Financial Regulatory Reform: Missing an Obvious Target

Congress and the Administration have now picked their targets for regulatory reform following the long-inflating credit bubble that finally burst in 2008, the aftermath of which still suppresses economic activity here in America as well as the rest of the world.  Commercial banks, investment banks, financial products, derivatives, etc. . . .all were placed in the crosshairs of the big legislative and regulatory guns in Washington and, perhaps, well they should be. One trophy-size culprit, however, seems nowhere to be found on the target lists of the Congressional or Administration grenadiers. Fannie Mae, that publically traded, congressionally created, private enterprise (GSE or government-sponsored enterprise in beltway speak) seems to have totally escaped the purview of the government blame seekers.  Small wonder.  Of all of the bailouts handed over to private banks, investment firms, automobile companies and insurance companies, none have been more outrageous than the bailouts provided to Fannie Mae and it’s first cousin, Freddie Mac.  Although the government very belatedly seized these GSEs, taxpayer money continues to be provided to these hybrid public‑private creations right under our collective noses each and every day.  The Congressional pontificators have focused attention on every miscreant except the one they (or their predecessors) created and which they continue to feed.

Everyone agrees that the overheated housing market created a pricing bubble that was destined, like the San Andreas Fault or Eyjafjalljokull, the volcanic mountain in Iceland, to experience a major blow-up.  Thus, the country was treated to the laborious hearings, the parade of witnesses, the written testimony and the mountains of documents presented at the recently staged congressional hearings.  We now have, from the Senate, a gargantuan 1500-page bill that will, when reconciled with an earlier House version spawn new federal agencies, regulatory rulemaking, changes in market trading patterns, reorganization of many of our major financial institutions and the sure-to-follow litigation being cooked up by hordes of trial lawyers to make sure the evil doers are punished (and their own pockets are lined with large class-action contingency fees).

Absent from this amazing flurry of lawmaking oversight “reform” activity, however, are Fannie and Freddie whose policies were, perhaps, most responsible for the housing and related financial market wreckage, the individual bankruptcies, the supply overhang and all of the related effects of a burst housing bubble. These two companies have operated with a largess of support from the federal government (that would be we taxpayers). We, all of us who pay taxes, provide to these public-private basket cases lines of credit through the U.S. Treasury, exemption from state and local income taxes and a lower cost of borrowing. The bonds of Fannie Mae and Freddie Mac are perceived to have the backing of the government; and while that is not literally the case, that perception has enabled these hybrids to enjoy lower costs of borrowing resulting from the higher credit ratings which the implicit backing of the government makes possible. How could any company with such advantages, i.e., exclusion from state and local taxes, lower borrowing costs, virtually unlimited demand for its services and very high-powered, high-salaried, highly bonused, politically connected executives ever make such a mess of things.

Fannie and Freddie were created to buy fixed-rate mortgages from banks, which provide loans to lower and middle-income buyers who often invest little equity in their homes.  As these two government-sponsored enterprises purchase mortgages from banks, the banks are able to lend more money to buyers.  The ease with which people could acquire homes with the help of Fannie and Freddie, of course, increased the demand for homes, which is exactly what the government intended when it created Fannie and Freddie.  In fact, the government required lending institutions to increase the ratio of loans in low-income areas. Because of the increased ratio requirements, institutions in the primary mortgage market pressed Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers at interest rates higher than conventional loans. Fannie Mae and Freddie Mac, of course, also had an obligation to maintain shareholder value by maintaining profitability.    Huge executive bonuses were tied to earnings, which would have been fine as long as those earnings were legitimate and consistent with the mission of the companies.  But long before the current financial crisis unfolded the Securities and Exchange Commission had ruled that Fannie Mae had violated accounting rules, overstating profits by an estimated $9 billion between 2001 and 2005, which represented approximately 40% of its profits during those years.

This relatively new market, consisting of a large number of unqualified buyers, artificially stimulated demand, which, in turn, increased the prices for homes available for purchase.   Homeowners, seeing the value of their homes appreciate year after year borrowed against the increased (inflated) equity to finance everything from college tuition for their children to improving the family standard of living, Hundreds of billions of dollars were loaned with borrowers putting little or no money down.  As housing prices rose, homeowners cashed in their imaginary new wealth to pay bills, buy boats, cars and other creature comforts. Suddenly millions of Americans found themselves with a lot of debt and very little equity to prop up that debt. Add to this the millions of Americans who were convinced they could borrow beyond their means because, they rationalized, “their means” would increase as their home values increased. But, when the housing market began to run out of steam and home prices began to retreat, the decline in home values, represented a decline in the net worth people had, or thought they had accumulated.

The rest of the story is, of course, history. Taxpayers were left holding a bag containing hundreds of billions, if not trillions, of dollars of debt.  Not only is this risk to the taxpayer not addressed by the new legislation, it continues unabated.  Within the past couple of weeks Fannie Mae and Freddie Mac asked the Treasury for an aggregate $19 billion of additional taxpayer funds, and the hemorrhage is going to continue.  These government-created behemoths, according to the Wall Street Journal, backed over 96 percent of all home loans in the first quarter of 2009.

Although ownership of Fannie and Freddie has been, since September of 2008, under federal conservatorship, by that time, Fannie and Freddie owned or guaranteed over half of the U.S.’s $12 trillion mortgage market.

In substance, government policy, at least since the Clinton Administration, has been to expand so‑called affordable housing in America.  In furtherance of that policy, lending institutions vastly lowered the credit standards they historically applied to underwrite loans resulting in low or no equity loans for buyers who clearly could not otherwise afford the homes they were buying.  Along the way it became the mantra of politicians that every American should be able to own a home . . . one step from saying every American should have the right to own a home.  Sounds familiar doesn’t it?  Read:  right to a college education, right to government provided health care.

Given the incredibly relaxed lending standards, including low or no equity loans, one would assume that our lawmakers now would be screaming for overhaul and oversight of Fannie and Freddie.  Their portfolios represent trillions of dollars in off balance sheet debt (which by 2007 consisted largely of sub‑prime or Alt‑A loans made without traditional underwriting standards) potentially as large and threatening to the nation as the unfunded liabilities of Medicare and Social Security.  Such an assumption, however, would have been, and still is, wrong.

