Liberalism is a Disease

Clout goes to high school

2010-03-23T19:50:00.000-07:00

March 23, 2010

Chicago Tribune

"We didn't want to advertise what we were doing because we didn't want a bunch of people calling."—David Pickens, former top aide to Chicago Public Schools chief Arne Duncan

[Ed. note - Duncan is now Obama's Secretary of Education]

The quote says it all. CPS officials maintained a secret list to track requests from politicians, businessmen and other VIPs who wanted to get students admitted to one of the city's elite high schools. Most parents didn't know they could appeal to Duncan's office for a closer look, and that's the way school officials wanted it.

It's one more example of how things are done in Illinois: One set of rules for people with clout, another set for everyone else.

Getting into one of Chicago's nine selective-enrollment high schools is a fiercely competitive process, with tens of thousands of students vying for a few thousand slots. Admission is based on a point system, but principals have limited discretion to enroll students who wouldn't normally make the cut.

For years, some parents have complained that well-connected neighbors were able to access those few spots through back channels. Last summer, a handful of public officials acknowledged they had used influence to get friends and relatives admitted. A federal investigation was launched in July, and Duncan's replacement, Ron Huberman, ordered an internal investigation and an outside audit. The district's clout list, maintained over several years under Duncan, was obtained by the Tribune this week.

Those on the list include House Speaker Michael Madigan, Attorney General Lisa Madigan, former U.S. Sen. Carol Moseley Braun, former White House social secretary Desiree Rogers and half of the Chicago City Council. The initials "A.D." — Arne Duncan, Pickens says — appear dozens of times. Duncan's mother and his wife also appear as sponsors.

Pickens says Duncan told him to create the list to centralize the calls that were previously fielded by principals. Pickens and his staff screened the requests and passed some of them on to principals, who are allowed to hand pick up to 5 percent of their students based on criteria including leadership, family hardship and extracurricular activities.

Pickens, now chief of staff to the Chicago Board of Education president, and Duncan, now U.S. secretary of education, say their referrals were not meant as directives to the principals to admit certain students.

That's the same argument made by defenders of the University of Illinois' "Category I" system, the shadow admissions track for politically connected applicants. Last year, the Tribune's "Clout Goes to College" series revealed that hundreds of them got special consideration because of pressure from lobbyists, lawmakers and other power brokers.

That scandal eventually led to the resignations of the university president, chancellor and six of nine trustees. But many of the politicians who intervened on behalf of applicants defiantly denied any wrongdoing. There was no arm-twisting, they insisted; it was all "constituent service." The documents showed otherwise: Category I applicants had higher acceptance rates, despite lower ACT scores and class ranks. In other words, clout trumped merit.

It's impossible to draw (or rule out) such a conclusion from the CPS list. Entries, which list the applicant's VIP sponsor and contain check-off boxes to track the progress of the request, are often incomplete or marked "pending." Among those that were completed, roughly 43 percent were marked "yes" or "done."

So, no, having an alderman for an uncle doesn't guarantee your kid will get into Whitney Young. It doesn't matter. The students whose names appear on that list have a leg up on those who don't. CPS has no business running that sort of racket.Selective-enrollment high schools are among the biggest incentives to keep parents from sending their kids to private schools or fleeing to the suburbs. But parents aren't going to stay if the system is being gamed. Competition is already steep, and the families who have no clout — or who decline to exercise it — are at a disadvantage. They deserve a fair and honest system. They didn't get one.

One big difference between the U. of I. and CPS: When Huberman learned about the problem, he moved immediately to fix it. He has taken significant steps to create a fair and transparent selection process. Principals are required to document contacts from anyone lobbying for an applicant, and classify the contact as appropriate or not. They have to document any contact from CPS brass. Their discretionary picks will be reviewed by a panel and the CPS inspector general will have a role in that review. Huberman's goal is to restore faith and preserve some discretion in the admissions process. He has taken good steps.

We haven't heard the last, though, about the history of clout in the schools.

Copyright © 2010, Chicago Tribune

Are Some Races More Equal Than Others?

2010-03-15T23:11:00.000-07:00

By Abigail Thernstrom and Tim Fay Friday, March 12, 2010

Filed under: The Journal of the American Enterprise Institute

How will the Obama administration respond to a formal complaint in the wake of serious black-on-Asian violence at South Philadelphia High School?

Secretary of Education Arne Duncan has just announced a new push to enforce civil rights laws to combat discrimination in our schools. In the last decade, he said, his department’s Office for Civil Rights “has not been as vigilant as it should have been . . . But that is about to change.” His remarks were made March 8 in a speech at the Edmund Pettus Bridge commemorating the 45th anniversary of the civil rights march on Selma, Alabama, that came to be known as “Bloody Sunday.”

The Department of Justice (DOJ) is also eager to break with the allegedly lax civil rights policies of the Bush administration. Tom Perez, assistant attorney general for civil rights, has appointed a new education section chief, Anurima Bhargava, who comes to the department directly from the NAACP Legal Defense and Educational Fund (LDF), where she had been director of education practice since 2006. "I am excited she will be joining us as we continue our efforts to restore and transform the civil rights division," Perez declared.

Duncan wants to eliminate racial disparities in education in general, including in student discipline in particular. Undoubtedly, Perez does as well. But what will they do in response to a formal complaint filed by the Asian American Legal Defense and Education Fund (AALDEF) in the wake of serious black-on-Asian violence at South Philadelphia High School (SPHS)? AALDEF has charged that the district acted with "deliberate indifference" to the harassment of Asian students and with "intentional disregard" of their welfare.

Interethnic tension is generally ignored in the media, as is the level of violence and disorder in an appalling number of urban schools.

Will the Obama administration act aggressively to ensure Asian rights to a public education free of intimidation and actual violence—surely a basic civil right? Or will such action be taken only when blacks are the victims rather than the perpetrators? If the administration acts in the interest of the Asians, black students will be singled out as racially hostile troublemakers—a conclusion that neither the Department of Education nor the DOJ will welcome, if Duncan’s announcement means what it says.

The Philadelphia story has largely been covered by just the local press. Interethnic tension—of which there is much—is generally ignored in the media, as is the level of violence and disorder in an appalling number of urban schools. And yet everyone who followed the Rodney King riots knows there has been no love lost between Asian shopkeepers and black residents in Los Angeles, for instance. And they know, as well, that learning cannot take place in chaotic environments.

SPHS houses roughly 1,000 students, 70 percent of whom are black, 18 percent Asian, 6 percent Hispanic, and 5 percent white. The Asians are by no means a homogenous group and speak a variety of languages, the most common of which are Chinese dialects, Vietnamese, Spanish, and Cambodian; 12 percent of these Asian students are classified English Language Learners.

The whole Philadelphia district has been plagued by harassment and violence towards Asian students for many years.

According to Asian advocates, the whole Philadelphia district has been plagued by harassment and violence towards Asian students for many years. At SPHS, the assaults have occurred in the cafeteria line, in bathrooms, in stairwells, on school buses, and elsewhere. The incidents ran the gamut from verbal abuse, physical intimidation, blocking doorways, cutting in line ahead of Asian students in the cafeteria, use of anti-Asian racial epithets, and more serious physical abuse including shoving, kicking, and punching—sometimes at the hands of more than one assailant. Advocates have accused school officials, including school Superintendent Arlene Ackerman and Principal LaGreta Brown (both black) of indifference to the plight of Asian students in their charge.

The anti-Asian attacks at SPHS began in October 2008, and prompted Asian advocacy groups to beg for help from the Philadelphia school administration. None was forthcoming, according to AALEF. Three months ago, in early December, tensions came to a head. Trouble started on December 2, and the next day, black students reportedly began to hunt for Asians, checking classrooms were they might be found. A group of apparently organized black students reportedly rushed the stairwells to the second floor where many Asian students were located. Security camera footage from the lunchroom showed a group of 60 to 70 students—most of them black—surging forward with a smaller faction attacking a small group of Asian students.

The AALDEF complaint describes a complete breakdown of adult leadership. One Asian student has charged the lunch staff with “cheering happily,” and others have described security officers as looking the other way. In truth, those charges have been disputed, and other facts are equally hard to pin down. Police and volunteers did try to contain the mounting violence, and at some point the school was “locked down.” School officials later decided to have classrooms dismissed one-by-one, and contacted police to provide extra protection outside the school. The ranks of the police thinned, however, when some had to respond to another emergency, and by the time a group of Asians were heading home they were insufficiently protected. Escorted out of the school by the principal (perhaps only for a short way—another disputed fact), the Asian students spotted blacks lying in wait; they made a futile attempt to run from trouble. In the ensuing attack, one Asian student’s nose was broken, and as many as 13 ended up needing treatment at the local hospital.

Education schools regard training in handling alienated, angry, disruptive urban students who make learning so difficult for their peers as their lowest priority.

Subsequent testimony and written statements of Asian student victims is heartrending. Duyngoc Truong, a SPHS student who had been beaten, told a School Reform Commission that being let down by those in charge "hurt our bodies, it also hurt our hearts. We have the right to go to school and we need to be treated fairly." Wei Chen, president of the Chinese American Student Association, told the school board: "We have suffered a lot to get to America and we didn't come here to fight. We just want a safe environment to learn and make more friends. That's my dream."

Even before the SPHS incident, the Philadelphia Office of the Safe Schools Advocate (OSSA) had issued a blistering report about the level of violence in the system and the inability, or unwillingness, of school officials to take meaningful action. Ironically, OSSA was “defunded” this past summer. According to press accounts, “defunded” is Pennsylvania edu-speak for “we didn’t like the fact that OSSA accurately reported on this issue when we told them not to, so we closed the office and let the staff go.”

Urban school systems in general try to keep the truth about violence and chaos well hidden. A revealing 2007 report by the Department of Education’s Office of the Inspector General makes the obvious point that no school wants to be labeled as “persistently dangerous.” And as long as schools can set the criteria by which persistent danger is measured, they can escape the label.

“Can dangerous schools be great schools?” the Fordham Institute (dedicated to “advancing educational excellence”) asked in September 2009. According to New York City's annual progress reports, it continued, the answer is yes. “Not only did an astounding 97 percent of the Big Apple's schools receive A or B ratings on their 2008–2009 report cards, six of them also appear on the state's ‘most violent’ list.” In 2005, Lisa Snell of the Reason Foundation reported that in 2003–2004, if you believe the data collected from the states themselves, only 26 schools in America were dangerous.

On the question of school discipline, Secretary Duncan’s only expressed concern has been over racial disparities in discipline.

Federal data tells a much more chilling story. According to a 2000 survey conducted by the National Center for Educational Statistics (NCES), 71 percent of public elementary and secondary schools experienced at least one violent incident during the 1999–2000 school year (including rape, sexual battery other than rape, physical attacks or fights with and without a weapon, threats of physical attack with and without a weapon, and robbery with and without a weapon). In 20 percent of public schools, what NCES calls “serious violent incidents” occurred. These data, of course, do not include incidents of bullying and the host of disruptive behaviors that make teaching and learning very difficult.

And yet in 2004, Public Agenda, the highly respected nonprofit research organization, found that 61 percent of professors of education believe that teachers who have encountered discipline problems have been failing to make their lessons engaging; education schools regard training in handling alienated, angry, disruptive urban students who make learning so difficult for their peers as their lowest priority. Disorder and violence—and the complexity of dealing with the problem—are barely on their radar screens.

There was plenty of warning that SPHS could become the scene of dreadful black-on-Asian violence. This past January, USA Today called the school “a cauldron of cultural discontent.” For years, school officials and administrators who were supposed to be nurturing young lives failed to act to protect youngsters whose color apparently made their fate a matter of indifference, if not outright hostility. Not only were racial epithets hurled by black students, but the principal at a public meeting referred disparagingly to “the Asian agenda” of advocacy groups.

The difficulty of creating a school in which students feel safe and are actually learning is much harder if administrators must make sure blacks are not overrepresented and Asians underrepresented.

No adult broke a student’s nose, but adults were complicit in the violence from which the Asian students suffered. Putting aside the question of racism, disorder and violence in an inner-city school has become educational business as usual. In conventional education circles little attention is paid to the whole issue.

The Obama administration has just promised to “restore and transform” civil rights enforcement. On the question of school discipline, Secretary Duncan’s only expressed concern has been over racial disparities in discipline. For a man who comes from Chicago, one might have expected him to note the unacceptably high level of disorder and violence. Instead, he has announced his intention to “collect and monitor the data on equity”—implying that there was racism to uncover with the data properly collected. That is also Superintendent Ackerman’s working assumption. Racism “is the proverbial elephant in the room," she has said. No one racial group should be blamed for the events at SPHS, she warned. Black-on-Asian violence is no occasion to pin blame on blacks.

The DOJ’s new education section chief, steeped in NAACP-LDF culture, may also avert her gaze from the Asian victims of black mobs in an overwhelmingly black school. The LDF, on its website, has an education agenda. It lists only three concerns. The first two are protecting racial preferences and fighting for increased racial integration in schools—i.e., racially balanced school populations through quotas, if necessary. The third is described as the “school to prison pipeline,” which an undated, but clearly recent report calls “one of the most urgent challenges in education today.”

Why is it that Asian-American students are only half as likely as whites to be suspended or expelled from school?

The report describes “the punitive and overzealous tools and approaches of the modern criminal justice system [as having] seeped into our schools, serving to remove children from mainstream educational environments and funnel them onto a one-way path toward prison.” Black students, it notes, represent only 17 percent of public school enrollments nationwide, but account for 34 percent of suspensions. “Moreover, studies show that African-American students are far more likely than their white peers to be suspended, expelled, or arrested for the same kind of conduct at school.”

Evidently, it is beyond imagination that disparities in school discipline reflect disparities in the conduct that merits discipline. Why is it that Asian-American students are only half as likely as whites to be suspended or expelled from school? Does this reveal the powerful anti-white biases of our largely white teaching force today? And does it reveal anti-black hostility on the part of black administrators and teachers when they discipline disproportionately high numbers of black students?

As far as we can tell at present, the Obama’s administration’s perspective is that of the LDF. That is, the big problem with school discipline is not the failure to impose it. Rather, it is the racial disparities that appear when data on disciplined students are collected. It is very hard to make schools like SPHS safe for all those who attend it—especially when those in charge seem unprepared to stop problems before they start by insisting on a culture of civility, which the best schools do. But the difficulty of creating a school in which students feel safe and are actually learning is certainly made much harder if administrators must worry about getting the numbers right—making sure blacks are not overrepresented and Asians underrepresented when disciplined students are counted for federal reporting purposes. Obama administration officials may have their hearts in the right place—worrying about the number of blacks who are floundering in school—but their heads are badly askew.

Abigail Thernstrom is an adjunct scholar at the American Enterprise Institute and the vice chair of the U.S. Commission on Civil Rights. Her most recent book is Voting Rights—and Wrongs: The Elusive Quest for Racially Fair Elections. Tim Fay is the special assistant to the vice chair of the U.S. Commission on Civil Rights.

Obama's Misleading Medicine

2009-07-28T01:02:00.000-07:00

By Robert J. Samuelson

Monday, July 27, 2009

The most misused word in the health care debate is "reform." Everyone wants "reform," but what constitutes "reform" is another matter. If you listen to President Obama, his "reform" will satisfy almost everyone. It will insure the uninsured, control runaway health spending, subdue future budget deficits, preserve choice for patients and improve quality of care. These claims are self-serving exaggerations and political fantasies. They have destroyed what should be a serious national discussion of health care.

The health-care conundrum involves a contradiction that the administration steadfastly obscures: In the short run -- meaning four to eight years -- government cannot both insure the uninsured and rein in health spending. Here's why. The notion that the uninsured get little or no care is a myth: They now receive about 50 to 70 percent as much health care as the insured. If they become insured, they would use more health care, possibly as much as today's insured. That would increase both government and private health spending, depending on how the insurance is provided.

Until health-care costs are better controlled, expanding insurance coverage will be expensive. The president talks endlessly about the need to limit spending and eliminate waste. These are worthy goals. But changing the way medical care is delivered and paid for would take years and involve disruptive and unpopular measures. Patient co-payments might increase; networks of doctors and hospitals might displace individual practices; the tax exclusion for employer-paid health insurance might be curbed. Obama downplays the obstacles. His "reform" isn't likely to compel needed changes, partly because it's not clear what will work.

Evaluations of proposals reflect this reality. The Congressional Budget Office judges that the legislation in the House would, through expanded Medicaid and subsidies for private insurance, reduce the uninsured from 46 million in 2007 to 17 million in 2019. But the cost would be $1 trillion over a decade; of that, $239 billion would add to the budget deficit. Worse, the costs would rise faster than the sources of financing, including a tax on the wealthy. In 2019, the projection's last year, the deficit would be $65 billion. Assuming that the deficit rises 4 percent a year, the cumulative shortfall in the second decade would total about $800 billion.

But Obama sees all blue sky. "Here's what reform will mean for you," he said at a recent rally. "It will mean lower costs and more choices and coverage you can count on. Health insurance reform will save you and your family money," he said. (Note: Except for subsidies, it's doubtful families will experience savings anytime soon.) And later: "We'll also change incentives so that our doctors and our nurses can finally start providing patients with the best care and not just the most expensive care. And if we do that, then reform . . . will lower our deficits in the long run."

Contrast Obama's reassuring rhetoric with this exchange at a congressional hearing between Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee, and Douglas Elmendorf, head of the CBO.

Conrad: "From what you have seen from the product of the committees that have reported, do you see a successful effort being mounted to bend the long-term cost curve?"

Elmendorf: "No, Mr. Chairman. In the legislation that has been reported, we do not see the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount. And on the contrary, the legislation significantly expands the federal responsibility for health care costs. . . . The (cost) curve is being raised."

Judged objectively, "reform" may do exactly the opposite of what Obama says. But because the president is so well-spoken, he has the ability to make misleading statements sound reasonable or sophisticated. Still, they're misleading.

The administration had to make choices; it could emphasize expanded insurance coverage ("access") or cost control, but not both. It chose coverage, embracing the long-standing liberal grail of "universal" insurance. Millions of Americans would receive more health care, though how much their health would improve is uncertain (the administration can't logically argue that much health care is wasteful and also that the uninsured will automatically benefit from more of it). Many with insurance would gain the peace of mind that they won't lose it.

But what helps many Americans as individuals may hurt society as a whole. That's the paradox. Unchecked health spending is depressing take-home pay, squeezing other government programs -- state and local programs as well as federal -- and driving up taxes and budget deficits. The president has said all of this; he simply isn't doing much about it. He offers the illusion of "reform" while perpetuating the status quo of four decades: expand benefits, talk about controlling costs. The press should put "reform" in quote marks, because this is one "reform" that might leave the country worse off.

What is Liberalism? It's Discrimination Against Asian-Americans

2009-03-29T01:05:00.000-07:00

New UC admissions policy gives white students a better chance, angers Asian-American community

By Lisa M. Krieger

Mercury News
Posted: 03/27/2009 07:55:18 PM PDT

A new University of California admissions policy, adopted to increase campus diversity, could actually increase the number of white students on campuses while driving down the Asian population.

Now angry Asian-American community leaders and educators are attacking the policy as ill-conceived, poorly publicized and discriminatory.

"It's affirmative action for whites," said UC-Berkeley professor Ling-chi Wang. "I'm really outraged "... and profoundly disappointed with the institution."

At an Asian Pacific Americans in Higher Education conference Friday in San Francisco, Asian activists also noted the policy will result in negligible increases in African-American students and only a modest climb in the number of Latinos. But it's the drop in the already significant Asian count that has many in that community so upset.

Although Asians account for only 12 percent of the state's population, they now represent 37 percent of UC admissions — the single largest ethnic group. At UC-Berkeley, 46 percent of the freshman class is Asian. There are dormitories with Asian themes and spicy bowls of pho are served up in the Bear's Lair cafeteria.

Under the new policy, according to UC's own estimate, the proportion of Asian admissions would drop as much as 7 percent, while admissions of whites could rise by up to 10 percent.

"The UCs are a means of upward mobility," said Anthony Lin, a San Jose resident who is a graduate student at University of California-Los Angeles. "The University of California, because it is a research institution, is very prestigious."

More diversity

Since its adoption by the UC Regents in February, the policy has triggered Asian suspicions of the UC entry system not felt since the mid-1980s, when a change in admissions policy caused a decline in Asian undergraduate enrollment. In 1989, then-UC-Berkeley Chancellor Ira Michael Heyman apologized for the policy.

"I fear a general sense that there are too many Asians in the UC system," said Patrick Hayashi, former UC associate president.

In this newest overhaul of eligibility requirements, UC has eliminated SAT subject tests — which Asians tend to do well on.

Those critical of the proposed plan vow to get it reversed by appealing to those who hold UC's purse strings: state legislators. On Tuesday, two panels of the California Legislature will jointly hold a hearing to review the policy.

Meanwhile, supporters of the change, which results from a faculty study and is backed by president Mark G. Yudof, see it as a way to ease the widening achievement gap on their campuses. The impact of the new policy, according to UC's preliminary analysis, would be to simplify the application process and cast a wider net among promising low-income students.

It's a consequential shift for the UC system, reflecting its effort to make UC more accessible. The new policy applies to students entering college in fall 2012; they are now high school freshmen.

More than a decade after California passed Proposition 209, voting to eliminate racial preferences, university administrators have struggled to create a better balance on campus. The use of a strict meritocracy has been blamed on the rise of "the Asian campus." Some say it has come at the expense of historically underrepresented blacks and Hispanics — as well as whites.

"The president would not have supported the policy had he not felt it was fair and created opportunity," said Nina Robinson, UC's director of policy and external affairs for student affairs.

Many students — especially low-income and/or minority students — become ineligible to apply because they do not take the subject matter tests, she said.

Flawed report

But an analysis of the change predicts that the number of Asians admitted to UC could decrease because Asians tend to excel on the "subject tests," which are no longer part of the application.

The number of admitted whites could increase, because more weight will be given to the "reasoning SAT," which favors American natives.

African-Americans and Latinos could benefit slightly from the expanded class-ranking criteria because top students from troubled schools such as San Jose's Lick High School could be UC-eligible.

Critics say they are frustrated because UC has not made public the statistical analysis on which their decision was based.

But the report that created the data for that analysis, called the 2007 CPEC Eligibility Study, is deeply flawed, according to New York University education professor Robert Teranishi.

"It shows a wide margin of error for Asians. It is not a good predictive model, perhaps because the Asian population is very diverse. 'Asian' represents a lot of different demographic backgrounds," he said. "It should not be used to guide major policy decisions." Wang, who compared it to "peddling snake oil," complained that Asians had not been invited to participate in the process.

"The changes over the last two years took place inside the ivory tower and closed the door, without the public's knowledge," he said.

Added Hayashi: "A public university should be more responsive. Private schools can do anything they want. But public schools have a different set of objectives. "It will have a devastating impact on our community. It is a fatal mistake to think it will blow over."

The university has the power to set admissions criteria, said Steve Boilard of the California Legislative Analyst's Office. But the Legislature approves its $3 billion in funding every year.

"This is a dynamic where we need to work together to ensure its mission," he said.

What's Up With All the Tax Probkems with Obama's Staff?

2009-02-05T23:28:00.000-08:00

No wonder the Democrats love taxes. They don’t pay ‘em. I think we could eliminate the federal budget deficit if the Democrats just paid the taxes they owe.

Nathan Moore: “The problem here, at least in my view, is not so much that Solis’ husband had some rather antique tax liens hanging around, but that the Obama administration’s vetting process has revealed itself to be decidedly incompetent. Or, more accurately, arrogant, which really is just a subform of incompetence. . . . The message is clear, no matter how earnestly the president employs Newspeak rhetoric in a vain attempt to muddle it - there are two sets of rules, one for us, and one for them. If they truly believed there was one set of rules, the administration would have taken it upon itself to weed out the tax-encumbered nominees from the process, but they didn’t - and that speaks volumes.”

I almost forgot to mention the problems of Democratic Congressman Charles Rangel!

Solis Nomination Vote Delayed After Tax Issue Arises

2009-02-05T23:25:00.000-08:00

By Holly Rosenkrantz

Feb. 5 (Bloomberg) -- A Senate committee put off its vote on Representative Hilda Solis’s nomination as labor secretary, one day after her husband paid to settle tax liens.

White House Press Secretary Robert Gibbs said Solis’s nomination wasn’t in trouble even though the Senate Committee on Health, Education, Labor and Pensions today delayed the vote. Her husband paid about $6,400 yesterday to settle the liens.

Solis is the fourth of President Barack Obama’s nominees to top posts whose family’s taxes have become an issue in the Senate’s confirmation process. Three have said they had failed to pay all their taxes, and two withdrew from consideration.

Gibbs said Solis wasn’t involved in the liens and shouldn’t be blamed. “We’re not going to penalize her for her husband’s mistakes,” Gibbs told reporters at the White House. “Her tax returns are in order.”

Former Senator Tom Daschle, a South Dakota Democrat, withdrew Feb. 3 as nominee for health secretary after questions arose about errors on his federal taxes. Hours earlier, Nancy Killefer withdrew from consideration as deputy director of the White House Office of Management and Budget. She also cited a personal “tax issue.”

Timothy Geithner was confirmed as Treasury secretary on Jan. 2, overcoming concerns that he underpaid federal taxes in previous years.

Auto Repair Business

Solis’s accountant was unaware of the tax liens until about two days ago, White House spokesman Tommy Vietor said. The liens had been outstanding for as long as 16 years against an auto repair business belonging to Solis’s husband, Sam Sayyad. The liens were first reported today by USA Today.

“He believes he paid the taxes,” Vietor said. “He believes they are only county fees and assessments, and he is planning to appeal.”

The couple filed their taxes jointly. The liens were on a business for which Sayyad was the sole proprietor.

Solis, a California Democrat, has already had her nomination delayed while Republicans examine her support for union legislative goals such as the Employee Free Choice Act, which would make it easier to unionize. Labor leaders today said it was important that the Senate confirm her nomination.

“As the daughter of two immigrant workers and proud union members, Hilda Solis is the embodiment of the American dream,” said Andrew Stern, president of the Service Employees International Union.

Senator Michael Enzi of Wyoming, the top Republican on the committee considering her nomination, will examine the new issue, said Craig Orfield, Enzi’s spokesman. Enzi hasn’t yet decided how he will vote.

“Obviously, there are new tax issues to review now,” Orfield said. “It’s going to take a few days” because “we’re trying to get answers and verify a lot of new information.”

To contact the reporter on this story: Holly Rosenkrantz in Washington at hrosenkrantz@bloomberg.net
Last Updated: February 5, 2009 18:19 EST

Daschle Withdraws Nomination Following Tax Questions

2009-02-05T23:24:00.000-08:00

By Kristin Jensen and Edwin Chen

Feb. 3 (Bloomberg) -- Former Senator Tom Daschle withdrew as nominee for secretary of health and human services after questions arose about errors on his federal taxes.

Hours earlier, another of President Barack Obama’s nominees, Nancy Killefer, withdrew from consideration as deputy director of the White House Office of Management and Budget. She also cited a personal “tax issue.”

The twin withdrawals in rapid succession dealt Obama his worst setback as president, threatening to delay his efforts to enact comprehensive health care overhaul and inject greater accountability into his administration.

Fixing the nation’s health system “will require a leader who can operate with the full faith of Congress and the American people and without distraction,” Daschle, 61, said in a statement today. “Right now, I am not that leader.”

Obama said in a statement that he accepted Daschle’s decision with “sadness and regret.” In a series of previously scheduled interviews with television networks later in the day, Obama took responsibility for the demise of the nomination.

“Did I screw up in this situation? Absolutely,” Obama told NBC. “I’m willing to take my lumps.”

He said the episode, while “an embarrassment,” should not detract from his agenda.

Amended Returns

Daschle’s nomination faced delays after he amended three years of returns on Jan. 2 for unreported income, including personal use of a car and driver provided by Leo Hindery Jr., founder of the private-equity firm InterMedia Advisors. Daschle, who sat on the firm’s board, paid $140,000 in back taxes and interest.

Killefer was to oversee White House efforts to make government more accountable for its spending.

In her letter to Obama, Killefer, 55, said she came “to realize in the current environment that my personal tax issue of D.C. unemployment tax could be used to create exactly the kind of distraction and delay those duties must avoid.”

Daschle’s withdrawal stunned his former colleagues in the Senate, many of whom had defended him.

“It’s regrettable,” said Senate Finance Committee Chairman Max Baucus, a Montana Democrat. “I thought he was going to get confirmed.” Daschle also was to have held a senior post within the White House.

Daschle “did the honorable thing to spare his family, the president and his colleagues in the Senate from a tough political battle,” Illinois Senator Dick Durbin, the Senate’s No. 2 Democrat, said.

Health Care Role

The withdrawal “really sets us back a step” in the drive to overhaul the health-care system because “there are very few people who could have stepped into the role he was going to play,” Durbin said.

Daschle’s tax errors are part of “an unfortunate trend here” that shows “some serious problems with the vetting process” in the Obama administration, Republican Senator John Cornyn of Texas said in an interview yesterday.

Like Daschle and Killefer, Treasury Secretary Timothy Geithner also faced questions about back taxes he had to pay. He was confirmed Jan. 26.

Today’s events are all the more reason for Obama to push his economic stimulus bill through Congress quickly and chalk up a big win as quickly as possible, said analyst Paul Begala, a onetime top adviser to President Bill Clinton.

“It all depends on passing a successful economic plan,” he said. “The country believes in this new president and wants him to succeed.”

Economy Is Key

“This is somewhere between a huge embarrassment and, at least temporarily, debilitating,” said Washington-based political analyst Stuart Rothenberg. “But if a year from now the economy is coming back and the U.S. looks strong, and our international reputation is up, nobody is going to worry about this other stuff.”

Three of Obama’s nominees now have withdrawn before going through the confirmation process. Obama’s first pick to lead the department, New Mexico Governor Bill Richardson, withdrew last month amid a federal investigation into the state’s government.

In seeking replacements for Daschle and Killefer, the Obama White House now must adhere to “zero-tolerance for vetting problems,” and Obama must pick “ivory snow” nominees with spotless records, said Charlie Cook, publisher of the Cook Political Report.

Obama Pledge

That job is no mean feat in part because of Obama’s own campaign pledge to limit the role of lobbyists in his administration, as well as to instill a new era of personal responsibility and government accountability.

“Obama set incredibly high standards” that may continue to “expose him to suggestions of hypocrisy,” Cook said.

Still awaiting confirmation are William Lynn, Obama’s nominee to be deputy defense secretary, and William Corr, the president’s pick as the next deputy secretary of health and human services.

Lynn, 55, is senior vice president in Raytheon’s Washington office and oversees government lobbying for what is the nation’s fourth-largest defense contractor. He was a registered lobbyist until March 2008.

Critics said Corr, executive director of the nonprofit advocacy group Campaign for Tobacco-Free Kids, acted as a lobbyist. A campaign spokesman, Joel Spivak, said Corr “was not ever a fulltime lobbyist.”

“Obama came in with such high expectations and lofty rhetoric,” said Rothenberg. “Now he’s encountering the difficulties of governing.”

Vetting Process

The Daschle and Killefer incidents suggested less-than- rigorous background checks on potential jobholders.

“The question is whether this somehow uncovers some weaknesses in the early days of the administration that will show up later,” Rothenberg said.

At the White House, press secretary Robert Gibbs said Obama retains confidence in the vetting process.

“The president has confidence in the processing,” Gibbs said. “The bar we’ve set is higher” than any past administration, he said, adding that it would take more than two weeks for the president to make good on his pledge to bring change to Washington.

“Thankfully, we’ve got four years to try,” Gibbs said.

The biggest casualty, several analysts said, may be Obama’s aspirations to overhaul the U.S. health care system.

“Having such a high powered, well-wired guy as Daschle as the quarterback on health care was going to be huge,” Cook said.

“I’m sure they’ll get somebody that’s quite competent. But they’re not going to be able to step in the same way that Tom Daschle did,” he said. “So of course it’s a setback.”

To contact the reporters on this story: Kristin Jensen in Washington at kjensen@bloomberg.net; Edwin Chen in Washington at Echen32@bloomberg.net

Tax issues prompt Obama nominee to withdraw

2009-02-05T23:15:00.000-08:00

Another one bites the dust.

February 3, 2009

WASHINGTON (CNN) -- Nancy Killefer withdrew her nomination Tuesday to become the Obama administration's chief performance officer, citing unspecified problems with District of Columbia unemployment tax.

The post is a new one, set up to help the incoming administration "scrub" waste from the federal budget. But in a letter to President Barack Obama, Killefer said her tax issue "could be used to create exactly the kind of distraction and delay those duties must avoid."

"Because of this I must reluctantly ask you to withdraw my name from consideration," she wrote.

Killefer was nominated to be deputy director of management at the Office of Management and Budget, and her duties as chief performance officer were added on. The OMB portion required her to be confirmed by the Senate.

Killefer is the third Obama nominee to face tax troubles, after questions about Treasury Secretary Timothy Geithner and former Senate Majority Leader Tom Daschle, Obama's pick for health and human services secretary, who also withdrew Tuesday.

A senior administration official told CNN that Killefer's tax issues dealt with household help, and that Obama aides had expected her to be raked over the coals after the Geithner and Daschle nominations. The official said that Killefer had been upfront about the matter and that Obama's staff had reviewed the questions raised and decided they were comfortable with her before the announcement of her nomination.

Geithner, whose office oversees the Internal Revenue Service, was confirmed after admitting that he had failed to pay in timely fashion more than $34,000 in self-employment taxes while he worked at the International Monetary Fund from 2001 to 2004. The issue was caught during a 2006 audit, and Geithner told the Senate that the debt was incurred unintentionally.

Daschle, who had been awaiting confirmation, previously had acknowledged that he failed to pay taxes on a car and driver provided by a friend and on $80,000 in consulting fees after he left the Senate. He called the matter a mistake and said he paid his taxes in full, but he announced Tuesday that he "will not be a distraction" to the administration. Obama said he accepted Daschle's withdrawal "with sadness and regret."

Killefer, a senior director at the management consulting firm McKinsey & Company, was nominated last month as Obama pledged to cut unnecessary spending and bring "a new sense of responsibility to Washington." Officials said her position would restore fiscal order and reform government.

"We can no longer afford to sustain the old ways when we know there are new and more efficient ways of getting the job done," Obama said in announcing her nomination.

The Congressional Budget Office announced last month that the deficit for the current budget year will be $1.2 trillion. Obama said at the time the government would have to "make tough choices" in the budget "to address both the deficit of dollars and the deficit of trust."

Killefer served as assistant secretary for management and chief financial officer of the Treasury Department during the Clinton administration.

CNN's Ed Henry contributed to this report.

Geithner's failure to pay taxes just an 'honest mistake'?

2009-01-19T01:17:00.000-08:00

The Chicago Sun-Times
January 17, 2009

BY ROGER SIMON
Would it be OK if I stopped paying my taxes until Barack Obama names me to be his secretary of the Treasury?

That is a deal I would like to get. That is the deal financial wizard Timothy Geithner got.

He didn't pay all of his federal taxes for years. Then, after Obama decided to name him Treasury secretary, the president-elect's vetting team discovered Geithner's little oversight.

Not paying your taxes is considered serious for some people. But not for Geithner, a Wall Street "wonder boy" -- he is 47 -- who is president of the Federal Reserve Bank of New York and was instrumental in putting together the recent Wall Street bailout package.

You would think a guy like this would know about paying taxes, but no. Mistakes were made.

Geithner failed to pay the proper self-employment taxes for 2001, 2002, 2003 and 2004, even though he was sent documents telling him he had to do so.

But in 2006, Geithner got a document he couldn't ignore. The Internal Revenue Service sent Geithner a notice saying he had not paid his taxes for 2003 and 2004, and Geithner paid up.

But he did not pay up for 2001 and 2002, even though he must have known that he skipped taxes for those years, too.

He didn't pay those taxes until Obama decided he wanted Geithner to head the Treasury and sent vetters to look into Geithner's past.

The vetters discovered Geithner's little tax error in November and told Geithner. Then Geithner paid up, with interest. The vetters also told Obama, of course.

According to an article by Politico's Craig Gordon and Amie Parnes, Obama "decided to push ahead with the nomination anyway because he 'still wanted him.'"

At the end of the day, a source said, "Barack decided that he was the best person for a really important job."

OK, I get it.

The economy is teetering on the brink, and we need to cut corners a little. We can't be all that scrupulous and nitpicky when the future of the nation is at stake.

So in November, Team Obama announced that Geithner had this little problem and was paying his back taxes with interest and that it was all an honest mistake and no big deal, right?

Wrong. They decided to keep it a secret. But the Wall Street Journal discovered it and blew the whistle Tuesday.

