambiguously won. It was an emotionally exhausting war justified first on grounds of national survival, then for spreading democracy. The moral clarity and political unity that went with the war's beginning collapsed into political division and disillusion.

From this there has emerged under the Obama administration a new kind of moral clarity. It is founded on conciliatory tendencies, a preference for multilateral solutions, a powerful desire to be on the right side of global public opinion, and an instinct for looking away from that which we'd rather not to see. This has put some political stress on our residual post-9/11 commitments, particularly in the case of Afghanistan, while creating an overwhelming aversion to possible confrontations, particularly against revanchist Russia and millenarian Iran.

The Locarno generation felt similarly about standing in the way of Japan's invasion of Manchuria, Italy's of Abyssinia and Germany's of Czechoslovakia. In their case, as increasingly in ours, a weak foreign policy was a function of severe economic distress. But economic considerations were as often an alibi for inaction as they were a reason for it. Folklore aside, the German economy was in considerably worse shape than Britain's for most of the '30s. But while the British were timid, Hitler was willful.

Today, Russia and Iran are in a parlous economic state, but they are also keen to seek their advantage through calculated acts of provocation and aggression. They sense that the commitments the Bush administration made to the security of our allies aren't ones the Obama administration is especially eager to honor. That goes for missile defense in Poland and the Czech Republic; for the independence of Georgia, Ukraine and other former Soviet republics; for the status of forces agreement with Iraq; perhaps also for the security of Israel if it opts for air strikes against Iran's nuclear facilities.

We know how this movie ends. So here's a suggestion: If we're going to squander trillions in "stimulus," let's spend more on defense. An F-22 assembly line adds just as much to employment as a few thousand more "green" workers, with the added bonus of deterring our enemies. That's a lesson the democracies learned almost too late in the dismal post-Locarno years. Why make the same mistake twice?