Repeated warnings by economists, members of the Bush Administration and Republicans in Congress that the debt of the GSEs was like a barrel of dynamite waiting to explode fell on deaf ears.  In 2006, Sen. John McCain weighed in with a pointed plea for improved regulation of the GSEs.  He warned of the enormous exposure of our financial system and the taxpayers to the unnecessary risks being taken by Fannie and Freddie.  The Wall Street Journal has, on their editorial pages, for over a decade, alerted its readers to the risk to America of the grossly over‑stated balance sheets of Fannie Mae and Freddie Mac.  By the end of 2007, the year before the housing bubble burst, Fannie Mae and Freddie Mac were sitting on combined debt and mortgage guarantees of $5.2 trillion that was supported by $83.2 billion (1.6%) of capital.

Democrats in Congress have been far less vigilant about the systemic risk posed by Fannie and Freddie than they have been about Wall Street investment bankers or large national banks that, essentially, packaged and sold bundles of mortgages ostensibly backed by these government sponsored enterprises.  Whether this chronic failure by Congress to recognize the systemic danger to the financial markets the pathetic balance sheets of Fannie Mae and Freddie Mac represented was, and is, a result of the symbiotic relationship arising out of the campaign contributions congressmen and senators regularly receive from these GSE’s is really not for us to judge but the circumstantial evidence surely points that way.

Among the fifteen lawmakers who received the largest political contributions from those two companies in the ten years ending in 2008, the list includes:  Sen. Chris Dodd (D‑Conn.), Sen. John Kerry (D-Mass.), then Sen. Barack Obama (D-Ill.), then Sen. Hillary Clinton (D-NY), Sen. Tim Johnson (D-SD), Sen. Kent Conrad (D-ND) and Rep. Barney Frank (D‑Mass.) . . . most of whom are the most vocal critics of Wall Street, or who serve on Committees which regulate the banking and lending industry (e.g., House Financial Services Committee, Senate Banking Committee, Senate Finance Committee) and who are among the most vocal advocates for campaign finance reform.  Mr. Frank may be deserving of the “chutzpah” award since he has spent years blocking Republican efforts to impose tougher regulations on Fannie and Freddie even though he blames Republicans for their failure.

What we are witnessing in the debate now reaching its apex in Congress is the usual Washington game . . . an effort to shift blame rather than to legislate effective change.  This is particularly so in an election year, especially a year when incumbents are being challenged by new political forces like those typified by the tea party activists.  Democrats want to shift the focus to the evils and excesses of Wall Street and the big banks and they are not without some very good arguments.  But can the voting public take Congressional Democrats and the Administration seriously about the need for more financial oversight if Fannie Mae and Freddie Mac, the two companies most directly involved in the funding of the housing bubble are allowed to continue, even under federal conservatorship, with business as usual?  It looks to us like the Congressional majority is more interested in hiding their oversight malfeasance and restoring their candy store flow of reliable campaign contributions than protecting the taxpayers from the predatory practices against which they have been relentlessly inveighing.

Greece: Coming Attractions?… Or Wake-Up Call?

It is not the magnitude of the rapidly collapsing Greek economy that should concern us in America.  It is, rather, that Greece is unquestionably the proverbial canary in the coal mine that should have the American ruling class burning the midnight oil to extract us from the mess they and their predecessors have created for us.  Instead, our government is ignoring the warning from the dead canary and even the waning peeps from the other moribund canaries in the coal mine.

The liberal left in America, along with conservatives in name only, has flirted with the European economic welfare paradigm for years and now we have an Administration that has morphed that flirtation into a full blown love affair.  Greece, which has spent itself into oblivion providing unsustainable benefits (mostly to ever-growing public payrollers) is, we are told, an aberration and the Administration will, no doubt, say the same thing about Portugal and Italy and Ireland too.  But then we have Spain and Great Britain and even France (and let’s not forget Iceland) staggering down the same path toward economic never-never land, all suffering from the same delusional affliction that is now being pursued with gusto by our ruling class…the belief that we can best improve life for all Americans, nearly half of whom pay no taxes, by raising taxes on the declining number of Americans who do.

The left has always believed that prosperity is something that can be bought through government taxation of society’s income, rather than something that is simply a by-product of society’s productivity.  Let us say it again.  Government cannot create sustainable wealth or prosperity.  Only the people, individually and through the commercial and industrial institutions they create, can do that.

Healthy societies are growing societies that earn the means (the capital) for reinvestment in continued health and growth.  In this process of market-driven growth everyone who participates eventually prospers. Healthy societies are not those such as we are witnessing in Europe, whose earnings are sucked dry by government for redistribution to accomplish objectives as dictated by government planners.   Yet it is this withering European model that our current Administration and its congressional majority have embraced, notwithstanding the warnings screaming at us from across the Atlantic and throughout nearly every precinct in America.  President Obama has stated, unambiguously, that he personally believes that at some level of income no one needs to earn any more, presumably the point at which government should take the balance for redistribution. He acknowledged, however, that this view was, “not the American way.”

While there are structural differences between the debt-laden welfare states of Europe and America, there are very frightening similarities between the course we are now pursuing and the course that has brought so much of Europe to such sorry circumstance.  The primary difference, of course, is that Euro-denominated states cannot monetize the burgeoning debt created by their own individual budget deficits.  That is, they do not have the ability to devalue a national currency as we can by printing more of it.  That is because the twenty-seven Euro countries are all yoked to the Euro.   That said, the problem being experienced in Europe is not, at its core, currency driven.  It is caused by excessive overborrowing to support programs that cannot be paid for from current revenue, which results in accumulated debt that cannot be retired through economic growth because the debt service burdens consume the capital which would otherwise be available to create that growth.

Greece, like the other PIGS countries (Portugal, Italy, Ireland and Spain) as well as Great Britain, France and Iceland got into so much hot water (or red ink) by spending (and committing to spend in the future) far more money than their already high tax rates could fund, so they borrowed with the same abandon that the United States is now funding its commitments.  They, like the United States, have turned time and time again to taxes and debt to stay afloat but never to sustained reductions in spending.  Never, of course, is a very long time and, in Europe, time has finally run out.  The creditor nations (or, we should say, the central banks of the creditor nations) have had enough and severe spending cuts are being imposed on Greece, as they surely will be on the other high spending countries of the EU if defaults on national debt are to be avoided.