The Senate Finance Committee has been looking into Geithner -- it has to vote on his appointment -- and discovered something else.

According to Gordon and Parnes: "In addition, Geithner included payments to overnight camps in calculating his dependent child care credit in 2001, 2004 and 2005.

His accountant informed him in 2006 that the camps were not allowable expenses. The committee notes that Geithner did not file amended returns to fix the mistake."

Can I get this deal? Can I ignore my accountant? He is always telling me that my trips to Vegas are not allowable under "necessary mental health expenses," and fool that I am, I keep listening to him.

The Geithner foul-up is different from the Bill Richardson foul-up. The Obama vetters were unable to get Richardson to give them all of the background information they needed, but Obama went ahead and appointed Richardson to the Cabinet anyway. Then that blew up, and Richardson withdrew his name.

With Geithner, the vetters found the bad stuff -- yay! -- but everybody thought they could sweep it under the rug. Boo.

Now Republicans are forcing a delay on the Geithner hearing until after Obama is inaugurated.

Team Obama says Geithner made "honest mistakes."

OK. I'll buy that. But as secretary of the Treasury, Geithner would be in charge of the Internal Revenue Service. And we will see how easy he is on other people when they say they made "honest mistakes."

Liberals Are Cheap Bastards

2008-12-22T10:16:00.013-08:00

The "great" Nick Kristof of the New York TImes states the obvious in an surprisingly refreshing op-ed:

December 21, 2008
Op-Ed Columnist
Bleeding Heart Tightwads
By NICHOLAS D. KRISTOF

This holiday season is a time to examine who’s been naughty and who’s been nice, but I’m unhappy with my findings. The problem is this: We liberals are personally stingy.

Liberals show tremendous compassion in pushing for generous government spending to help the neediest people at home and abroad. Yet when it comes to individual contributions to charitable causes, liberals are cheapskates.

Arthur Brooks, the author of a book on donors to charity, “Who Really Cares,” cites data that households headed by conservatives give 30 percent more to charity than households headed by liberals. A study by Google found an even greater disproportion: average annual contributions reported by conservatives were almost double those of liberals.

Other research has reached similar conclusions. The “generosity index” from the Catalogue for Philanthropy typically finds that red states are the most likely to give to nonprofits, while Northeastern states are least likely to do so.

The upshot is that Democrats, who speak passionately about the hungry and homeless, personally fork over less money to charity than Republicans — the ones who try to cut health insurance for children.

“When I started doing research on charity,” Mr. Brooks wrote, “I expected to find that political liberals — who, I believed, genuinely cared more about others than conservatives did — would turn out to be the most privately charitable people. So when my early findings led me to the opposite conclusion, I assumed I had made some sort of technical error. I re-ran analyses. I got new data. Nothing worked. In the end, I had no option but to change my views.”

Something similar is true internationally. European countries seem to show more compassion than America in providing safety nets for the poor, and they give far more humanitarian foreign aid per capita than the United States does. But as individuals, Europeans are far less charitable than Americans.

Americans give sums to charity equivalent to 1.67 percent of G.N.P., according to a terrific new book, “Philanthrocapitalism,” by Matthew Bishop and Michael Green. The British are second, with 0.73 percent, while the stingiest people on the list are the French, at 0.14 percent.
(Looking away from politics, there’s evidence that one of the most generous groups in America is gays. Researchers believe that is because they are less likely to have rapacious heirs pushing to keep wealth in the family.)

When liberals see the data on giving, they tend to protest that conservatives look good only because they shower dollars on churches — that a fair amount of that money isn’t helping the poor, but simply constructing lavish spires.

It’s true that religion is the essential reason conservatives give more, and religious liberals are as generous as religious conservatives. Among the stingiest of the stingy are secular conservatives.
According to Google’s figures, if donations to all religious organizations are excluded, liberals give slightly more to charity than conservatives do. But Mr. Brooks says that if measuring by the percentage of income given, conservatives are more generous than liberals even to secular causes.

In any case, if conservative donations often end up building extravagant churches, liberal donations frequently sustain art museums, symphonies, schools and universities that cater to the well-off. (It’s great to support the arts and education, but they’re not the same as charity for the needy. And some research suggests that donations to education actually increase inequality because they go mostly to elite institutions attended by the wealthy.)

Conservatives also appear to be more generous than liberals in nonfinancial ways. People in red states are considerably more likely to volunteer for good causes, and conservatives give blood more often. If liberals and moderates gave blood as often as conservatives, Mr. Brooks said, the American blood supply would increase by 45 percent.

So, you’ve guessed it! This column is a transparent attempt this holiday season to shame liberals into being more charitable. Since I often scold Republicans for being callous in their policies toward the needy, it seems only fair to reproach Democrats for being cheap in their private donations. What I want for Christmas is a healthy competition between left and right to see who actually does more for the neediest.

Of course, given the economic pinch these days, charity isn’t on the top of anyone’s agenda. Yet the financial ability to contribute to charity, and the willingness to do so, are strikingly unrelated. Amazingly, the working poor, who have the least resources, somehow manage to be more generous as a percentage of income than the middle class.

So, even in tough times, there are ways to help. Come on liberals, redeem yourselves, and put your wallets where your hearts are

Getting Out of the Credit Mess

2008-12-09T10:55:00.000-08:00

The last thing we need is policy that encourages or incurs more debt

The Wall Street Journal
December 9, 2008

By HARVEY GOLUB

The federal government has announced a series of actions in the past few weeks ostensibly designed to make consumer credit more available and invigorate the economy. Obviously, the country is in recession and the recession is likely to get deeper. But will these actions reduce the depth and duration of the recession? Or, in the long run, will they make matters even worse?

Last month the Federal Reserve and the Treasury announced that the government would buy $500 billion in mortgages guaranteed by Fannie Mae and Freddie Mac. They also announced they would lend $200 billion against securities backed by car loans, student loans, credit-card debt, and small business loans. The purpose of both moves is to create lending capacity across key elements of the consumer sector.

Most recently, the government announced that it would subsidize new home mortgages by one percentage point, effectively lowering monthly payments on a 30-year loan by about 10%. The stated reason was to help the housing market, which is crucial to an economic recovery.
With each announcement, the Fed and Treasury were careful to point out they might take additional action in support of these sectors and others as well. And it is a virtual certainty the government will cobble together some program to reduce foreclosures to keep people in their homes. I'm sure that, as other industries or sectors come under pressure, there will be new programs to help. The automobile industry will not be the last to come to Washington.

To begin to understand today's problem, we have to have a sense of how we got there. Between 1994 and second quarter 2008, the U.S, housing stock more than doubled in value from $7.6 trillion to $19.4 trillion. Almost three quarters of that increase was due to a speculative bubble, the root cause of which was government policies designed to increase home ownership, largely among people who would be considered nonprime borrowers -- i.e., people without sufficient documented income or employment history and little or no savings or credit history.

The intellectual start of this mess was in a flawed Boston Federal Reserve study published in 1992 that purported to show that minorities were treated less well than whites. That study led to increased political pressure on banks to modify their standards with increased emphasis through the Community Reinvestment Act, and aided by U.S. Department of Housing and Urban Development regulations in the Clinton administration that required parity of outcomes in the lending process.

The effect of all of this meddling was compounded by the lax or incompetent supervision of Fannie Mae and Freddie Mac. All in all, the government got into the business of encouraging and then forcing lending institutions to make mortgage loans to people who could not pay them back. What we ended up with is a failure of government, which we have erroneously termed a failure of capitalism.

The standards applied to these subprime loans began to be applied to what heretofore had been prime borrowers who also increasingly became overextended. But, as housing prices increased, owners cashed out their equity and bought cars, appliances and other items, including using the freed-up equity to pay for everyday living purchases. Over the past decade alone, U.S. households have taken on some $8 trillion in debt, bringing the nation's current consumer debt load to $14 trillion.

This cynical and unsustainable cycle was abetted by mortgage originators who had little interest in making sure loans were good quality, investment banks that securitized and packaged these loans, rating agencies who forgot fundamental laws of gravity, and purchasers who bought securities they could not possibly understand. This was fueled by borrowers who committed fraud and bought houses, or speculated in them, when there was no realistic chance they could afford them.

All of this led to a huge overleveraging in the consumer market. The increase in debt burden fueled much of the nation's economic growth over recent decades, aided somewhat by increases in productivity and underpinned by easy money from the Federal Reserve. Since consumers represent about 70% of the nation's GNP, and since leverage cannot increase forever, we were bound to see the bubble burst and eventually enter a substantial recession.

So, are the current credit easing actions likely to be helpful or not? In my judgment, measures to create liquidity are likely to be helpful. Financial institutions that lend money to credit-worthy people for reasonable purposes have experienced a substantial reduction in available funding from which they can make loans. Hence the programs to support the securitization markets are sensible because money used for this purpose will be lent and used for purchases. Programs that deliver a short-term reduction in mortgage rates will, at the margin, help absorb some of the available housing stock, reducing the time it will take for housing to reach market-clearing levels.

However, measures intended to reduce foreclosures, per se, are likely to be ineffective at best and morally flawed at worst. When analysts say that people are being foreclosed because house values have declined they are missing the point. A large number of foreclosures are taking place because people can no longer refinance and take value out. They could not afford the houses to begin with and greed or stupidity -- not a falling real-estate market -- have caused their problems. On the other hand, measures to subsidize homeowners facing foreclosures because they have lost their jobs can be helpful.

In the longer term, our nation must delever -- either by reducing the amounts of borrowing or by increasing consumer earning power through economic growth. Relying on growth alone implies a growth rate higher than we have ever experienced in our nation's history. Nonetheless, our public policy must encourage economic growth by lowering tax rates for corporations and individuals while at the same time avoiding what would be growth killers, including "card check" legislation and trade restrictions. Public policy should support higher savings rates, and avoid encouraging increased consumer spending funded by further debt, which may be helpful in the short term but catastrophic in the longer term.

It is not only consumers that must delever. Governments must as well. State and local governments across the nation have incurred direct and indirect debt or obligations in the tens of trillions of dollars -- obligations that cannot be met under any set of reasonable circumstances without an explosion in growth and tax revenues. In fact, we continue to incur debt for politically palatable ideas, like rebate checks, which have very little stimulative power but increase the depth of the hole we're in.

To solve this problem for ourselves and future generations, we must get back to our historic reliance on personal responsibility and market forces, and get government out of economic management. It doesn't do a good job, as the current economic mess amply proves.

Mr. Golub is a former chairman and CEO of American Express.

The night we waved goodbye to America... our last best hope on Earth

2008-11-09T23:39:00.000-08:00

The Daily Mail
November 8, 2008
By Peter Hitchens

Anyone would think we had just elected a hip, skinny and youthful replacement for God, with a plan to modernise Heaven and Hell – or that at the very least John Lennon had come back from the dead.

The swooning frenzy over the choice of Barack Obama as President of the United States must be one of the most absurd waves of self-deception and swirling fantasy ever to sweep through an advanced civilisation. At least Mandela-worship – its nearest equivalent – is focused on a man who actually did something.

I really don’t see how the Obama devotees can ever in future mock the Moonies, the Scientologists or people who claim to have been abducted in flying saucers. This is a cult like the one which grew up around Princess Diana, bereft of reason and hostile to facts.

It already has all the signs of such a thing. The newspapers which recorded Obama’s victory have become valuable relics. You may buy Obama picture books and Obama calendars and if there isn’t yet a children’s picture version of his story, there soon will be.
Proper books, recording his sordid associates, his cowardly voting record, his astonishingly militant commitment to unrestricted abortion and his blundering trip to Africa, are little-read and hard to find.

If you can believe that this undistinguished and conventionally Left-wing machine politician is a sort of secular saviour, then you can believe anything. He plainly doesn’t believe it himself. His cliche-stuffed, PC clunker of an acceptance speech suffered badly from nerves. It was what you would expect from someone who knew he’d promised too much and that from now on the easy bit was over.

He needn’t worry too much. From now on, the rough boys and girls of America’s Democratic Party apparatus, many recycled from Bill Clinton’s stained and crumpled entourage, will crowd round him, to collect the rich spoils of his victory and also tell him what to do, which is what he is used to.

Just look at his sermon by the shores of Lake Michigan. He really did talk about a ‘new dawn’, and a ‘timeless creed’ (which was ‘yes, we can’). He proclaimed that ‘change has come’. He revealed that, despite having edited the Harvard Law Review, he doesn’t know what ‘enormity’ means. He reached depths of oratorical drivel never even plumbed by our own Mr Blair, burbling about putting our hands on the arc of history (or was it the ark of history?) and bending it once more toward the hope of a better day (Don’t try this at home).

I am not making this up. No wonder that awful old hack Jesse Jackson sobbed as he watched. How he must wish he, too, could get away with this sort of stuff.

And it was interesting how the President-elect failed to lift his admiring audience by repeated – but rather hesitant – invocations of the brainless slogan he was forced by his minders to adopt against his will – ‘Yes, we can’. They were supposed to thunder ‘Yes, we can!’ back at him, but they just wouldn’t join in. No wonder. Yes we can what exactly? Go home and keep a close eye on the tax rate, is my advice. He’d have been better off bursting into ‘I’d like to teach the world to sing in perfect harmony’ which contains roughly the same message and might have attracted some valuable commercial sponsorship.

Perhaps, being a Chicago crowd, they knew some of the things that 52.5 per cent of America prefers not to know. They know Obama is the obedient servant of one of the most squalid and unshakeable political machines in America. They know that one of his alarmingly close associates, a state-subsidised slum landlord called Tony Rezko, has been convicted on fraud and corruption charges.

They also know the US is just as segregated as it was before Martin Luther King – in schools, streets, neighbourhoods, holidays, even in its TV-watching habits and its choice of fast-food joint. The difference is that it is now done by unspoken agreement rather than by law.
If Mr Obama’s election had threatened any of that, his feel-good white supporters would have scuttled off and voted for John McCain, or practically anyone. But it doesn’t. Mr Obama, thanks mainly to the now-departed grandmother he alternately praised as a saint and denounced as a racial bigot, has the huge advantages of an expensive private education. He did not have to grow up in the badlands of useless schools, shattered families and gangs which are the lot of so many young black men of his generation.

If the nonsensical claims made for this election were true, then every positive discrimination programme aimed at helping black people into jobs they otherwise wouldn’t get should be abandoned forthwith. Nothing of the kind will happen. On the contrary, there will probably be more of them.

And if those who voted for Obama were all proving their anti-racist nobility, that presumably means that those many millions who didn’t vote for him were proving themselves to be hopeless bigots. This is obviously untrue.

I was in Washington DC the night of the election. America’s beautiful capital has a sad secret. It is perhaps the most racially divided city in the world, with 15th Street – which runs due north from the White House – the unofficial frontier between black and white. But, like so much of America, it also now has a new division, and one which is in many ways much more important. I had attended an election-night party in a smart and liberal white area, but was staying the night less than a mile away on the edge of a suburb where Spanish is spoken as much as English, plus a smattering of tongues from such places as Ethiopia, Somalia and Afghanistan.

As I walked, I crossed another of Washington’s secret frontiers. There had been a few white people blowing car horns and shouting, as the result became clear. But among the Mexicans, Salvadorans and the other Third World nationalities, there was something like ecstasy.

They grasped the real significance of this moment. They knew it meant that America had finally switched sides in a global cultural war. Forget the Cold War, or even the Iraq War. The United States, having for the most part a deeply conservative people, had until now just about stood out against many of the mistakes which have ruined so much of the rest of the world.

Suspicious of welfare addiction, feeble justice and high taxes, totally committed to preserving its own national sovereignty, unabashedly Christian in a world part secular and part Muslim, suspicious of the Great Global Warming panic, it was unique.

These strengths had been fading for some time, mainly due to poorly controlled mass immigration and to the march of political correctness. They had also been weakened by the failure of America’s conservative party – the Republicans – to fight on the cultural and moral fronts.

They preferred to posture on the world stage. Scared of confronting Left-wing teachers and sexual revolutionaries at home, they could order soldiers to be brave on their behalf in far-off deserts. And now the US, like Britain before it, has begun the long slow descent into the Third World. How sad. Where now is our last best hope on Earth?

Work Will Set You Free

2008-11-07T10:52:00.000-08:00

From the Official Obama Presidential Website:

The Obama Administration will call on Americans to serve in order to meet the nation’s challenges. President-Elect Obama will expand national service programs like AmeriCorps and Peace Corps and will create a new Classroom Corps to help teachers in underserved schools, as well as a new Health Corps, Clean Energy Corps, and Veterans Corps. Obama will call on citizens of all ages to serve America, by developing a plan to require 50 hours of community service in middle school and high school and 100 hours of community service in college every year.

If Obama is still in office when my children reach middle school (God help us if he is), I will refuse to participate in this program. My family will not be coerced into mandatory "volunteer" work, an oxymoron if I've ever heard one. We already donate plenty of our time and money towards helping others ON OUR OWN TERMS.

President Barack Obama

2008-11-05T13:30:00.000-08:00

Here are few predictions for the next four years (courtesy of Steven Den Beste):

1. Obama's "hold out your hand to everyone" foreign policy is going to be a catastrophe. They'll love it in Europe. They're probably laughing their heads off about it in the middle east already.

2. The US hasn't suffered a terrorist attack by al Qaeda since 9/11, but we'll get at least one during Obama's term.

3. We're going to lose in Afghanistan.

4. Iran will get nuclear weapons. There will be nuclear war between Iran and Israel. (This is the only irreversibly terrible thing I see upcoming, and it's very bad indeed.)

5. There will eventually be a press backlash against Obama which will make their treatment of Bush look mild. Partly that's going to be because Obama is going to disappoint them just as much as all his other supporters. Partly it will be the MSM desperately trying to regain its own credibility, by trying to show that they're not in his tank any longer. And because of that they are eventually going to do the reporting they should have done during this campaign, about Obama's less-than-savory friends, and about voter fraud, and about illegal fund-raising, and about a lot of other things.

6. Obama will not be re-elected in 2012. He may even end up doing an LBJ and not even running again.

Hockey moms and capital markets

2008-10-07T21:44:00.000-07:00

Asia Times
October 7, 2008
by Spengler

Why do Asian investors depend on American capital markets? Given the near breakdown of key sectors of the American market, one might expect Asians to bring their money home. Quite the opposite has happened: Asian currencies have fallen sharply against the American dollar.

On my desk is a draft paper by a prominent Asian politician, sent to me privately for comment. It calls on Asians to take charge of their own financial destiny and invest their money in Asian markets rather than into the maelstrom of American markets. Privately, I advised the leader in question not to publish it. It will do no good. Asian capital markets cannot absorb Asia's savings.

What does America have that Asia doesn't have? The answer is, Sarah Palin - not Sarah Palin the vice presidential candidate, but Sarah Palin the "hockey mom" turned small-town mayor and reforming Alaska governor. All the PhDs and MBAs in the world can't make a capital market work, but ordinary people like Sarah Palin can. Laws depend on the will of the people to enforce them. It is the initiative of ordinary people that makes America's political system the world's most reliable.

America is the heir to a long tradition of Anglo-Saxon law that began with jury trial and the Magna Carta and continued through the English Revolution of the 17th century and the American Revolution of the 18th. Ordinary people like Palin are the bearers of this tradition.

Outside of the United States, the young governor of Alaska has become a figure of ridicule - someone who did not own a passport until last year and who quaintly believes that her state's proximity to Russia gives her insights on foreign policy. How, my European friends ask, was it possible for such an an ignorant bumpkin to become a candidate for America's second-highest office? They don't understand America.

Provincial America depends on the initiative of ordinary people to get through the day. America has something like an Education Ministry, but it has little money to dispense. Americans pay for most of their school costs out of local taxes, and levy those taxes on themselves. In small towns, many public agencies, including fire protection and emergency medical assistance, depend almost entirely on volunteers. People who tax themselves, and give their own time and money for services on which communities depend, are not easily cowed by the federal government or by large corporations.

Palin's career may look like a poor imitation of a Preston Sturges script, but films such as Hail the Conquering Hero (1944) struck a chord with Americans precisely because the character type of the ordinary man or woman who takes on entrenched interests is instantly recognizable in America.

Palin really did take on the American oil companies and turn the scoundrels out of office. Her predecessor, Frank Murkowski, appointed her to the state oil and gas commission in the apparent belief that a small-town mayor and former beauty queen would rubber-stamp corrupt deals between the state and the Big Oil companies.

Shades of Jimmy Stewart in Mr Smith Goes to Washington, Palin ran against Murkowski and took his job. That does not qualify her to be president, to be sure, but it does show cunning and strength of character. Palin is qualified for high office by temperament if not by education, and is preferable to candidates whose education has made no improvement on their characters.

The fact that ordinary people safeguard their rights and have the means to challenge established interests does not exclude the possibility of fraud on a grand scale.

Asian investors were cheated by a conspiracy of the financial industry and the ratings agencies, which sold them ostensibly low-risk securities that turned out to be toxic. The just-approved US$700 billion support package for American banks sets America back to a regime of oligarchy, according to New York Times columnist David Brooks. Despite this fraud and its attendant humiliation, and despite the deterioration of governance in American markets, Asian investors are putting more rather than less money into America, judging from the decline of Asian currencies against the dollar in the course of the crisis.

One doesn't see demonstrations by wronged peasants in the small towns of America. There never were peasants - American farmers always were entrepreneurs - and the locals avenge injury by taking over their local governments, which have sufficient authority to make a difference. At the capillary level, school boards, the Parent Teachers' Association, self-administered religious organizations and volunteer organizations incubate a political class entirely different from anything to be found in Asia. There are tens of thousands of Sarah Palins lurking in the minor leagues of American politics, and they are the guarantors of market probity.

"Hockey Moms," to be sure, may not be the optimal promoters of America's future. One for one, the "Piano Moms" of China are cleverer people and produce smarter offspring. China's 30 million students of classical piano are one of the two great popular movements in the world today: the other is the House Church movement in Chinese Christianity. Children who play hockey will grow up to get coffee for children who study piano. As a pool of talent, nothing compares with the educated segment of the East Asian population that has embraced and mastered Western culture. Nonetheless, Asia still can't invest its own money at home, and seems farther than ever from that objective.

It is true that Asian economies depend on American consumers and an American recession is bad for Asian currencies. But why don't Asians consume what they produce at home? The trouble is that rich Asians don't lend to poor Asians in their own countries. Capital markets don't work in the developing world because it is too easy to steal money. Subprime mortgages in the US have suffered from poor documentation. What kind of documentation does one encounter in countries where everyone from the clerk at the records office to the secretary who hands you a form requires a small bribe? America is litigious to a fault, but its courts are fair and hard to corrupt.

Asians are reluctant to lend money to each other under the circumstances; they would rather lend money in places where a hockey mom can get involved in local politics and, on encountering graft and corruption, run a successful campaign to turn the scoundrels out. You do not need PhDs and MBAs for that. You need ordinary people who care sufficiently about the places in which they live to take control of their own towns and states when required. And, yes, it doesn't hurt if they own guns. Popular gun ownership places a limit on the abuse of state power.

Proposals to expand Asian financial markets have been circulating for 20 years. In 1996, the old print edition of Asia Times (which ceased operations during the 1997 financial crisis) published an excellent little booklet on the subject of Asian fixed income markets, sponsored by Lehman Brothers, which also has ceased operations. The East Asia Pacific central banks launched flagship local currency bond funds in 2003 and 2004 with considerable fanfare.

Several months ago, the Asian Development Bank (ADB) reported, "With the credit squeeze in the United States imposing limits on many borrowers' access to the market, some foreign companies are beginning to issue bonds within the Asia region ... in February 2008, Lehman Brothers issued a S$250 million [US$171 million) five-year bond. It is the largest foreign issue in the Singapore market to date." Lending money to the now-defunct Lehman Brothers was the one capital markets coup the ADB had to brag about in early 2008.

Asian capital markets never lost their baby teeth. By way of comparison, US fixed income markets at the end of 2007 had $30.146 trillion outstanding, or 220% of gross domestic product (GDP). East Asia's fixed income markets, reports the Asian Development Bank, were only 46% of GDP. Asia's fixed income markets are a quarter as America's relative to GDP. That is why Asia's retirement money must look for a home overseas.

Perhaps America's fixed income markets expanded too fast. Mortgage-backed securities, for example, jumped from $2.36 trillion to $7.27 trillion during the decade through 2007, while Treasury debt only rose from $3.66 billion to $4.86 trillion. More than $2 trillion of the mortgage expansion occurred in the subprime or "alternative documentation" categories, which have lost roughly half their market value in the past 15 months.

The trouble, as I argued in May, is that the sausages - the derivative securities created out of the inedible scraps of the mortgage market - were subject to monstrously large demand from a world of aging savers (see The monster and the sausages, Asia Times Online, May 20, 2008).

This will only get worse. Twenty-eight percent of China's population falls in the age cohort of 39-64 years, when individuals must put away most of their retirement savings. By 2025, the proportion will rise to 35%. (By contrast, America has 32% of its population in the 39-64 cohort today, but it will fall to 30% by 2025).

How HUD Mortgage Policy Fed The Crisis

2008-09-23T15:07:00.000-07:00

Subprime Loans Labeled 'Affordable'
By Carol D. Leonnig
Washington Post
June 10, 2008

In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.

Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more "affordable" loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.

Housing experts and some congressional leaders now view those decisions as mistakes that contributed to an escalation of subprime lending that is roiling the U.S. economy.

The agency neglected to examine whether borrowers could make the payments on the loans that Freddie and Fannie classified as affordable. From 2004 to 2006, the two purchased $434 billion in securities backed by subprime loans, creating a market for more such lending. Subprime loans are targeted toward borrowers with poor credit, and they generally carry higher interest rates than conventional loans.

Today, 3 million to 4 million families are expected to lose their homes to foreclosure because they cannot afford their high-interest subprime loans. Lower-income and minority home buyers -- those who were supposed to benefit from HUD's actions -- are falling into default at a rate at least three times that of other borrowers.

"For HUD to be indifferent as to whether these loans were hurting people or helping them is really an abject failure to regulate," said Michael Barr, a University of Michigan law professor who is advising Congress. "It was just irresponsible."

Congress is expected to vote before its Fourth of July recess on legislation that would strip HUD of its regulatory authority over Fannie and Freddie and give it to a stronger regulator.
Fannie and Freddie finance about 40 percent of all U.S. mortgages, with $5.3 trillion in outstanding debt. Owned by private shareholders but chartered by Congress, they are exempt from state and local taxes and receive an estimated $6.5 billion-a-year federal subsidy because they can borrow money more cheaply than other investors. In return, they are expected to serve "public purposes," including helping to make home buying more affordable.

HUD officials dispute allegations that the agency encouraged abusive lending and sloppy underwriting standards that became the hallmark of the subprime industry. Spokesman Brian Sullivan said the agency and Congress wanted to increase homeownership among underserved families and could not have predicted that subprime lending would dominate the market so quickly.

"Congress and HUD policy folks were trying to do a good thing," he said, "and it worked."
Since HUD became their regulator in 1992, Fannie and Freddie each year are supposed to buy a portion of "affordable" mortgages made to underserved borrowers. Every four years, HUD reviews the goals to adapt to market changes.

In 1995, President Bill Clinton's HUD agreed to let Fannie and Freddie get affordable-housing credit for buying subprime securities that included loans to low-income borrowers. The idea was that subprime lending benefited many borrowers who did not qualify for conventional loans. HUD expected that Freddie and Fannie would impose their high lending standards on subprime lenders.

Banks typically back prime loans with customers' deposits. But subprime lenders often rely on money from Wall Street investors , who buy packages of loans as investments called mortgage-backed securities.

In 2000, as HUD revisited its affordable-housing goals, the housing market had shifted. With escalating home prices, subprime loans were more popular. Consumer advocates warned that lenders were trapping borrowers with low "teaser" interest rates and ignoring borrowers' qualifications.

HUD restricted Freddie and Fannie, saying it would not credit them for loans they purchased that had abusively high costs or that were granted without regard to the borrower's ability to repay. Freddie and Fannie adopted policies not to buy some high-cost loans.

That year, Freddie bought $18.6 billion in subprime loans; Fannie did not disclose its number.
In 2001, HUD researchers warned of high foreclosure rates among subprime loans.

"Given the very high concentration of these loans in low-income and African American neighborhoods, the growth in subprime lending and resulting very high levels of foreclosure is a real cause for concern," an agency report said.

But by 2004, when HUD next revised the goals, Freddie and Fannie's purchases of subprime-backed securities had risen tenfold. Foreclosure rates also were rising.

That year, President Bush's HUD ratcheted up the main affordable-housing goal over the next four years, from 50 percent to 56 percent. John C. Weicher, then an assistant HUD secretary, said the institutions lagged behind even the private market and "must do more."

For Wall Street, high profits could be made from securities backed by subprime loans. Fannie and Freddie targeted the least-risky loans. Still, their purchases provided more cash for a larger subprime market.

"That was a huge, huge mistake," said Patricia McCoy, who teaches securities law at the University of Connecticut. "That just pumped more capital into a very unregulated market that has turned out to be a disaster."

In 2003, the two bought $81 billion in subprime securities. In 2004, they purchased $175 billion -- 44 percent of the market. In 2005, they bought $169 billion, or 33 percent. In 2006, they cut back to $90 billion, or 20 percent. Generally, Freddie purchased more than Fannie and relied more heavily on the securities to meet goals.

"The market knew we needed those loans," said Sharon McHale, a spokeswoman for Freddie Mac. The higher goals "forced us to go into that market to serve the targeted populations that HUD wanted us to serve," she said.

But because Fannie and Freddie were buying mortgage-backed securities rather than the actual subprime loans, their involvement came too late to require stiffer standards from lenders.
Fannie and Freddie "made no progress in civilizing the market," said Sandra Fostek, a senior regulator at HUD.

William C. Apgar Jr., who was an assistant HUD secretary under Clinton, said he regrets allowing the companies to count subprime securities as affordable.

"It was a mistake," he said. "In hindsight, I would have done it differently."

Allen Fishbein, who was Apgar's adviser at HUD and is now at the Consumer Federation of America, said the agency failed to use its regulatory power by refusing to credit Fannie and Freddie for loans that were "contrary to good lending practices."

"They chose not to put the brakes on this dangerous lending when they could have," Fishbein said.
Fostek said the agency had no practical way to comb through the tens of millions of individual loans contained in the subprime securities. She said that Fannie and Freddie did not overwhelmingly rely on securities to meet the goals but added that she would not disclose the amount counted because it is considered proprietary.

Fannie and Freddie spokespeople say their partners had agreed not to sell them loans with several prohibited characteristics, including credit insurance, excessively high costs and prepayment penalties that lasted longer than three years. But experts say the volume of subprime foreclosures proves they were toxic to borrowers.

Judith Kennedy, president of the National Association of Affordable Housing Lenders, said that while Fannie and Freddie nurtured unregulated subprime lenders, an estimated 30 percent of subprime borrowers could have qualified for safe, lower-cost prime loans.

"The damage to homeowners, to neighborhoods, to state and local governments as the tax base erodes, and now to all American taxpayers, is almost incalculable," she said.

Sen. Jack Reed (D-R.I.), a member of the Senate banking committee who brokered some of the regulatory reform in the pending bill, said HUD's homeownership push ignored reality.

"We need to focus on putting families in homes they can truly afford, not just on getting a sale, packaging the loan into a sophisticated financial security and walking away to the next closing," he said. "Today, people are wondering, 'Why weren't the regulators and the industry probing these [loans] more deeply?' "

Staff researcher Julie Tate contributed to this report

At Freddie Mac, Chief Discarded Warning Signs

2008-09-23T14:56:00.000-07:00

By CHARLES DUHIGG
The New York Times
Published: August 5, 2008

The chief executive of the mortgage giant Freddie Mac rejected internal warnings that could have protected the company from some of the financial crises now engulfing it, according to more than two dozen current and former high-ranking executives and others.

That chief executive, Richard F. Syron, in 2004 received a memo from Freddie Mac’s chief risk officer warning him that the firm was financing questionable loans that threatened its financial health.

Today, Freddie Mac and the nation’s other major mortgage finance company, Fannie Mae, are in such perilous condition that the federal government has readied a taxpayer-financed bailout that could cost billions. Though the current housing crisis would have undoubtedly caused problems at both companies, Freddie Mac insiders say Mr. Syron heightened those perils by ignoring repeated recommendations.

In an interview, Freddie Mac’s former chief risk officer, David A. Andrukonis, recalled telling Mr. Syron in mid-2004 that the company was buying bad loans that “would likely pose an enormous financial and reputational risk to the company and the country.”

Mr. Syron received a memo stating that the firm’s underwriting standards were becoming shoddier and that the company was becoming exposed to losses, according to Mr. Andrukonis and two others familiar with the document.

But as they sat in a conference room, Mr. Syron refused to consider possibilities for reducing Freddie Mac’s risks, said Mr. Andrukonis, who left in 2005 to become a teacher.
“He said we couldn’t afford to say no to anyone,” Mr. Andrukonis said. Over the next three years, Freddie Mac continued buying riskier loans.

Mr. Syron contends his options were limited.

“If I had better foresight, maybe I could have improved things a little bit,” he said. “But frankly, if I had perfect foresight, I would never have taken this job in the first place.”
Mr. Andrukonis was not the only cautionary voice at Freddie Mac at the time. According to many executives, Mr. Syron was also warned that the firm needed to expand its capital cushion, but instead that safety net shrank. Mr. Syron was told to slow the firm’s mortgage purchases. Instead, they accelerated.

Those and other choices initially paid off for Mr. Syron, who has collected more than $38 million in compensation since 2003. But when housing prices began declining in 2006, choices at Freddie Mac and Fannie Mae proved disastrous. Stock prices at both companies have fallen by more than 60 percent since February, destroying more than $80 billion of shareholder value.

More than two dozen current and former high-ranking executives at Freddie Mac, analysts, shareholders and regulators said in interviews that Mr. Syron had ignored recommendations that could have helped avoid the current crisis. Many of those interviewed were given anonymity for fear of damaging their careers by speaking publicly.

Now, some outsiders are saying that Mr. Syron and the top executive at Fannie Mae — some of the highest-profile figures in the business world — should be replaced.
“The top people should be booted out, and replaced by executives who have the confidence of the markets,” said Janet Tavakoli, a finance industry consultant and observer of both firms. Large Freddie Mac shareholders, speaking on the condition of anonymity, echoed those sentiments.

Mr. Syron and the Fannie Mae chief executive, Daniel H. Mudd, defended their choices, saying in interviews that they did not anticipate that the housing market would decline so quickly and that they were buffeted by conflicting pressures.

“This company has to answer to shareholders, to our regulator and to Congress, and those groups often demand completely contradictory things,” Mr. Syron said in an interview.
Indeed, executives of both companies maintain that one of the reasons the firms hold so many bad loans is that Congress has leaned on them for years to buy mortgages from low-income borrowers to encourage affordable housing. In 2004, Freddie Mac warned regulators that affordable housing goals could force the company to buy riskier loans.

Others, however, dismiss that explanation. “Sure, it’s hard to deal with the pressures of Congress and shareholders and regulators,” said a former high-ranking Freddie Mac executive. “But that’s why executives get paid so much. It’s not acceptable to blame those pressures for making bad choices.”

In a statement, Freddie Mac said executives were unable to verify that Mr. Andrukonis’s memorandum existed, and that the company’s default and delinquency rates were substantially lower than other firms. “There is little to nothing that Freddie Mac could have done to prevent the losses that it is now incurring,” wrote company spokesman, David R. Palombi.
Mr. Mudd said the companies were victims of circumstance.

“You’ve got the worst housing crisis in U.S. recorded history, and we’re the largest housing finance company in the country, so when one goes down, the other goes with it,” he said. A Fannie Mae spokesman, Brian A. Faith, said that beginning in 2005, executives “sounded the alarm” about riskier loans and began limiting their purchases.

The depths of Freddie Mac’s problems are complicated by its long-planned, continuing search for a chief executive to replace Mr. Syron, who is expected to remain chairman. Two people who were approached — Kenneth I. Chenault of American Express and Laurence D. Fink of BlackRock — said they did not want to be considered for the position.

Some outsiders are surprised to learn that among the candidates the company is considering is Alan Schwartz, who headed Bear Stearns as it collapsed. Mr. Chenault, Mr. Fink and Mr. Schwartz could not be reached or declined to comment.

Mr. Syron joined Freddie Mac as chief executive and chairman in 2003, after the company revealed it had manipulated earnings by almost $5 billion. He came to Freddie Mac after serving as chairman of the Thermo Electron Corporation, a scientific instruments firm, and of the American Stock Exchange. An economist with a Ph.D. and the first in his family to graduate from high school, Mr. Syron was welcomed as an unpretentious but politically astute leader.
Mr. Mudd was promoted to chief executive of Fannie Mae the following year, after that company was also accused of accounting errors totaling $6.3 billion. His compensation has totaled more than $42 million.