One in three Greeks work for the government and they enjoy higher wages and better benefits than their countrymen working in the private sector.  The people who have been manning the barricades and rioting in Greece are not primarily the unemployed or under employed. To the contrary, they are the well and very securely employed and many are eligible to retire after 35 years of service at eighty percent of their highest salary after which they continue to be eligible for government paid health plans and other perks.  The reality is that they are being paid with money their government doesn’t have and can no longer borrow.  That is the real cause of the violent backlash to the bitter medicine the creditor nations are requiring of Greece and soon will be requiring of the other newly debt-burdened nations of Europe.  It is also ironic that it is government employees who are rioting against the government they serve, in opposition to the consequences of the policies they themselves put in place.

Perhaps, we in America shouldn’t be too hasty in our criticism of Greece (or the other PIGS) and its bloated public payroll.  The American taxpayer is funding quite a public sector gravy train too.  Federal, state and municipal payrolls have actually increased during the recession both in numbers employed and wages paid.  To make it worse, President Obama announced last week a program to make it easier to apply for and land a government job.  His objective, he says, is parity with the private sector.  However, recent data shows that the average public employee in America already earns significantly more than his private sector counterpart.  Real wages are significantly higher in the public sector and public sector benefits are exceedingly higher than private sector benefits.

Private sector wages and benefits must ultimately come from the income of private enterprises.  Public sector wages and benefits come primarily from the taxes paid by private sector employees and the companies that employ them.  We certainly don’t begrudge paying anyone an honest day’s pay for an honest day’s work whether they work in the public or the private sector.  But we certainly understand the palpable angst in the country engendered by an ever-growing and over-reaching public sector.

There was a time when most people understood that public sector jobs that were funded by private sector taxes may not have paid quite as well as private sector jobs, but that the benefits were generally more attractive.   Federal employees earn thirteen days of vacation leave a year for the first three years of service, twenty days a year for the next twelve years and twenty-six days a year after fifteen years of service.  And that is in addition to thirteen days of sick leave each year.  Today, however, those same federal employees are, according to the Bureau of Labor Statistics, on average, also earning significantly more in wages for doing comparable work and the federal payroll has also been expanding throughout the recession while virtually all sectors among private enterprises have been contracting.

The same phenomenon is taking place on the local level as well, where public employee unions have negotiated for early retirement and lifetime pensions and health benefits which have exhausted state and municipal budgets and sent government officials scurrying to enact new taxes and to charge new and increased fees on almost every municipal service.  Park in front of your own home…pay the government; plant a tree…pay the government; need a bag to carry your groceries…pay the government.

Someone once said that nothing and no one is all bad.  And we suppose we can find some good in the debacle unfolding in Greece and elsewhere in Europe.  It is, after all, an incredibly fortuitous wake-up call for America.  As Yogi Berra once said, “when you come to a fork in the road…take it.”  We are at Yogi’s fork in the road.  Our public debt (on-balance sheet debt) does not yet mirror that of Greece (114% of GDP) or the other PIGS of Europe.  Our consolidated obligations, however,  (public debt added to our unfunded liabilities and the public debt and unfunded liabilities of our states and municipalities) are astronomical.  The federal unfunded liabilities alone stand at just under $110 trillion, or many times more than our entire GDP.

With the price of an ounce of gold having now broken through the $1200 threshold and with the EU’s leaders having just announced a $1 trillion rescue package to help steel world financial markets against blow-back from the mess in Greece, we in America must stop and reassess what we are doing and where we are going.  We have to slash every dime of unnecessary spending.  Even our own Secretary of Defense has urged cutting back on the substantial bloat in defense spending. Every other agency should do the same.

Perhaps, most importantly, we need seriously to think anew about which needs in our daily lives are personal responsibilities and which are the roles of government. In other words, we need seriously to reconsider the very essence of America’s social contract.  Expanding government’s role in health care, and mandating expanded Medicaid costs to states, many of which already have busted budgets, attempting to control through regulation, and yet new taxes, the wax and wane of climate change, turning a blind eye toward skyrocketing pork and earmarks, rapidly expanding the federal payroll and spending trillions to stimulate an economy that just needs the federal government to get out of its way does not augur well for the economic health of the country.

We should stop and rethink raising taxes that will retard economic growth and reduce individual initiative and productivity.  We have no chance of avoiding a PIGS type debt crisis without sustained robust economic growth. Capital formation and investment should be encouraged, yet we are about to raise tax rates on capital appreciation. Corporations should be encouraged to distribute dividends from earnings beyond that which is needed to fund growth, yet we are about to triple the tax rate on distributed dividends (even though earnings from which dividends are paid are already fully taxed at corporate tax rates). Everyone should pay a fair tax, yet nearly half of our tax filers pay no taxes at all, and those who pay the most are about to have their taxes raised.  Our unfolding tax policy may be good for those engaged in cultivating class warfare, but it will not be good for the American economy since it will suck finite resources from those people and businesses upon whom we must rely for that very growth.  Ultimately, this boils down to a political decision.  If Americans want everything from government, then the price will be paid in both diminished American growth and economic power.  We simply cannot have it both ways.  Reality has caught up with smoke and mirrors and the proverbial piper is knocking on the door and demanding to be paid.

Greece and the other PIGS of Europe needn’t foreshadow America’s coming attractions. What is currently unfolding across the Atlantic needn’t be a prediction of what is soon going to happen here.  Greece may well be the economic Dunkirk of 21st century Europe.  We should make sure it is a morning wake-up call for America and not a national nightmare.

The Sad Spectacle of US Immigration Policy

The apparent absence of grownups in the Administration and in Congress (not just this Administration and not just this Congress) has produced a truly sad, and indeed, scandalous spectacle.  History will not treat our current ruling class kindly with respect to immigration policy, nor should it.  If our own federal government doesn’t show sufficient respect for our nation’s borders, why should we expect anyone else to?

Clearly, the federal government has the sole authority and responsibility under the constitution to protect the nation’s borders.  But if the government fails, utterly fails, to discharge that responsibility or, worse, fails to even show an inclination to secure its borders, it is entirely reasonable that border states will attempt to do what the federal government has refused to do.  Sneaking into the United States in violation of all of our immigration procedures is a serious violation of our laws. Ignoring the law, or doing little or nothing to enforce the law, does not make illegal immigration any less illegal.

Arizona, the state with the most porous border, and with the highest ratio of illegal immigrants to population has enacted legislation (SB 1070) in an attempt to discourage the flow of illegals into its jurisdiction and to have sent home those illegals whose actions have raised reasonable suspicion of other violations of the law.   It is suspected violations of the law other than illegal entry that authorizes law-enforcement officers to inquire into one’s resident status, not the color of one’s skin, not one’s accent or one’s social customs.

SB 1070, contrary to what so many media talking heads and opportunistic politicians have suggested, is not a reincarnation of Nazi Germany’s Nuremberg Laws, and Governor Jan Brewer, who signed the Arizona bill into law is not a reincarnation of Adolph Hitler.   Those who are whipping masses of well-intentioned Americans into a frenzy by equating Governor Brewer or SB 1070 with Nazism are far more reminiscent of Joseph Goebbels and his Nazi “big lie” propaganda campaign than are those Arizona lawmakers who are simply trying to do something about the unimpeded tide of illegal immigration into their state.

We would favor a sensible path to legal status including eventual citizenship for those undocumented aliens who want only to work, contribute to America’s growth and who respect our laws and our language, IF the federal government first secured the nation’s borders.  The reality is that a huge number of those who have come here without proper authorization, today, have children who are, in every respect, 100% American citizens. Another sad reality is that many, perhaps most, of those who so vehemently oppose what Arizona has legislated into law, really oppose any Act or policy, or the enforcement of any law, that deals with illegal immigration as a violation of the law.

SB 1070 goes to great length to avoid racial profiling, the specter of which has engendered nearly all of the well-orchestrated hysteria against the law, and to protect employers who have made a reasonable effort to comply with the law when hiring immigrant workers.  The Arizona law merely says that the federal law is also the law of Arizona, one of the states with international borders, the integrity of which the federal law is, presumably, there to protect.  Given that the bordering country is Mexico and that virtually all of the immigrants who illegally enter Arizona from Mexico are, of course, Mexicans, the law is subject to concern that it might result in some racial profiling. Well it might, but the Arizona law makes it quite clear that racial profiling will not be tolerated and those who drafted the law have, in fact, gone to great length to proscribe racial profiling.

At this point in our essay perhaps a short digression into the history of immigration law might be useful.  The United States Constitution expressly gives the United States Congress the power to establish a uniform rule of naturalization.  The Immigration and Naturalization Act enacted in 1952 sets forth the legal requirements to become a U.S. citizen.

Prior to that time numerous statutes governed immigration but they were not codified in any coherent way.  It is far beyond either the scope or purpose of this essay to trace the changes Congress has made in immigration policy.  What is clear is that changes to the law often reflect fears and prejudices rather than the hopes of our citizens.  Often statutory changes have stemmed from the fear of workers of loss of job security from cheap foreign labor.

Immigration to America has not been an easy ticket since early in the twentieth century.  Quotas, since the end of World War One, have been established originally based on nationality and later giving preference to certain skill sets or close relatives of U.S. citizens.  Under current law, only foreign nationals who are admitted as legal immigrants or who are recognized as candidates for political asylum are eligible to take steps toward citizenship.

In the 19th century, immigration law and policy clearly favored white Europeans.  After the Civil War, criteria excluding blacks were successfully challenged.  However, in the late 19th and early 20th centuries, laws were enacted to exclude Chinese immigrants and national policy clearly made immigration of other Asian nationalities quite restrictive and almost impossible.  The outright racial prejudice on which various federal law and interpretive court decisions were based is almost unbelievable to any person who has grown up during and after the Civil Rights movement.

Only in 1965 was the immigration law amended to remove “natural origins” as the basis to qualify for immigration, although country quotas remain.  Political and economic considerations still mattered; however, as the Congress tried to adjust the laws to take into account the needs of various industries and the protection of jobs of American workers.

So what is different now, that has brought immigration law and policy front and center on the nation’s political agenda and made it such an explosive issue?  Without defending past exclusionary policies and quotas, it is clear that immigration laws were much more easily enforced in earlier times largely because the vast majority of immigrants had to cross an ocean to get here.  From the moment they disembarked they were part of a legally sanctioned process and we could, theoretically, keep track of them as they progressed through that process.  But in the past 20 years or so the bulk of the population influx into America has been Latino, mostly Mexican, and entry is possible by walking across the border.  True enough, we make efforts at policing the border but those efforts have been largely ineffective given that we share a 2100-mile border with Mexico.

Let us stipulate that Latino immigrants like others of different ethnic origins before them have been, and should be, absorbed into the fabric of our society.  But unless we want to abandon any immigration control, close our eyes to the established law, and simply open our doors to all comers the law must be respected and enforced.

It is estimated that somewhere between 10.8 and 12 million illegal immigrants are currently living in the United States.  Any new immigration bill must deal with that issue.  It is totally unrealistic to believe that we could, or should, identify, roundup and deport even a substantial number of these people.  To do so would be draconian and contrary to our collective sense of American values and proper due process, even allowing for the illegal status.  On the other hand, to ignore the issue, or simply grant amnesty to those who violated the law would be to reward illegality and encourage more of it.  Given the strain on the public resources of our states and municipalities, any addition to any public assistance program caused by people who are here illegally, who may not pay taxes and who may be competing for jobs against American citizens when unemployment is close to ten percent, is a combustible issue.

However, our Congress has punted on the subject of immigration reform for years and the public is quite sick of it.  Leaders are supposed to lead.  As we said in a prior essay, the inability of Congress to solve problems is what frustrates and motivates millions of Americans including those who comprise most of the Tea Party movement.

The two political parties seem far more interested in seeking political gain in the next election cycle than they are in seeking sensible and practical solutions to real problems that antagonize the American public. The political left paints as “racist” or “fascist” anyone who expresses a desire to crack down on illegal immigration from Mexico.  Conservatives who want only to focus on border control and simply deport those who are already here are wearing blinders.