By the time both men took over, the firms had perfected the art of making money by capitalizing on the perception they were implicitly backed by the government. That belief allowed Fannie and Freddie to borrow at relatively low rates and use those funds to buy mortgages as investments. The companies also collected fees in exchange for guaranteeing that borrowers would repay other home loans. By the end of 2007, the firms held mortgages worth more than $1.4 trillion combined, and guaranteed payments on loans worth $3.5 trillion more.

Both firms had sophisticated systems to hedge against risks. But they remained exposed to one unlikely, but potentially catastrophic possibility: a wide-scale decline in national home prices.
The only real protection against such a downfall was purchasing only the safest loans.

However, the companies were constantly under pressure to buy riskier mortgages. Once, a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers, according to a Congressional source. Shareholders attacked the executives for missing profitable opportunities by being too cautious. Mr. Syron and Mr. Mudd eventually yielded to those pressures, effectively wagering that if things got too bad, the government would bail them out.

“The thinking was that if something really bad happened to the housing market, then the government would need Freddie and Fannie more than ever, and would have to rescue them,” Mr. Andrukonis said. “Everybody understood that at some level the company was putting taxpayers at risk.”

Representatives of Mr. Syron and Mr. Mudd said the firms never made choices assuming the government would intervene. Both said they balanced shareholder and Congressional demands against market realities.

For years, the companies collected rich profits. But some executives grew increasingly concerned.

Mr. Andrukonis wrote his memo in 2004. At the time, he also briefed the risk oversight committee of the board of directors, but did not share his memo with them, he said. A member of that committee declined to return phone calls.

Soon thereafter, Freddie Mac’s head of capital compliance and oversight, Donald Solberg, counseled Mr. Syron to maintain a thick capital cushion, according to multiple people familiar with those discussions. Mr. Solberg continued making that recommendation until early 2007, when he left the company. Mr. Solberg declined to comment on his conversations.
Last year, Treasury Secretary Henry M. Paulson Jr. and the Federal Reserve chairman, Ben S. Bernanke, privately urged both companies to raise more money. At one point, Mr. Bernanke threatened to publicly scold the companies if they did not raise more cash.

Beginning in November, Fannie Mae raised $14.4 billion from shareholders over a six-month period. But Mr. Syron was more resistant. Freddie Mac raised $6 billion in preferred stock last year, but at a March conference in New York, Mr. Syron combatively dismissed suggestions he would raise more simply because officials told him to.

“This company will bow to no one,” Mr. Syron told a room of investors and analysts. Despite promises, the company has delayed a planned $5.5 billion stock sale. Because of that delay, the effective cost of raising funds has skyrocketed as the company’s share price has declined.
In a statement, Freddie Mac said Mr. Syron’s March comments focused on dilutive capital raising and that the stock sale was delayed because lawyers said it could not occur while the company was registering with the Securities and Exchange Commission. That process was finalized last month.

In 2007, as home prices were falling and defaults rising in some areas, people at both firms urged their chief executives to scale back on mortgage purchases. Fannie Mae shrunk its mortgage portfolio slightly.

Mr. Syron’s Freddie Mac, however, increased its portfolio by $17 billion.
That same year the companies posted combined losses of $5.2 billion. This year, they have announced losses of $2.4 billion, and analysts say they may lose an additional $24 billion or more.
Last month, after weeks of rumors and bad news, investors began dumping the companies’ shares, driving their stock prices down almost 60 percent apiece. The selling did not subside until Mr. Paulson unveiled a rescue plan with powers to inject billions of taxpayer dollars into the companies. That plan has not been activated, but the law, signed by President Bush last week, also gives the government sweeping new regulatory control over the firms.

“It basically worked exactly as everyone expected — when things got bad, the government came to the rescue,” said a second former high-ranking Freddie Mac executive. “But we didn’t expect it would come at the cost of a new regulator who now has the power to burrow into our business forever.”

In the last three weeks, the companies’ stock prices have recovered a small portion of their losses. Executives, however, remain concerned that more bad news could spark another panic.
Freddie Mac will report its second-quarter financial results Wednesday. Fannie Mae will release its results on Friday.

“I’ve had four other jobs as C.E.O., and I came out of them all pretty well,” Mr. Syron said.

“What I’m working for right now is to save my reputation.”

Eric Dash contributed reporting.

Blame Fannie Mae and Congress

2008-09-23T13:21:00.000-07:00

By CHARLES W. CALOMIRIS and PETER J. WALLISON
The Wall Street Journal
September 23, 2008

Many monumental errors and misjudgments contributed to the acute financial turmoil in which we now find ourselves. Nevertheless, the vast accumulation of toxic mortgage debt that poisoned the global financial system was driven by the aggressive buying of subprime and Alt-A mortgages, and mortgage-backed securities, by Fannie Mae and Freddie Mac. The poor choices of these two government-sponsored enterprises (GSEs) -- and their sponsors in Washington -- are largely to blame for our current mess.

How did we get here? Let's review: In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of "affordable housing." They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse.

It is important to understand that, as GSEs, Fannie and Freddie were viewed in the capital markets as government-backed buyers (a belief that has now been reduced to fact). Thus they were able to borrow as much as they wanted for the purpose of buying mortgages and mortgage-backed securities. Their buying patterns and interests were followed closely in the markets. If Fannie and Freddie wanted subprime or Alt-A loans, the mortgage markets would produce them. By late 2004, Fannie and Freddie very much wanted subprime and Alt-A loans. Their accounting had just been revealed as fraudulent, and they were under pressure from Congress to demonstrate that they deserved their considerable privileges. Among other problems, economists at the Federal Reserve and Congressional Budget Office had begun to study them in detail, and found that -- despite their subsidized borrowing rates -- they did not significantly reduce mortgage interest rates. In the wake of Freddie's 2003 accounting scandal, Fed Chairman Alan Greenspan became a powerful opponent, and began to call for stricter regulation of the GSEs and limitations on the growth of their highly profitable, but risky, retained portfolios.

If they were not making mortgages cheaper and were creating risks for the taxpayers and the economy, what value were they providing? The answer was their affordable-housing mission. So it was that, beginning in 2004, their portfolios of subprime and Alt-A loans and securities began to grow. Subprime and Alt-A originations in the U.S. rose from less than 8% of all mortgages in 2003 to over 20% in 2006. During this period the quality of subprime loans also declined, going from fixed rate, long-term amortizing loans to loans with low down payments and low (but adjustable) initial rates, indicating that originators were scraping the bottom of the barrel to find product for buyers like the GSEs.

The strategy of presenting themselves to Congress as the champions of affordable housing appears to have worked. Fannie and Freddie retained the support of many in Congress, particularly Democrats, and they were allowed to continue unrestrained. Rep. Barney Frank (D., Mass), for example, now the chair of the House Financial Services Committee, openly described the "arrangement" with the GSEs at a committee hearing on GSE reform in 2003: "Fannie Mae and Freddie Mac have played a very useful role in helping to make housing more affordable . . . a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing." The hint to Fannie and Freddie was obvious: Concentrate on affordable housing and, despite your problems, your congressional support is secure.

In light of the collapse of Fannie and Freddie, both John McCain and Barack Obama now criticize the risk-tolerant regulatory regime that produced the current crisis. But Sen. McCain's criticisms are at least credible, since he has been pointing to systemic risks in the mortgage market and trying to do something about them for years. In contrast, Sen. Obama's conversion as a financial reformer marks a reversal from his actions in previous years, when he did nothing to disturb the status quo. The first head of Mr. Obama's vice-presidential search committee, Jim Johnson, a former chairman of Fannie Mae, was the one who announced Fannie's original affordable-housing program in 1991 -- just as Congress was taking up the first GSE regulatory legislation.

In 2005, the Senate Banking Committee, then under Republican control, adopted a strong reform bill, introduced by Republican Sens. Elizabeth Dole, John Sununu and Chuck Hagel, and supported by then chairman Richard Shelby. The bill prohibited the GSEs from holding portfolios, and gave their regulator prudential authority (such as setting capital requirements) roughly equivalent to a bank regulator. In light of the current financial crisis, this bill was probably the most important piece of financial regulation before Congress in 2005 and 2006. All the Republicans on the Committee supported the bill, and all the Democrats voted against it. Mr. McCain endorsed the legislation in a speech on the Senate floor. Mr. Obama, like all other Democrats, remained silent.

Now the Democrats are blaming the financial crisis on "deregulation." This is a canard. There has indeed been deregulation in our economy -- in long-distance telephone rates, airline fares, securities brokerage and trucking, to name just a few -- and this has produced much innovation and lower consumer prices. But the primary "deregulation" in the financial world in the last 30 years permitted banks to diversify their risks geographically and across different products, which is one of the things that has kept banks relatively stable in this storm.

As a result, U.S. commercial banks have been able to attract more than $100 billion of new capital in the past year to replace most of their subprime-related write-downs. Deregulation of branching restrictions and limitations on bank product offerings also made possible bank acquisition of Bear Stearns and Merrill Lynch, saving billions in likely resolution costs for taxpayers.

If the Democrats had let the 2005 legislation come to a vote, the huge growth in the subprime and Alt-A loan portfolios of Fannie and Freddie could not have occurred, and the scale of the financial meltdown would have been substantially less. The same politicians who today decry the lack of intervention to stop excess risk taking in 2005-2006 were the ones who blocked the only legislative effort that could have stopped it.

Mr. Calomiris is a professor of finance and economics at Columbia Business School and a scholar at the American Enterprise Institute. Mr. Wallison, a senior fellow at the American Enterprise Institute, was general counsel of the Treasury Department in the Reagan administration.

Andrew Cuomo and Fannie and Freddie

2008-09-22T09:50:00.000-07:00

How the youngest Housing and Urban Development secretary in history gave birth to the mortgage crisis
By Wayne Barrett
published: August 05, 2008

There are as many starting points for the mortgage meltdown as there are fears about how far it has yet to go, but one decisive point of departure is the final years of the Clinton administration, when a kid from Queens without any real banking or real-estate experience was the only man in Washington with the power to regulate the giants of home finance, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), better known as Fannie Mae and Freddie Mac.

Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis. He took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded "kickbacks" to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.

What he did is important—not just because of what it tells us about how we got in this hole, but because of what it says about New York's attorney general, who has been trying for months to don a white hat in the subprime scandal, pursuing cases against banks, appraisers, brokers, rating agencies, and multitrillion-dollar, quasi-public Fannie and Freddie.

It all starts, as the headlines of recent weeks do, with these two giant banks. But in the hubbub about their bailout, few have noticed that the only federal agency with the power to regulate what Cuomo has called "the gods of Washington" was HUD. Congress granted that power in 1992, so there were only four pre-crisis secretaries at the notoriously political agency that had the ability to rein in Fannie and Freddie: ex–Texas mayor Henry Cisneros and Bush confidante Alfonso Jackson, who were driven from office by criminal investigations; Mel Martinez, who left to chase a U.S. Senate seat in Florida; and Cuomo, who used the agency as a launching pad for his disastrous 2002 gubernatorial candidacy.

With that many pols at the helm, it's no wonder that most analysts have portrayed Fannie and Freddie as if they were unregulated renegades, and rarely mentioned HUD in the ongoing finger-pointing exercise that has ranged, appropriately enough, from Wall Street to Alan Greenspan. But the near-collapse of these dual pillars in recent weeks is rooted in the HUD junkyard, where every Cuomo decision discussed here was later ratified by his Bush successors.

And that's not an accident: Perhaps the only domestic issue George Bush and Bill Clinton were in complete agreement about was maximizing home ownership, each trying to lay claim to a record percentage of homeowners, and both describing their efforts as a boon to blacks and Hispanics. HUD, Fannie, and Freddie were their instruments, and, as is now apparent, the more unsavory the means, the greater the growth. But, as Paul Krugman noted in the Times recently, "homeownership isn't for everyone," adding that as many as 10 million of the new buyers are stuck now with negative home equity—meaning that with falling house prices, their mortgages exceed the value of their homes. So many others have gone through foreclosure that there's been a net loss in home ownership since 1998.

It is also worth remembering that the motive for this bipartisan ownership expansion probably had more to do with the legion of lobbyists working for lenders, brokers, and Wall Street than an effort to walk in MLK's footsteps. Each mortgage was a commodity that could be sold again and again—from the brokers to the bankers to the securities market. If, at the bottom of this pyramid, the borrower collapsed under the weight of his mortgage's impossible terms, the home could be repackaged a second or a third time and either refinanced or dumped on a new victim.

Those are the interests that surrounded Cuomo, who did more to set these forces of unregulated expansion in motion than any other secretary and then boasted about it, presenting his initiatives as crusades for racial and social justice.

Cuomo was shrewd enough at the age of 24 to manage his father's successful 1982 gubernatorial campaign, and to help run his government. The only statewide campaign his father ever lost was in 1994—when Andrew was at HUD as an assistant secretary and couldn't manage it. He is as quick and as silver-tongued as the elder Cuomo he sounds so much like, but HUD was a test of his depth, so he found himself balancing competing forces and making deals on a grander scale than he was used to in Albany. We now know that he was also making history.

In 2000, Cuomo required a quantum leap in the number of affordable, low-to-moderate-income loans that the two mortgage banks—known collectively as Government Sponsored Enterprises—would have to buy. The GSEs don't actually sell mortgages to borrowers. They buy them from banks and mortgage companies, allowing lenders to replenish their capital and make more loans. They also purchase mortgage-backed securities, which are pools of mortgages regularly acquired by the GSEs from investment firms. The government chartered these banks to pump money into the mortgage market and, while they did it, to make a strong enough profit to attract shareholders. That created a tug-of-war between their efforts to maximize shareholder value, which drove them toward high-end mortgages, and their congressionally mandated obligation to finance loans for those who needed help. The 1992 law required HUD's secretary to make sure housing goals were being met and, every four years, set new goals for Fannie and Freddie.

Cuomo's predecessor, Henry Cisneros, did that for the first time in December 1995, taking a cautious approach and moving the GSEs toward a requirement that 42 percent of their mortgages serve low- and moderate-income families. Cuomo raised that number to 50 percent and dramatically hiked GSE mandates to buy mortgages in underserved neighborhoods and for the "very-low-income." Part of the pitch was racial, with Cuomo contending that Fannie and Freddie weren't granting mortgages to minorities at the same rate as the private market. William Apgar, Cuomo's top aide, told The Washington Post: "We believe that there are a lot of loans to black Americans that could be safely purchased by Fannie Mae and Freddie Mac if these companies were more flexible."

While many saw this demand for increasingly "flexible" loan terms and standards as a positive step for low-income and minority families, others warned that they could have potentially dangerous consequences. Franklin Raines, the Fannie chairman and first black CEO of a Fortune 500 company, warned that Cuomo's rules were moving Fannie into risky territory: "We have not been a major presence in the subprime market," he said, "but you can bet that under these goals, we will be." Fannie's chief financial officer, Timothy Howard, said that "making loans to people with less-than-perfect credit" is "something we should do." Cuomo wasn't shy about embracing subprime mortgages as a possible consequence of his goals. "GSE presence in the subprime market could be of significant benefit to lower-income families, minorities, and families living in underserved areas," his report on the new goals noted.

Moody's didn't sound an immediate alarm, but its senior analyst, Stanislas Rouyer, said the expansion into subprime loans and the lower level of documentation that came with them could mean that Fannie 's loss levels would increase in the future. Steven Holmes, a reporter from the Times's Washington bureau, wrote at the time: "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But," he added, "the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s."

When HUD released the next set of goals in 2004, it reported that after Cuomo's previous edict, there had been a sudden spurt of GSE subprime investment, "partly in response to higher affordable-housing goals set by HUD in 2000." Fannie had gone from $1.2 billion in subprime-mortgage and securities purchases in 2000 to $9.2 billion in 2001 and $15 billion in 2002. Freddie's numbers were murkier, but clearly also on the rise. In 2003 alone, the two bought $81 billion in subprime securities—which also count against the goals.

Fannie also developed a "flexible" product line, providing up to 100 percent financing and requiring borrowers to make as little as a $500 contribution, and bought $13.7 billion of those loans in 2003. In addition to subprime loans and securities, both banks burst into the "alt-a" market, making alternative products easily available to borrowers who had slightly better credit histories than subprime borrowers, but were unwilling to provide full documentation of their financial histories. (It was the "alt-a" investments that recently brought down the private bank IndyMac.) These risky adventures, according to the 2004 HUD report, prompted Freddie to claim that "the increased goals created tension in its business practices between meeting the goals and conducting responsible lending practices," a self-serving attempt to plant the blame back on HUD.

After this initial uptick, the two banks purchased $434 billion in securities backed by subprime loans between 2004 and 2006. The Washington Post noted this June that the GSEs' aggressive acquisitions "created a market for more such lending" by others, feeding the fire. No one knows just how big a bite the subprime mess is now taking out of the GSEs, or how much of that portfolio will ultimately go bad, but it has become axiomatic that, whatever the total, it is too much, since it will have seriously shaken confidence in these two linchpin institutions.

That June Post story focused its critical reassessment of HUD's affordable-housing goals on the department's 2004 decision—during the Bush re-election campaign—to juice them up again, pushing the target to 56 percent by 2007. Though the story never mentioned Cuomo—whose three-year, eight-point goal hike exceeded Bush's more gradual six-point increase—it did quote his top aide William Apgar, who helped craft the 2000 policy, saying: "It was a mistake." Apgar, who now teaches at Harvard, conceded, "In hindsight, I would have done it differently."

But raising the affordable-housing goals was only half the Cuomo story.

The HUD secretary is also required to produce voluminous rules that govern how the GSEs meet those goals, and the 187-page rules Cuomo issued opened the door to abuse.

The rules explicitly rejected the idea of imposing any new reporting requirements on the GSEs. In other words, HUD wanted Fannie and Freddie to buy risky loans, but the department didn't want to hear just how risky they were.

HUD conceded in the rules that many consumer groups had urged it to insist that the GSEs provide "loan-level data" revealing how many of their loans contained high interest rates, prepayment penalties, or other requirements that presaged bad loans.

Indeed, in March 2000, HUD had acknowledged that the new goal-driven pressure on the GSEs might "warrant increased monitoring and additional reporting." But when the final rules were adopted in October, that momentary caution had been abandoned: "HUD is not establishing any requirements for additional data to carry out this rule." The report explained that the GSEs "objected" to information mandates "related to their purchases of high-cost mortgages," so HUD decided against imposing "an undue additional burden." HUD would have no way of telling how abusive the low-income mortgages it was mandating might be.

Reporting from the GSEs to HUD "does not provide the details . . . [for] effective monitoring of their subprime activity," warned Allen Fishbein in a housing journal two years after the rules were published. Fishbein, who was the senior advisor at HUD for GSE oversight under Cuomo and is now general counsel at the Center for Community Change, said that HUD "should have the necessary information" to determine if the GSEs were purchasing "loans with predatory features," but that it did not.

In a Voice interview, Fishbein, who was reluctant to say a critical word about the regulations he and Cuomo developed, did acknowledge that "it would have been a beneficial thing" to have required such data from the GSEs in the 2000 rule-making, though he contended that HUD has "the general authority to collect it" without a rule-making.

"I certainly would have favored more data in hindsight," he said. But the failure to include reporting requirements that many consumer groups championed at the time was an invitation then—and not just in retrospect—for the GSEs to hide bad loans. Fishbein prefers to blame the lack of verification on the Bush administration, but when Cuomo issued his rules barely a week before the 2000 election, he failed to put any data demands in place that would have alerted the next administration, regardless of who it was, to any risks in the new GSE portfolio. In fact, Bush's HUD did institute some reporting requirements in 2004, but then never revealed much of what was learned.

But Cuomo wasn't only stifling data that HUD could use to keep the GSEs out of trouble. He also went against his own recommendation—in a report issued jointly with the Treasury Department a few months earlier—that called for a prohibition against the GSEs purchasing loans "with high costs and/or predatory features." Instead, Cuomo decided without explanation to adopt rules that prohibited nothing.

Consumer groups then contended that if HUD wasn't going to bar bad loans, it should at least penalize the GSEs for every one they made. Cuomo declined to do that as well, instead declaring that loans with specific odious terms would not be counted against the goals. His allies have pointed to this refusal as evidence of his toughness, but Cuomo couldn't very well reward Fannie and Freddie for purchasing bad loans. And the absence of any reporting requirements made it virtually impossible to figure out which loans shouldn't be credited anyway.

Cuomo also adopted Fannie and Freddie's standards of what a bad loan was, almost verbatim. For example, HUD accepted Fannie's many caveats on prepayment penalties—a predatory practice long condemned by housing advocates. The final rules allowed the GSEs to take goal credit on some loans that carried these penalties, even though these sky-high charges often either bound borrowers to bad mortgages or cost them dearly to climb out.

It should come as no surprise, then, that Fannie conceded in 2005 that 10 percent of its loans had such prepayment penalties. HUD's next rulemaking, in 2004, freely acknowledged that "certain practices were not enumerated in the regulations adopted in 2000," including certain kinds of prepayment penalties, and that they "often lock borrowers into disadvantageous loan products." But once again, HUD did nothing about those practices.

While fashioning these final rules, Cuomo wrestled with the octopus-like reach of Fannie and Freddie, which spend tens of millions each year on lobbying firms. The GSEs hired 88 lobbying firms over six years, three of which were friendly enough with Cuomo to give to his campaign committee later.

Just a look at the New Yorkers tied to the GSEs must have impressed Cuomo, who, after all, would soon return to New York politics. Harold Ickes, the former Clinton chief of staff and a Democratic power broker in this state, was on the Freddie board. Tom Downey, the former New York congressman who would later donate $21,894 to Cuomo, was a Fannie lobbyist. And Al D'Amato, the former banking committee chair who'd shepherded Cuomo's appointment through the Republican Senate, was a Fannie consultant.

But Cuomo was closer to the GSEs' most formidable opponents—namely, the Mortgage Bankers Association (MBA), regarded as the most influential private real-estate finance lobby in Washington, and the upstart FM Watch, a new coalition of heavyweights from Chase to AIG. Both of these groups wanted Cuomo to put as much affordable-housing pressure on the GSEs as he could, and they said so in their releases and newsletters. They opposed what they called Fannie and Freddie's profit-driven "mission creep," which they saw as a publicly subsidized invasion of their high-end mortgage market. Their goal was the same as Cuomo's: to push Fannie and Freddie deeper into low-end mortgages, consistent with the mission statement in their charters.

Two of Cuomo's aides who had also worked for his father, Howard Glaser and Todd Howe, left HUD to take top jobs at the association in the middle of the GSE rule-making (the MBA parted company with both once Andrew was out of HUD). In 2000, a year after Howe joined the association, he described how he had helped build a grassroots MBA effort to pressure Congress and others into supporting HUD in what he described as the "battle" being "waged against Fannie Mae." Glaser's Harvard alumni biography says he "played a key role in negotiating a multi-billion-dollar increase in GSE affordable-housing goals." He and Howe—who insist they had "no contact" with Cuomo on the MBA's behalf—have given $3,000 to Cuomo in recent years.

The MBA also retained Brad Johnson, another ex–Mario Cuomo aide described as his "eyes and ears" in Washington, to lobby HUD while Andrew was secretary. Three other long-term HUD staffers who worked there under Cuomo—including the lawyer who was the contact person listed on the GSE rules—also ended up at the MBA or one of its lobbying firms. Angelo Mozilo, the CEO of Countrywide who's become the face of the subprime scandal, was at one point the MBA's president and a member of its executive committee throughout Cuomo's HUD tenure. He and other MBA leaders became Cuomo donors, with Mozilo donating $1,000 twice—in 2002 and 2006.

Describing HUD as "the court of last resort" and "a key ally," MBA president Kit Sumner hailed Cuomo shortly after the announcement of the GSE goals at the organization's annual convention, which usually draws 6,000 lenders and brokers. Cuomo spoke at the convention every year during his tenure, appeared there as recently as 2004, and was listed on the agenda for 2005, though the MBA says he didn't attend. His father was a paid convention speaker in 2004 as well. Cuomo was regarded as such a friend of the MBA that National People's Action, a Chicago-based housing group, staged protests unrelated to the GSEs at the MBA, HUD, and Cuomo's home in McLean, Virginia. The group's spokesman declared: "We know that the MBA has a lot of pull with Andrew Cuomo, and we tried to convince them to back off. MBA said they are fully committed to HUD."

FM Watch's lobbyists during the Cuomo years at HUD included Tony Podesta, the brother of Clinton's chief of staff, and the law firm Akin Gump, where Cuomo has so many allies that his campaign committee has collected $67,550 in contributions there since he formed it in early 2001. Joel Jankowsky, head of the Akin lobbying group that represented this single-issue group, gave $7,500 to Cuomo—most of it within weeks after the formation of Andrew's committee in 2001. Jankowsky is a close personal friend of Dan Glickman, who joined Akin when he stepped down as agriculture secretary just as Cuomo left HUD in 2001. Glickman's wife Rhoda was Cuomo's deputy chief of staff, and the two Glickmans donated $10,500 to Cuomo. They also covered $23,900 of their own expenses traveling and fundraising for the campaign, which listed that as an in-kind contribution.

These groups clearly had Cuomo's ear, but he was also being pushed to commit the GSEs to more affordable and, in some cases, riskier loans by consumer organizations—groups like ACORN, which has considerable clout in New York elections. The housing advocates were happy with Cuomo's goal-setting at HUD, but the lax reporting requirements and predatory-lending loopholes suggest who was actually driving his agenda. The MBA and FM Watch didn't care about these issues; advocates did. When the final rules were announced, most of the consumer groups said little about these loopholes, but Bruce Marks, CEO of the Neighborhood Assistance Corporation, criticized the tepid enforcement: "What you're seeing is Fannie and Freddie flexing their muscle," he observed. "They have more money than God, and they use it."

Cuomo wouldn't answer Voice questions for this piece, but he was briefed on every issue raised in it and discussed his responses with Glaser, who replied in both interviews and e-mails. Glaser insisted that raising the GSE goals "was a good thing then and now," contending that "no one ever criticized Cuomo for not taking on the fight at HUD" and blaming "the Bush team that never even tried" for the mistakes that have led to the current debacle.

He dismissed the failure to include any reporting requirements in the rules by confusing it with a parallel path that Cuomo took in his final two years—an eventually successful effort to get the GSEs to supply HUD with data on the terms of 10 million loans from their automated underwriting (AU) system. Glaser contends that the GSE's ad hoc decision to turn over that information—which no court was even asked to order—obviated the need to put any data requirements in a binding rule. It's odd that Glaser makes that argument now, since Cuomo never did so when he was making the rules, and when he went on for pages about whether or not to require loan data. In fact, Cuomo's handling of the AU data itself has long been a sore spot. Fishbein's 2002 article noted that HUD completed its review of the data in 2000, but "inexplicably has yet to release the results." (Fishbein says he doesn't know if this was Cuomo's fault.)

Glaser argues that "mortgage bankers thought Cuomo was the toughest secretary they had ever known," especially Mozilo. But Cuomo was celebrated in issue after issue of the MBA's weekly publication, Real Estate Finance Today, and his MBA alliance went well beyond the GSEs—in particular, the steps he took to reshape the Federal Housing Administration, which guarantees millions of mortgages. These actions, too, sought to maximize homeownership—this time by opening the FHA's door to borrowers unable to qualify in the past, a lofty goal that has also helped spur an FHA delinquency rate that exceeds its subprime competitors. The MBA cheered each of these Cuomo decisions—dramatically raising the limits on the size of FHA loans, slicing the down-payment requirement to 3 percent, and cutting the agency's insurance-premium costs virtually in half. Cuomo even supported down-payment and closing-cost assistance programs that allowed FHA borrowers to buy a home without spending a cent of their own money up front.

To the MBA, bigger FHA guarantees on the loans that MBA members granted, combined with easier terms, was a recipe for greater profits. That's why Cuomo announced the insurance cut at their convention shortly before he left office. And that's why the front page of the MBA paper was headlined "MBA Welcomes New FHA Ceiling" when he raised the loan limits, eventually nearly doubling them to $235,000. His decision to grant such large FHA mortgages was, as the GSEs pointed out, in stark contrast with his efforts to drive them into the affordable market. Indeed, it was GSE opposition to the new FHA ceilings that sparked the firefights between them and the Cuomo/MBA combine. At first, the Bush administration echoed Cuomo's FHA policies, but when the crisis hit, it began condemning down-payment assistance and urging a sliding, risk-based scale of insurance premiums.

Cuomo's fellow attorney generals in Illinois, California, and Massachusetts have filed lawsuits against Countrywide and other mortgage companies in the current crisis. And those lawsuits are aimed in part at the sucker punch called "yield-spread premium" that was thrown at millions of households who got mortgages from brokers. Brokers have taken over the origination market in recent years by aggressively advertising, and they decide which lenders get the business.

Cuomo hasn't sued anybody over these outrageous payments to brokers—which are based on the "spread" between the high interest rate that brokers persuade unwary borrowers to accept and the par or going rate they would ordinarily have to pay. If Cuomo did sue, it might make for an awkward moment or two in court, since it was Cuomo who issued a rule in 1999 that dozens of federal courts have since found legalized the yield-spread premiums. He was the first HUD secretary to say they were "not illegal per se," nullifying most of the 150 class-action lawsuits against them filed across the country.

There are certainly those who believe that YSPs are at the heart of the crisis. Senator Chris Dodd, the chair of the banking committee, is trying to ban them, prodded by the fact that up to 90 percent of subprime mortgages quietly triggered these lucrative payments. When the Federal Reserve recently considered barring them and then backed off, a Times editorial charged that it had "balked on banning the practice whereby brokers maximize their commissions by signing up borrowers for the most expensive loan possible, even when the borrower qualifies for a cheaper." The Illinois attorney general, Lisa Madigan, accused Countrywide of structuring their deals with brokers "in a manner that virtually guaranteed" that they were "more concerned with getting the highest YSP possible than getting their borrowers the best loan possible," oblivious to "the possible fraud that this financial incentive would motivate."

Actually, no one has described what's wrong with YSPs better than Andrew Cuomo himself. In his first year as HUD secretary, when his earliest proposal to reform YSPs attracted a Times story, he said: "Too often consumers think the brokers are working for them. In reality, they are working against them." Cuomo's proposed rules that year did not go so far as to prohibit YSPs, but they did require brokers to enter into a written contract with borrowers; the brokers had to check one of three boxes, revealing whether they represented borrowers only or were receiving lender fees. Then they had to disclose the size of the fees, which usually far exceeded what the borrowers were paying.

Cuomo said the point was "to discourage practices that give financial incentives to mortgage brokers that offer higher-priced loans than what are generally available in the marketplace." The MBA, which includes brokers and other industry organizations, got Congressional leaders to oppose it, and Cuomo retreated. A year and a half later, Cuomo adopted a new rule that did the opposite of his first proposal. "The Lending Industry Welcomes Policy Clarification" was the subhead on the MBA's cover story. Cuomo's 1999 rule, issued under pressure from Congress to come up with a policy statement one way or the other because of all the lawsuits, found that YSPs were legal if "reasonably related to the value of the goods" actually furnished or the services "actually performed" by brokers. The Cuomo rule-making also stated that "HUD does not view the name of the payment as the appropriate issue," even though calling something a premium based on a "yield" and a "spread" pretty much destroys any notion that the payment is tied to a good or a service.

Experts point out that borrowers usually have no idea that such a thing exists. In fact, Harvard law professor Howell Jackson discovered that the HUD booklet on settlement costs, issued for distribution to borrowers on Cuomo's watch, never mentions YSPs or how they are financed. "You may wish to ask about the fees that the mortgage broker will receive for its services" is as close as the booklet gets. "Critically absent," concludes Jackson, "is disclosure of the fact that the borrower finances the cost of YSPs through higher monthly mortgage payments." In 1997, Cuomo's proposed rule said that "a consensus" on only one point emerged from the negotiations with the department's broadly based advisory group, namely that "a rule should require that mortgage brokers inform borrowers of the role that they are serving early enough in the transaction to allow the consumer to shop for alternatives." Cuomo's final rule, much like the GSE edict, concluded: "This statement does not mandate disclosures beyond those currently required."

Glaser acknowledged that YSPs are a big cause of the crisis, though he pointedly insisted that they were "not the biggest," and he blamed them on Bush. He pointed out that Mel Martinez issued a YSP rule in late 2001, and claimed that he did so because Cuomo's ruling permitted class-action lawsuits. In fact, courts around the country had denied class-action certifications based on Cuomo's ruling, but a circuit court in Alabama decided that Cuomo's regulations were "ambiguous," which is why Martinez then issued what he called a "clarification" of the Cuomo regulations. But as a San Francisco circuit court found shortly thereafter, the Martinez clarification essentially "reiterated" Cuomo's position and "carries forward the same principles." A dissenting member of the same California panel deplored Cuomo's ruling and said "the phrase 'yield spread premium' " was a "way of avoiding calling a kickback a kickback."

The sad fact is that Cuomo's surrender on YSPs can't be excused as an unfortunate consequence of well-motivated policy, as his defenders have argued regarding his FHA and GSE actions. He has no cover for this one; it exposes him as an agent of special interests. And looking at his GSE and FHA policies through the lens of his retreat on these payoffs (which even Glaser, in a marked change from his MBA days, now condemns) suggests a pattern of compromised judgments.

With Martinez, who was hailed at a $250,000 fundraiser co-chaired by superlobbyist felon Jack Abramoff right after he stepped down as secretary, and Jackson, who is an FBI target now, following him at HUD, Cuomo was, in some respects, the last chance that borrowers had before the crisis hit. The grand ambitions unleashed when he orchestrated his father's win at such an early age propelled him to HUD's helm at a similarly early age, and convinced him to run for governor before he was ready. He seems more comfortable at 50 in the state attorney general's office than he has ever appeared in his public life, but the country will be living with his HUD mistakes, ill- or well-intended, for a long time to come.

How the Democrats Created the Financial Crisis

2008-09-22T09:21:00.000-07:00

Commentary by Kevin Hassett

Sept. 22 (Bloomberg) -- The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., ambiguity has been a big part of the story.

Why did Bear Stearns fail, and how does that relate to AIG? It all seems so complex.

But really, it isn't. Enough cards on this table have been turned over that the story is now clear. The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally.

Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves.

In the times that Fannie and Freddie couldn't make the market, they became the market. Over the years, it added up to an enormous obligation. As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.

The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.

Turning Point

Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.

It is easy to identify the historical turning point that marked the beginning of the end.

Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even ``on the page'' of allowable interpretations.

Then legislative momentum emerged for an attempt to create a ``world-class regulator'' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.

Greenspan's Warning

The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie ``continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. ``We are placing the total financial system of the future at a substantial risk.''

What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

Different World

If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.

That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: ``It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''

Mounds of Materials

Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.

But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.

Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.

Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.

There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.

Oh, and there is one little footnote to the story that's worth keeping in mind while Democrats point fingers between now and Nov. 4: Senator John McCain was one of the three cosponsors of S.190, the bill that would have averted this mess.

(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Senator John McCain of Arizona in the 2008 presidential election. The opinions expressed are his own.)

Obama Sends His Kids to Private Schools

2008-09-10T10:06:00.000-07:00

while local kids rot in shitty public schools.

From Sandra Tsing Loh via the New York Times:

Here’s the thing: I do not know why Barack and Michelle Obama cannot send their children to a nice public school in Hyde Park. You understand that I am a bit unstable this election season (I voted for Hillary) and I do my research by erratically Googling from home. And all I know about Hyde Park — and, readers, I’d love to be corrected if I’m wrong — is that even though real estate prices seem high, the brave little public schools in its ZIP code seem to be flailing. Their scores on www.greatschools.net are largely 2’s and 4’s (on a scale of 1 to 10, 10 being the best). When you read the tea leaves as manically as I do, those low numbers suggest that few children of educated, middle-class children are attending the local schools. Rather, they’ve withdrawn, with nary a ripple, into their whispery private enclaves.

Let us not even touch the term “community organizer,” so buffeted about, by both sides, like a balloon at a rock concert. Let us just say that if Mr. and Mrs. Obama — a dynamic, Harvard-educated couple — had chosen public over private school, they could have lifted up not just their one local public school, but a family of schools. First, given the social pressure (or the social persuasion of wanting to belong to the cool club), more educated, affluent families would tip back into the public school fold. And second, the presence of educated type-A parents with too much time on their hands ensures that schools are held, daily, to high standards.