As Peggy Noonan stated in her op-ed piece in the May 1st edition of the Wall Street Journal “The American president has the power to control America’s borders if he wants to, but George W. Bush and Barack Obama did not (and do not) want to, and for the same reason, and we all know what it is.  The fastest growing demographic in America is the Hispanic vote, and if either party cracks down on illegal immigration, it risks losing that vote for generations.  But while the Democrats worry about the prospects of the Democrats and the Republicans about the well-being of the Republicans, who worries about America?”  “No one” she answered.

It is by no means clear whether the Arizona statute will pass constitutional muster.  However, sooner or later (probably sooner) the courts will weigh in on this issue.  What is clear, however, is that the people of Arizona acted because Congress abdicated its responsibility.  Approximately 500,000 illegal immigrants live in Arizona, a state with a population of slightly over 5 million people.  Whatever one’s position on illegal immigrants, that is a huge number of people for a single state to absorb.  The state’s ability to educate the children of illegal immigrants or to provide health or emergency services is already strained.  And the resentment felt by the citizens of Arizona who, rightly or wrongly, believe their jobs are jeopardized or that their tax money is supporting illegals, is palpable.

With political will and interparty cooperation the problem could be solved.  Start with this premise:  Every sovereign nation, in the interest of its own security, is entitled to live within secure and defined borders.  Thus, before the rest of the immigration problem is addressed, the border must be made secure.  We need to know that the problem will not grow before we implement any policy that addresses the undocumented millions who are already here.  Moreover, this is an imperative not just because of illegal immigrants, but because of the growing problem of the violent Mexican drug cartels who are now expanding their reach into the U.S., particularly Arizona and California.  These cartels are so powerful that they almost amount to an insurgency (think Pakistan and Afghanistan).  The only way to secure the border is with a fence or wall, monitored with sophisticated surveillance equipment that covers the entire 2100-mile border.  It certainly can be done and should be done in a bi-partisan manner.

If our legislators could agree on that, an immigration reform bill could be enacted. As an example, we could develop a policy, perhaps a policy that would allow some of the illegal immigrants who are already here and who are able, to work their way toward legal status through some sort of service program ‑‑ either in the military or through a domestic service corp. Other programs or monetary penalties could be established for those who could not perform military or other civilian service. While this would recognize that there is no way we can effectively deport 12 million people from the country, it would, nonetheless, require them to pay some price to move toward citizenship so that illegal behavior was not simply rewarded. With a secure border we would not have to fear that a program allowing undocumented immigrants to take well-defined steps toward citizenship would simply invite more illegals.

Bad economic times and an electorate very disgruntled with the ability of the people supposedly in control to actually take control is a dangerous mix.  Add to this circumstance a burgeoning illegal immigrant problem and it could become a source of very significant social unrest.  It isn’t too late for sensible politicians in Washington to craft a sensible solution, but given the wise words etched on the edifice of the National Archives, “Past is Prologue,” count us among the pessimists.

Mideast Policy: The President’s Chickens Are Coming Home To Roost

“Since you, Mr. President and you, the members of the American administration, believe in this (a two-state solution), it is your duty to call for the steps in order to reach the solution and impose the solution (emphasis added) — impose it!” demanded Fatah and PA Authority President Mahmoud Abbas during a speech to leaders of Fatah just last week. “But don’t tell me it’s a vital national strategic American interest … and then not do anything,” he continued.

And so there you have it. Washington’s tongue lashing of Israeli Prime Minister Netanyahu and the Administration’s breath-taking statements that the Israeli-Palestinian conflict is endangering the lives of American troops seems to represent a fundamental shift in America’s strategic thinking.  Abbas’s demand will undoubtedly be remembered as the first of what will most assuredly be a chorus of international support for President Obama’s newly emerging, Mideast policy…a conference at which the terms of peace will be crafted by the United States and imposed on Israel and a new state of Palestine. Over sixty years of Arab intransigence are finally paying off.

And so, we see another ill-fated peace conference on the horizon. Certainly, there have been many American-sponsored peace conferences (both direct and indirect) before.  There was the shuttle diplomacy of the Nixon Administration during which Secretary of State Henry Kissinger shuttled back and forth between Israeli leaders and Arab leaders.  The very dedicated and hard-working Dennis Ross found himself on the same merry-go-round during the Clinton years. Those were known as proximity talks (sound familiar?).  No Arab official or Palestinian leader would sit at the same table with an Israeli representative. The idea was to secure enough concessions from Israel to coax an actual face-to-face meeting into reality.

Then, of course, there was the first Camp David conference, which was made possible by Anwar Sadat’s readiness to permanently end Egypt’s long- standing, state-of-war with Israel in return for Israel returning to Egypt the Sinai Peninsula, which Israel had captured in the 1967 six-day war and retained following the so-called Yom Kippur War of 1973.  Sadat, a courageous and honorable soldier and statesman, was assassinated for his bravery …for his willingness to bring to an end the long-standing, state- of-war between Egypt and Israel.  No Arab or Palestinian leader has since been willing to enter into any agreement with Israel if such an agreement required a clear statement that the Israeli-Palestinian dispute would then be resolved and that no further demands were to be made by either party against the other. The Madrid conference brokered by President George H.W. Bush, the Wye River conferences brokered by President Clinton, the second Camp David conference and the failed Annapolis peace conference sponsored by President George W. Bush, all failures because peace, permanent peace, was never on the Arab agenda…not then, and not now.

At first we hoped the Jerusalem outbursts during Vice President Biden’s visit and those outbursts that followed might just be a matter of amateur ineptitude and bungling by the Obama Administration and an overreaction to the clumsy leak by a minority member of the Israeli government about an East Jerusalem building project in an old Jewish neighborhood moving through some zoning process.   Ineptitude and bungling, however, would suggest a misstep here and there, but not premeditation or deliberation.  Now, we know better.  The doubters among us have been, of course, disquieted by the coterie of left wing, anti-Israel ideologues that seemed ever present in Obama’s life, especially during the last twenty years or so.   From the rantings of Reverend Jeremiah Wright to the resurrection of Zbigniew Brezinski, the writing has been on the proverbial wall for all to see, if only we were willing to look.

During the run-up to the presidential election, candidate Obama, speaking to a Jewish audience in Cleveland referred to “a strain within the pro-Israel community that says: unless you adopt an unwavering pro-Likud (hard-line) approach to Israel (presumably against the Palestinians) that you are anti-Israel and that can’t be the measure of our friendship with Israel.” We don’t doubt that there is such a strain within the “pro-Israel community” just as there is also a very strong Peace Now strain and many strains in between within that same “community”.  Such “strains” are, however, irrelevant.  Both America and Israel either are, or are not, strategic allies in that very unstable region of the world.

The so-called special relationship between the United States and Israel is more than an emotional tie, or of importance only to Jewish Americans.  It has enormous strategic importance to America.  Israel is the only stable democracy in the region.  The Reagan Administration considered Israel a “strategic asset” because of the need to have an ally in the Mideast to oppose the Soviet Union.  Israel’s Defense Minister Ariel Sharon and Secretary of Defense Caspar Weinberger signed a memorandum of understanding (MOU) on November 30, 1981, establishing a framework for consultation and cooperation to enhance the national security of both countries.  In November 1983, Israel and the United States formed a joint political-military committee to implement most of the 1981 MOU provisions.  Joint air and sea military exercises began in June 1984, and thereafter the United States built facilities to stockpile military equipment in Israel.  On May 6, 1986, Israel and the United States signed an agreement for Israeli participation in Strategic Defense Initiative research.  Under SDI, Israel developed the “Arrow” anti-ballistic missile with a substantial U.S. contribution.  Israeli sources continue to provide intelligence to confront the threat of Islamic fundamentalism.

Even Richard Nixon, no matter how reluctantly, understood the strategic importance of America’s relationship with Israel. When Israel was, quite literally, on the ropes following Egypt and Syria’s invasion in 1973, Nixon ordered the greatest airlift of ordnance in history to the embattled Israelis. When our erstwhile European allies, by then totally dependent on Arab oil, refused to grant American planes landing rights to refuel, Nixon ordered mid-air refueling of our transports.  When asked where we would get the aircraft for such an operation, he reportedly responded, “Send everything that flies.” He knew our intervention on Israel’s behalf would enrage the proverbial Arab street.  But he came to the aid of an important ally.

Can anyone seriously imagine President Obama taking action on Israel’s behalf that might enrage the Arab street?  Can one imagine President Obama ordering the military to “send everything that flies?” Frankly, we can’t. Which is our way of saying that whatever the Obama Administration’s relationship is with Israel, it is no longer that of a strategic ally.  Within hours of Vice President’s Biden’s ill-fated meeting with Netanyahu, Biden, Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff and General Petraeus all weighed in with statements implying that our relationship with Israel is endangering the lives of American troops.

That implication is disturbing on two counts.  First, it signals a very substantial change in America’s relationship with Israel, and, second, it simply isn’t true.  We are in Iraq because of a now deposed and deceased dangerous megalomaniac, Saddam Hussein, not because of the Israel-Palestinian conflict, and we are in Afghanistan because of Al Qaeda and the Taliban’s collusion to murder thousands of Americans on 9/11, not because of Israel and the Palestinians.  Rather, it seems to us that President Obama seems to have concluded that his desire to “reset “America’s relationship with the Muslim world is seriously inconvenienced by our long-standing support of the only democracy in the Middle East.

President Obama may, indeed, “reset” America’s relationship with the Muslim world even if that means “resetting” America’s relationship with Israel to accomplish his inaugural-speech goal.  If that is the course we are on it will represent the most historic development vis-à-vis Israel since America joined with thirty-two other nations at the UN in establishing the state on November 29, 1947.

Any attempt to “reset” relations with Israel should be seen in the context of other “resets.”  Since taking office the Obama Administration has attempted, in their words, to reach out to our adversaries to eliminate their hostility to the U.S.  Let’s examine his efforts:

Iran — need we say more?

Syria — numerous envoys have been sent to meet with President Bashir Assad.  The president has nominated an ambassador to that country.  Results so far:  increasing support by Syria of Hezbollah in violation of its pledge to stop sending them weapons and a recent report that scud missiles capable of reaching every city in Israel are also being transferred.

Russia — despite the nuclear arms reduction treaty (which was largely negotiated by the prior administration) they continue their efforts to thwart Iranian sanctions and sell armaments and aircraft to the Chavez regime in Venezuela.

China — there we see a similar thwarting of serious sanctions on Iran, and no progress in convincing China that tying their currency to the dollar distorts trade in their favor.

At the same time, the Administration’s policy in Honduras almost cost us a vital ally against the dangerous anti-American Bolivarian axis which Hugo Chavez has created and which now includes Ecuador, Bolivia and, if Daniel Ortega gets his way, the restoration of the Sandinistas in Nicaragua.

The message to friendly nations who have relied on us as a bulwark against tyranny (e.g., Ukraine and Georgia to name a couple) is that the United States is an unreliable friend.  And the message to the Palestinians and the rest of the Muslim world is that if you stonewall long enough America can be had.

However, the president’s efforts may be providing for him unwelcome plaudits he doesn’t want from sources he never expected which are likely to complicate his efforts.  On April 26, while Mr. Obama was welcoming the World Champion New York Yankees to the White House, just two blocks away, His Excellency Brother Leader Muammar Gaddify, in a live video address from Tripoli beamed to the National Press Club professed his love of President Obama who he referred to as “our son” and offered support for his policies.  The Brother Leader noted that the Muslim world “welcomed very much the arrival of Mr. Obama to the presidency, because the ordinary citizen knows that “… he comes from a Muslim family maybe even of an Arab origin.”

This statement shows that the intemperate public flogging of Israel by the White House has already caused leaders of Islamic states to conclude that the US has shifted to their side and that if they continue to stonewall, America will do their bidding for them and extract concessions from Israel. A better demonstration of the law of unintended consequences in the delicate art of diplomacy could hardly be found.

Henry Kissinger in his 2001 book “Does America Need a Foreign Policy,” warns of the danger of future leaders who would come to power with no historical memory of the circumstances and events that fueled the issues with which they would be dealing.  Enter President Obama who apparently now sees Israel as the hindrance to peace.