But the significance of educated families opting in to their local public schools goes deeper than that. Research done by Richard Kahlenberg, a senior fellow at the Century Foundation, indicates that poor children benefit hugely by mixing, daily, with middle-class children (particularly those from families who value education). Conversely, as long as the deleterious effects of poverty, like rampant absenteeism and serious health issues, do not overwhelm the school culture, middle-class children suffer no ill effects. Furthermore, studies have shown that new immigrant children learn English faster and master the complex linguistic skills they need to succeed on standardized tests when they are in classrooms with native English speakers. Sadly, because of the widespread flight of higher-minded families, ethnic segregation (not to mention class segregation) in public schools today is so extreme that only one in five immigrant children will have even one native English-speaking friend.

So it is with huge grief-filled disappointment that I discovered that the Obamas send their children to the University of Chicago Laboratory School (by 5th grade, tuition equals $20,286 a year). The school’s Web site quotes all that ridiculous John Dewey nonsense about developing character while, of course, isolating your children from the poor. A pox on them and, while we’re at it, a pox on John Dewey! I’m sick to death of those inspirational Dewey quotes littering the Web sites of $20,000-plus-a-year private schools, all those gentle duo-tone-photographed murmurings about “building critical thinking and fostering democratic citizenship” in their cherished students, living large on their $20,000-a-year island.

Meanwhile, Joseph Biden, the Amtrak senator, standing up boldly for the right to be a Roman Catholic, appears to have sent all three children to the lovely looking Archmere Academy in Delaware. Archmere’s Web site notes some public school districts allow Archmere students to use public school buses. Well, isn’t that great — your tax dollars at work in the great state of Delaware because with $18,000 a year in tuition, they can’t afford their own buses.
Then again, a spot of happy news for the Democrats: not only did John McCain’s four children attend elite private schools in Arizona, but collective donations to their children’s private schools between 2001 and 2006, totaled $500,000.

And yes, I know I appear to be ranting on like a pit bull without lipstick, which brings me to the final nail in the coffin in this sorry election year. As a Democrat I am horrified that Sarah Palin is the one who snagged the deeply profound — and absolutely ignored by professional smart people — emotional real estate of “P.T.A. mother.” I too am, in fact, not just “my kids’ mom” but their Title I Los Angeles public school P.T.A. secretary. This unheard female howl is, for better or worse, what Ms. Palin has set out to tap into; it is real, and I am sick that we’ve let the Republicans charge this ground.

Sarah Palin’s children went to what looks like a humble little public school: Iditarod Elementary on Wasilla Fishhook Road. The school’s score on www.greatschools.net is a 4. That’s a lot of street cred, for a gun-totin’, snow-mobilin’ creationist-lovin’ lady.

Oh, I’m such a depressed, Democrat P.T.A. mother

Is the grass greener with socialized medicine?

2008-08-25T13:22:00.000-07:00

By Sally C. Pipes
Special to the Examiner 8/23/08 7:35 PM
link

With Democrats convinced 2008 is their year, the campaign trail is awash with promises to make universal health care a reality by the end of the next president’s first term.

The basic argument of those who support a government takeover of the health care system is familiar. As New York Times columnist Paul Krugman once put it, “America’s health care system spends more, for worse results, than that of any other advanced country.”

Krugman’s line has been repeated so often it’s considered gospel truth in most public debates — people rarely check to see if it matches the facts. As the American humorist Josh Billings quipped, “the problem with the world ain’t ignorance, it’s the things people know that just ain’t so.”

If they did, they’d probably be surprised. Socialized health care isn’t all it’s cracked up to be.

Take the much-vaunted Canadian system. More than 825,000 Canadian citizens are currently on waiting lists for surgery and other necessary treatments. Fifteen years ago, the average wait between a referral from a primary-care doctor to treatment by a specialist was around nine weeks. Today, that wait is over 16 weeks.

That’s almost double what doctors consider clinically reasonable. As Canadian physician Brian Day explained to The New York Times, Canada “is a country in which dogs can get a hip replacement in under a week and in which humans can wait two to three years.”
In part, these waits are due to a doctor shortage. According to the Organization for Economic Cooperation and Development, Canada ranks 24th out of 28 countries in doctors per thousand people.

Why so few doctors? Over the past decade, about 11 percent of physicians trained in Canadian medical schools have moved to the United States. That’s because doctors’ salaries in Canada are negotiated, set and paid for by provincial governments and held down by cost-conscious budget analysts. Today, in fact, the average Canadian doctor earns only 42 percent of what a doctor earns in the United States.

Canada also limits access to common medical technologies. When compared with other OECD countries, Canada is 13th out of 24 in access to magnetic resonance imagings, 18th of 24 in access to computed tomography scanners, and seventh of 17 in access to mammograms.

The problems plaguing Canada are characteristic of all universal health care systems.

In Britain, more than 1 million sick citizens are currently waiting for hospital admission. Another 200,000 are waiting just to get on a waiting list. Each year, Britain’s National Health Service cancels around 100,000 operations.

Britain even has a government agency explicitly tasked with limiting people’s access to prescription drugs. Euphemistically called the National Institute for Health and Clinical Effectiveness, the agency determines which treatments the British health care system covers. More often than not, saving money takes priority over saving lives.

In 2008, for instance, NICE refused to approve the lung cancer drug Tarceva. Despite numerous studies showing that the drug significantly prolongs the life of cancer patients — and the unanimous endorsement of lung cancer specialists throughout the United Kingdom — NICE determined that the drug was too expensive to cover relative to its effectiveness. As of August 2008, England is one of only three countries in Western Europe that denies citizens access to Tarceva.

Britain’s behavior is typical — every European government rations drugs to save money. Eighty-five new drugs hit the U.S. market between 1998 and 2002. During that same time period, only 44 of those drugs became available in Europe.

The evidence clearly indicates that patients under socialized medicine are suffering. Why, then, do countries with government-run health care consistently outrank the United States on international quality surveys?

It’s not because the American health care system is inferior. It’s because these surveys use deeply flawed metrics that don’t reflect health care quality.

Case in point: The World Health Organization rankings of overall health system performance placed the United States 37th out of 191 countries. That’s behind not only Canada, Britain and France, but even countries like Costa Rica, Morocco and Cyprus.

Life expectancy accounted for 25 percent of a nation’s WHO ranking. But life expectancy is the function of a variety of factors. Medical care is just one of them. Just as important are a nation’s homicide rate, the number of accidents, diet trends, ethnic diversity and much more.

Another factor accounting for 25 percent of a nation’s ranking was “distribution of health,” or fairness. By this logic, treating everyone exactly the same is more important than treating people well. So long as everyone is equal — even if they’re equally miserable — a nation will do quite well in the WHO rankings.

In measuring the quality of a health care system, what really matters is how well it serves those who are sick. And it’s here that America really excels.

According to an August 2008 study published in Lancet Oncology, the renowned British medical journal, Americans have a better than five-year survival rate for 13 of the 16 most prominent cancers when compared with their European and Canadian counterparts.

With breast cancer, for instance, the survival rate among American women is 83.9 percent. For women in Britain, it’s just 69.7 percent. For men with prostate cancer, the survival rate is 91.9 percent here but just 73.7 percent in France and 51.1 percent in Britain.

American men and women are more than 35 percent more likely to survive colon cancer than their British counterparts.

It’s no wonder then that foreign dignitaries living in countries with socialized health care systems routinely come to this country when they need top-flight medical treatment.

When Italian Prime Minister Silvio Berlusconi needed heart surgery in 2006, he traveled to the Cleveland Clinic — often considered America’s best hospital for cardiac care. When Canadian Member of Parliament Belinda Stronach, who had denounced a two-tier health care system for Canadians, needed breast cancer surgery herself in 2007, she headed to a California hospital and paid out of pocket.

So much for the “free” health care they could have received at home.

As for the supposed cost advantages of socialized medicine? Those are illusory, too. True, other developed nations may spend less on health care as a percentage of gross domestic product than the United States does — but so does Sudan. Without considering value, such statistical evaluations are worthless.

And one of the primary reasons health care costs more in America is that we are a wealthy country that demands the best. And, we’re investing a lot more in medical research.

The United States produces over half of the $175 billion in health care technology products purchased globally. In 2004, the federal government funded medical research to the tune of $18.4 billion. By contrast, the European Union — which has a significantly larger population than the United States — allocated funds equal to just $3.7 billion for medical research.

Between 1999 and 2005, the United States was responsible for 71 percent of the sales of new pharmaceutical drugs. The next two largest pharmaceutical markets — Japan and Germany — account for just 4 percent each.

While no one can deny that there are significant problems in the American health care system, overall it provides exceptional value. The ideologues who claim we’d be better off under socialized medicine are massively wrong. Government-run health care has proven to be heartless and uncaring — and the inferior treatments it provides come with a very steep price tag.

Obama’s Curious Capital Gains Tax Epiphany

2008-08-19T18:04:00.000-07:00

Obama’s Curious Capital Gains Tax Epiphany
August 18, 2008 10:45 AM ET
by James Pethokoukis
US News & World Report

Here's the question: Why did Barack Obama finally go with a smaller-than-expected suggested increase in the capital gains tax rate? Let me present what is, I think, a plausible answer in 10 easy steps (see "Did Obama Blink on Capital Gains Taxes?" for more details):

1) In September 2007, Obama (the primary election version) suggests a possible near doubling of the maximum capital gains tax to 28 percent on the grounds of fairness (big with Dem primary voters) and a need to raise revenue. (Why 28 percent? Because that was the top Bill Clinton cap gains rate inherited from Ronald Reagan.) But Obama leaves himself plenty of wiggle room, providing a range of between 28 percent and 20 percent, the latter being the rate that resulted from the 1997 Clinton-Gingrich reduction and was followed by an economic and stock market boom.

2) The economy (credit crisis, spiking oil prices) worsens, making tax hikes seem riskier.

3) Obama's numerous Wall Street backers accept that tax rates are going up but express unhappiness about the possible 28 percent rate.

4) In an April 2008 debate in Philadelphia, Obama doesn't seem to understand the link between cap gains rates and tax revenues and seems more interested in their equity (fairness) impact rather than their impact on equities (stocks, as well as the economy).

5) Hillary Clinton—whose advisers were quietly suggesting no cap gains tax hike—concedes in early June.

6) The campaign moves to the general, where tax hikes aren't as popular as in the Dem primaries.

7) In a mid-June 2008 interview with CNBC's John Harwood, Obama says he might "possibly defer" his tax increases depending on the state of the economy.

8) The economy worsens (unemployment rises, gas prices soar to record levels).

9) McCain, pushing for no new taxes, stays close in the polls.

10) Obama (the general election version) opts for the lower cap gains rate of 20 percent.

All this being said, sometimes it is the destination rather than the journey. As Larry Kudlow puts it on his blog:

The McCain folks are now slamming Obama's credibility on tax hikes and other issues. They infer that the young Illinois senator is a flip-flopper. Well, that's true. But some flip-flops are better than others. Sen. McCain flip-flopped on the Bush tax cuts and drilling. Bravo for that. And if Sen. Obama is flip-flopping toward lower investment taxes, so much the better.

Obama's Non-Existent Energy Plan

2008-08-04T10:09:00.000-07:00

Senator Barack Obama's energy plan can be summed up as follows: "Inflate Your Tires and Get a Tune-Up." Really. It's on YouTube.

There are things you can do individually, though, to save energy. Making sure your tires are properly inflated — simple thing. But we could save all the oil that they’re talking about getting off drilling — if everybody was just inflating their tires? And getting regular tune-ups? You’d actually save just as much!

Obamanomics Is a Recipe for Recession

2008-07-30T15:48:00.000-07:00

By MICHAEL J. BOSKIN
July 29, 2008
The Wall Street Journal

What if I told you that a prominent global political figure in recent months has proposed: abrogating key features of his government's contracts with energy companies; unilaterally renegotiating his country's international economic treaties; dramatically raising marginal tax rates on the "rich" to levels not seen in his country in three decades (which would make them among the highest in the world); and changing his country's social insurance system into explicit welfare by severing the link between taxes and benefits?

The first name that came to mind would probably not be Barack Obama, possibly our nation's next president. Yet despite his obvious general intelligence, and uplifting and motivational eloquence, Sen. Obama reveals this startling economic illiteracy in his policy proposals and economic pronouncements. From the property rights and rule of (contract) law foundations of a successful market economy to the specifics of tax, spending, energy, regulatory and trade policy, if the proposals espoused by candidate Obama ever became law, the American economy would suffer a serious setback.

To be sure, Mr. Obama has been clouding these positions as he heads into the general election and, once elected, presidents sometimes see the world differently than when they are running. Some cite Bill Clinton's move to the economic policy center following his Hillary health-care and 1994 Congressional election debacles as a possible Obama model. But candidate Obama starts much further left on spending, taxes, trade and regulation than candidate Clinton. A move as large as Mr. Clinton's toward the center would still leave Mr. Obama on the economic left.

Also, by 1995 the country had a Republican Congress to limit President Clinton's big government agenda, whereas most political pundits predict strengthened Democratic majorities in both Houses in 2009. Because newly elected presidents usually try to implement the policies they campaigned on, Mr. Obama's proposals are worth exploring in some depth. I'll discuss taxes and trade, although the story on his other proposals is similar.

First, taxes. The table nearby demonstrates what could happen to marginal tax rates in an Obama administration. Mr. Obama would raise the top marginal rates on earnings, dividends and capital gains passed in 2001 and 2003, and phase out itemized deductions for high income taxpayers. He would uncap Social Security taxes, which currently are levied on the first $102,000 of earnings. The result is a remarkable reduction in work incentives for our most economically productive citizens.

The top 35% marginal income tax rate rises to 39.6%; adding the state income tax, the Medicare tax, the effect of the deduction phase-out and Mr. Obama's new Social Security tax (of up to 12.4%) increases the total combined marginal tax rate on additional labor earnings (or small business income) from 44.6% to a whopping 62.8%. People respond to what they get to keep after tax, which the Obama plan reduces from 55.4 cents on the dollar to 37.2 cents -- a reduction of one-third in the after-tax wage!

Despite the rhetoric, that's not just on "rich" individuals. It's also on a lot of small businesses and two-earner middle-aged middle-class couples in their peak earnings years in high cost-of-living areas. (His large increase in energy taxes, not documented here, would disproportionately harm low-income Americans. And, while he says he will not raise taxes on the middle class, he'll need many more tax hikes to pay for his big increase in spending.)

On dividends the story is about as bad, with rates rising from 50.4% to 65.6%, and after-tax returns falling over 30%. Even a small response of work and investment to these lower returns means such tax rates, sooner or later, would seriously damage the economy.

On economic policy, the president proposes and Congress disposes, so presidents often wind up getting the favorite policy of powerful senators or congressmen. Thus, while Mr. Obama also proposes an alternative minimum tax (AMT) patch, he could instead wind up with the permanent abolition plan for the AMT proposed by the Ways and Means Committee Chairman Charlie Rangel (D., N.Y.) -- a 4.6% additional hike in the marginal rate with no deductibility of state income taxes. Marginal tax rates would then approach 70%, levels not seen since the 1970s and among the highest in the world. The after-tax return to work -- the take-home wage for more time or effort -- would be cut by more than 40%.

Now trade. In the primaries, Sen. Obama was famously protectionist, claiming he would rip up and renegotiate the North American Free Trade Agreement (Nafta). Since its passage (for which former President Bill Clinton ran a brave anchor leg, given opposition to trade liberalization in his party), Nafta has risen to almost mythological proportions as a metaphor for the alleged harm done by trade, globalization and the pace of technological change.

Yet since Nafta was passed (relative to the comparable period before passage), U.S. manufacturing output grew more rapidly and reached an all-time high last year; the average unemployment rate declined as employment grew 24%; real hourly compensation in the business sector grew twice as fast as before; agricultural exports destined for Canada and Mexico have grown substantially and trade among the three nations has tripled; Mexican wages have risen each year since the peso crisis of 1994; and the two binational Nafta environmental institutions have provided nearly $1 billion for 135 environmental infrastructure projects along the U.S.-Mexico border.

In short, it would be hard, on balance, for any objective person to argue that Nafta has injured the U.S. economy, reduced U.S. wages, destroyed American manufacturing, harmed our agriculture, damaged Mexican labor, failed to expand trade, or worsened the border environment. But perhaps I am not objective, since Nafta originated in meetings James Baker and I had early in the Bush 41 administration with Pepe Cordoba, chief of staff to Mexico's President Carlos Salinas.

Mr. Obama has also opposed other important free-trade agreements, including those with Colombia, South Korea and Central America. He has spoken eloquently about America's responsibility to help alleviate global poverty -- even to the point of saying it would help defeat terrorism -- but he has yet to endorse, let alone forcefully advocate, the single most potent policy for doing so: a successful completion of the Doha round of global trade liberalization. Worse yet, he wants to put restrictions into trade treaties that would damage the ability of poor countries to compete. And he seems to see no inconsistency in his desire to improve America's standing in the eyes of the rest of the world and turning his back on more than six decades of bipartisan American presidential leadership on global trade expansion. When trade rules are not being improved, nontariff barriers develop to offset the liberalization from the current rules. So no trade liberalization means creeping protectionism.

History teaches us that high taxes and protectionism are not conducive to a thriving economy, the extreme case being the higher taxes and tariffs that deepened the Great Depression. While such a policy mix would be a real change, as philosophers remind us, change is not always progress.

Mr. Boskin, professor of economics at Stanford University and senior fellow at the Hoover Institution, was chairman of the Council of Economic Advisers under President George H.W. Bush.

Obama Got Discount on Home Loan

2008-07-02T13:34:00.000-07:00

Campaign Defends Lower Rate as Lender Competition for Business
By Joe Stephens
Washington Post Staff Writer
Wednesday, July 2, 2008

Shortly after joining the U.S. Senate and while enjoying a surge in income, Barack Obama bought a $1.65 million restored Georgian mansion in an upscale Chicago neighborhood. To finance the purchase, he secured a $1.32 million loan from Northern Trust in Illinois.

The freshman Democratic senator received a discount. He locked in an interest rate of 5.625 percent on the 30-year fixed-rate mortgage, below the average for such loans at the time in Chicago. The loan was unusually large, known in banker lingo as a "super super jumbo." Obama paid no origination fee or discount points, as some consumers do to reduce their interest rates.

Compared with the average terms offered at the time in Chicago, Obama's rate could have saved him more than $300 per month.

Obama spokesman Ben LaBolt said the rate was adjusted to account for a competing offer from another lender and other factors. "The Obamas have since had as much as $3 million invested through Northern Trust," he said in a statement.

Modest adjustments in mortgage rates are common among financial institutions as they compete for business or develop relationships with wealthy families. But amid a national housing crisis, news of discounts offered to Sens. Christopher J. Dodd (D-Conn.), chairman of the banking committee, and Kent Conrad (D-N.D) by another lender, Countrywide Financial, has brought new scrutiny to the practice and has resulted in a preliminary Senate ethics committee inquiry into the Dodd and Conrad loans.

Within Obama's presidential campaign organization, former Fannie Mae chief executive James A. Johnson resigned abruptly as head of the vice presidential search committee after his favorable Countrywide loan became public.

Driving the recent debate is concern that public officials, knowingly or unknowingly, may receive special treatment from lenders and that the discounts could constitute gifts that are prohibited by law.

"The real question is: Were congressmen getting unique treatment that others weren't getting?" associate law professor Adam J. Levitin, a credit specialist at Georgetown University Law Center, said about the Countrywide loans. "Do they do business like that for people who are not congressmen? If they don't, that's a problem."

Under financial disclosure rules, members of Congress are not obliged to disclose debts owed to financial institutions for personal residences. Names of lenders and rates paid on mortgages sometimes can be determined by scrutinizing property transaction records. In March, in response to media questions, Obama posted on his campaign Web site records related to his house purchase.

Last week, during debate on a bill to help homeowners caught in the foreclosure crisis, some members of the Senate ethics committee proposed an amendment to require that lawmakers disclose their mortgage lenders and loan terms in annual financial forms starting next year.

In Obama's case, he received a lower rate than the average offered at the time in Chicago for similarly structured jumbo loans. He secured his final mortgage commitment on June 8, 2005, and during that week, rates on similar loans for which information is available averaged 5.93 percent, according to HSH Associates, which surveys lenders. Another survey firm, Bankrate.com, placed the average at 6 percent.

"It's certainly safe to say that this borrower did better than average," said Keith Gumbinger, an HSH vice president, noting that consumer rates vary widely. "It's a good deal."

The Obama campaign called the rate "consistent with Northern Trust policies, and it reflected the base rate set for that period discounted to address the competition for the account and other opportunities, such as personal financial services, that the relationship would bring to Northern Trust."

When the Obamas secured the loan, their income had risen dramatically. Obama assumed his Senate seat in January 2005, with an annual salary of $162,100. That same month, Random House agreed to reissue an Obama memoir, for which it originally paid $40,000, as part of a $2.27 million deal that included two future nonfiction books and a children's book.

Around the same time, the University of Chicago Hospitals promoted Michelle Obama to a vice president and more than doubled her pay, to $317,000.

The couple wanted to step up from their $415,000 condo. They chose a house with six bedrooms, four fireplaces, a four-car garage and 5 1/2 baths, including a double steam shower and a marble powder room. It had a wine cellar, a music room, a library, a solarium, beveled glass doors and a granite-floored kitchen.

The Obamas had no prior relationship with Northern Trust when they applied for the loan. They received an oral commitment on Feb. 4, 2005, and locked in the rate of 5.625 percent, the campaign said. On that date, HSH data show, the average rate in Chicago for a 30-year fixed-rate jumbo loan with no points was about 5.94 percent.

Jumbo loans are for amounts up to $650,000, but the Obamas' $1.32 million loan was so large that few comparables are available. Mortgage specialists say that many high-end buyers pay cash.

Obama's Republican opponent, Sen. John McCain, has no mortgages on properties he owns with his wife, Cindy, who is a multimillionaire.

Unlike Countrywide, where leaked internal e-mails documented a special discount program for friends of chief executive Angelo Mozilo, Northern Trust says it has no formal program to provide discounts to public officials. Loan officers may consider a borrower's occupation when establishing an interest rate, the bank said.

"A person's occupation and salary are two factors; I would expect those are two things we would take into consideration," said Northern Trust Vice President John O'Connell. "That would apply to anyone seeking to get a mortgage at Northern Trust." He added that the rates offered to Obama were "consistent with internal Northern Trust rates at that time."

"The bottom line is, this was a business proposition for us," he said. "Our business model is to service and pursue successful individuals, families and institutions."

O'Connell referred additional questions to the campaign.

Since 1990, Northern Trust employees have donated more than $739,000 to federal campaigns, including $71,000 to Obama, according to the Center for Responsive Politics.

Obama's house purchase has been a source of controversy. In 2006, the Chicago Tribune
reported that on the day of the closing, the wife of Obama's longtime friend and fundraiser Antoin "Tony" Rezko closed on an adjoining lot that had been the estate's side yard.

The Obamas bought the house for $300,000 less than the asking price of $1.95 million, while Rezko's wife, Rita, bought the neighboring lot for the full asking price of $625,000. Rita Rezko later sold a portion of the undeveloped lot to the Obamas, enlarging the senator's yard.

Tony Rezko already had been linked to a grand jury investigation involving public corruption. Last month, he was convicted of 16 counts in an influence-peddling scheme that reached the highest levels of Illinois state government. END

Note: What I find most interesting is that I paid more money down ($400,000) on my house than Obama did ($300,000) even though my house is less than half the price of his mansion, and he still managed to get a lower interest rate than I did. Also, why does a family of four need a house with six bedrooms and 5 1/2 baths? Talk about excess consumption.

The Obama house: 6 bedrooms and 5.5 bathrooms

Why does a family of 4 need 5.5 bathrooms? As Obama himself put it: "We can’t drive our SUVs and eat as much as we want and keep our homes on 72 degrees at all times... and then just expect that other countries are going to say OK." Except your family, of course, Senator Obama.

Obama's Dry Hole

2008-06-30T23:59:00.000-07:00

The Wall Street Journal
June 30, 2008; Page A12

"I want you to think about this," Barack Obama said in Las Vegas last week. "The oil companies have already been given 68 million acres of federal land, both onshore and offshore, to drill. They're allowed to drill it, and yet they haven't touched it – 68 million acres that have the potential to nearly double America's total oil production."

Wow, how come the oil companies didn't think of that?

Perhaps because the notion is obviously false – at least to anyone who knows how oil and gas exploration actually works. Predictably, however, Mr. Obama's claim is also the mantra of Nancy Pelosi, Barbara Boxer, John Kerry, Nick Rahall and others writing Congressional energy policy. As a public service, here's a remedial education.

Democrats are in a vise this summer, pinned on one side by voter anger over $4 gas and on the other by their ideological opposition to carbon-based energy – so, as always, the political first resort is to blame Big Oil. The allegation is that oil companies are "stockpiling" leases on federal lands to drive up gas prices. At least liberals are finally acknowledging the significance of supply and demand.

To deflect the GOP effort to relax the offshore-drilling ban – and thus boost supply while demand will remain strong – Democrats also say that most of the current leases are "nonproducing." The idea comes from a "special report" prepared by the Democratic staff of the House Resources Committee, chaired by Mr. Rahall. "If we extrapolate from today's production rates on federal lands and waters," the authors write, the oil companies could "nearly double total U.S. oil production" (their emphasis).

In other words, these whiz kids assume that every acre of every lease holds the same amount of oil and gas. Yet the existence of a lease does not guarantee that the geology holds recoverable resources. Brian Kennedy of the Institute for Energy Research quips that, using the same extrapolation, the 9.4 billion acres of the currently nonproducing moon should yield 654 million barrels of oil per day.

Nonetheless, the House still went through with a gesture called the "use it or lose it" bill, which passed on Thursday 223-195. It would be pointless even if it had a chance of becoming law. Oil companies acquire leases in the expectation that some of them contain sufficient oil and gas to cover the total costs. Yet it takes years to move through federal permitting, exploration and development. The U.S. Minerals Management Service notes that only one of three wells results in a discovery of oil that can be recovered economically. In deeper water, it's one of five. All this involves huge risks, capital investment – and time.

If anything, the Democrats ought to be dancing in the streets about "idle" leases. It means fewer rigs. The days of hit-or-miss wildcatting have been relegated to the past by new, more efficient technologies, such as seismic imaging, directional drilling (wells that are "steered" underground) and multilateral drilling (multiple underground offshoots from a single wellbore).

At the same time, finding new reservoirs has become far more complex. Except for a few very large fields discovered decades ago like Prudhoe Bay, most recent discoveries have been smaller, deeper and less concentrated. The U.S. needs a continuous supply of discoveries to replace declining wells.

Yet companies are not allowed to explore where the biggest prospects for oil and gas may exist – especially on the Outer Continental Shelf. Seven of the top 20 U.S. oil fields are now located in analogous deepwater areas (greater than 1,000 feet) in the Gulf of Mexico. In 2006, Chevron discovered what is likely to be the largest American oil find since Prudhoe, drilled in 7,000 feet of water and more than 20,000 feet under the sea floor. The Wilcox formation may have an upper end of 15 billion barrels of recoverable oil and should begin producing by 2014 – perhaps ushering in a new ultradeepwater frontier.

Likewise, in April, the U.S. Geological Survey revised its estimate for the Bakken Shale, underneath the badlands of North Dakota and Montana. The new assessment – as much as 4.3 billion barrels of oil – is a 25-fold increase over what the Survey believed in 1995. Such breakthroughs confirm that very large reserves exist, if only Congress would let business get at them.

All of which has Democrats sweating bullets. The leadership is desperate to avoid debating a Department of Interior spending bill, because they know Republicans will offer amendments lifting the drilling moratorium that may peel off some Democrats. Last week, Chairman David Obey shut down the Appropriations Committee rather than countenance more domestic energy production. Given Democratic energy illiteracy, this is a fight the GOP can win if it keeps up the pressure.

Canadian Health Care We So Envy Lies In Ruins, Its Architect Admits

2008-06-26T10:13:00.000-07:00

Investor's Business Daily

By DAVID GRATZER | Posted Wednesday, June 25, 2008 4:30 PM PT

As this presidential campaign continues, the candidates' comments about health care will continue to include stories of their own experiences and anecdotes of people across the country: the uninsured woman in Ohio, the diabetic in Detroit, the overworked doctor in Orlando, to name a few.

But no one will mention Claude Castonguay — perhaps not surprising because this statesman isn't an American and hasn't held office in over three decades.

Castonguay's evolving view of Canadian health care, however, should weigh heavily on how the candidates think about the issue in this country.

Back in the 1960s, Castonguay chaired a Canadian government committee studying health reform and recommended that his home province of Quebec — then the largest and most affluent in the country — adopt government-administered health care, covering all citizens through tax levies.

The government followed his advice, leading to his modern-day moniker: "the father of Quebec medicare." Even this title seems modest; Castonguay's work triggered a domino effect across the country, until eventually his ideas were implemented from coast to coast.

Four decades later, as the chairman of a government committee reviewing Quebec health care this year, Castonguay concluded that the system is in "crisis."

"We thought we could resolve the system's problems by rationing services or injecting massive amounts of new money into it," says Castonguay. But now he prescribes a radical overhaul: "We are proposing to give a greater role to the private sector so that people can exercise freedom of choice."

Castonguay advocates contracting out services to the private sector, going so far as suggesting that public hospitals rent space during off-hours to entrepreneurial doctors. He supports co-pays for patients who want to see physicians. Castonguay, the man who championed public health insurance in Canada, now urges for the legalization of private health insurance.

In America, these ideas may not sound shocking. But in Canada, where the private sector has been shunned for decades, these are extraordinary views, especially coming from Castonguay. It's as if John Maynard Keynes, resting on his British death bed in 1946, had declared that his faith in government interventionism was misplaced.

What would drive a man like Castonguay to reconsider his long-held beliefs? Try a health care system so overburdened that hundreds of thousands in need of medical attention wait for care, any care; a system where people in towns like Norwalk, Ontario, participate in lotteries to win appointments with the local family doctor.

Years ago, Canadians touted their health care system as the best in the world; today, Canadian health care stands in ruinous shape.

Sick with ovarian cancer, Sylvia de Vires, an Ontario woman afflicted with a 13-inch, fluid-filled tumor weighing 40 pounds, was unable to get timely care in Canada. She crossed the American border to Pontiac, Mich., where a surgeon removed the tumor, estimating she could not have lived longer than a few weeks more.

The Canadian government pays for U.S. medical care in some circumstances, but it declined to do so in de Vires' case for a bureaucratically perfect, but inhumane, reason: She hadn't properly filled out a form. At death's door, de Vires should have done her paperwork better.

De Vires is far from unusual in seeking medical treatment in the U.S. Even Canadian government officials send patients across the border, increasingly looking to American medicine to deal with their overload of patients and chronic shortage of care.

Since the spring of 2006, Ontario's government has sent at least 164 patients to New York and Michigan for neurosurgery emergencies — defined by the Globe and Mail newspaper as "broken necks, burst aneurysms and other types of bleeding in or around the brain." Other provinces have followed Ontario's example.

Canada isn't the only country facing a government health care crisis. Britain's system, once the postwar inspiration for many Western countries, is similarly plagued. Both countries trail the U.S. in five-year cancer survival rates, transplantation outcomes and other measures.

The problem is that government bureaucrats simply can't centrally plan their way to better health care.

A typical example: The Ministry of Health declared that British patients should get ER care within four hours. The result? At some hospitals, seriously ill patients are kept in ambulances for hours so as not to run afoul of the regulation; at other hospitals, patients are admitted to inappropriate wards.

Declarations can't solve staffing shortages and the other rationing of care that occurs in government-run systems.

Polls show Americans are desperately unhappy with their system and a government solution grows in popularity. Neither Sen. Obama nor Sen. McCain is explicitly pushing for single-payer health care, as the Canadian system is known in America.

"I happen to be a proponent of a single-payer health care program," Obama said back in the 1990s. Last year, Obama told the New Yorker that "if you're starting from scratch, then a single-payer system probably makes sense."

As for the Republicans, simply criticizing Democratic health care proposals will not suffice — it's not 1994 anymore. And, while McCain's health care proposals hold promise of putting families in charge of their health care and perhaps even taming costs, McCain, at least so far, doesn't seem terribly interested in discussing health care on the campaign trail.

However the candidates choose to proceed, Americans should know that one of the founding fathers of Canada's government-run health care system has turned against his own creation. If Claude Castonguay is abandoning ship, why should Americans bother climbing on board?

Gratzer is a senior fellow at the Manhattan Institute and a physician licensed in both the U.S. and Canada, where he received his medical training. His newest book, "The Cure: How Capitalism Can Save American Health Care," is now available in paperback.

Notable & Quotable

2008-06-25T10:16:00.000-07:00

Not Obama-related, but highly relevant in today's day and age.

Arthur Laffer speaking last month to graduates of Mercer University (via the Wall Street Journal):

Pursuing your dream of prospering will benefit everyone . . . When I graduated from Yale University, we had a serious commencement speaker not like the one you are stuck with today. The commencement speaker was President John F. Kennedy. And the point I'm making today is the same point he made all those years ago. He said, "No American is ever made better off by pulling a fellow American down, and all of us are made better off whenever any one of us is made better off." He concluded by using the analogy that "a rising tide raises all boats."

Never forget or be ashamed of the fact that pursuing your own self interest furthers everyone's interest. Without you, the poor would be poorer.

If only Barack Obama would take heed of this advice, he might get my vote.

Obama Voted to Raise Taxes for the Current 25% Federal Bracket

2008-06-11T10:59:00.000-07:00

I know Senator Obama wants to raise taxes on the "rich". I did not know that "rich" means anyone who makes more than $31,850 annually. He recently voted to increase the 25% bracket to 28%. According the the RNC website:

"Obama Voted In Favor Of The Democrats’ FY 2009 Budget, Which Would Raise Tax Rates For Americans Earning As Little As $31,850."

I've verified the RNC reference to Senate Resolution 70. It's pitiful that several Rebublicans also voted "yes" to higher taxes.

A Vote for McBama

2008-06-11T09:42:00.000-07:00

[Editor's Note - Robert Samuelson really hits the nail on the head with this article.]

June 11, 2008
A Vote for McBama
By Robert Samuelson

WASHINGTON -- For the party faithful, this is a sweet moment. They have their candidates and, whatever the obstacles, can still imagine victory in November. But the rest of us ought to remember that the politics of winning and governing often collide. The first involves maximizing popularity. The second requires farsighted choices that ultimately benefit the country but may initially hurt a president's approval ratings. What have we learned about the candidates' capacity for governing? Enough, I think, to temper the excitement.

Start with Barack Obama. Even those who disagree with him ought to feel pride in his impending nomination, because it continues America's racial reconciliation and atonement for slavery. But symbolism can't substitute for policy, and any feel-good fallout from electing Obama would soon fade. He'd have to earn popular support, and this would be made harder by a problem of his own making: He'd have to disavow much of his campaign rhetoric. The reason is that his campaign is itself a contradiction.

On the one hand, he projects himself as the great conciliator. He uses the metaphor of his race to argue that he is uniquely suited to bridge differences between liberals and conservatives, young and old, rich and poor -- to craft a new centrist politics. On the other hand, his actual agenda is highly partisan and undermines many of his stated goals. He wants to stimulate economic growth, but his hostility toward trade agreements threatens export-led growth (which is now beginning). He advocates greater energy independence but pretends this can occur without more domestic drilling for oil and natural gas.

All this reflects Obama's legislative record. From 2005 to 2007, he voted with his party 97 percent of the time, reports the Politico. But Obama's clever campaign strategy would put him in a bind as president. Championing centrism would disappoint many ardent Democrats. Pleasing them would betray his conciliating image. The fact that he has so far straddled the contradiction may confirm his political skills and the quiet aid received from the media, which helped him by virtually ignoring the blatant contradictions.

And what does the straddle tell us of him? Aside from ambition -- hardly unique among presidential candidates -- I cannot detect powerful convictions in Obama. He seems merely expedient in peddling his convenient conflicts. He strikes me as a super-successful graduate student: the brightest, quickest, most articulate guy in the seminar. In his career, he has advanced mainly by talking and writing -- not doing -- and may harbor a delusion common to the well-educated: that he can argue and explain his way around any problem.

By contrast, no one can claim that McCain lacks convictions. He has often defied Republican-party orthodoxy, and his credentials to lead a centrist coalition are stronger than Obama's. According to the Politico, he sided with his party only 83 percent of the time from 2005 to 2007. Even in this election year, he has taken unpopular positions. Note his criticism of farm subsidies, which won't help him in the Midwest. The trouble with McCain is that he often mistakes stubbornness for principle.

He has a hard time changing his mind, even when the evidence overwhelmingly suggests he's wrong. He has stuck with "campaign finance reform" despite its dismal record. After three decades, it has entangled political campaigns in rules and paperwork without solving any notable problem (for example, people continue to believe that wealthy "special interests" have too much influence). On immigration, he still does not grasp what I think is the actual problem: not illegal immigration so much as too many poor and unskilled immigrants, whether legal or illegal. Like Obama, he seems oblivious to the possible unintended consequences of endorsing an anti-global warming "cap-and-trade" program.

Steadfastness and good judgment are qualities we value in a president, and McCain has often displayed these. He was early and correct in his criticism of the Bush administration's conduct of the Iraq War and of its treatment of prisoners. He has been consistent in his opposition to high and wasteful federal spending. But good judgment must accompany steadfastness, and there are enough instances of McCain's bad judgment to make you wonder which would prevail.

So, vote for McBama. The truth is that both candidates leave room for doubt, and neither has forthrightly addressed some of America's obvious problems -- costly government retirement programs, immigration, our energy appetite. But for me, McCain does have one provisional and accidental advantage. By most appraisals, the Republicans will get slaughtered in congressional elections, and I have a visceral dislike of one-party government. It didn't work well under Bill Clinton or George W. Bush. Divided government doesn't ensure good government, but it may limit bad government by checking the worst instincts of both parties.

Copyright 2008, Washington Post Writers Group

Obama and the 'Rich'

2008-06-11T09:25:00.000-07:00

The Wall Street Journal
June 11, 2008
Obama and the 'Rich'

Barack Obama has been on a class-warfare tirade since he locked up the nomination, accusing John McCain of defending Bush tax cuts for "the rich." "For eight long years," he said Monday in a speech laying out his economic agenda, "our president sacrificed investments in health care, and education, and energy, and infrastructure on the altar of tax breaks for big corporations and wealthy CEOs."

Hmmm. Anybody even dimly acquainted with the record, especially President Bush's vast expansion of Medicare, might doubt the factual basis of such a statement. Never mind. Mr. Obama and the Congressional Democrats promise to sock it to "rich" taxpayers next year to pay for "middle class tax cuts" as well as some $300 billion in new spending. But there's a problem: They won't tell us exactly who the rich are.

In various tax proposals Mr. Obama has set the definition of rich at levels of $100,000, $200,000 and $250,000 in annual income. He has vowed, for example, to erase the Bush tax cuts not only for those who make more than $250,000, but to end the cap on Social Security taxes, which amounts to a tax hike on anyone who makes more than $100,000 in income. More recently, Austan Goolsbee, an Obama economic adviser, told me the new cap might be set at $200,000.

All of this has caused some heartburn among certain Democrats in high cost-of-living states. New York Rep. Joseph Crowley says a couple with earnings of $100,000 could be "a police officer and nurse." "In New York City," he adds, "they'd be struggling."

A similar argument came to the fore as Democrats debated the recent farm bill. Under the new law, farmers will be able to retain full subsidies even if they have incomes of $750,000. Because of various gimmicks, the USDA says that farmers could even have incomes up to $2 million and still be eligible for a farm welfare check. When it comes to farmers, Nancy Pelosi, Hillary Clinton and Barack Obama apparently believe that "soaking the rich" means soaking them with handouts.

This is not just a rhetorical exercise. It could tell us a lot about whether Democrats can come anywhere close to paying for all their spending promises and still meet their vow to balance the budget. One problem for Senator Obama and his class-warfare crowd is that repealing the Bush tax cuts for those with earnings of more than $250,000 would raise only about $40 billion a year, according to Cato Institute economist Alan Reynolds. That would leave President Obama with a $360 billion shortfall to meet his other proposals. Either those nurses and policemen are going to have to be defined as "rich" by Team Obama, or the Democrats' pledge of balancing the budget in five years is a fantasy. Add the fact that his various spending proposals will certainly prove more costly than projected. It sounds like not just the top 2% but most of the bottom 98% had better get ready for higher taxes under an Obama administration.

-- Stephen Moore

Where Does Obama Invest His Money?

2008-06-05T13:01:00.000-07:00

Political Diary - The Wall Street Journal
Where Does Obama Invest His Money?
March 27, 2008 10:26 p.m.

Barack Obama gave a major economic speech Thursday in New York, where the financial markets have been rattled in recent weeks, to put it mildly. That makes it all the more curious that Mr. Obama's tax returns, which he released this week, apparently show that he and his wife Michelle have next to no stake in the investor class.

Ryan Ellis of the American Shareholders Association has examined the Obama returns for calendar years 2001 to 2006 and found that, in all of those years, the couple reported a mere $1,188 in dividends in 2006 and another $2,754 in dividends in 2005. In the previous years, they reported no dividends of any kind.

Indeed, even though Michelle Obama had income from the University of Chicago's Hospital System that exceeded $1 million during the period the tax returns were filed, she appears to have neither a 401(k) plan nor an IRA for retirement contributions. In another sign the Obama household wasn't into building a nest egg, the couple cashed out $6,260 from a pension or 401(k) plan in 2000.

Given all this, Mr. Ellis asks why the Senator is so "hell-bent on pursuing punitive taxes on capital that would wreck America's retirement savings?" His answer: Perhaps it's "because, by and large, he doesn't have any skin in the game."

What a (Tax) Relief

2008-05-29T13:19:00.000-07:00

What a Relief
New York Sun Editorial
May 29, 2008

The Treasury Department marked the fifth anniversary of President Bush's signing into law the Jobs and Growth Tax Relief Reconciliation Act of 2003 by releasing two papers analyzing the effects of that and other tax cuts, and for those of us who enjoy the fine points of tax policy, they make for some fascinating reading.

We confess we stumbled a few times in making our way through the language, which seems at times to buy into left-wing assumptions. "Capital gains income, which is not captured in GDP, more than quadrupled between 1994 and 2000," says one of the papers. "Tax receipts from capital gains realizations more than tripled during this period, even though the tax rate on capital gains was reduced beginning in 1997."

Charlie Gibson, call your office. "Even though"? The tax receipts from capital gains didn't rise "even though" the capital gains tax was reduced, they rose because the capital gains tax was reduced. As the Laffer Curve graphically depicts, there is a point at which if you tax something less, you get more of it, and if you tax something more, you get less of it.

The paper makes the same rhetorical error later on, saying, "After 2004, tax revenues again grew faster than the economy. Despite the tax relief enacted earlier in the decade, the ratio of receipts to GDP was 18.8 percent in 2007, above the 40 year average."

"Despite" is the wrong word. Tax revenues did not rise "despite" the rate cuts; they rose because of the tax cuts. If we seem to be repeating ourselves, it's because it's almost impossible to overemphasize this point. It's a key to sensible tax policy. Rate reductions do not necessarily mean losses in government revenue. A portion of the revenue losses that would be predicted by a static analysis, sometimes all of them, sometimes more than all of them, are made up for by the effect of the rate cuts in spurring economic growth, work, savings, and investment.

Lest we seem too critical of the Treasury, let us say there is plenty of useful data in the papers. One point underscored is how the richest Americans shoulder more than their share of the tax burden. In 2005, most recent year for which data are available, the top 5% of taxpayers earned 35.7% of the income, but paid 59.7% of the income taxes. The top 1% of taxpayers earned 21.2% of the income, but paid 39.4% of the income taxes. The Democrats running for president, Senators Obama and Clinton, are promising to raise income tax rates on the "rich," but it's hard to see how that can be done much more without putting the burden of funding the whole federal government on a small minority of Americans and starting to raise the whole question of taxation without representation. If the persons paying for the government start to be a substantially different body than the overall population, a country begins to run the risk of serious political strains.

Such concerns are ameliorated somewhat by the data in the Treasury report on income mobility. It found substantial income mobility, with more than half of households moving to a different income quintile between 1996 and 2005. Roughly half of the households in the bottom quintile in 1996 had moved to a higher income quintile by 2005. And more than half of those in the top 1% of earners in 1996 had moved to a lower income group by 2005. Treasury analysis found that income mobility between 1996 and 2005 "was virtually the same as income mobility over the prior comparable period from 1987 to 1996."

The study also underscored that the president's tax cuts helped not only individuals but small businesses. "About 70 percent (1 million) of the 1.4 million tax returns that benefited from lowering the top two tax brackets from 39.6 percent to 35 percent and from 36 percent to 33 percent are flow-through business owners," the Treasury said. The report says that 34 million Americans own some sort of "flow-through" business, one that pays taxes via its individual owners. That includes roughly 4 million S corporations, 4 million partnerships, 22 million sole proprietorships and 2.2 million farms. In other words, the tax cuts affect not only wage-earners but employers and job creators.

One of the papers also underscores that the tax cuts are scheduled to expire at the end of 2010, which would mean significant tax increases for almost all taxpayers. As the Congress and the next administration weigh what to do about these scheduled sunsets, these Treasury reports will be worth keeping in mind.

Obama Stirs Ill Wind on Wall Street

2008-05-26T10:19:00.000-07:00

February 29, 2008
Obama Stirs Ill Wind on Wall Street
By Larry Kudlow

Sen. Barack Obama is very gloomy about America, and he's aligning himself with the liberal wing of the Democratic Party in hopes of coming to the nation's rescue. His proposal? Big-government planning, spending and taxing exactly what the nation and the stock market don't want to hear.

Obama unveiled much of his economic strategy in Wisconsin: He wants to spend $150 billion on a green-energy plan. He wants to establish an infrastructure investment bank to the tune of $60 billion. He wants to expand health insurance by roughly $65 billion. He wants to "reopen" trade deals, which is another way of saying he wants to raise the barriers to free trade.

He intends to regulate the profits for drug companies, health insurers and energy firms. He wants to establish a mortgage-interest tax credit. He wants to double the number of workers receiving the earned income tax credit and triple the benefit for minimum-wage workers.

The Obama spend-o-meter is now up around $800 billion. And tax hikes on the rich won't pay for it. It's the middle class that will ultimately shoulder this fiscal burden in terms of higher taxes and lower growth. This isn't free enterprise. It's old-fashioned-liberal tax, and spend, and regulate. It's plain ol' big government. The only people who will benefit are the central planners in Washington.

Obama would like voters to believe that he's the second coming of JFK. But with his unbelievable spending and new-government-agency proposals, he's looking more like Jimmy Carter. His is a "Grow the Government Bureaucracy Plan," and it's totally at odds with investment and business.

Obama says he wants U.S. corporations to stop "shipping jobs overseas" and bring their cash back home. But if he really wanted U.S. companies to keep more of their profits in the states, he'd be calling for a reduction in the corporate tax rate. Why isn't he demanding an end to the double-taxation of corporate earnings? It's simple: He wants higher taxes, too.

The Wall Street Journal's Steve Moore has done the math on Obama's tax plan. He says it will add up to a 39.6% personal income tax, a 52.2% combined income and payroll tax, a 28% capital-gains tax, a 39.6% dividends tax and a 55% estate tax.

Not only is Obama the big-spending candidate, he's also the very-high-tax candidate. And what he wants to tax is capital.

Doesn't Obama understand the vital role of capital formation in creating businesses and jobs? Doesn't he understand that without capital, businesses can't expand their operations and hire more workers?

Dan Henninger, writing in last Thursday's Wall Street Journal, notes that Obama's is a profoundly pessimistic message. "Strip away the new coat of paint from the Obama message, and what you find is not only familiar," writes Henninger. "It's a downer."

Obama wants you to believe that America is in trouble, and that it can only be cured with a big lurch to the left. Take from the rich and give to the non-rich. Redistribute income and wealth. It's an age-old recipe for economic disaster. It completely ignores incentives for entrepreneurs, small family-owned businesses and investors.

You can't have capitalism without capital. But Obama would penalize capital, be it capital from corporations or investors. This will only harm, and not advance, opportunities for middle-class workers.

Obama believes he can use government, and not free markets, to drive the economy. But on taxes, trade and regulation, Obama's program is anti-growth. A President Obama would steer us in the social-market direction of Western Europe, which has produced only stagnant economies down through the years.

It would be quite an irony. While newly emerging nations in Eastern Europe and Asia are lowering the tax penalties on capital and "reaping the economic rewards." Obama would raise them. Low-rate flat-tax plans are proliferating around the world. Yet Obama completely ignores this. American competitiveness would suffer enormously under Obama, as would job opportunities, productivity and real wages.

Imitate the failures of Germany, Norway and Sweden? That's no way to run economic policy.

I have so far been soft on Obama this election season. In many respects, he is a breath of fresh air. He's an attractive candidate with an appealing approach to politics. Obama is likable, and sometimes he "gets it" such as when he opposed Hillary Clinton's five-year rate freeze on mortgages.

But his message is pessimism, not hope. And behind the charm and charisma is a big-government bureaucrat who would take us down the wrong economic road.

Obama's Tax Evasion

2008-05-23T12:58:00.000-07:00

Review & Outlook - The Wall Street Journal
Obama's Tax Evasion
April 18, 2008; Page A16

The parsons of the press corps are furious with Charlie Gibson and George Stephanopoulos of ABC News, which means the pair must have done a pretty good job moderating Wednesday's Democratic debate in Philadelphia. Barack Obama had an off-night, so his media choir wants to shoot the questioners.

We thought the debate was one of the best yet, precisely because it probed the evasive rhetoric we've heard from both Democratic candidates throughout the campaign. Nowhere was this more apparent than during the exchanges between Mr. Gibson and Mr. Obama over taxes.
Time and again, the rookie Senator has said he would not raise taxes on middle-class earners, whom he describes as people with annual income lower than between $200,000 and $250,000. On Wednesday night, he repeated the vow. "I not only have pledged not to raise their taxes," said the Senator, "I've been the first candidate in this race to specifically say I would cut their taxes."

But Mr. Obama has also said he's open to raising – indeed, nearly doubling to 28% – the current top capital gains tax rate of 15%, which would in fact be a tax hike on some 100 million Americans who own stock, including millions of people who fit Mr. Obama's definition of middle class.

Mr. Gibson dared to point out this inconsistency, which regularly goes unmentioned in Mr. Obama's fawning press coverage. But Mr. Gibson also probed a little deeper, asking the candidate why he wants to increase the capital gains tax when history shows that a higher rate brings in less revenue.

"Bill Clinton in 1997 signed legislation that dropped the capital gains tax to 20%," said Mr. Gibson. "And George Bush has taken it down to 15%. And in each instance, when the rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28%, the revenues went down. So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?"

Mr. Obama answered by citing rich hedge fund managers. Raising the capital gains tax is necessary, he said, "to make sure . . . that our tax system is fair and that we are able to finance health care for Americans who currently don't have it and that we're able to invest in our infrastructure and invest in our schools. And you can't do that for free."

But Mr. Gibson had noted that higher rates yield less revenue. So the news anchor tried again: "But history shows that when you drop the capital gains tax, the revenues go up?" Mr. Obama responded that this "might happen or it might not. It depends on what's happening on Wall Street and how business is going." And then he went on a riff about John McCain and the housing market.

This is instructive. The facts about capital gains rates and revenues are well known to our readers, but we'll repeat them as a public service to the Obama campaign. As the nearby chart shows, when the tax rate has risen over the past half century, capital gains realizations have fallen and along with them tax revenue. The most recent such episode was in the early 1990s, when Mr. Obama was old enough to be paying attention. That's one reason Jack Kennedy proposed cutting the capital gains rate. And it's one reason Bill Clinton went along with a rate cut to 20% from 28% in 1997.

Either the young Illinois Senator is ignorant of this revenue data, or he doesn't really care because he's a true income redistributionist who prefers high tax rates as a matter of ideological dogma regardless of the revenue consequences. Neither one is a recommendation for President.
For her part, Hillary Clinton said that she, too, was open to hiking the capital gains tax rate, just not by as much as her rival. "I wouldn't raise it above the 20% if I raised it at all," she said. Of course, she too promised during Wednesday's debate not to raise "a single tax on middle-class Americans, people making less than $250,000 a year."

Both candidates would have voters believe that taxes on investment income only affect the rich. But that's not what Internal Revenue Service returns show. The reality is that the Clinton and Obama rate increases would hit millions of Americans who make well under $200,000. In 2005, 47% of all tax returns reporting capital gains were from households with incomes below $50,000, and 79% came from households with incomes below $100,000.

By the way, a higher capital gains tax rate isn't the only middle-class tax increase that Mr. Obama is proposing. He also wants to lift the cap on wages subject to the payroll tax. That cap was $97,500 in 2007 and is $102,000 this year. "Those are a heck of a lot of people between $97,000 and $200[,000] and $250,000," said Mr. Gibson. "If you raise the payroll taxes, that's going to raise taxes on them." Ignoring the no-tax pledge he had made five minutes earlier, Mr. Obama explained that such a tax increase was nevertheless necessary.

In other words he dodged the question, as he so often does with impunity. But thanks to Mr. Gibson's persistence, for 90 minutes Wednesday night Mr. Obama didn't get away with it. The voters learned a lot about Mr. Obama, who needs to learn a lot more about taxes and revenue.

Obama's Capital Loss

2008-05-23T12:53:00.001-07:00

REVIEW & OUTLOOK - The Wall Street Journal
Obama's Capital Loss
April 5, 2008; Page A8

Barack Obama recently released his tax records, and it was notable how little he and his wife appear to invest in the stock market. That may explain the Senator's odd belief that a significant hike in the capital gains tax rate won't matter to shareholders or harm the economy.

Or so Mr. Obama's replied to CNBC's Maria Bartiromo when she asked how much he'd increase the cap-gains tax, something he's said is necessary to restore "fairness" to the tax code. Thanks to the 2003 tax cuts, the top rate is currently 15%.

"When I talk to people like Warren Buffett or others and I ask them, you know, what's – how much of a difference is it going to be if it's 20 or 25%, they say, look, if it's within that range then it's not going to distort, I think, economic decision making," he said. He concluded that a higher rate would boost federal receipts, which would allow the government to redistribute "relief to middle class and working class families."

With apologies to economists Buffett and Obama, the history of this tax isn't on their side. The capital gains rate is crucial to investment decisions; higher rates make capital more expensive, dampening incentives to invest and reducing economic growth. John F. Kennedy understood this, as he proposed a capital gains tax cut. Bill Clinton joined with Republicans in 1997 to sign legislation lowering the rate to 20% from 28%.

Critics howled this would reduce tax revenues, and they howled when Republicans cut the rate to 15% in 2003. What followed in both cases was an enormous "unlocking" effect, as investors sold more stock and assets to take advantage of the lower rate. Capital gains realizations soared to an estimated $729 billion in 2006 from $269 billion in 2002. This goosed Treasury receipts from capital gains, to an estimated $110 billion in 2006 from $49 billion in 2002.

Mr. Obama doesn't have to guess what sort of "distortion" would come from significantly raising the cap-gains rate. In 1986, the tax rate jumped to 28% from 20%, a 40% increase. Tax revenues spiked briefly in anticipation of the hike (as investors moved to cash in at the lower rate), then dropped precipitously. Four years later, in 1990, the federal government was still taking in 13% less revenue at the 28% rate than it did in 1985 at the 20% rate.

As for Mr. Obama's implication that capital gains remain the privilege of the wealthy well, that's yesterday. In recent decades, the U.S. has become a shareholder society, and average Americans increasingly rely on investment income to save for retirement or even to pay bills.

In 2005, according to the most recent data from the Internal Revenue Service, 8.5 million households paid taxes on capital gains. A hefty 47% of those tax filers reported income of less than $50,000, while 79% had income under $100,000. Keep in mind that capital gains themselves count as income and often are a one-time windfall from the sale of a small business or long-held stock. These working families would suffer a double whammy, both with a higher tax rate and lower stock prices – because financial markets factor higher taxes on stock profits into lower stock valuations.

With the economy weak, this is an especially poor time to be talking up tax hikes. A higher rate, and its devaluing of U.S. assets, would hammer U.S. competitiveness, making it harder to attract global capital. America is increasingly isolated in taxing capital gains. Many industrialized competitors publicize a lower rate, and many (Germany, Switzerland, Austria, New Zealand) have no levy at all.

If Mr. Obama really wants to lift the economy – and those middle-class American shareholders – he'd advocate cutting the rate, or indexing it to inflation so investors aren't taxed on phantom gains. That would violate the Democratic left's faith that tax rates don't matter to growth and that raising taxes on capital and "the rich" is good politics. We doubt members of America's politically astute investor class agree.

Blame Barack, Not Charlie & George

2008-05-23T12:49:00.000-07:00

Blame Barack, Not Charlie and George
by Larry Kudlow, National Review Online

It’s rather amusing watching the liberal media in full-scale attack mode on George Stephanopoulos and Charles Gibson, with the Washington Post’s Tom Shales as the general leading the charge. Oh my gosh! Their hero Obama has been wounded!

What’s the problem here? Messrs. Gibson and Stephanopolis actually challenged Obama with tough, well-informed questions on tax policy and politics? That’s what they’re supposed to do. At any rate, it’s fascinating to watch members of the mainstream liberal media lunge at each others throats. It’s kind of like watching Hillary and Obama, isn’t it?

Look, here’s the deal: Obama bungled the tax question, big time. Period. End of sentence. End of story. To my liberal friends out there all I can say is: Get over it. Your guy has a very poor grasp of basic economic principles.

First off, you don’t raise taxes during a recession. That’s a no-brainer. Second, doubling the capital-gains tax affects Americans up and down the income ladder, not just rich hedge-fund managers. In addition, capital-gains tax cuts are self-financing, and they stimulate jobs and the economy. You want to raise budget revenues? Cut the cap-gains tax rate. That’s what history shows. Finally, hiking the payroll tax also affects people up and down the income ladder.

Uncapping the payroll tax reveals still another cultural misstep by Sen. Obama. He apparently has a difficult time understanding that nowadays, a veteran fireman or a veteran cop, married to a veteran schoolteacher, will make well over $100,000. In fact, they can make close to $200,000. Yet Obama still wants to go ahead and tax both the first and last payroll dollar of this group at a very high marginal tax rate by uncapping the Social Security (FICA) tax. (Incidentally, I don’t think Mr. Obama knows any cops or fireman. How about that? That is the problem. In other words, his economics are bad and his social circle is very limited.)

But put all this aside for a moment. Obama’s real agenda is a liberal-left ideology that places income redistribution above economic growth. That’s his real message. And looking at the results of presidential elections over the past three decades, Carter, Mondale, Dukakis, Gore, and Kerry all lost with a similar message. Bill Clinton? He was a growth Democrat. So he won twice. But Obama is aligning himself with the Democratic losers. And that will make him a loser as well.

Now, whether Hillary’s pit-bull routine during the debate helped her or not remains to be seen. We’ll learn more on that front come Tuesday when Pennsylvanians head to the voting booths. But that’s a different issue. All I’m saying is that liberals need to quit blaming Charlie Gibson and George Stephanopolis for Obama’s shortcomings. But do blame Obama for failing to grasp the tax penalties he will create on upward mobility for the very people he thinks he’s helping. These same people will be hurt a second time around when the wealthy folks who own capital have less of it — after tax — to invest in new businesses and new jobs.

Charlie Gibson Hammers Obama on Cap-Gains

2008-05-23T12:46:00.000-07:00

Gibson Hammers Hillary-Obama on Cap-Gains
by Larry Kudlow, National Review Online

ABC’s Charlie Gibson did a heck of a job advancing the supply-side ball during last night’s Democratic debate. Gibson presented clear evidence that whenever the capital-gains tax rate has been cut in the past twenty years, tax revenues have shot up, while the one time the rate was raised — surprise, surprise — revenues headed south. Gibson then confronted Obama with his promise to essentially double the capital-gains rate if he were elected president.

Obama didn’t budge. The reality that a lower cap-gains rate brings in more government tax revenue didn’t faze him one bit. Apparently, nor does the fact that raising the cap-gains rate diminishes jobs, enervates capital formation, and leads to lousy economic growth. Obama’s response and sole concern remains sticking it to rich people, like hedge-fund managers.

Someone ought to point out to Sen. Obama that of the 8.5 million tax filers who declared capital gains in 2005, 79 percent had incomes under $100,000. Seventy-nine percent! The unfortunate fact is that Wall Street won’t be the only one hit hard by Obama’s populism. Main Street will be hit even harder.

Obama's No Fan of Retirement Savings

2008-05-23T12:41:00.000-07:00

Obama: No fan of retirement saving
by Greg Minkiw

A key feature of the U.S. tax system is the option to put some income into tax-deferred savings accounts, such as IRAs and 401(k) plans. These accounts make the tax system a bit like a consumption tax rather than a true income tax in the sense that some part of saving gets exempt from taxation until it is later withdrawn and consumed. Many economists believe that consumption taxes are better than income taxes because they do not distort the intertemporal margin between consumption today and consumption in the future. Many financial advisers encourage people to put as much as they can into these retirement accounts.

I was surprised to see that Senator Obama has, for some reason, decided not to use this opportunity. His recently released tax returns show significant Schedule C income from book royalties (about half a million dollars in the most recent year). I am not a tax accountant, but I believe he could have put a substantial part of these earnings ($44,000) into a SEP-IRA and deferred taxes on it until withdrawal. Line 28 on his tax return, however, is completely blank.

Why? I don't know. Maybe he is getting bad tax advice. Or maybe he is expecting vastly higher tax rates in the future when the accumulated savings will need to be withdrawn and taxed. As Obama economic adviser Austan Goolsbee has written, "Future increases in tax rates potentially threaten to significantly reduce the value of your retirement savings and may even mean that you should not save in 401(k) accounts at all."

Dunkin' Donuts Tries to Go Upscale, But Not Too Far

2006-05-22T16:29:00.000-07:00

By JANET ADAMY
The Wall Street Journal
April 8, 2006; Page A1

Dunkin' Donuts last year paid dozens of faithful customers in Phoenix, Chicago and Charlotte, N.C., $100 a week to buy coffee at Starbucks instead. At the same time, the no-frills coffee chain paid Starbucks customers to make the opposite switch.

When it later debriefed the two groups, Dunkin' says it found them so polarized that company researchers dubbed them "tribes" -- each of whom loathed the very things that made the other tribe loyal to their coffee shop. Dunkin' fans viewed Starbucks as pretentious and trendy, while Starbucks loyalists saw Dunkin' as austere and unoriginal.

"I don't get it," one Dunkin' regular told researchers after visiting Starbucks. "If I want to sit on a couch, I stay at home."

SIZZLING SECTOR

Bridging some of that divide -- but not too much -- is key to Dunkin' Donuts' ambitious plan to expand its largely Eastern coffee chain into a national powerhouse that's as synonymous with coffee as Starbucks Corp., the nation's largest coffee chain. Armed with fresh capital from December's $2.43 billion private-equity buyout of Dunkin' Brands Inc., Dunkin' plans to remake its nearly 5,000 U.S. stores over the next three years, and have triple that number in less than 15 years.

Dunkin' plans to unveil the first part of the new strategy Monday with an advertising campaign aimed at rebranding the chain as a quick but appealing alternative to specialty coffee shops and fast-food chains. Chief Executive Jon Luther says Dunkin' is likely to consider an initial public offering in the next two to three years under new owners Thomas H. Lee Partners, Bain Capital Partners and the Carlyle Group.

While executives of Canton, Mass.-based Dunkin' insist they aren't trying to emulate their Seattle rival, Dunkin's store makeovers include some similarities to Starbucks. A prototype Dunkin' store in Euclid, Ohio, outside Cleveland, features rounded granite-style coffee bars where workers make espresso drinks face-to-face with customers. Open-air pastry cases brim with yogurt parfaits and fresh fruit while a carefully orchestrated pop-music soundtrack is piped throughout.

Dunkin's challenge underscores how Starbucks, which has blanketed the U.S. with almost 7,800 tony locations, has forced quick-service restaurants to rethink store designs and menus. With Americans eating more snacks and fewer meals, Starbucks is taking food sales from restaurants as it encourages customers to visit its coffee shops around the clock.

Yet Dunkin' built itself on serving simple fare to working-class customers. Inching upscale without alienating that base is proving tricky. There will be no couches in the new stores. And Dunkin' renamed a new hot sandwich a "stuffed melt" after customers complained that calling it a "panini" was too fancy.

Some customers "have remarked along the lines of 'You're trying to be somebody else,' " says Ryan Humphrey, who oversees Dunkin' franchisees in the Cleveland area. Regina Lewis, the chain's vice president, consumer and brand insights, says, "We're walking that line. The thing about the Dunkin' tribe is, they see through the hype."

Dunkin' Donuts hopes to counter Starbucks by expanding its menu beyond breakfast with snacks that can substitute for meals, like smoothies and dough-wrapped pork bites. The new Euclid store is doing three times the sales of other stores in its area, partly because more customers are coming after 11 a.m. for new gourmet cookies and Dunkin' Dawgs, hot dogs wrapped in dough, says Matt Zaroslinski, the store's director of operations.

Anne Saunders, Starbucks senior vice president, global brand, says Starbucks doesn't focus on Dunkin' Donuts as a competitor. While competitors may use elements of its strategy, they can't recreate Starbucks' "unique and differentiated concept," she says.

William Rosenberg opened the first Dunkin' Donuts in Quincy, Mass., in 1950 after running a business that delivered meals and coffee-break snacks on the outskirts of Boston. Residents flocked to his store for the coffee and fresh doughnuts. Mr. Rosenberg started franchising the Dunkin' Donuts name and, by 1963, the East Coast was home to 100 stores.

In 1982, the company began running ads starring Fred, the weary, mustachioed baker who woke before sunrise to make doughnuts. The popular spots helped transform the chain into a cultural icon. Expansion continued into the Midwest and Southeast, with franchisees owning all the stores. European drink maker Allied Domecq PLC bought the company in 1990.

Losing Sales to McMuffin

At that time, Dunkin' was losing breakfast sales to Egg McMuffins and other morning sandwiches at McDonald's Corp. and Burger King Corp. Starbucks and other high-end cafes began sprouting in the 1990s, bringing more competition. By then, Dunkin' concedes, some of its stores had become smoke-filled and dingy. Sales slid as the company clung to its strategy of selling sugary doughnuts by the dozen.

In the mid-1990s, Dunkin' shifted its focus to coffee in the hope that promoting a more frequently consumed item would drive store traffic, says William Kussell, Dunkin' Donuts' chief operating officer. Later, Krispy Kreme Doughnuts Inc. started gaining doughnut market share as it expanded beyond the South. From 1997 to 2002, some Dunkin' stores were moved under the same roof as two other brands owned by its parent company Allied Domecq, ice-cream-chain Baskin-Robbins and sandwich shop Togo's.

The idea was that each brand would draw customers at different times of the day: Dunkin' for breakfast, Togo's for lunch, Baskin-Robbins for late-day snacks. It didn't work. Customers were confused and franchisees complained it was too difficult to manage everything from slicing tomatoes to baking doughnuts to making milk shakes, Mr. Kussell says. Last fall, Dunkin' Donuts began extracting the other brands from stores.

The coffee push, however, was a success. By 2005, when Pernod Ricard SA acquired Dunkin' Brands Inc. as part of its purchase of Allied Domecq, sales at Dunkin' totaled $3.85 billion, up 14% from the previous year.

Coffee makes up 62% of sales. Dunkin' says it is continuing to improve its coffee. Last year, it created a special advisory council to travel across Central America in search of higher-quality beans.

Dunkin', which has about 6,800 stores world-wide, says operating profit grew 35% in the two years that ended in 2005.

Dunkin' says it sells 2.7 million cups of coffee a day in the U.S. A Starbucks spokeswoman says it sells about four million.

Starbucks, with roughly 11,000 stores world-wide, had revenue exceeding $6 billion last year. The Seattle-based chain created what it calls a "third place" -- outside the home and office -- featuring couches, eclectic music and art-splashed walls. It's part of the reason customers are willing to pay more for Starbucks coffee. A 10-ounce cup at Dunkin' Donuts costs $1.19 on average, while a 12-ounce cup at Starbucks costs $1.40 to $1.65, depending on the location.

Other chains mimicked Starbucks while Dunkin' stores remained essentially the same. Four years ago, McDonald's began a major redesign in areas where there was a high concentration of office workers, adding earth-tone colors and replacing fluorescent lights with single lamps that dangle over tables at restaurants. The fast-food chain is testing espresso beverages and last month rolled out a stronger coffee blend. In some stores it sells a blend made by Seattle's Best Coffee, a Starbucks brand.

Dunkin's Chief Executive Mr. Luther, a former president of Popeyes Chicken & Biscuits who joined Dunkin' in 2003, says he tried to convince other executives there was "life across the Hudson River." He thought the company should fill out markets in the East, then expand West. In 2004, Dunkin' finally began drawing its own plan to remake stores.

Company researchers set out to determine whether Dunkin' could draw consumers in new cities, and how to lure customers from fast-food chains, coffee houses and convenience stores. "Consumers love environments," Mr. Luther says. "We have to move our environment where the customer is."

Early research showed consumers wanted nicer stores, but revealed a potential problem: the loyal Dunkin' tribe was bewildered and turned off by the atmosphere at Starbucks. They groused that crowds of laptop users made it difficult to find a seat, Dunkin' says. They didn't like Starbucks' "tall," "grande" and "venti" lingo for small, medium and large coffees. And, Dunkin' says, they couldn't understand why anyone would pay as much as $4 for a cup of coffee.

"It was almost as though they were a group of Martians talking about a group of Earthlings," says Justin Holloway, an executive vice president at Hill, Holliday, Connors, Cosmopulos Inc., the advertising agency that helped Dunkin' with its research. One customer told researchers that lingering in a Starbucks felt like "celebrating Christmas with people you don't know."

The Starbucks customers Dunkin' paid to switch were equally uneasy in Dunkin' shops. They bristled when workers dumped standard amounts of cream and sugar in their coffee, instead of letting them do it for themselves, choosing their own amounts. "The Starbucks people couldn't bear that they weren't special anymore," Mr. Holloway says.

About 45% of Dunkin' Donuts customers have an annual household income between $45,000 and $100,000 a year, the company says -- with 30% earning less than that and 25% earning more. Dunkin' says its customers include blue- and white-collar workers across all age, race and income demographics. Starbucks' Ms. Saunders says that while its early customers tended to be urban professionals, the base has expanded so broadly it can't be categorized. She wouldn't release information on customers' average income.

Dunkin' researchers concluded that it wasn't income that set the two tribes apart, as much as an ideal: Dunkin' tribe members wanted to be part of a crowd, while members of the Starbucks tribe had a desire to stand out as individuals. "The Starbucks tribe, they seek out things to make them feel more important," Ms. Lewis says. Members of the Dunkin' Donuts tribe "don't need to be any more important than they are."

Starbucks's Ms. Saunders says her company's customers don't fit into a mold but "tend to be people who do like to be introduced to new things." She says that the company hasn't done similar studies comparing its customers with those at Dunkin' Donuts.

Dunkin' executives made dozens of decisions, big and small, ranging from where to put the espresso machines to how much of its signature pink and orange color scheme to retain to where to display its fresh-baked goods.

They decided early on that Dunkin' would keep its goal of moving customers through its cash register line in two minutes; Starbucks, by comparison, has a goal of three minutes. Dunkin' customers said they didn't want any changes in store design to result in longer waiting times.

Out went the square laminate tables, to be replaced by round imitation-granite tabletops and sleek chairs. Dunkin' covered store walls in espresso brown and dialed down the pink and orange tones. Executives considered but held off on installing wireless Internet access because customers "just don't feel it's Dunkin' Donuts," says Joe Scafido, chief creative and innovation officer. Executives continue to discuss dropping the word "donut" from its signs to convey that its menu is now broader.

Dunkin' sought to add hearty snacks to appeal to meal-skipping customers. Focus groups liked hot flatbreads and smoothies, but balked at tiny pinwheels of dough stuffed with various fillings. Customers said "they felt like something at a fancy cocktail hour," Ms. Lewis says, and weren't substantial enough. Dunkin' increased the size and will market them as "bites" filled with pork and other ingredients.

Dunkin' stores have never had piped-in music. The company hired Muzak LLC to "architecture" a sound that was upbeat but "won't annoy people," Mr. Scafido says. The result is a soundtrack including pop-star Jessica Simpson, classic-rock group Queen and hip-hop singer Beyoncé Knowles -- as well as artists that are familiar at Starbucks, such as Stevie Wonder. "It's not the Starbucks sound," Mr. Scafido says.

New ads feature the slogan "America Runs on Dunkin' " and show office and construction workers relying on the chain to get them through their day. Marketers are exploring ways to allow customers to place orders online and via text messages.

At the Euclid store, Mr. Zaroslinski says most customers say they like the increased natural light from larger windows, the expanded menu and the new coffee bar that includes stainless steel pitchers of cream and skim milk that customers use on their own -- a first for Dunkin' Donuts. Franchisees are footing the $150,000 bill for remodeling each store.

Different Vibe

Stacey Stevens, a 34-year-old Euclid resident who recently visited the new Dunkin' store there, said she noticed it felt different than other Dunkin' locations. "I don't remember there being lots of music," she said, while picking up a dozen doughnuts. "I like it in here." She said it felt "more upbeat" than Starbucks.