Israel, the only nation among its neighbors to have been legally established by a majority of the nations then comprising the United Nations…Israel, the nation that was invaded by the armies of five neighbors at the moment of its birth…Israel, the nation whose civilians were regularly subjected to unrelenting and deadly so-called Fedayeen attacks from Gaza in the early years of its existence. Israel, the nation that was, and is, subject to a unified boycott by most of the Arab block…Israel, the nation attacked more than any other nation during the past half century…Israel, whose athletes are harassed and even murdered at international competitions… Israel, whose civilian population centers were the targets of literally thousands of missile attacks, day in and day out. Israel, the nation that offered every concession and acceded to most every demand at the Clinton-sponsored Camp David Conference…Israel, is now seen as the hindrance to peace.

Our president now calls upon Israel to take bold steps to meet the demands of a hostile regime that won’t sit at the same table unless yet more concessions are agreed to in advance and which couldn’t bring Hamas, which controls Gaza, to a peace conclave even if one were convened.

Israel is a remarkable success story, unprecedented in the annals of time.  In barely a single generation Israel now ranks among those at the forefront in science, mathematics, physics, medicine, education, space exploration, high-tech innovation, literature, agriculture, standard of living, emergency response and venture capital.  Moreover, it has absorbed more immigrants relative to its size than any nation in the world while the 27 Muslim nations have failed for over 60 years even to absorb a few thousand Palestinians living in refugee camps in the West Bank and in Lebanon.

The point we are making is to recognize that the nature of America’s long-standing and evolving relationship with Israel seems, under President Obama, to have run its course.  We seem now to be determined to be an even-handed mediator and no longer a strategic ally. Perhaps it was inevitable.  Perhaps the peace vision was a farce all along.  In many respects the infamous “Three No’s” of Khartoum i.e. No Peace, No Recognition and No Negotiation is still, when all is said and done, the driving force that informs those Palestinians and other belligerents who may ultimately determine the outcome of the Israeli-Palestinian conundrum.  There is no peace. There is no recognition and, practically speaking, there really is no meaningful negotiation nor, perhaps, has there ever been.  A negotiation that does not have as its agreed upon goal a final resolution of a conflict is not a negotiation at all.  It is but a tactic in a continuing conflict and the continuation of a Palestinian charade.  For this the president is abandoning our only friend in the region.  Not only have the chickens come home to roost, but several flocks are likely to follow.

The Tea Party Movement. What Is It?

Unlike the “experts” on both sides of the political spectrum who will state with absolute certainty who the Tea Partiers are and what they stand for (invariably to support the reporter’s political persuasion), we will admit that at this point in time, we can only say for certain what the movement is not.  Like the storied Boston Tea Party of 1773 where the citizens of Massachusetts protested British taxes being imposed on them without any representation and dumped three shiploads of British tea into the harbor, the current movement is not a political party, at least not yet, and it probably never will be.

Of course every commentator and pollster is ready to tell us definitively what the meaning is of this unique new political movement.  Former President Clinton likened its followers to the odious Timothy McVeigh of Oklahoma City notoriety.   The former President knows better but as a loyal Democrat he apparently is willing to share in the heavy lifting to demonize the Tea Party.  Many Republican leaders say the movement is nothing more than an outcry against the policies of the current Administration, but in our view that would be an over simplification as well.

The common philosophical thread which does seem to run all through Tea Party adherents who speak out appears to be a sense that government has become too large, too overbearing, too much in debt and that it is muscling into our private lives as never before.  True, many attendees who are interviewed are outraged about specific issues like high taxes, the recently enacted health care bill and the tactics used to force its passage.  Divining coherency and consistency out of all of this is impossible even though we are treated daily to talking heads and newspaper analysts who state with absolute assurance what it all means.

Our take is that the movement can be attributed simply to frustration with the “political class” and a free-floating anxiety about whether any elected officials can provide inspiration and leadership in troubled times.  But any review of the history of the shifting political tides in our nation clearly shows that this movement has numerous antecedents . . . and that it is very healthy for our democracy.

In recent years, we Americans have been increasingly worried about our relative position in the world and whether it is declining economically, commercially and militarily vis‑à‑vis other powers, and there is good reason for this worry.  But one characteristic of America in which we can place enormous confidence is that, built into our democracy’s DNA, is free speech and the dynamics of an open marketplace of ideas which revivifies the political system and supplies it with the equivalent of new blood cells to keep it healthy.  By way of comparison, the Chinese model, even allowing for its impressive economic growth, is ossified (as is that of every dictatorship not open to change and experiment), and in the long run that is very likely to prove costly to oppressive nations.  Moreover, it will ultimately prove to be dangerous to them.  As we have seen this year in Iran, people cannot forever be suppressed, whether by a dictatorship of the left or the right.  If there is no safety valve for free expression, the only outlet becomes violence and revolution.  What makes America different is that change springs from the ideas of ordinary people and those ideas can grow into living political organisms.

Political commentators and pundits have, of course, found in the Tea Party movement new material for their unending need to fill space in the op-ed pages of major daily newspapers and to participate on endless cable television commentary.  They count the number of people at rallies who are in business suits, and they analyze in great detail the racial makeup of the on-stage participants giving speeches, and the people in the audience.  The New York Times reported that 18 percent of Americans who identify themselves as Tea Party supporters tend to be “white, male, married, and more than 45 years of age.”  In general “they are wealthier and more educated than the general public.”

Some pundits note that Tea Party attendees comprise a mix of libertarianism and conservatism with the political issue common denominator being lower spending and smaller government.  However, media analysis varies greatly.  Commentators on the left have derided the movement as if it were comprised only of angry mobs of Klansmen carrying pitchforks and armed to the teeth threatening elected political officials with bodily harm.  They converge upon a rally of tens of thousands of people and then spend the next two weeks discussing, without end, a few boors whose behavior was vile and who may have shouted vulgar racial or homophobic epitaphs.  We have all seen “instant replay” videotape coverage played over and over in which we are supposed to determine whether someone in the crowd used the “N” word when screaming at a political official of color or who spat in the face of an elected official.  On the right numerous commentators have claimed that the allegations of bad behavior have been fabricated.  But to focus on a few bad actors is to miss the meaning of what is happening all around us in this political year.