One Euclid store manager persuaded Richard Wandersleben to upgrade from a regular coffee to a $2.39 latte during a recent visit. The 73-year-old retired tool-and-die maker, who drinks about three cups of coffee a day, says he liked espresso when he got his first taste from a coffee vending machine in Arkansas. But when he tried it later at specialty coffee shops, "it didn't taste anything like that." The Dunkin' Donuts latte, however, suited him fine. "It's a little creamier," than regular coffee, he said.

Dunkin' Donuts plans to expand in the East, adding stores in Charlotte, Pittsburgh, Indianapolis, Jacksonville, Fla., Nashville and Cincinnati. It doesn't plan to start building out on the West Coast for about five years. Mr. Luther says there's one city it has no plans to enter: Seattle.

Adopted in China, Seeking Identity in America

2006-03-23T09:29:00.000-08:00

March 23, 2006
The New York Times
By LYNETTE CLEMETSON

Molly Feazel desperately wants to quit the Chinese dance group that her mother enrolled her in at age 5, because it sets her apart from friends in her Virginia suburb. Her mother, though, insists that Molly, now 15, will one day appreciate the connection to her culture.

Qiu Meng Fogarty, 13, prefers her Chinese name (pronounced cho mung) to Cecilia, her English name. She volunteers in workshops for children in New York adopted from China "so that they know it can all work out fine," she said.

Since 1991, when China loosened its adoption laws to address a growing number of children abandoned because of a national one-child policy, American families have adopted more than 55,000 Chinese children, almost all girls. Most of the children are younger than 10, and an organized subculture has developed around them, complete with play groups, tours of China and online support groups.

Molly and Qiu Meng represent the leading edge of this coming-of-age population, adopted just after the laws changed and long before such placements became popular, even fashionable.

Molly was among 61 Chinese children adopted by Americans in 1991, and Qiu Meng was one of 206 adopted the next year, when the law was fully put into effect. Last year, more than 7,900 children were adopted from China.

As the oldest of the adopted children move through their teenage years, they are beginning — independently and with a mix of enthusiasm and trepidation — to explore their identities. Their experiences offer hints at journeys yet to come for thousands of Chinese children who are now becoming part of American families each year.

Those experiences are influenced by factors like the level of diversity in their neighborhoods and schools, and how their parents expose them to their heritage.

"We're unique," Qiu Meng said.

A view that Molly does not share. "I don't see myself as different at all," said Molly, whose friends, her mother said, all seem to be "tall, thin and blond."

The different outlooks are normal say experts on transracial adoption.

Most Americans who bring Chinese children to the United States are white and in the upper middle class.

Jane Brown, a social worker and adoptive parent who conducts workshops for adopted children and their families, says the families should directly confront issues of loss and rejection, which the children often face when they begin to understand the social and gender politics that caused their families in China to abandon them.

Ms. Brown also recommends that transracial adoptive families address American attitudes on race early, consistently and head on.

"Sometimes parents want to celebrate, even exoticize, their child's culture, without really dealing with race," said Ms. Brown, 52, who is white and who has adopted children from Korea and China.

"It is one thing to dress children up in cute Chinese dresses, but the children need real contact with Asian-Americans, not just waiters in restaurants on Chinese New Year. And they need real validation about the racial issues they experience."

The growing population is drawing the attention of researchers. The Evan B. Donaldson Adoption Institute, a research group based in New York, is surveying adopted children from Asia who are now adults to try to find ways to help the younger children form healthy identities.

Nancy Kim Parsons, a filmmaker who was adopted from Korea, is making a documentary comparing the experiences of adults who had been adopted a generation ago from Korea with the young children adopted from China.

South Korea was the first country from which Americans adopted in significant numbers, and it is still among the leaders in international adoptions, along with Russia, Guatemala, Ukraine, Kazakhstan, India and Ethiopia. The experiences of those adopted from Korea have provided useful lessons for families adopting from China.

Hollee McGinnis, 34, the policy director at the Donaldson institute, was adopted from South Korea by white parents and was raised in Westchester County. Ten years ago, she started an adult support group, called Also Known As, which now also mentors children adopted from China.

"College was when I really began trying to understand what other people saw in my face," she said. "Before then I didn't really understand what it meant to be Asian."

It is a process McKenzie Forbes, 17, who was adopted from China and raised in towns in Virginia and West Virginia where there are few other Asians, is just starting to absorb. For her, college holds the promise of something new.

"I am feeling ready to break out a little bit," McKenzie said. "When I am around other Asians, I feel a connection that I don't feel around other people. I can't explain it exactly. But I think it will be fun to meet other people and hear their stories."

McKenzie, who was accepted by Dickinson College in Pennsylvania, applied only to universities with Asian student groups. Confident and pensive, she likes classical music and punk rock. She is wild about Japanese anime, a hobby she hopes to turn into a career, and to travel to Japan. Exploring China, she said, "is what everyone would expect."

Adopted at 2, McKenzie is among the oldest of the current wave of children adopted from China. Like many Americans adopting from overseas at the time, McKenzie's family turned to China because of a movement started in 1972 by the National Association of Black Social Workers discouraging the placement of African-American children with white adoptive families.

"With an African-American child we had no guarantee that the mother or a social worker wouldn't come and take the child away," McKenzie's mother, Maree Forbes, said. "With the children from China, we felt safe that there wouldn't be anyone to come back to get them."

McKenzie has a younger sister, Meredyth, 15, also adopted from China, and brothers Robert and John, 11-year-old twins, adopted from Vietnam. The family left Culpepper, Va., when McKenzie was 5, after children at school ostracized her because she is Chinese.

More frequent than outright racism though, McKenzie and Meredyth said, are offenses of ignorance. They were called out of class at their current school, for example, because a counselor wanted them to take an English language test for immigrant students. "We probably spoke better English than the instructor," Meredyth said.

The experience has been different for Qiu Meng Fogarty. As she recovered from a fit of giggles about something having to do with a boy, Qiu Meng looked at her friends Celena Kopinski and Hope Goodrich, who were also adopted from China, and breathed a cheery sigh.

"It's like we're related," she said, sitting on her bed in her home on Manhattan's Upper West side. "It's nice because we're all on the same page. We don't have to be like, 'Oh, you're adopted?' or 'Oh, yeah, I'm Chinese,' It's just easy."

The three girls have been friends for as long as they can remember. Their parents helped form Families With Children From China, a support group started in 1993 that now has chapters worldwide.

Some teenagers lose interest in the group because many of its activities focus on younger children. But Qiu Meng, a perky wisp of a girl with an infectious laugh, is still enthusiastically involved. She sold "Year of the Dog" T-shirts at a Chinese New Year event in January, and is a mentor at group workshops.

She said she remembers how hard it was to talk about painful things when she was younger and children at school would stretch their eyes upward and tease her. "There aren't a lot of children who can talk openly and easily about things like that," she said. "So it feels good to be able to help them."

Last summer, Qiu Meng, Celena and Hope attended a camp for children adopted from around the world. When it ended, counselors gathered the campers in a circle and connected them with a string. The campers all went home with a section of the string tied to their wrists, as a reminder their shared experience.

When a volleyball coach later told Qiu Meng to cut off the string for a game, she carefully tucked it away, took it home and hung it on her bedroom wall among numerous Chinese prints and paintings.

The teenagers all acknowledge that they are just beginning a long process of self-definition, and even though Molly is still trying to persuade her parents to allow her to quit the Chinese dance class, she admits privately that she benefits from the struggle.

"If my parents didn't push, I know I would just drop it all completely," she said. "And then I wouldn't have anything to fall back on later."

Molly, Qiu Meng and McKenzie said they would not have wanted to grow up any other way, and they all said they would one day like to adopt from China. "It's a good thing to do," Qiu Meng said. "And since I'm Asian, they wouldn't look different."

A "Moronic" Proposal

2005-09-14T12:36:00.000-07:00

Wall Street Journal - REVIEW & OUTLOOK

A 'Moronic' Proposal
September 14, 2005; Page A20

Some public-spirited folks in Bozeman, Montana, have come up with a wonderful idea to help Uncle Sam offset some of the $62 billion federal cost of Hurricane Katrina relief. The Bozeman Daily Chronicle reports that Montanans from both sides of the political aisle have petitioned the city council to give the feds back a $4 million earmark to pay for a parking garage in the just-passed $286 billion highway bill. As one of these citizens, Jane Shaw, told us: "We figure New Orleans needs the money right now a lot more than we need extra downtown parking space."

Which got us thinking: Why not cancel all of the special-project pork in the highway bill and dedicate the $25 billion in savings to emergency relief on the Gulf Coast? Is it asking too much for Richmond, Indiana, to give up $3 million for its hiking trail, or Newark, New Jersey, to put a hold on its $2 million bike path?

And in the face of the worst natural disaster in U.S. history, couldn't Alaskans put a hold on the infamous $454 million earmark for the two "bridges to nowhere" that will serve a town of 50 people? That same half a billion dollars could rebuild thousands of homes for suffering New Orleans evacuees. One obstacle to this idea apparently will be Don Young, the House Transportation Committee Chairman who captured the funds for Alaska in the first place. A spokesman in his office told the Anchorage Daily News that the pork-for-relief swap was "moronic." Sounds like someone who wants Mr. Young to become "ranking Member" next Congress.

In all there are more than 6,000 of these parochial projects -- or about 14 for every Congressional district -- funded in the highway bill. The pork reduction plan is particularly appropriate as a response to Katrina, because we have learned in recent days that one reason that money was not spent on fortifying the levees in New Orleans was that hundreds of millions of dollars were rerouted to glitzier earmarked projects throughout the state of Louisiana.

We're hearing all sorts of bad ideas about how to offset the $62 billion of spending already authorized for Hurricane Katrina relief. Cancel the Bush tax cuts, raise the gasoline tax by $1 a gallon, increase deficit spending, and sharply cut spending on national defense and the war in Iraq. In Washington, it seems, everything is expendable except for the slabs of bacon that are carved out of the federal fisc to ensure re-election.

The glory of what is happening in Bozeman is that taxpayers are proving to be wiser about priorities than their politicians. We like the suggestion by Ronald Utt of the Foundation Heritage that, when the new levee is built to protect the Big Easy from future storms, it should bear a bronze plaque stamped: "Proudly Brought to You by the Citizens of Alaska."

The Larger Shame

2005-09-07T23:33:00.000-07:00

The New York Times

September 6, 2005

By NICHOLAS D. KRISTOF
The wretchedness coming across our television screens from Louisiana has illuminated the way children sometimes pay with their lives, even in America, for being born to poor families.

It has also underscored the Bush administration's ongoing reluctance or ineptitude in helping the poorest Americans. The scenes in New Orleans reminded me of the suffering I saw after a similar storm killed 130,000 people in Bangladesh in 1991 - except that Bangladesh's government showed more urgency in trying to save its most vulnerable citizens.

But Hurricane Katrina also underscores a much larger problem: the growing number of Americans trapped in a never-ending cyclone of poverty. And while it may be too early to apportion blame definitively for the mishandling of the hurricane, even President Bush's own administration acknowledges that America's poverty is worsening on his watch.

The U.S. Census Bureau reported a few days ago that the poverty rate rose again last year, with 1.1 million more Americans living in poverty in 2004 than a year earlier. After declining sharply under Bill Clinton, the number of poor people has now risen 17 percent under Mr. Bush.

If it's shameful that we have bloated corpses on New Orleans streets, it's even more disgraceful that the infant mortality rate in America's capital is twice as high as in China's capital. That's right - the number of babies who died before their first birthdays amounted to 11.5 per thousand live births in 2002 in Washington, compared with 4.6 in Beijing.

Indeed, according to the United Nations Development Program, an African-American baby in Washington has less chance of surviving its first year than a baby born in urban parts of the state of Kerala in India.

Under Mr. Bush, the national infant mortality rate has risen for the first time since 1958. The U.S. ranks 43rd in the world in infant mortality, according to the C.I.A.'s World Factbook; if we could reach the level of Singapore, ranked No. 1, we would save 18,900 children's lives each year.

So in some ways the poor children evacuated from New Orleans are the lucky ones because they may now get checkups and vaccinations. Nationally, 29 percent of children had no health insurance at some point in the last 12 months, and many get neither checkups nor vaccinations. On immunizations, the U.S. ranks 84th for measles and 89th for polio.

One of the most dispiriting elements of the catastrophe in New Orleans was the looting. I covered the 1995 earthquake that leveled much of Kobe, Japan, killing 5,500, and for days I searched there for any sign of criminal behavior. Finally I found a resident who had seen three men steal food. I asked him whether he was embarrassed that Japanese would engage in such thuggery.

"No, you misunderstand," he said firmly. "These looters weren't Japanese. They were foreigners."

The reasons for this are complex and partly cultural, but one reason is that Japan has tried hard to stitch all Japanese together into the nation's social fabric. In contrast, the U.S. - particularly under the Bush administration - has systematically cut people out of the social fabric by redistributing wealth from the most vulnerable Americans to the most affluent.

It's not just that funds may have gone to Iraq rather than to the levees in New Orleans; it's also that money went to tax cuts for the wealthiest rather than vaccinations for children.

None of this is to suggest that there are easy solutions for American poverty. As Ronald Reagan once said, "We fought a war on poverty, and poverty won." But we don't need to be that pessimistic - in the late 1990's, we made real headway. A ray of hope is beautifully presented in one of the best books ever written on American poverty, "American Dream," by my Times colleague Jason DeParle.

So the best monument to the catastrophe in New Orleans would be a serious national effort to address the poverty that afflicts the entire country. And in our shock and guilt, that may be politically feasible. Rich Lowry of The National Review, in defending Mr. Bush, offered an excellent suggestion: "a grand right-left bargain that includes greater attention to out-of-wedlock births from the Left in exchange for the Right's support for more urban spending." That would be the best legacy possible for Katrina.

Otherwise, long after the horrors have left TV screens, about 50 of the 77 babies who die each day, on average, will die needlessly, because of poverty. That's the larger hurricane of poverty that shames our land.

E-mail: nicholas@nytimes.com

New Orleans in Peril

2005-09-02T10:18:00.000-07:00

August 31, 2005

The New York Times (Editorial)

On the day after Hurricane Katrina was declared to be not as bad as originally feared, it became clear that the effects of the storm had been, after all, beyond devastation. Homeowners in Biloxi, Miss., staggered through wrecked neighborhoods looking for their loved ones. In New Orleans, the mayor reported that rescue boats had begun pushing past dead bodies to look for the stranded living. Gas leaks began erupting into flames, and looking at the city, now at least 80 percent under water, it was hard not to think of last year's tsunami, or even ancient Pompeii.

Disaster has, as it almost always does, called up American generosity and instances of heroism. Young people helped the old onto rafts in flooded New Orleans streets, and exhausted rescue workers refused all offers of rest, while people as far away as Kansas and Arizona went online to offer shelter in their homes to the refugees. It was also a reminder of how much we rely on government to imagine the unimaginable and plan for the worst. As the levees of Lake Pontchartrain gave way, flooding New Orleans, it seemed pretty clear that in this case, government did not live up to the job.

But this seems like the wrong moment to dwell on fault-finding, or even to point out that it took what may become the worst natural disaster in American history to pry President Bush out of his vacation. All the focus now must be on rescuing the survivors. Beyond that lies a long and painful recovery, which must begin with a national vow to help all the storm victims and to save and repair New Orleans.

People who think of that graceful city and the rest of the Mississippi Delta as tourist destinations must have been reminded, watching the rescue operations, that the real residents of this area are in the main poor and black. The only resources most of them will have to fall back on will need to come from the federal government.

Those of us in New York watch the dire pictures from Louisiana with keen memories of the time after Sept. 11, when the rest of the nation made it clear that our city was their city, and that everyone was part of the battle to restore it. New Orleans, too, is one of the places that belongs to every American's heart - even for people who have never been there.

Right now it looks as if rescuing New Orleans will be a task much more daunting than any city has faced since the San Francisco fire of 1906. It must be a mission for all of us.

Truly Muslim, fully American

2005-08-01T23:50:00.000-07:00

July 28, 2005
Christian Science Monitor

By Fatina Abdrabboh
CAMBRIDGE, MASS. - "I condemn terrorism." Lately, because I'm a Muslim, these are the only three words people seem to want to hear come out of my mouth. Beyond the words themselves, the way I proclaim them is measured for sincerity. Perhaps even more than the days immediately after 9/11, I as a Muslim feel now that many of my fellow Americans believe that Islam and its adherents are evil, pure and simple.

I can't help wondering if the fact that I'm identifiably Muslim through my hijab, or scarf, is so potent that the only response I evoke is anger.

Thinking through recent incidents, I try to assess the validity of my feelings - am I overreacting, or paranoid?

Last month, while driving home from the airport, I managed to get lost in construction detours. I rolled down my window and asked a woman in the car next to me for directions: "Will this road take me into Cambridge?" I couldn't believe my eyes when she ignored my question and rolled up her window.

It was broad daylight. I had not - before then - considered my appearance frightening or abnormal. Apparently shedid.

Another incident: I recently participated in a phone-a-thon for a religious studies program at Harvard. A friend tapped my shoulder and said her caller wanted to speak with a Muslim. I took the phone. It turned out the man was a preacher from Texas and wanted to know when Muslims "were going to join the rest of the enlightened world and rid themselves of fanaticism." I tried to explain that the matter was far more complicated than simply blaming the beliefs of a billion people and that it was misguided to blame Islam for the actions of its fringe extremists. The preacher interrupted me and said I sounded like "every other wishy-washy" Muslim ambiguous about condemning terrorism. Needless to say, he didn't donate to the program.

Why is my stance on terrorism my only defining feature? Casual conversations at the grocery store, the gym, the dry cleaner all seem laser-guided, by the way I look, to Islam and terrorism - and never to those everyday conversations that might revolve around other aspects of my life like how I like my Harvard classes, my training for the Boston Marathon, or my recent obsession with my stock portfolio.

I desperately try to shrug these incidents off as I focus on school and training for the marathon. But these incidents don't seem to be isolated - and, indeed, have intensified just since the July 7 suicide bombings in London and last week's attempted bombings there. Columnists in many of our nation's most influential newspapers focused on the Arab and Muslim response to the attacks. They castigated Arab and Muslim Americans for not publicly condemning terrorism - as if, in addition to the condemnations Muslim groups have indeed issued in days since 7/7, we're expected to march in the streets of New York, Washington, and Boston and chant, "We hate Bin Laden, too."

But I wonder if - given the fearful environment - that would be enough of an "unequivocal" condemnation.

What would people think if I told them that I did not ride the subway for one month after our faux pas at Abu Ghraib out of fear that retaliation against the US would be directed at our subway systems?

I, too, am vulnerable as an American. The terrorists in London didn't care about Shahara Islam, a young Muslim woman killed in the attacks. Do Americans not recognize the dark irony of Shahara's last name? They didn't care about her. And I'm no different: Terrorists intent on blowing up the train I'm riding will not care that I'm a Muslim. They won't be deterred by the sight of me on a subway seat with my Arabic-printedbags from a halal meat market, as I try to keep close to Islamic dietary prescriptions.

And that is the point: Terrorism is not about Islam; it is about a perverse agenda being paraded through the Muslim world under the banner of my faith. Why then should Muslims in America have to condemn it all the time?

Just because we don't wear T-shirts that say "Muslims condemn terrorism" doesn't mean we don't abhor such acts. Yes, there's an increased obligation for Arabs and Muslims to fulfill their responsibility as American citizens to integrate with the broader community, and most undoubtedly have.

But I believe the role we play should be characterized by positive rather than negative resonance. I've chosen to live by this philosophy: It's not my job to tell you what I am not, but rather what I am. I offer others not what I hate, but what I love, such as what America stands for, in principle. And most important, I choose not to tell but to show others what I represent as a Muslim. It is essential that our discussions as Americans break out of the skewed dialectic on Islam.

Of course not everybody reacts to Muslims this way. But I'm convinced it's the reality - not my paranoid view - that many do. I'm optimistic that as a nation we can move beyond stereotypes and embrace the millions of Muslims in America - that we can break down the crazy expectation that someone like me who wears hijab cannot possibly be "fully" American.

The thought of a veiled woman listening to rock and roll on an iPod mini, jogging near the Charles River at night, or playing the guitar need not be far-fetched. I do all of the above.

I categorically condemn terrorism. Now, will my fellow citizens in America hear more of what I have to say? Will America embrace me for who I am - a practicing Muslim, an ardent debater, and an aspiring public servant?

Most important, will they recognize that I'm fully American?

• Fatina Abdrabboh, born and raised in Dearborn Mich., is a student at Harvard University's John F. Kennedy School of Government

Where the Right is Right

2005-07-24T16:18:00.000-07:00

July 24, 2005
The New York Times
By NICHOLAS D. KRISTOF
Liberals took the lead in championing human rights abroad in the 1970's, while conservatives mocked the idea. But these days liberals should be embarrassed that it's the Christian Right that is taking the lead in spotlighting repression in North Korea.

Perhaps no country in human history has ever been as successful at totalitarianism as North Korea. Koreans sent back from China have been herded like beasts, with wires forced through their palms or under their collarbones. People who steal food have been burned at the stake, with their relatives recruited to light the match. Then there was the woman who was a true believer and suggested that the Dear Leader should stop womanizing: after she was ordered executed, her own husband volunteered to pull the trigger.

"The biggest scandal in progressive politics," Tony Blair told The New Yorker this year, "is that you do not have people with placards out in the street on North Korea. I mean, that is a disgusting regime. The people are kept in a form of slavery, 23 million of them, and no one protests!"

Actually, some people do protest. Conservative Christians have aggressively taken up the cause of North Korean human rights in the last few years, and the movement is gathering steam. A U.S.-government-financed conference on North Korean human rights convened in Washington last week, and President Bush is expected shortly to appoint Jay Lefkowitz to the new position of special envoy for North Korean human rights.

The problem with the conservatives' approach is that it's great at calling attention to the issues, but some of its methods are flawed and counterproductive. There's talk, for example, of proposing a 25 percent tariff on Chinese goods unless China protects Korean refugees - but a tariff wouldn't help Koreans and would undermine the world economy. Likewise, a campaign by well-meaning activists to help North Korean refugees in China has so far only set off a Chinese crackdown that forced some 100,000 refugees back to North Korea. The conservative approach has generally been a mix of fulmination and isolation, which hurts ordinary Koreans, amplifies Korean nationalism and cements the Dear Leader in place.

Debra Liang-Fenton, executive director of the U.S. Committee for Human Rights in North Korea, a bipartisan and secular group, agrees that the religious right is more active on this issue, but she wants more liberals to join the campaign as well. Her group is a good place to start: www.hrnk.org.

So can anything be done to help North Koreans? Yes, if liberals stop ceding the issue to conservative Christians. Ultimately, the solution to the nuclear standoff is the same as the solution to human rights abuses: dragging North Korea into the family of nations, as we did with Maoist China and Communist Vietnam.

Our first step should be to talk directly to North Koreans, even invite senior officials to the United States. Many conservatives would accept direct talks, as long as the agenda included human rights (on the model of the Helsinki accords).

Second, we should welcome North Korea's economic integration with the rest of the world. For example, we should stop block\ing Pyongyang's entry into the Asian Development Bank and encourage visits to North Korea by overweight American bankers. In a country where much of the population is hungry, our most effective propaganda is our paunchiness.

Third, we should continue feeding starving North Koreans, while also pushing for increased monitoring. The food is delivered through the U.N. World Food Program in sacks that say, in Korean as well as English, that the food is from America. Nobody has done more to bring about change in North Korea than the World Food Program, which now has 45 foreigners traveling around the country.

Having just returned from North Korea, I see a glimmer of hope, for in Pyongyang you can feel North Korea changing. Free markets are popping up. Two tightly controlled Internet cafes have opened. Special economic zones seek foreign investment. Casinos lure Chinese gamblers. Cellphones have been introduced, with restrictions. The economy has been rebounding since 2001. Plans are under way for a new Orthodox church.

These are modest changes, but they are worth building on. For that to happen, we need two things almost as elusive as North Korean democracy: cooperation between liberals and conservatives, and acknowledgement that our long policy of isolating North Korea has completely failed.

E-mail: nicholas@nytimes.com

NY Times Editors Caught Red-Handed

2005-07-24T16:07:00.000-07:00

The New York Times
July 24, 2005

Other Voices: On Editing, Explanations and Perceptions
In the final paragraph of "When an Explanation Doesn't Explain Enough" (July 17), you refer to "the mistaken perceptions of some readers." Were they really mistaken?

It seems to me that your explanation of this situation confirms the suspicion of "an unusual number of readers" that "a Times editor had tried to put words in the mouth of the reserve Army officer, Capt. Phillip Carter, without his consent."

After all, isn't that exactly what happened? Captain Carter had rejected an editor's suggestions that were included (albeit inadvertently) in the published version of his opinion article. To my eyes, these unauthorized insertions have an anti-Bush bias.

Although I'm no fan of President Bush, I do believe strongly that the strength of our democracy depends in part on a well-informed (broadly defined) citizenry. Necessarily, our citizenry depends on an effective - and ethical - Fourth Estate. In my view, The Times failed us in this case, and the line, "The Times regrets the error," is both trite and inadequate.

CHUCK NORDHOFF
Seattle, July 17, 2005

•

I agree that the editors' note on the Op-Ed page falls far short of being a full explanation. A bigger problem, however, is the question of what should be considered standard give-and-take. The changes made by the editor did not "clarify and improve" - the standard set forth by David Shipley, the Op-Ed page editor. They completely changed the meaning as well as the focus of Capt. Phillip Carter's article.

Given the editorial positions of The Times, it is inevitable that readers will assume the worst: that the editor tried to put words in Captain Carter's mouth. What other possibility is there?

Explaining how it happened is helpful, but I believe readers are entitled to know more. Have the policies regarding "editing" Op-Ed articles been clarified? Has the particular editor been disciplined? If there are no consequences for such actions, what will deter them in the future?

ARTHUR SIEGEL
New York, July 17, 2005

•

Despite your long and confusing explanation, it is clear that an Op-Ed editor's initial proposed insertion into Capt. Phillip Carter's article was made up out of whole cloth before later discussions with the writer. Even though the piece was to be revised based on editors' subsequent conversations with Captain Carter, the initial reaction by the editor who chose this language as the going-in position is indicative of both the inherent bias of this individual editor as well as (I fear) The Times's editorial staff.

The real error here isn't that the wrong piece was run. Rather, it is that the Times editorial board permits editors to think - however fleetingly - that they can change the text and tone of a citizen's opinion to fit their own preconceived political notions.

As a United States Marine reservist who recently served a combat tour in Iraq, I find this incident to be particularly objectionable. No self-serving explanation or apology stating that proper procedures were not followed can hide the apparent lack of candor demonstrated by the editor who initially proposed this language.

(Lt. Col.) PAUL AMATO
Pittsburgh, July 17, 2005

•

You write: "Captain Carter's message led The Times that same afternoon to propose the textual changes that alluded to the surprise of his call to active duty, the officer said. 'Within 10 minutes' after receiving the changes, he recalled, 'I said, "No way." Those were not words I would have said. It left the impression that I was conscripted.' His call-up was 'not a surprise,' he told me, because he had actually 'volunteered' for mobilization."

I cannot imagine how this turn of events could be interpreted by any reasonable person other than that the editor put his or her words into the mouth of the original author, words that the author immediately and completely disagreed with.

It is clear that those "suggested changes" had nothing to do with clarity and style, but everything to do with the editor's political agenda and bias. It is disappointing that you appear to see it differently.

TONY GOZDZ
Marlborough, Mass., July 17, 2005

•

You have proved beyond any doubt whatsoever that The Times's editorial process is in fact biased. If not, why would the editors even have proposed the textual changes that alluded to the surprise of Capt. Phillip Carter's call to active duty, when he clearly asserts that he was in "no way" surprised?

Is that how editors work - they "propose" the emotional response that the subject of the article ought to have experienced? What do you think the chances are that the editor would have proposed that Captain Carter was "gratified" or "thrilled" to have been recalled to active duty?

DAVID DON
Burlington, Vt., July 17, 2005

•

You do not cite the real problem: the system that encouraged the mistake to happen.

If The Times was going to print the Op-Ed article, it should have done so when the original submission arrived or discarded it in its entirety. The attempt by the editor to help the writer by suggesting clarifications and adding updates and revisions was wrong. If the contributor was not a professional writer, so be it. Let him tell his story his way.

Op-Ed editors should not be tampering with the content of the originals other than correcting spelling or blatant grammatical errors. In the case you describe, there were just too many revisions and communications flying back and forth.

ROBERT J. LeDONNE
Woodcliff Lake, N.J., July 17, 2005

Pay No Attention to the Man Behind the Curtain

2005-07-24T15:10:00.000-07:00

July 17, 2005
The New York Times

When an Explanation Doesn't Explain Enough
By BYRON CALAME
Corrections Appended

UPHOLDING the journalistic integrity of The New York Times requires a lot of care. Maintaining the perception of journalistic integrity can require even more care.

Mistakes can become a black eye for the paper, especially when established editing procedures and safeguards are bypassed. And even a forthright correction, when crafted without careful attention to the perceptions it may create, can make things worse.

Such a case occurred a little more than a week ago, when this disturbing editors' note appeared in the paper:

"The Op-Ed page in some copies yesterday carried an incorrect version of an article about military recruitment. The writer, an Army reserve officer, did not say, 'Imagine my surprise the other day when I received orders to report to Fort Campbell, Ky., next Sunday,' nor did he characterize his recent call-up to active duty as the precursor to a 'surprise tour of Iraq.' That language was added by an editor and was to have been removed before the article was published. Because of a production error, it was not. The Times regrets the error."

An unusual number of readers were quick to assume - and complain - that a Times editor had tried to put words in the mouth of the reserve Army officer, Capt. Phillip Carter, without his consent. Many saw an anti-Bush bias in the added language.

"How can it be that editors were putting words in the mouth/pen of a contributor, words that completely changed the tone of the piece?" asked Peter Henry of Princeton, N.J. "Mr. Carter's aim was to call upon the President to make direct recruiting pitches. This urging could be read to contain an implicit criticism, yes, but certainly not in the manner akin to what the editor(s) inserted into Mr. Carter's work. What was added by the editor(s) changed the tenor of the contribution and was, in layperson's terms, a bold-faced lie."

Michael J. Painter of San Francisco also had questions: "It's one thing to change a word or phrase for clarity's sake or cut something for brevity, but how can any editor pull such stuff out of thin air and add it to an op-ed piece? An op-ed piece is supposed to reflect the views of the author, not an editor's. I don't get it. What am I missing?"

We must go back to early June to start finding answers to these questions. That's when Captain Carter, then still a lawyer in a San Francisco firm, submitted a 700-word Op-Ed piece that urged President Bush to make a military recruiting speech. The analysis had already been edited when Captain Carter sent an e-mail message to the paper on June 22 that said the Army had "recalled" him for duty in Iraq.

Captain Carter's message led The Times that same afternoon to propose the textual changes that alluded to the surprise of his call to active duty, the officer said. "Within 10 minutes" after receiving the changes, he recalled, "I said, 'No way.' Those were not words I would have said. It left the impression that I was conscripted." His call-up was "not a surprise," he told me, because he had actually "volunteered" for mobilization. (It's not clear when the editors first learned that he had volunteered for active duty.)

An e-mail response from his editor later in the day continued to press for mentioning the call to active duty. "O.K.," it said, according to Captain Carter, "but we need the personal reference. Not only does it make the piece stronger, we otherwise would not be forthcoming with the readers."

In subsequent telephone conversations, Captain Carter told me, "I indicated I would pull the piece before having textual references added." David Shipley, the editor in charge of the Op-Ed pages, confirms the officer's threat. So the version of the article with the suggested "surprise" phrases in the text was cast aside. It was then agreed that a reference to active duty would be included in the author identification that ran with the article.

This sort of give-and-take is standard practice on the Op-Ed pages. "We try to clarify and improve copy," said Mr. Shipley. "We do this for the benefit of our contributors, many of whom are not professional writers. We do not impose language on them - if they want something out or something in, we accede to their wishes. They have final sign-off."

So Captain Carter, who has contributed articles to several publications, approved the final version without the "surprise" phrases - a clearance that is standard practice on the Op-Ed pages. But then came the mistake that the editors' note called a "production error." The editor in charge of the piece accidentally discarded, or "spiked" in the paper's jargon, the cleared final version and instead put the previously rejected copy with the "surprise" phrases on the track for publication. "Unfortunately, we blew it," Mr. Shipley said.

When the editor left on vacation, Captain Carter worked with a second editor to update the article after President Bush's June 28 speech about Iraq. The editor entered the officer's changes in the version of the piece that he found in the lineup of articles awaiting publication, which was the one with the "surprise" sentences. But that version was never sent back to Captain Carter, as a strict adherence to the standards of the Op-Ed pages would seem to require even though all the changes had come from him.

"If the changes are really small, and they're fine, and they're from the author, then it's really just a matter of typing them in correctly," Mr. Shipley said. "In retrospect, of course, I wish we had sent him a final final."

The stage was now set for the hectic events of Tuesday night, July 5. In San Francisco, Captain Carter checked nytimes.com at about 10 p.m. his time to look at his article, headlined "Quiet Man," a reference to the president. Spotting the "surprise" phrases in the article, he immediately called The Times's news desk in New York. "I told them to kill it," he told me in an interview last week.

So the Carter article was yanked out of the paper and an ad for The Times itself was hastily dropped in its place. The article was also removed from nytimes.com until a corrected version could be prepared.

The next morning, Gail Collins, editor of the editorial page, and Mr. Shipley began work on the editors' note, the strongest of the corrective statements The Times publishes. Clearly, they didn't try to minimize the mistakes that had been made. But because they did not take a little more space to explain how the "surprise" phrases had surfaced as part of the give-and-take of the editing and updating process, readers were left to suspect the worst. And that fed perceptions of a serious ethical lapse at The Times.

"It did not occur to me to get into a more detailed explanation of the editorial process," Mr. Shipley said. "In hindsight, maybe I should have added a line or two. It was already pretty long and complicated, though."

Even with this sorting out of the mistakes actually made and the mistaken perceptions of some readers, the doubts about the paper's credibility stirred up by this incident won't be easily erased.

Corrections
The July 17 public editor column incorrectly reported where Phillip Carter lived and the location of the law firm where he worked before he was called to active Army duty. He lived in Santa Monica, Calif., and the law firm was in Los Angeles.

The public editor serves as the readers' representative. His opinions and conclusions are his own. His column appears at least twice monthly in this section

The Quiet Man

2005-07-24T14:14:00.000-07:00

July 6, 2005
The New York Times
By PHILLIP CARTER
Editors' Note

The Op-Ed page in some copies of Wednesday's newspaper carried an incorrect version of the below article about military recruitment. The article also briefly appeared on NYTimes.com before it was removed. The writer, an Army reserve officer, did not say, "Imagine my surprise the other day when I received orders to report to Fort Campbell, Ky., next Sunday," nor did he characterize his recent call-up to active duty as the precursor to a "surprise tour of Iraq." That language was added by an editor and was to have been removed before the article was published. Because of a production error, it was not. The Times regrets the error. A corrected version of the article appears below.

* * *

LOS ANGELES — AMERICA is facing a military manpower meltdown. Overwhelmed by the demands in Iraq and Afghanistan, the Army has all but used up its emergency recruiting measures: higher enlistment bonuses; more expensive marketing campaigns; even home loans for some recruits. Although the Army recruited its quota for June, it will probably miss its target for the year. Retention is going fairly well, thanks in part to re-enlistment incentives that are tax-free when a soldier re-ups in a combat zone.

The Army has also cycled through hundreds of thousands of reservists and deployed emergency personnel policies like “stop loss” to man its units.

Yet the supply of troops is still dwindling, to such an extent that the Army has now told field commanders to retain soldiers they had been intending to discharge for alcohol and drug abuse. It’s time to call in the heavy artillery: the president of the United States.

Since Sept. 11, 2001, President Bush has made many speeches in support of the global war on terrorism, including his address last week exhorting Americans to stay the course in Iraq. Unfortunately, he has never made a recruiting speech, and his only call to arms came in a fleeting reference at the end of his recent speech. Young Americans (and their parents) need to be told that they have a duty to shoulder the burden of military service when our nation is at war, and that doing so is essential for the preservation of freedom and democracy at home and abroad.

President Abraham Lincoln was able to man the Union Army without conscription for the first two years of the Civil War in large part because of his calls to service. Winston Churchill girded Britain for great sacrifice during World War II with his famous pledge to fight in the streets and on the beaches. Such leaders understood the power of the bully pulpit, and the need for the people to connect their personal sacrifice to a larger national goal.

President Bush’s second inaugural address, with its vision of America’s mission to spread freedom, offers a good platform for a recruiting pitch. And he could broaden his message beyond just military service by calling for young Americans to serve in all areas where their country needs them, from front lines of homeland security to those of inner-city education.

Still, the military is where the need is most acute. Recruiting duty may be the toughest job in the Army today; many recruiting sergeants would probably rather be with a combat unit in Iraq than hitting the high schools in Illinois.

A presidential recruiting speech may not fill every barracks, nor will it induce every old soldier to sign on for another tour, but it would help remind potential soldiers of what we’re fighting for.

Phillip Carter is a lawyer and Army reserve officer who was recently called up to active duty for Operation Iraqi Freedom.

A Sucker Bet

2005-07-16T20:51:00.000-07:00

The New York Times
By NICHOLAS D. KRISTOF
July 17, 2005
PYONGYANG, North Korea

Every single home in this country has two portraits on the wall, one of the Great Leader, Kim Il Sung, who is still president even though he died 11 years ago, and one of his son, the Dear Leader, Kim Jong Il. Inspectors regularly visit homes to make sure the portraits are well cared for.

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Every subway car carries those same two portraits as well, and every adult wears a button depicting the Great Leader. And every home (or village, in rural areas) has an audio speaker, which starts broadcasting propaganda at 6 each morning to tell people how lucky they are.

Children spend long hours in day care centers from the age of 6 months, sometimes returning to their parents only on weekends. Men normally perform seven or more years of military service. Disabled people are sometimes expelled from Pyongyang, a green and well-groomed capital that is one of the prettiest in Asia, because they are considered unsightly.

And although the national ideology is juche, or self-reliance, the U.N. World Food Program feeds 6.5 million North Koreans, almost one-third of the population. Even so, hunger is widespread and has left 37 percent of the children stunted.

Yet North Korea focuses its resources on prestige projects, like an amazing 10-lane highway to Nampo (with no traffic).

Many conservatives in and out of the Bush administration assume that North Korea's population must be seething and that the regime must be on its last legs. Indeed, the Bush administration's policy on North Korea, to the extent that it has one, seems to be to wait for it to collapse.

I'm afraid that could be a long, long wait. The central paradox of North Korea is this: No government in the world today is more brutal or has failed its people more abjectly, yet it appears to be in solid control and may even have substantial popular support.

From a brief visit like mine, it's hard to gauge the mood, because anyone who criticizes the government risks immediate arrest. But Chinese and other foreigners I've spoken to who live in North Korea or visit regularly say they believe that most North Koreans buy into the system, just as ordinary Chinese did during the Maoist period.

Likewise, over the years I've interviewed dozens of North Koreans who have fled to China or South Korea, and they overwhelmingly say that while they personally dislike the regime - that's why they fled - their relatives believe in the Kim dynasty with a quasi-religious faith. They say that when everyone is raised to worship the Dear Leader, when there are no contrary voices, people genuinely revere the leader.

Most say the faith is not as strong as it was a dozen years ago, mostly because so many people have heard whispers of Chinese prosperity. But they still laugh at the idea that the Dear Leader is about to be toppled.

"I think we'll have regime change in America before we have regime change in North Korea," says Han Park, a Korea specialist at the University of Georgia. He estimates that 30 percent of North Koreans have a stake in the system, and that most of the rest know so little about the outside world that they don't realize how badly off they are.

A hermetic seal is the main reason the Kim dynasty has survived so long. When I arrived at Pyongyang airport, I was obliged to hand over my cellphones and satellite phones, to be picked up on my departure. Even many senior government officials have no access to the Internet.

From the moment I landed at the airport, I kept trying to change money. But the airport refused, my hotel refused and shops refused. Foreigners are supposed to pay for everything only in foreign currency and be isolated from the local economy. (Finally, a friendly Korean official - they were all surprisingly friendly, with unexpectedly good senses of humor - gave me a few coins as souvenirs for my children.)

If the American policy premise about North Korea - that it is near collapse - is highly dubious, our essential policy approach is even more so. The West should be trying to break that hermetic seal, to increase interactions with North Korea and to infiltrate into North Korea the most effective subversive agents we have: overweight Western business executives.

Instead, we maintain sanctions, isolate North Korea and wait indefinitely for the regime to collapse. I'm afraid we're helping the Dear Leader stay in power.

E-mail: nicholas@nytimes.com

Time to Pull Out. And Not Just From Iraq.

2005-07-15T17:52:00.000-07:00

The New York Times
July 15, 2005
By JOHN DEUTCH
Cambridge, Mass.

AMERICAN foreign policy should be guided by two general principles: the first is advancing our security and political interests; the second is encouraging prosperity and responsive government for all people. It may be that with our encouragement and example, many countries will choose to adopt democracy and a market economy, presumably adapted to their own culture. Of course, others will follow a very different road for some time, perhaps indefinitely, as ethnic differences, poverty and historical and religious traditions affect and constrain choices.
America embarks on an especially perilous course, however, when it actively attempts to establish a government based on our values in another part of the world. It is one matter to adopt a foreign policy that encourages democratic values; it is quite another to believe it just or practical to achieve such results on the ground with military forces. This is true whether we are acting alone, as is largely the case in Iraq, or as part of an international coalition.
It seems that many in the Bush administration believed that an invasion to topple Saddam Hussein would result in a near spontaneous conversion of Iraq, and with luck much of the Middle East, to democracy. But the notion of intervening in foreign countries to build a society of our preference is not just a Republican or conservative failing. The corresponding Democratic or liberal failing is the view that America has a duty to intervene in foreign countries that egregiously violate human rights and a responsibility to oppose and, where possible, remove totalitarian heads of state. This Democratic rhetoric quickly moves from "peacekeeping" in a country torn by strife to "peacemaking" and to "nation-building."
The Clinton administration's intervention in Bosnia in the mid-1990's is an example of just such a failing: moving from an initial, laudable objective of stopping the Serbian "ethnic cleansing" of Bosnians to a fantastical goal of creating a "multiethnic" society with peaceful coexistence among three groups - Bosnian Muslims, Croats and Serbs - that have a history of enmity.
We should not shirk from quick military action for the purpose of saving lives that are in immediate danger. For example, the decision not to intervene early to prevent mass murder in Rwanda was a major failure. But we should not be lured into intervention that has as its driving purpose the replacement of despotic regimes with systems of government more like our own. It is not that the purpose is unworthy, but rather that it is unlikely to succeed.
Moreover, in trying to achieve regime change or nation-building, we tend to rely on military force rather than diplomacy, trade and economic assistance. The American military, the best in the world, is built to fight and win wars; we can ask the Marine Corps to defeat Republican Guard divisions or destroy rebel strongholds in Falluja, but maintaining local security, brokering political alliances and running local water systems, hospitals, power plants and schools are not major parts of its mission or training. Reshaping our military to take on the activities that the Pentagon euphemistically calls "stability and security" operations will come at a cost - both in terms of potentially compromising the war-fighting capacity of our troops and in diverting the resources needed to support the civic action that underlies nation-building.
If we want to influence the behavior of nations, we would be better served by combining diplomacy with our considerable economic strength. Even North Korea saw the advantages, for a period of time, of constraining (albeit selectively and temporarily) its nuclear weapons activities for the economic benefits that accompanied the "agreed framework" of 1994. More recently, Libya backed off its secret pursuit of weapons of mass destruction, apparently on the sole expectation of economic benefit. The demise of the apartheid regime in South Africa after an embargo showed what sometimes can be done by collective economic action.
So where does that leave us on Iraq? There is a widespread view, even among many who opposed the invasion, that we have a responsibility to keep our troops in place until certain minimum conditions are achieved: some degree of security for the Iraqi people; a reasonable start on stable and representative self-government; and partial reconstruction of the civilian infrastructure. Prompt withdrawal is considered unthinkable by most Republicans and Democrats, because it is difficult to envision a pullout that leaves a peaceful Iraq in its wake and doesn't invite further unrest in the region.
So the expectation is that we will be in Iraq for several more years, perhaps with a somewhat reduced presence, but spending considerable money (more than $1 billion per week) and sacrificing lives ( one dozen to two dozen deaths and serious casualties per week), while working to achieve those minimum objectives required for withdrawal.
THIS conventional view, however, ignores two important questions. The first is, how much are American interests in the Arab world being harmed by our continued presence in Iraq? Second, how much does the United States' presence in Iraq reduce our ability to deal with other important security challenges, notably those posed by North Korea, Iran and international terrorism? Those who argue that we should "stay the course" because an early withdrawal from Iraq would hurt America's global credibility must consider the possibility that we will fail in our objectives in Iraq and suffer an even worse loss of credibility down the road.
I do not believe that we are making progress on any of our key objectives in Iraq. There may be days when security seems somewhat improved or when the Iraqi government appears to be functioning better, but the underlying destabilizing effect of the insurgency is undiminished. When, after the fall of Baghdad, the decision was taken to disband the Iraqi Army, an impossible security situation was created: a combination of hostile ethnic factions supported by demobilized, but armed, military and security units with surrounding nations actively supporting them.
The insurgency cannot be overcome easily by either United States military forces or immature Iraqi security forces. Nor would the situation be eased even if, improbably, the United Nations, NATO, our European allies and Japan choose to become seriously involved.
Our best strategy now is a prompt withdrawal plan consisting of clearly defined political, military and economic elements. Politically, the United States should declare its intention to remove its troops and urge the Iraqi government and its neighbors to recognize the common regional interest in allowing Iraq to evolve peacefully and without external intervention. The first Iraqi election under the permanent constitution, planned for Dec. 15, is an appropriate date for beginning the pullout.
Militarily, we should establish a timetable for reducing the scope of operations that has enough flexibility so as not to provide a tactical advantage to insurgents. We should also plan on continuing measures like no-flight zones, border surveillance, training for Iraqi security forces, intelligence collection and maintenance of a regional quick-reaction force.
Economically, we should define what amount of assistance we are prepared to extend to Iraq as long as it stays on a peaceful path. It would be best if this aid was but one facet of a broader set of economic initiatives to benefit Arab states that advance our interests.
Of course, these measures cannot guarantee a secure and democratic Iraq free of external domination. But they could be first steps of a strategy to pursue America's true long-term interests in the Middle East and the Persian Gulf.

John Deutch, deputy secretary of defense from 1994 to 1995 and director of central intelligence from 1995 to 1996, is a professor of chemistry at the Massachusetts Institute of Technology.

Behind Enemy Lines

2005-07-13T13:23:00.000-07:00

The New York Times

By NICHOLAS D. KRISTOF
July 12, 2005
PYONGYANG, North Korea

President Bush and his top officials are studiously pretending not to notice, but here in the most bizarre country in the world, the Dear Leader, Kim Jong Il, is throwing down a nuclear gantlet at Mr. Bush's feet.

Senior North Korean officials here say the country has just resumed the construction of two major nuclear reactors that it stopped work on back in 1994. Before construction resumed, the C.I.A. estimated that it would take "several years" to complete the two reactors, but that they would then produce enough plutonium to make about 50 nuclear weapons each year.

This is the most regimented, militarized and oppressive country in the world, but the government seems very firmly in control. And this new reactor construction, if it is sustained, is both scary and another sign that U.S. policy toward North Korea has utterly failed.

I was able to get a visa to North Korea (after being "banned for life" after my last visit, in 1989, for reasons that remain unclear) by tagging along with The Times's publisher, Arthur Sulzberger Jr., on a visit here. The government arranged for us to interview senior officials, including the vice president, the foreign minister and a three-star general. Officials insist that the new reactors are intended solely to provide energy for civilian purposes - and that in any case, North Korea will never transfer nuclear materials abroad.

Don't bet on that. If Pyongyang gets hundreds of weapons by using the new reactors, there will be an unacceptable risk of plutonium's being peddled for cash.

"If they were to succeed in getting one or the other in operation, that would really change the dynamics of the situation," said Jonathan Pollack, a North Korea expert at the Naval War College.

Kenneth Lieberthal, who ran Asian affairs for a time in the Clinton White House, put it this way: "If they get those two sites up, that then creates the potential for them becoming the proliferation capital of the world."

The Bush administration has refused to negotiate with North Korea one on one, or to offer a clear and substantial package to coax Mr. Kim away from his nuclear arsenal. Instead, Mr. Bush has focused on enticing North Korea into six-party talks. The North finally agreed on Saturday to end a yearlong stalemate and join another round of those talks.

Mr. Bush is being suckered. Those talks are unlikely to get anywhere, and they simply give the North time to add to its nuclear capacity.

Li Chan Bok, a leading general in the North Korean Army, made it clear that even as the six-party talks staggered on, his country would add to its nuclear arsenal.

"To defend our sovereignty and our system," he said, "we cannot but increase our number of nuclear weapons as a deterrent force."

The threat of new reactors coming on line makes it all the more urgent that Mr. Bush try direct negotiations - not only about nuclear weapons but also, as some conservatives are suggesting, about North Korea's human rights abuses.

No one knows whether direct negotiations and a clearer road map of incentives would succeed, but they couldn't fail any more abjectly than the present policy.

The two projects that North Korea is resuming work on are a 50-megawatt reactor in Yongbyon and a 200-megawatt reactor in Taechon. The former is now just a shell that has deteriorated in the years since work was suspended, but Li Gun, a director general in the Foreign Ministry, says work on it may be completed this year or next. The Taechon reactor would apparently take at least two or three years to complete.

It's possible that North Korea is bluffing or is resuming construction only to have one more card to negotiate away. But if not, there will be considerable pressure in the U.S. for surgical military strikes to prevent the reactors from becoming operational.

General Li said that if the U.S. launched a surgical strike, the result "will be all-out war." I asked whether that meant North Korea would use nuclear weapons (most likely against Japan). He answered grimly, "I said, 'We will use all means.' "

So don't let the welcome resumption of the six-party talks distract us from the reality: Mr. Bush's refusal to engage North Korea directly is making the peninsula steadily more dangerous. More than at any time since the Cuban missile crisis of 1962, we are on a collision course with a nuclear power.

E-mail: nicholas@nytimes.com

Give Us an 'Eclipse Policy'

2005-07-13T13:10:00.000-07:00

The Wall Street Journal

By KANG CHOL-HWAN
July 13, 2005; Page A14

Condoleezza Rice arrived in Seoul yesterday to the news that South Korea had agreed to send its communist neighbor half a million tons of rice as "humanitarian aid." Ms. Rice put the best face possible on the matter, saying the aid did not undercut U.S. policy toward Pyongyang. Perhaps. But it is important to understand that North Koreans are starving not because of a lack of aid from South Korea or the U.S., but because they are deprived of freedom. Giving aid only throws a line to the government, and prolongs starvation, surely a perverse outcome.

Just look at recent history. In 1998, we nearly witnessed the collapse of the Kim Jong Il regime as three million people died of hunger. Bodies lined the streets, malnutrition caused cutbacks in military exercises, and an energy shortage even affected residential areas reserved for central party officials. The North Korean people finally had some hope that the time had come for regime change, or at least for the start of Chinese-style economic reforms. Sensing also that his end was near, Kim in desperation began begging the international community for aid. Then out of the blue, South Korea's government stepped in and saved him and his regime.

South Korean President Kim Dae Jung decided to give assistance to North Korea without demanding in return either an improvement in the human-rights situation or an increase in economic freedoms. Hundreds of millions of dollars were blindly handed over to Kim Jong Il to do with as he pleased. Much aid was diverted to the military and other power organs, reviving them and helping them to consolidate their power.

More than seven years have passed since South Korea began this policy of indiscriminate assistance. How successful has it been? To judge by progress in the country's human-rights situation, or in its willingness to dismantle its nuclear-weapons program, throwing aid at this regime has been demonstrably counterproductive. The human-rights situation has worsened and food shortages remain unabated. As for disarmament talks, Pyongyang has boycotted the negotiating table for more than a year. Supporters of Seoul's "Sunshine Policy" claim that tensions on the peninsula have been eased and that the policy has contributed toward a settlement of peace. This is a bare-faced lie. As the South Korean government sings its peace songs, Kim Jong Il openly declares possession of nuclear weapons.

In compliance with the government's strategy, South Korea's media has turned a blind eye to the truth in North Korea, painting a false picture of reconciliation and cooperation. As a result, the South Korean people are barely aware of the calamity taking place only 25 miles north of Seoul, nor of the atrocities taking place in North Korea's gulag. For nine long years I was one of its 200,000 political prisoners. I can tell you that the true tragedy of North Korea is virtually unknown even in the South.

While North Korea's people long to see the end of Kim Jong Il's misrule, Seoul insists on holding a dialogue, and cooperating, only with our dictator. While we want to see an end to the menace represented by the People's Army, all we hear from President Roh Moo Hyun and his people is, "Do not irritate Kim Jong Il . . . We need to accept the North Korean system . . . We do not want Kim Jong Il's regime to collapse . . . Kim Jong Il is an intelligent leader." These words fill the North Korean people with indescribable anger. On what basis could Seoul claim its right to go beyond the wishes of the North Korean people? It is up to the North Korean people to decide whether or not to accept Kim Jong Il as their leader.

Signs that North Korea is once again on the brink of a collapse abound, which probably is why Pyongyang has demanded the 500,000 tons of rice from Seoul. As in the 1990s, the food crisis is affecting the ruling elite, and there are reports that rations have been cut even in Pyongyang. The demise of Kim Jong Il may come unexpectedly fast. He is running out of time. If his regime is not kept alive with artificial aid, he will not have enough time to blackmail the world with a nuclear-weapons program.

This is why Ms. Rice should remain steadfast in resisting calls by Mr. Roh's government in Seoul to give aid to North Korea. Kim Dae Jung's Sunshine Policy, now being repeated by Mr. Roh, has failed most miserably. If it was a genuine mistake, Ms. Rice and the rest of the Bush administration should try to open eyes in Seoul. If Pyongyang has been manipulating policy behind the scenes, America must react by renewing its determination not to deal with Pyongyang.

George W. Bush, whom I met in the White House last month, knows all of this. His steadfast stance against Kim Jong Il and his love toward my fellow suffering North Koreans is about to give results. The darkest moment of the night is right before dawn. My feeling is that North Koreans will be able to see daylight soon. Now is not the time to give in to North Korea's blackmail or to the general feeling of appeasement that pervades the Seoul government. Now is not the time to give aid, or to agree to bilateral negotiations between the U.S. and North Korea.

Until things change in Seoul, Mr. Bush is the only hope the North Korean people have left. Those who are against him are only going to prolong their suffering.

Mr. Kang, the first person to escape from a North Korean concentration camp, is author of "The Aquariums of Pyongyang: Ten Years in the North Korean Gulag" (Basic Books, 2001).

Jack's Death, His Choice

2005-07-11T15:58:00.000-07:00

July 10, 2005
The New York Times
By NICHOLAS D. KRISTOF
PORTLAND, Ore.

Jack Newbold is a 59-year-old retired tugboat captain who is dying of bone cancer. It's one of the most painful cancers, and he doesn't want to put his wife and 17-year-old daughter through the trauma of caring for him as he loses control over his body.

So Mr. Newbold faces a wrenching choice in the coming weeks: should he fight the cancer until his last breath, or should he take a glass of a barbiturate solution prescribed by a doctor and put himself to sleep forever? He's leaning toward the latter.

"I've got less than six months to live," he said. "I don't want to linger and put my wife and family through this."

I don't know what I would do if I were Mr. Newbold, nor if I were his wife or daughter (they're both supporting him in any decision he makes). But I do believe that it should be their decision - not President Bush's.

Unfortunately, Mr. Bush is fighting to overturn the Oregon Death With Dignity law, which gives Mr. Newbold the option of hastening his death. Oregon voters twice passed referendums approving the law, which has been used since 1998, and it has wide support in the state.

The Bush administration issued an order that any doctor who issued a prescription under the state law would be prosecuted under federal law. Oregon won an injunction against the order, John Ashcroft lost an appeal, and now the Supreme Court will hear arguments in the fall.

"I'm just grateful I live in the state of Oregon, where we have this option," Mr. Newbold said. "I'm just sorry the John Ashcrofts of the world want to dictate not only how you live, but also how you die. There's nothing more personal, other than childbirth, than passing on."

Mr. Newbold, a Vietnam veteran and former merchant seaman, is funny and blunt, with a flair for nautical language unsuitable for a family newspaper. He started with head and neck cancer. Now cancer is spreading to his bones, disabling him and forcing him to take morphine for pain.

"By God, I want to go out on my own terms," Mr. Newbold said. "I don't want someone dictating to me that I've got to lie down in some hospital bed and die in pain."

Mr. Newbold has started the process of obtaining the barbiturates; two doctors must confirm that the patient has less than six months to live, and the patient must make three requests over at least 15 days. Typically, the drug is secobarbital - the powder is removed from the capsules and mixed into water or applesauce - or pentobarbital, which comes as a liquid. Patients typically slip into a coma five minutes after taking the medication and die within two hours.

Like many patients, Mr. Newbold says that his biggest concern isn't pain so much as the loss of autonomy and dignity. That's partly why he wants the medication on hand - if he feels himself losing the self-control he has prized all his life, he can hasten the process.

"I may never use the medication," he said, "but the knowledge that you have the ability to end it gives you so much relief."

That's common - many patients who get the barbiturates do not in fact use them, but derive comfort from having the choice. Over all, 208 patients over seven years have used the law to hasten death, according to the Compassion in Dying Federation of Oregon, which helps patients work their way through the legal requirements.

When patients use the law, they typically set a date and gather family and friends around them. Those who have witnessed such a parting say it's not as morbid as it may sound.

"It's pretty weird knowing what day you're going to die, but we could plan for it," said Julie McMurchie, whose mother used the barbiturates about a week before she was expected to die naturally of lung cancer. "Two of my siblings lived out of state, and they were able to come, so we were all present. ... We were all there to hug and kiss her and tell her we loved her, and she had some poetry she wanted read to her, and it was all loving and peaceful.

"I can't imagine why anybody would begrudge us that opportunity to say goodbye, and her that opportunity to have peace."

The same applies to Jack Newbold and everyone in his position. Mr. Newbold faces an excruciating choice in the coming weeks, and he's got enough on his mind without the White House second-guessing him.

Back off, Mr. Bush.

E-mail: nicholas@nytimes.com

Veiled Praise

2005-06-23T13:13:00.000-07:00

June 23, 2005

By FATINA ABDRABBOH
Cambridge, Mass.

I CONSIDER my appearance quite unremarkable. I'm 5 feet 8 inches, 150 pounds, fresh-faced and comfortably trendy - hardly, in my view, a look that should draw stares. Still, the Muslim headscarf, or hijab, that I wear makes me feel as if I am under a microscope.

I try to go to the gym just about every morning. Because I work out with my scarf on, people stare - just as they do on the streets of Cambridge.

The other day, though, I felt more self-conscious than usual. Every television in the gym highlighted some aspect of America's conflict with the Muslim world: the war in Iraq, allegations that American soldiers had desecrated the Koran, prisoner abuse at Guantánamo Bay, President Bush urging support of the Patriot Act. The stares just intensified my alienation as an Arab Muslim in what is supposed to be my country. I was not sure if the blood rushing to my head was caused by the elliptical trainer or by the news coverage.

Frustrated and angry, I moved to another part of the gym. I got on a treadmill and started running as hard as I could. As sweat dripped down my face, I reached for my towel, accidentally dropping my keys in the process. It was a small thing, I know, but as they slid down the rolling belt and fell to the carpet, my faith in the United States seemed to fall with them. I did not care to pick them up. I wanted to keep running.

Suddenly a man, out of breath, but still smiling and friendly, tapped me on my shoulder and said, "Ma'am, here are your keys." It was Al Gore, former vice president of the United States. Mr. Gore had gotten off his machine behind me, picked up my keys, handed them to me and then resumed his workout.

It was nothing more than a kind gesture, but at that moment Mr. Gore's act represented all that I yearned for - acceptance and acknowledgment.

There in front of me, he stood for a part of America that has not made itself well known to 10 million Arab and Muslim-Americans, many of whom are becoming increasingly withdrawn and reclusive because of the everyday hostility they feel.

It is up to us as Americans to change how the rest of the world views us by changing how we view some of our own citizens. Mr. Gore's act reminded me that rather than running away on my treadmill, I needed to keep my feet on the soil in this country. I left the gym with a renewed sense of spirit, reassured that I belong to America and that America belongs to me.

Fatina Abdrabboh is a student at the Kennedy School of Government at Harvard.

Losing Our Country

2005-06-09T23:52:00.000-07:00

June 10, 2005
The New York Times
By PAUL KRUGMAN

Baby boomers like me grew up in a relatively equal society. In the 1960's America was a place in which very few people were extremely wealthy, many blue-collar workers earned wages that placed them comfortably in the middle class, and working families could expect steadily rising living standards and a reasonable degree of economic security.

But as The Times's series on class in America reminds us, that was another country. The middle-class society I grew up in no longer exists.

Working families have seen little if any progress over the past 30 years. Adjusted for inflation, the income of the median family doubled between 1947 and 1973. But it rose only 22 percent from 1973 to 2003, and much of that gain was the result of wives' entering the paid labor force or working longer hours, not rising wages.

Meanwhile, economic security is a thing of the past: year-to-year fluctuations in the incomes of working families are far larger than they were a generation ago. All it takes is a bit of bad luck in employment or health to plunge a family that seems solidly middle-class into poverty.

But the wealthy have done very well indeed. Since 1973 the average income of the top 1 percent of Americans has doubled, and the income of the top 0.1 percent has tripled.

Why is this happening? I'll have more to say on that another day, but for now let me just point out that middle-class America didn't emerge by accident. It was created by what has been called the Great Compression of incomes that took place during World War II, and sustained for a generation by social norms that favored equality, strong labor unions and progressive taxation. Since the 1970's, all of those sustaining forces have lost their power.

Since 1980 in particular, U.S. government policies have consistently favored the wealthy at the expense of working families - and under the current administration, that favoritism has become extreme and relentless. From tax cuts that favor the rich to bankruptcy "reform" that punishes the unlucky, almost every domestic policy seems intended to accelerate our march back to the robber baron era.

It's not a pretty picture - which is why right-wing partisans try so hard to discredit anyone who tries to explain to the public what's going on.

These partisans rely in part on obfuscation: shaping, slicing and selectively presenting data in an attempt to mislead. For example, it's a plain fact that the Bush tax cuts heavily favor the rich, especially those who derive most of their income from inherited wealth. Yet this year's Economic Report of the President, in a bravura demonstration of how to lie with statistics, claimed that the cuts "increased the overall progressivity of the federal tax system."

The partisans also rely in part on scare tactics, insisting that any attempt to limit inequality would undermine economic incentives and reduce all of us to shared misery. That claim ignores the fact of U.S. economic success after World War II. It also ignores the lesson we should have learned from recent corporate scandals: sometimes the prospect of great wealth for those who succeed provides an incentive not for high performance, but for fraud.

Above all, the partisans engage in name-calling. To suggest that sustaining programs like Social Security, which protects working Americans from economic risk, should have priority over tax cuts for the rich is to practice "class warfare." To show concern over the growing inequality is to engage in the "politics of envy."

But the real reasons to worry about the explosion of inequality since the 1970's have nothing to do with envy. The fact is that working families aren't sharing in the economy's growth, and face growing economic insecurity. And there's good reason to believe that a society in which most people can reasonably be considered middle class is a better society - and more likely to be a functioning democracy - than one in which there are great extremes of wealth and poverty.

Reversing the rise in inequality and economic insecurity won't be easy: the middle-class society we have lost emerged only after the country was shaken by depression and war. But we can make a start by calling attention to the politicians who systematically make things worse in catering to their contributors. Never mind that straw man, the politics of envy. Let's try to do something about the politics of greed.

E-mail: krugman@nytimes.com

Deficit Is Arriving Under Forecasts

2005-06-09T12:24:00.000-07:00

Good News for White House
Comes on Economy's Climb,
High Level of Tax Receipts
By JACKIE CALMES
Staff Reporter of THE WALL STREET JOURNAL
June 9, 2005 10:27 a.m.; Page A3

The White House, which hasn't had much good news since President Bush's second term began, is about to start spreading some: This year's deficit is coming in lower than anticipated, thanks to the economic recovery and higher-than-expected tax receipts.

While the administration and Congress won't officially revise their separate annual deficit projections until midsummer for fiscal 2005, which ends Sept. 30, government and private-sector analysts agree the shortfall is more likely to be about $350 billion, rather than the $427 billion the administration forecast in January. Treasury Secretary John Snow is expected to carry the tidings to London for this weekend's summit of finance ministers from the Group of Eight leading nations, who have harped on the growing American debt and foreign borrowing.

Administration officials say the improved fiscal picture suggests the president is on track to deliver more quickly on a campaign promise to cut the annual deficit in half as a share of the total U.S. economy, to 2.3% of gross domestic product. (By comparison, last year's $412 billion deficit was 3.6% of GDP.) Private analysts don't put much stock in that promise, however; even if Mr. Bush claims victory, the nation still faces long-term deficit problems. Overall federal spending is increasing, including for war costs. More broadly, spiraling health-care costs for Medicare and Medicaid programs, including a prescription-drug benefit for seniors starting next year and a wave of baby-boomer retirements after 2008, will drive federal deficits to unsustainable sizes.

"These are the good ol' days. These are the best of times," says Congressional Budget Office Director Douglas Holtz-Eakin, a former administration economic adviser. "After this, it gets worse."

Accentuating the positive, the administration yesterday unexpectedly released an updated economic forecast that will be used to calculate the revised budget projections in July. Officials said economic growth would continue at a 3.4% annual rate, just under what they projected in December. While rising energy prices nudged up the inflation forecast to 2.3% for the year, inflation is projected to fall back to the earlier estimate of 2.1% after that. The administration sees interest rates rising over the next few years -- both short-term rates largely influenced by the Federal Reserve Board and also bond-market rates, which have been surprisingly low.

"With the president's focus on spending discipline, we are seeing positive signs for the American economy, and for the federal government's balance sheet," Budget Director Joshua Bolten said in a statement.

His Office of Management and Budget wouldn't speculate on a narrower 2005 deficit projection. But private forecasters have begun doing so, especially after CBO last month suggested the deficit would be closer to $350 billion than the $394 billion it had earlier forecast for the president's 2005 budget.

A narrowing deficit makes life easier for the administration in several ways. It can more readily counter complaints from European allies -- which have larger deficits as a share of their economies -- that the U.S. needs to do more to get its economic house in order, just as Mr. Bush is about to attend a G-8 meeting next month in Scotland. At home, a smaller deficit eases his argument for making his first-term tax cuts permanent, blunting Democrats' complaints that those tax cuts and war costs are exacting an economic toll on the nation.

But a narrower deficit has downsides for the president as well. "The bad news, of course, is that as the deficit comes down cyclically, the pressure ... is lessened" to get Congress to make tough changes in tax and spending policy to reduce deficits for the long term, says Goldman, Sachs & Co. chief economist William Dudley.

Also, deficit calculations complicate Mr. Bush's flagging drive to overhaul Social Security. A narrower deficit is possible largely because Mr. Bush and Congress are counting surpluses for Social Security; until 2017, the system is expected to draw more in workers' payroll taxes and interest than it pays out in benefits. Some congressional Republicans are urging the White House to earmark the Social Security surpluses to create the personal retirement accounts that Mr. Bush has proposed. But he won't do so, White House advisers say, given his commitment to showing a reduced deficit.

Mr. Bush's promise to halve the deficit by fiscal 2009, when he leaves office, starts from his administration's own projection last year that the 2004 deficit would be $521 billion, or 4.5% of GDP. So half would be a figure equal to 2.3% of GDP, officials say. But private analysts considered the administration's projection inflated, just as they did this year's forecast of a $427 billion deficit for 2005, so the administration "could create an environment in which the numbers then come in better than expected," said Morgan Stanley economist David Greenlaw. While his and other analysts' projections have proved too high, he added, "using numbers in the $420 billion range really were not supportable by any stretch of the imagination."

The CBO this week, in its latest monthly budget report for the first two-thirds of the fiscal year through May, tried to account for the improved deficit picture. It said federal tax revenue had risen by 15.4% compared with the same eight months of fiscal 2004, more than double the 7% growth in federal outlays so far. The 2005 deficit through May was $273 billion, narrower by $73 billion from the comparable period a year before.

Individuals' income-tax payments were up 20%, and the CBO suggested the growth was "more concentrated" among taxpayers who pay the highest rates -- the wealthy whose incomes have grown faster than those of lower-income Americans in recent years. Such conclusions can't be certain until more data are available in the coming year. Another factor, the CBO said, were lower-than-expected tax refunds. Corporate revenues in the first eight months were 48% higher, reflecting profits growth in 2004. The CBO said its next report, which will reflect June 15 estimated-tax payments, will be the first to gauge corporate profits for 2005.

Its director, Mr. Holtz-Eakin, said in an interview that offsetting the good news on increased revenues is the pressure on the White House and Congress to fix the alternative-minimum tax. The AMT was intended to make sure that wealthy taxpayers can't claim so many tax breaks that they avoid any liability, but increasingly it is snagging the middle-class -- bringing billions of dollars more to the Treasury, but at the risk of a taxpayers revolt. Federal spending, meanwhile, is up significantly for Medicare, defense, farm subsidies, education, homeland security and interest on the federal debt.

In short, Mr. Holtz-Eakin said, "I don't see anywhere in this picture where there's room for big improvement."

Write to Jackie Calmes at jackie.calmes@wsj.com

Wealth Porn

2005-06-08T18:02:00.000-07:00

WASHINGTON, June 7, 2005
CBS NEWS

This commentary was written by CBSNews.com's Dick Meyer.
--------------------------------------------------------------------------------
Behind every liberal rich-person basher lurks a rich-person gawker. Or at least most of the time.

The New York Times has been running an impressive, book-length series of articles about class in America. Some of them have been riveting as well as "important." But I'd bet a Rolex that the most popular of the nine pieces published thus far was the front page story that ran Sunday, June 5, headlined, "Old Nantucket Warily Meets the New."

It's all about how the new "hyper-rich" have taken the island over from the old rich. It's a great and grotesque piece.

Accompanying it is a wonkish but equally impressive look at how these "hyper-rich" people, those earning about $1.6 million a year or more annually, are leaving even the regular rich in the dust. The amount of national treasure consumed by the top 0.1 percent of taxpayers has grown to levels not seen since the Roaring '20s.

This is also a terrific piece.

But cruise around the rest of this Sunday's Times and what you'll find is a whole lot of what can only be called wealth porn. There are voyeuristic, detailed, titillating accounts of the doings and digs of the rich and well-groomed all over the paper. It's like that every Sunday. This week it was jarring because of the stories I just mentioned. I think that's called cognitive dissonance.

It is precisely the same cognitive dissonance that allowed the Democratic Party to nominate John Kerry and John Edwards - combined net worth, about $1 billion - to bash the rich, bemoan the split of the "two Americas" and beat up on George and Dick for being pals of the rich. When the rich, or those profiting from the rich, condemn other, less enlightened rich people, skin crawls. And many Americans - to the chagrin of Democrats, Marxists and Europeans - tend not to begrudge the rich and hyper-rich their riches.

Back to the Sunday Times, the single greatest current events icon in the East Coast, Blue State urban, moneyed and intellectual world. If anything creates water-cooler buzz in this orbit, it's the Sunday Times. It is also the greatest purveyor of super high-class, wealth porn there is and it's blessed with the imprimatur of news, sociology and high purpose.

The Times magazine this week, ironically, was "The Money Issue." The cover story was a terrific profile of a more-than-hyper-rich hedge manager named Cliff Asness. The piece was a nice glimpse into the secretive hedge fund universe, but what made it riveting was the portrait of a not famous, under-40 gazillionaire. As always, the Sunday magazine had a section for real estate porn: page after page filled with ads for opulent homes. This week there were ads for 27 homes listed at over $5 million.

In the Sunday Styles section, Alexandra Wolfe - daughter of writer Tom Wolfe - filed a story about how grown daughters of people with names like Tisch and Della Femina are taking their kids to posh new clubs where they can exercise and socialize while their kids get taken care of nearby.

There was a short feature about what's hot in diamond earrings (hoops, not chandeliers, prices ranging from $2,400 to $16,500) and a long article about how David Geffen, Steven Spielberg and Jeffrey Katzenberg are concerned about giving the public access to public beaches in Malibu. There were also the regular weekly features about society weddings and charity balls.

The Sunday Business Section always profiles a hyper-rich guy and this week it was Ronald Perelman. The piece had real news value apart from the wealth porn, just like the hedge fund story.

I'm not suggesting the Times shouldn't have done any of these stories. I just want to point out the irony of running an excellent set of pieces about the anthropology and demographics of the hyper-rich in a paper that is dining out on them. It is a kind of limousine liberalism that I believe also afflicts the Democratic Party too often, a conceit that "we are the enlightened rich."

Bill Clinton didn't bash the rich a lot, but he could have; Johns Kerry and Edwards did bash the rich a lot, and it flopped. It flopped partly because Americans who are not rich simply do not have a European-style, class base resentment. Americans aspire to being rich. That's the American way. But the '04 Democratic rhetoric also flopped because the guys spewing looked like such phonies; they weren't just rich, they were richer than the Republicans: they were hyper-rich.

In the House, Dennis Hastert, former high school wrestling coach, is a more authentic voice of the little guy than Nancy Pelosi, wife of a wealthy real estate developer, and in her own right part of a powerful political family including two past mayors of Baltimore, one of them also a five-term congressman.

The Senate has plenty of guys who make well-to-do look shabby, but the Democrats probably have the greater net worth, led by heirs like Kennedy, Dayton and Rockefeller and self-made moguls like Corzine, Kohl, and Lautenberg.

The point is not that being rich, or exploiting interest in the rich to sell newspapers, should be disqualifiers for tackling issues of economic justice. The point is to do it with some humility and an ear well-tuned to hypocrisy.

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Dick Meyer, a veteran political and investigative producer for CBS News, is the Editorial Director of CBSNews.com, based in Washington.

Old Nantucket Warily Meets the New

2005-06-08T17:51:00.000-07:00

June 5, 2005
The New York Times

By GERALDINE FABRIKANT
NANTUCKET, Mass. - In spring, along with the daffodils, crowds on the ferry and workers raking the beaches, comes the ritual of real estate gossip. What properties changed hands over the winter? And who could possibly be paying those out-of-sight prices?

That 15-acre waterfront parcel for sale for $15 million? It was snatched up after only one day on the market. Turns out the purchaser was Steven Rales, the billionaire entrepreneur who owns at least 61 acres next door and bought the parcel to protect his privacy and waterfront views, said Dalton Frazier, a local real estate agent.

Have any other palatial estates expanded? Not so long ago H. Wayne Huizenga, the billionaire founder of Blockbuster and owner of the Miami Dolphins, wanted more elbow room and bought a neighboring house for $2.5 million. Richard Mellon Scaife, the publisher and heir to a banking fortune, bought an extra house too; he needed it for the staff.

The real estate frenzy, even in the dead of winter, is only the most visible reminder that over the past decade or so this 50-square-mile, fishhook-shaped island off the Cape Cod coast has come to be dominated by a new class: the hyper-rich. They emerged in the 1980's and 1990's, when tectonic shifts in the economy created mountains of wealth. They resemble the arrivistes of the Gilded Age, which began in the 1880's when industrial capitalists amassed staggering fortunes, except that there are so many of them and they seem to be relatively anonymous.

Like their precursors, they tend to be brash, confident and unapologetic. They feel they have earned their money, and they are not shy about spending it. They construct huge mansions, outdo one another in buying high-end status symbols like mega-yachts (100 years ago it was private railroad cars) and not infrequently turn to philanthropy. Their wealth is washing over the upper reaches of society as it did a century ago, bringing cultural and political clout as they take up positions on museum boards and organize presidential campaign fund-raising dinners.

And they seem unconcerned about being accepted by the old money. If the blue bloods want to mix with them, fine. But if not, the hyper-rich are content to stick with their kind. If they cannot join an exclusive country club, they form their own. They are very good at creating a self-enclosed world where the criterion for admission is not the Social Register, but money.

Once a low-key summer resort, Nantucket is rapidly turning into their private preserve, joining the ranks of other enclaves like Palm Beach, Aspen, the Hamptons and Sun Valley. Now that the hyper-rich have achieved a critical mass, property values have zoomed so high that the less-well-off are being forced to leave and the island is becoming nature's ultimate gated community.

"It's a castle with a moat around it," said Michael J. Kittredge, a 53-year-old entrepreneur who realized a fortune when he sold his Yankee Candle Company seven years ago for about $500 million. He was relaxing in the living room of his 10,000-square-foot house, which has a basement movie theater and a 2,000-bottle wine cellar. A separate residence a quarter-mile away houses staff members and a gym.

"Successful people want to be with other successful people," Mr. Kittredge said. "Birds of a feather," he added. "On Nantucket you don't feel bad because you want a nice bottle of wine. If you order a $300 bottle in a restaurant, the guy at the next table is ordering a $400 bottle."

Dressed in blue jeans and a pink button-down shirt, he looked across the breadth of his swimming pool at a spectacular water view. The island, he said, is rapidly dividing into two types of people: "the haves and the have-mores."

New-Fashioned Values

Nantucket, with its vistas overlooking cranberry bogs and more than 80 miles of beaches, has always had its share of rich people. In the first half of the 19th century, owners of whaling ships amassed fortunes from oil and built the still well-preserved Federalist and Greek Revival mansions on upper Main Street.

During the last century, Vanderbilts, Mellons, duPonts and other wealthy families built residences here. Over time, as inherited wealth smoothed the rough edges, their descendants morphed into American high society and evolved a signature style of living based on understatement and old-fashioned patrician values.

Some of the scions of these older families are still here. They spend their time sailing, playing tennis and sometimes recalling the halcyon days of crossing the moors behind packs of beagles to hunt down rabbits. The mix of the old aristocratic families and the hyper-rich often plays out as a none-too-subtle tug of war between class and money.

Nina Chandler Murray, an 85-year-old relative of the Poor family from Standard & Poor's, the investment credit rating firm, is convinced that the world of the elite was more genteel in the old days.

"Coming from a New England background, you had a honed discipline of what was expected," Dr. Murray, a psychologist, said over iced tea and chocolate chip cookies on the porch of her hillside home above the harbor. "Showing off money was a sin. It was not that status was not important, but marriage was very closely controlled and predetermined, and everyone knew where everyone else fit."

A family name alone was enough to place someone in the pecking order. Wealthy people dressed down. Women eschewed heavy jewelry. The uniform for a man was a plain shirt, faded "Nantucket red" Bermuda shorts and Topsiders. Now, Dr. Murray suggested, the rule is: If you've got it, flaunt it.

"What has happened in America is that achievement is so important that everyone wants everyone else to know what they have done," she continued. "And in case you don't know, they want to tell you with a lethal combination of houses, cars and diamonds."

Dr. Murray was appalled at a recent dinner party when a woman leaned over to her and said, "My husband paid $250,000 to join the golf club, and he doesn't even play golf."

Work Hard, Spend Hard

Mr. Kittredge, who began his candle-making business at age 16 in his mother's kitchen and says he was raised in a "lower-class to lower-middle-class" home, holds attitudes typical of many of the newcomers. When prodded he will say that he worked hard for his money and that others can do the same. He is unapologetic about spending it lavishly and says that he has paid his dues in the form of taxes, which he estimates at $500 million so far. He also says that the chasm between the old-timers and the newcomers is inevitable.

"Money makes a lifestyle," he said. "It creates a division between the old money and the new. It is a little bit of class jealousy. We go to a cocktail party and a guy is telling my wife about his airplane. So finally the question comes up: 'How do you get over to the island?' and she says, 'We come by plane.' And he says, 'What kind of plane?' and she says, 'A G-IV.' And so the wind comes out of the guy's sails."

"The old money guy has a twin-prop airplane and that is pretty incredible," Mr. Kittredge continued. "For his time, that is pretty great. Now he is talking to a guy who is half his age who has a transcontinental jet. That is the end of the conversation.

"Or you meet someone and they start telling you about their boat. He has a 45-foot boat and he is very happy with it. Then he'll say, 'Do you have a boat?' And you say, 'Yes.' 'Well, what kind of boat do you have?' And you say, 'A Fed Ship.' And he says, 'How big is it?' That's how people rank them. So I have to say, 'It's 200 feet.' It's the end of the conversation. Is there envy? Yes, could be. Was he a wealthy guy in his day? Absolutely, but relative to today - no. The two worlds can mix as long as they don't talk too much."

The accouterments of wealth play a different role for the old-money clans than they do for the new wealthy, says Nelson W. Aldrich Jr., author of "Old Money."

"For many self-made men," Mr. Aldrich said, "homes, boats and even membership in expensive clubs are trophy signs of wealth. But for the older money, a boat may well be part of a tableau that has to do with family, with his grandparents and his children. It is part of his identity. If he walked away from the conversation, it was because he thought he was talking about his boat as part of his life. Instead he found he was talking about money, and he doesn't like being reminded that he lives in a competitive world."

Over time, some say, the new money will not prove much different. "Ultimately, the new money becomes as insular as the old money because it gains the power to exclude," said Michael Thomas, a novelist who, like his father, was a partner at Lehman Brothers and whose mother came from an old New England family. "Once you have the power to exclude, you have what people have been seeking in old money."

The single greatest change brought by the hyper-rich is in the cost of housing. The average Nantucket house price last year jumped 26 percent, to $1.672 million, said H. Flint Ranney, a veteran real estate broker.

Last fall one waterfront residence, with its own elevator, wine cellar, theaters and separate guesthouse, sold for $16 million, the year's record.

"Shame has somehow gone out the window," Mr. Thomas said. "There is no incentive to exercise control."

A handful of the new affluent indulge their fantasies with gusto. Michael S. Egan, the founder of Alamo Rent-a-Car, built his own baseball field, complete with a batting cage and stands. Roger Penske, the automotive tycoon and former race car driver, tussled for months with the Historic District Commission until he finally won permission to build a faux lighthouse that joins the two wings of his multimillion-dollar home. The investment banker Robert Greenhill likes to fly his Cessna jet to the Nantucket airport or his Cessna seaplane to his waterfront dock.

The rise in real estate values has, of course, benefited many of the old-timers. With some of their fortunes eroding, they find they are sitting on an extremely valuable asset, a realization that adds a touch of ambivalence to their protests against changes that are all too obvious.

One such change is at the airport. On high summer weekends, more than 250 Challengers, Gulfstreams and Citations a day might land there, vying for parking spaces. Some jets drop off passengers for a round of golf and whisk them away after.

In easternmost Siasconset, the gray-shingled fishermen's cottages that occupied the corners of plots of sea grass and wildflowers are giving way to mansions in private cul-de-sacs. Here and there hedges have sprouted up, tall as windsurfers, to partition the property parcels. They separate the community, contributing to the ineffable sense that something familiar and precious about the ethos of the island is disappearing.

"At least one new family has built a hedge to avoid people seeing them as they pass by," said Wade Green, 72, who has summered here for years. "Those open paths had an old-fashioned elegance to them. It is part of an old and fading spirit of community. Blocking them off is an unfriendly and antipublic thing to do."

Not all the changes here are striking. Downtown, with its cobblestone streets and absence of traffic lights, could still pass as a quaint New England fishing village. But some harbingers horrify the old-timers: upscale restaurants, boutique windows displaying expensive designer jewelry and the arrival of the first ever chain store, a Ralph Lauren shop.

On the sidewalks, class speaks through clothes. "The old money wears Lily Pulitzer, J. McLaughlin and C K Bradley," said one saleswoman, who wanted her name withheld to avoid offending customers. "They wear gold hoops, and if they buy new jewelry it is pearls or they upgrade their diamond rings. The new money wears Juicy Couture, Calypso and big necklaces. They even go to different restaurants. The old people go to 21 Federal and the new people go to the Pearl. They don't want to mix. They want to show off for each other."

But the lines cross. A handful of the hyper-rich gravitate toward Lily Pulitzer to give themselves a blue-blood look. And some pedigreed teenagers lust for Juicy Couture.

Daisy Soros, wife of the harbor designer Paul Soros and sister-in-law of the financier George Soros, has been coming to Nantucket since the 1960's, an era when few women, new money or old, dressed up. She thinks that the newcomers are beginning to influence the culture.

"Everybody is building monster houses now, and they are all dressing up," Mrs. Soros said. "Now even I wear Manolos," she added with a laugh.

Some say that too much is being made of all these distinctions. "The only people who are truly class conscious," said Roger Horchow, who realized his fortune when he sold his catalog business to Neiman Marcus in 1988 for $117 million, "are the second tootsie wives of men with big bankrolls."

Why Wait? Build a New One

When there is a division between the old and the new, it is apt to express itself on the most time-honored of battlefields: the putting green, the tennis court or the marine berth.

The existing clubs are still the preserves of the old wealth, but new clubs are springing up to welcome newcomers, as well as some longtime residents who grew impatient with waiting lists. For years the Sankaty Head Golf Club had a waiting list that seemed to extend for decades. So in 1995, Edmund A. Hajim, an investment banker in Manhattan, and others created the Nantucket Golf Club, assiduously designed to look as if it had been around forever. It became such a hit that its list is now full, too, even at a cost of $325,000 (80 percent reimbursable upon departure), as opposed to the $30,000 it costs to join Sankaty Head.

In the same way, the old Nantucket Yacht Club has spawned a rival, the Great Harbor Yacht Club. About 300 families have already bought memberships, which now cost $300,000.

Some Nantucketers applaud the new clubs.

"Why shouldn't they start a club if they can't get into the old ones," said Letitia Lundeen, who was raised in the social whirl of New York and Washington and now runs an antiques store here.

The resentment of new money riles Liz Petkevich, whose husband, J. Misha Petkevich, an investment banker and former Olympic figure skater, helped found the new yacht club.

Her husband worked hard for what he achieved, she said. "Does that mean we are better than anyone else? No. But we should not be penalized because we cannot get into the old yacht club."

In the old days, the clubs were homogenous and dominated by white Anglo-Saxon Protestant families.

"When I first came here it was the tail end of the 'grande dame' era," said David L. Hostetler, a sculptor, who arrived in 1971. "The place was dominated by WASP women in Bermuda shorts. There were hardly any Jews."

Today the island's elite is diversified enough to support a synagogue where membership has reached 250 families and where the yarmulke worn during services is Nantucket red and decorated with miniature whales.

One place where the old and the new do mix is charity events. As in cultural and philanthropic institutions from San Francisco to New York City, the old money has made room at the table for the new money to replenish the coffers. There are more and more fund-raising events, and they are no longer the low-key affairs they once were. Last year the annual cocktail party and auction for the Nantucket Historical Association instituted valet parking and a classical quartet in black tie.

Some appreciate the infusion of money and energy that the newcomers have brought. "The old money doesn't like to spend money because they worry about whether they can make it again," Ms. Lundeen said. "Even when they can spend it, they often think it's vulgar and unnecessary. The newcomers have brought the island up to par with their demands."

Everything New Is Old

Old-time Nantucketers are given to trading what one of them called "barbarian stories." Did you hear that Rick Sherlund, a Goldman Sachs partner, annoyed some of his neighbors when he hired Jackson Browne to entertain at his anniversary party? Or that Jon Winkelried, another Goldman Sachs partner, had the nerve to close off a small road that people had been using for as long as anyone can remember? Or that Louis V. Gerstner, the former I.B.M. chief executive, hired a Boston litigator to help him push through a plan for a large new house on his $11 million waterfront plot?

Aggressive behavior, Dr. Murray said, is natural to the species. "And after all, why should they give it up?" she said. "Look where it has gotten them. That is exactly how they made their money."

One Nantucketer was L. Dennis Kozlowski, the former chief executive of Tyco International, on trial a second time on charges of criminal larceny, accused of looting the company of tens of millions of dollars. His lavish New York apartment, with its $6,000 shower curtain, became a symbol of the over-the-top corporate lifestyle.

To some, the multimillion-dollar party that Mr. Kozlowski gave on Sardinia to celebrate his wife's birthday - replete with a vodka-spewing ice sculpture fashioned after Michelangelo's "David" - was a modern echo of the lavish celebrations of the Gilded Age.

Subtler distinctions between old and new money lie in the attitude toward work. The financier David Rubinstein bought a 15-acre waterfront property, tore down the existing house, as many wealthy buyers have done, and put up an 8,000-square-foot home. The stunning view lets him watch the sun rise and set, and yet he has boasted to friends that he spends only 12 days a year here; a rock on his front lawn reads: "I'd rather be working."

Robert E. Torray, who is a co-manager of a mutual fund family and has been flying here on his company's Gulfstream since the 1980's, is either on the golf course or working the phone in his cranberry red library. He likes it here because there are Wall Street moguls everywhere and wherever he goes he can talk business.

That is hardly the attitude of some veteran summer residents, who find comfort in the thought that they can occasionally be fogged in without worrying about the office. For them, being rich means a license to break schedules and to play. "If you are working," said Nicki Gamble, whose husband, Richard, is an heir to the Proctor & Gamble fortune, "it is very nerve-racking. The way to be here is not to be working."

Caught by a Boom

The high cost of housing is squeezing middle-class people off the island.

The former principal of Nantucket High School, Paul Richards, and his wife, Martina, a nurse, moved last year to Needham, Mass., after renting here for five years. "The expense of that together with having two little children made a home beyond reach," Mr. Richards said. "It was frustrating to be driven away from two jobs that we very much enjoyed, but a starter home for our family would have cost over $600,000."

Linda Finney Williams, administrator of the Nantucket Zoning Board of Appeals, who has a 19-year-old son in college and an older daughter in law school, said, "I'm hanging on by my fingernails."

"The cost of living has risen so much that it's very hard on us."

The demand for labor is so great that every weekday roughly 400 workers fly in from the mainland for construction, gardening, plumbing and other services. The commute may be a nuisance, but the money makes it worthwhile. It also explains why building is so expensive; the additional costs are passed along to customers.

John Sheehan, a 65-year-old construction worker who rises every day at 4:30 a.m. to catch a plane from Hyannis, does not complain. "I have always been in the lower-middle-class area," Mr. Sheehan said. "But the times are good for me now. I'm making more money than I ever did and I'm living more comfortably."

To try to stem the outflow of workers the Nantucket Housing Office, a private nonprofit group, has proposed a one-time "McMansion" tax of $8 per square foot on any construction space exceeding 3,000 square feet.

The bill has several more hurdles, but if it is approved, the proceeds would be used to build housing for families making $120,825 a year or less.

Some real estate agents worry that the hyper-rich will resent the tax, but so far wealthy homebuilders seem to regard it as a pittance compared with the other costs they incur.

Despite the money to be made, some shop owners and other locals miss the way the island used to be.

Though she applauds their self-confidence, Ms. Lundeen, the antiques dealer, says she is sometimes appalled by what she considers the cavalier ignorance of some women who are suddenly rich. "They don't want to learn," she said. "I had a monogrammed tray and when I proposed it to a customer, she said, 'Why would I want other people's monograms?' These women have never inherited anything."

Robin Bergland, a young florist who moved here from Manhattan, has stopped providing flowers for weddings. "The final straw was a wedding where a Wall Street executive tried to bill me for the wedding gown and medical expenses," she said. "He charged that the roses I used to decorate their party tent ruined the hem of the bride's dress and caused her aunt to trip and break her leg.

"I got threatening phone calls daily. I was terrified until I gave the case to my lawyer and they went away. There's no question it was unlikely to have happened five years ago."

The old summer people "used to try and fit in," said Arlene Briard, a taxi driver who has lived here 35 years. "They didn't want to differentiate themselves by class or by a look that said how much money I have. When I sold TV Guides to people, I'd walk into a house, sit down and have a lemonade with people or play tennis with them at the yacht club. Now they get in my taxi and find a way to tell me that they belong to the Nantucket Golf Club.

"Class has a certain grace," Ms. Briard said. "Just because you can go to Chanel and buy a dress does not mean you have class. A person who just pays their bills on time can have class."

Richest Are Leaving Even the Rich Far Behind

2005-06-06T12:26:00.000-07:00

The New York Times
June 5, 2005
By DAVID CAY JOHNSTON
When F. Scott Fitzgerald pronounced that the very rich "are different from you and me," Ernest Hemingway's famously dismissive response was: "Yes, they have more money." Today he might well add: much, much, much more money.

The people at the top of America's money pyramid have so prospered in recent years that they have pulled far ahead of the rest of the population, an analysis of tax records and other government data by The New York Times shows. They have even left behind people making hundreds of thousands of dollars a year.

Call them the hyper-rich.

They are not just a few Croesus-like rarities. Draw a line under the top 0.1 percent of income earners - the top one-thousandth. Above that line are about 145,000 taxpayers, each with at least $1.6 million in income and often much more.

The average income for the top 0.1 percent was $3 million in 2002, the latest year for which averages are available. That number is two and a half times the $1.2 million, adjusted for inflation, that group reported in 1980. No other income group rose nearly as fast.

The share of the nation's income earned by those in this uppermost category has more than doubled since 1980, to 7.4 percent in 2002. The share of income earned by the rest of the top 10 percent rose far less, and the share earned by the bottom 90 percent fell.

Next, examine the net worth of American households. The group with homes, investments and other assets worth more than $10 million comprised 338,400 households in 2001, the last year for which data are available. The number has grown more than 400 percent since 1980, after adjusting for inflation, while the total number of households has grown only 27 percent.

The Bush administration tax cuts stand to widen the gap between the hyper-rich and the rest of America. The merely rich, making hundreds of thousands of dollars a year, will shoulder a disproportionate share of the tax burden.

President Bush said during the third election debate last October that most of the tax cuts went to low- and middle-income Americans. In fact, most - 53 percent - will go to people with incomes in the top 10 percent over the first 15 years of the cuts, which began in 2001 and would have to be reauthorized in 2010. And more than 15 percent will go just to the top 0.1 percent, those 145,000 taxpayers.

The Times set out to create a financial portrait of the very richest Americans, how their incomes have changed over the decades and how the tax cuts will affect them. It is no secret that the gap between the rich and the poor has grown, but the extent to which the richest are leaving everyone else behind is not widely known.

The Treasury Department uses a computer model to examine the effects of tax cuts on various income groups but does not look in detail fine enough to differentiate among those within the top 1 percent. To determine those differences, The Times relied on a computer model based on the Treasury's. Experts at organizations representing a range of views, including the Heritage Foundation, the Cato Institute and Citizens for Tax Justice, reviewed the projections and said they were reasonable, and the Treasury Department said through a spokesman that the model was reliable.

The analysis also found the following:

¶Under the Bush tax cuts, the 400 taxpayers with the highest incomes - a minimum of $87 million in 2000, the last year for which the government will release such data - now pay income, Medicare and Social Security taxes amounting to virtually the same percentage of their incomes as people making $50,000 to $75,000.

¶Those earning more than $10 million a year now pay a lesser share of their income in these taxes than those making $100,000 to $200,000.

¶The alternative minimum tax, created 36 years ago to make sure the very richest paid taxes, takes back a growing share of the tax cuts over time from the majority of families earning $75,000 to $1 million - thousands and even tens of thousands of dollars annually. Far fewer of the very wealthiest will be affected by this tax.

The analysis examined only income reported on tax returns. The Treasury Department says that the very wealthiest find ways, legal and illegal, to shelter a lot of income from taxes. So the gap between the very richest and everyone else is almost certainly much larger.

The hyper-rich have emerged in the last three decades as the biggest winners in a remarkable transformation of the American economy characterized by, among other things, the creation of a more global marketplace, new technology and investment spurred partly by tax cuts. The stock market soared; so did pay in the highest ranks of business.

One way to understand the growing gap is to compare earnings increases over time by the vast majority of taxpayers - say, everyone in the lower 90 percent - with those at the top, say, in the uppermost 0.01 percent (now about 14,000 households, each with $5.5 million or more in income last year).

From 1950 to 1970, for example, for every additional dollar earned by the bottom 90 percent, those in the top 0.01 percent earned an additional $162, according to the Times analysis. From 1990 to 2002, for every extra dollar earned by those in the bottom 90 percent, each taxpayer at the top brought in an extra $18,000.

President Ronald Reagan signed tax bills that benefited the wealthiest Americans and also gave tax breaks to the working poor. President Bill Clinton raised income taxes for the wealthiest, cut taxes on investment gains, and expanded breaks for the working poor. Mr. Bush eliminated income taxes for families making under $40,000, but his tax cuts have also benefited the wealthiest Americans far more than his predecessors' did.

The Bush administration says that the tax cuts have actually made the income tax system more progressive, shifting the burden slightly more to those with higher incomes. Still, an Internal Revenue Service study found that the only taxpayers whose share of taxes declined in 2001 and 2002 were those in the top 0.1 percent.

But a Treasury spokesman, Taylor Griffin, said the income tax system is more progressive if the measurement is the share borne by the top 40 percent of Americans rather than the top 0.1 percent.

The Times analysis also shows that over the next decade, the tax cuts Mr. Bush wants to extend indefinitely would shift the burden further from the richest Americans. With incomes of more than $1 million or so, they would get the biggest share of the breaks, in total amounts and in the drop in their share of federal taxes paid.

One reason the merely rich will fare much less well than the very richest is the alternative minimum tax. This tax, the successor to one enacted in 1969 to make sure the wealthiest Americans could not use legal loopholes to live tax-free, has never been adjusted for inflation. As a result, it stings Americans whose incomes have crept above $75,000.

The Times analysis shows that by 2010 the tax will affect more than four-fifths of the people making $100,000 to $500,000 and will take away from them nearly one-half to more than two-thirds of the recent tax cuts. For example, the group making $200,000 to $500,000 a year will lose 70 percent of their tax cut to the alternative minimum tax in 2010, an average of $9,177 for those affected.

But because of the way it is devised, the tax affects far fewer of the very richest: about a third of the taxpayers reporting more than $1 million in income. One big reason is that dividends and investment gains, which go mostly to the richest, are not subject to the tax.

Another reason that the wealthiest will fare much better is that the tax cuts over the past decade have sharply lowered rates on income from investments.

While most economists recognize that the richest are pulling away, they disagree on what this means. Those who contend that the extraordinary accumulation of wealth is a good thing say that while the rich are indeed getting richer, so are most people who work hard and save. They say that the tax cuts encourage the investment and the innovation that will make everyone better off.

"In this income data I see a snapshot of a very innovative society," said Tim Kane, an economist at the Heritage Foundation. "Lower taxes and lower marginal tax rates are leading to more growth. There's an explosion of wealth. We are so wealthy in a world that is profoundly poor."

But some of the wealthiest Americans, including Warren E. Buffett, George Soros and Ted Turner, have warned that such a concentration of wealth can turn a meritocracy into an aristocracy and ultimately stifle economic growth by putting too much of the nation's capital in the hands of inheritors rather than strivers and innovators. Speaking of the increasing concentration of incomes, Alan Greenspan, the Federal Reserve chairman, warned in Congressional testimony a year ago: "For the democratic society, that is not a very desirable thing to allow it to happen."

Others say most Americans have no problem with this trend. The central question is mobility, said Bruce R. Bartlett, an advocate of lower taxes who served in the Reagan and George H. W. Bush administrations. "As long as people think they have a chance of getting to the top, they just don't care how rich the rich are."

But in fact, economic mobility - moving from one income group to another over a lifetime - has actually stopped rising in the United States, researchers say. Some recent studies suggest it has even declined over the last generation.

School assignment system called ‘wasted effort'

2005-06-03T14:08:00.000-07:00

School assignment system called ‘wasted effort'

By Bonnie Eslinger
Staff Writer, San Francisco Examiner
June 3, 2005

The student-assignment system currently used to diversify San Francisco's public schools was called a "well-intentioned, but wasted effort that didn't do the job," according to the federal judge now overseeing the district's desegregation efforts.

U.S. District Judge William Alsup made the comments in court Thursday as the district updated the court on its progress toward meeting the goals of a 1983 legal settlement that has required the district to work toward integrating schools and increasing the academic achievement for the district's minority students.

The 22-year-old debate on how to best achieve those ends is again at the forefront since the court order, called a consent decree, is scheduled to end on Dec. 31, which would allow the district to try other ways to assign students to schools.

Peter Cohn, of the National Association for the Advancement of Colored People which originally filed suit against the district that led to the court-ordered desegregation, has said the organization will ask for an extension of the order due to evidence that shows the district remains segregated with a persistent achievement gap. He agreed a new system needed to be found.

The current system uses a "diversity index" that takes into account a student's socioeconomic background but does not consider race. It is the result of a subsequent lawsuit in 1999 by Chinese-American parents who said their children were being denied the opportunity to go to popular schools due to their race.

In recent months, the board has been reviewing several alternative ideas to the diversity index, three proposed by a community task force and another from first-year board member Norman Yee. However, the district's lawyers informed the judge Thursday that two school desegregation experts had been retained and were prepared to review all existing ideas as well as present new options.

"It was a good move to hire experts," said Cohn. "It will help the board make the most informed decision."

UCLA education professor Stuart Biegel, assigned by the court to monitor the desegregation efforts, also applauded the district's decision to seek other ideas. Two of the four current proposals allow more opportunity for students to get assigned to neighborhood schools, giving little advantage to students living within the boundaries of some of the worst schools to attend others.

Veteran board members Dan Kelly and Jill Wynns have both said they would not support any of the existing proposals since they don't focus on desegregating schools. Kelly has authored a resolution that would continue to work toward integration and bring back race as a factor in the assignment process.

San Francisco isn't the only school district embattled in school-assignment debates as a result of desegregation efforts. Districts across the country, including Boston, Chicago, Seattle and Baton Rouge, La., are currently in legal battles, but some districts have been released from their desegregation court orders, including Kansas City, Mo., and Dallas.

"It's a difficult thing desegregation, especially when the use of race could be limited," said Biegel, who later noted, "But there are plans nationwide that are working."

Last year, in Louisville, Ky., a federal judge upheld the limited use of race in making student assignments to achieve racial integration in the public schools.

David Levine, one of the lawyers for the Chinese plaintiffs, said that the Kentucky ruling wouldn't apply in California, since voters passed Proposition 209 in 1996, which eliminates the use of racial preferences for public education and other state agencies and

programs.

Whatever assignment system the district decides to use, the consent decree should come to an end, said Levine, since students were not forced by the district to go to bad schools. "The kids can choose any school they want, with the exception of Lowell [High School], and throw themselves into the lottery."

E-mail: beslinger@examiner.com

Fear and Rejection

2005-06-03T10:53:00.000-07:00

June 2, 2005
Fear and Rejection
By DAVID BROOKS
Forgive me for making a blunt and obvious point, but events in Western Europe are slowly discrediting large swaths of American liberalism.

Most of the policy ideas advocated by American liberals have already been enacted in Europe: generous welfare measures, ample labor protections, highly progressive tax rates, single-payer health care systems, zoning restrictions to limit big retailers, and cradle-to-grave middle-class subsidies supporting everything from child care to pension security. And yet far from thriving, continental Europe has endured a lost decade of relative decline.

Western Europeans seem to be suffering a crisis of confidence. Election results, whether in North Rhine-Westphalia or across France and the Netherlands, reveal electorates who have lost faith in their leaders, who are anxious about declining quality of life, who feel extraordinarily vulnerable to foreign competition - from the Chinese, the Americans, the Turks, even the Polish plumbers.

Anybody who has lived in Europe knows how delicious European life can be. But it is not the absolute standard of living that determines a people's morale, but the momentum. It is happier to live in a poor country that is moving forward - where expectations are high - than it is to live in an affluent country that is looking back.

Right now, Europeans seem to look to the future with more fear than hope. As Anatole Kaletsky noted in The Times of London, in continental Europe "unemployment has been stuck between 8 and 11 percent since 1991 and growth has reached 3 percent only once in those 14 years."

The Western European standard of living is about a third lower than the American standard of living, and it's sliding. European output per capita is less than that of 46 of the 50 American states and about on par with Arkansas. There is little prospect of robust growth returning any time soon.

Once it was plausible to argue that the European quality of life made up for the economic underperformance, but those arguments look more and more strained, in part because demographic trends make even the current conditions unsustainable. Europe's population is aging and shrinking. By 2040, the European median age will be around 50. Nearly a third of the population will be over 65. Public spending on retirees will have to grow by a third, sending Europe into a vicious spiral of higher taxes and less growth.

This is the context for the French "no" vote on the E.U. constitution. This is the psychology of stagnation that shaped voter perceptions. It wasn't mostly the constitution itself voters were rejecting. Polls reveal they were articulating a broader malaise. The highest "no" votes came from the most vulnerable, from workers and the industrial north. The "no" campaign united the fearful right, led by Jean-Marie Le Pen, with the fearful left, led by the Communists.

Influenced by anxiety about the future, every faction across the political spectrum found something to feel menaced by. For the Socialist left, it was the threat of economic liberalization. For parts of the right, it was the threat of Turkey. For populists, it was the condescension of the Brussels elite. For others, it was the prospect of a centralized European superstate. Many of these fears were mutually exclusive. The only commonality was fear itself, the desire to hang on to what they have in the face of change and tumult all around.

The core fact is that the European model is foundering under the fact that billions of people are willing to work harder than the Europeans are. Europeans clearly love their way of life, but don't know how to sustain it.

Over the last few decades, American liberals have lauded the German model or the Swedish model or the European model. But these models are not flexible enough for the modern world. They encourage people to cling fiercely to entitlements their nation cannot afford. And far from breeding a confident, progressive outlook, they breed a reactionary fear of the future that comes in left- and right-wing varieties - a defensiveness, a tendency to lash out ferociously at anybody who proposes fundamental reform or at any group, like immigrants, that alters the fabric of life.

This is the chief problem with the welfare state, which has nothing to do with the success or efficiency of any individual program. The liberal project of the postwar era has bred a stultifying conservatism, a fear of dynamic flexibility, a greater concern for guarding what exists than for creating what doesn't.

That's a truth that applies just as much on this side of the pond.

E-mail: dabrooks@nytimes.com

The Death Spiral of the Volunteer Army

2005-05-28T21:51:00.000-07:00

Editorial
May 29, 2005
The New York Times

Defense Secretary Donald Rumsfeld likes to talk about transforming America's military. But the main transformation he may leave behind is a catastrophic falloff in recruitment for the country's vital ground fighting forces: the Army and the Marine Corps. The recruitment chain that has given the United States highly qualified, highly skilled and highly motivated ground forces for the three decades since the government abandoned the draft has started to break down.

This is astonishing, even allowing for the administration's failure to prepare Americans honestly for how long and difficult the occupation of Iraq would be. There are over 60 million American men and women between 18 and 35, the age group sought by Army recruiters. Getting the 80,000 or so new volunteers the Army needs to enlist each year ought not to be such a daunting challenge. There are obvious attractions to joining the world's most powerful, prestigious and best-equipped ground fighting forces, and in so doing qualifying for valuable benefits like college tuition aid.

But Army recruitment is now regularly falling short of the necessary targets. Recruiters are having even more trouble persuading people to sign up for Army National Guard and Reserve units. The Marine Corps has been missing its much smaller monthly quotas as well. Unless there is a sharp change later this year, both forces will soon start feeling the pinch as too few trainees are processed to meet both forces' operational needs.

Why this is happening is no mystery. Two years of hearing about too few troops on the ground, inadequate armor, extended tours of duty and accelerated rotations back into combat have taken their toll, discouraging potential enlistees and their parents. The citizen-soldiers of the Guard and Reserves have suddenly become full-time warriors. Nor has it helped that when abuse scandals have erupted, the Pentagon has seemed quicker to punish lower-ranking soldiers than top commanders and policy makers. This negative cycle now threatens to feed on itself. Fewer recruits will mean more stress on those now in uniform and more grim reports reaching hometowns across America.

The results can now be seen at every Army and Marine recruiting office. (The Air Force and Navy, which have not been subjected to the same stresses and dangers as the ground forces, are meeting their recruiting quotas.) Missed quotas have translated into intense pressure to lower standards and recruit people who should not be in uniform. Earlier this month the Army required all of its recruiters to go through a one-day review of basic recruiting ethics.

Things might have been different if Mr. Rumsfeld had heeded the judgment of Gen. Eric Shinseki, then the Army chief of staff, in the months before the United States invaded Iraq and planned for a substantially larger occupation force. A larger force might have kept the insurgency smaller and more manageable. It would have been better able to defend itself without resorting to the kind of indiscriminate firepower that kills civilians, destroys homes and inflames Iraqi opinion. Individual combat brigades would not have been under such constant operational stress. But Mr. Rumsfeld rejected General Shinseki's sound advice. The Pentagon now says it gives field commanders as many troops as they ask for. But those commanders are aware of Mr. Rumsfeld's doctrinaire commitment to holding down troop numbers and of the diminished career prospects that could result from challenging him.

The Pentagon now hopes that next month's high school graduations will help it catch up to its recruiting goals. Besides crossing its fingers, the military should open more combat roles to women, end its senseless discrimination against gays and reach out to immigrants with promises of citizenship after completion of service. There should be no thought of reinstating the draft, which would be militarily foolish and politically explosive. But expanding the potential recruiting pool can be only a partial answer. Young people and their parents are reacting rationally to a regrettable and unnecessary transformation in how the United States government treats its ground troops. That is what needs to be changed.