James Taranto’s recent Wall Street Journal on-line column, “Best of the Web”, on April 19th makes an extraordinarily important point.  He notes that Charles Blow, of The New York Times, who attended a Tea Party rally was put off by the fact that the speakers on stage represented an abundance of ethnic diversity, but that there was a dearth of it in the crowd.  Blow said what he witnessed was a “political minstrel show” . . . for those engaged in a subterfuge of intolerance.”  Blogger, Conor Friedsdorf, who is also quoted in the Taranto column, states that “ . . . the vast majority of liberal writers would normally praise the act of highlighting the voices of people of color even if they aren’t  particularly representative of [the audience].  Let it happen at a rally of conservatives however, and it winds up [being criticized] on the nations’ premiere op-ed page.  As both Mr. Taranto and other commentators have observed, the political left is obsessed with racial diversity unless it occurs on the political right.

In the middle of President Obama’s term of office and with his party in complete control of the federal government, doesn’t it make sense that a political protest movement would have more adherents among the party out of power than the one in control?  Since African Americans vote in vast majorities for Democratic candidates and are rightfully proud (as are most Americans irrespective of ethnicity) that this nation elected its first black president, is it reasonable to expect large throngs of black Americans congregating in public in protest of his Administration?

Robert McCartney, a liberal Washington Post columnist, attended a Tea Party rally last week to determine just how reactionary and potentially violent the movement truly was. 
Answer:  Not very. 
He reported Tea Party members are not seething, ready-to-explode racists, as some liberal commentators have caricatured them.  While assortments of sign-carriers were present he ignored them and chose instead to interview, at random, numerous attendees.

“…On the whole, they struck me as passionate conservatives dedicated to working within the system rather than dangerous militia types or a revival of the Ku Klux Klan.

Although he found shrinking government to be their primary goal, none were clamoring for civil disobedience, much less armed revolt.

Interestingly, Politico, the non-partisan group that covers national affairs concluded much the same following a statistically valid sampling of 457 attendees at the Tea Party Tax-Day Rally in Washington, D.C.  They found that: three out of four tea partiers were worried about the direction in which the country is headed; seventy-two percent were worried that the next generation’s standard of living will be lower than their own; fifty-one percent have a close friend or family member who is out of work and an incredibly high percent (29%) are small-business owners.  Not quite the crazed insurrectionists the popular media make them out to be.

In the last two decades, Republicans and Democrats in turn have been given the opportunity by the voters to take responsibility and leadership to solve the most pressing problems of our country.  The current debt explosion, the underfunding of Social Security and Medicare, our dependence on foreign oil owned mostly by despotic nations and the threat of Islamic fundamentalism have been coming at us for years.  Each political party that has been given the opportunity by the American people to show leadership on any of these issues has frittered it away, being more concerned with having it all their way instead of seeking compromise solutions.  Seeking retribution against their predecessors seems always to trump the opportunity to govern effectively.

The Tea Party movement is not the first nor will it be the last spontaneous coalescing of a political protest movement disgusted with all mainstream political parties.  In one manner or another, this has happened many times before in our history and in some cases the movements ultimately morphed into the replacement of a political party.  The original Federalists and Republicans transitioned into Democrats and Whigs, the latter of which was absorbed into the Republican party which first elected Abraham Lincoln as President.

In the late 1890s, and the early twentieth century the country experienced a populist period, often associated with three-time defeated Democratic presidential candidate, William Jennings Bryan.  President Theodore Roosevelt altered the political landscape by reforming the Republican Party and adopting many progressive reforms (which the populists favored) to modify laissez-faire capitalism, and, of course, he ran for president in 1912 on a third party ticket.  Many of the populist demands of the Bryan era such as breaking up large monopolistic concentrations of power ended up either becoming law or being adopted as Amendments to the Constitution (i.e., direct election of Senators, women’s suffrage,etc.).  In American history, our politics has adapted to the changes brought about by social upheaval, changes in our frontiers, urbanization and reactions against concentration of power.  Because of this elasticity the democratic experiment created by our founding fathers has lasted and remained true to the basic principles embodied in our Constitution.

More recently, political protest movements altered the shape of our politics and our presidential elections.  The long delayed Civil Rights Movement sprang from the grass roots of the nation and it radically changed the shape of our body politic and our political alignments.

It is not surprising that this phenomena has arisen and loosely coalesced into a movement, given the current poisoned atmosphere of our national politics, the major economic crisis of the past three years, the changing fabric of our population, (now no longer European in its growth), competition from globalization, the change from a manufacturing economy to a service economy and a failure of mainstream politicians effectively to inspire our people away from a growing feeling that America’s great exceptionalism may be a thing of the past.

We are surely in a turbulent election year and emotions are running high.  At this point it appears that public anger at the political class as typified by tea parties, will result in many incumbents losing their seats this fall and right now the Democrats seem more endangered.  But this movement is not controlled by the Republican Party and its aim is not to sweep Democrats from office.  Rather, it is aimed at all those politicians who are elected year after year who seem utterly clueless about the anger that the voters have over their repeated failure to solve problems or improve the lives of the American people and who see their main job, once taking the oath of office, to start raising money for their reelection.  Both parties should take account of the fact that the public holds both parties and Congress in very low esteem.  The only thing on the upswing with the voters is cynicism and we can expect more of it now that the Administration seems to be trying to increase its standing by focusing its litigation guns at Wall Street.  Can the public have confidence in any institution?

The movement also proves that the posturing and spin of those in office do not fool the people.  Legislative chicanery and side deals done out of the light of day are in fact noticed, resented and exposed.  Congress cannot regain the trust of the public until it stops taking us for fools.

On November 2, 2010, the makeup of Congress is likely to change drastically.  Both parties will be affected by the decision of the voters.  On November 3, the pundits will tell us with their usual certainty precisely what the message was that was sent, and as usual they will not agree.  Coherence and democracy do not necessarily go hand in hand.  Democracy and politics are much too messy and for that we ought to be grateful.

New US Strategic Nuclear Arms Policy: Is America Safer?

Short answer: no… but then again, we seriously doubt that we’re in any greater danger either.  The new policy is both revocable and subject to review and modification if circumstances so warrant.  The questions we want to explore are the rationale for announcing a new policy in the first place and whether the recent summit of 47 nations to deal with nuclear risks accomplished any positive good.

The argument which is made by the right against the president’s newly announced policy, namely that enemy nations that are in compliance with the nuclear non-proliferation treaty (NPR) can attack us with non-nuclear weapons of mass destruction with complete impunity from nuclear retaliation seems a bit hysterical. One way or another, any nation that attacks us with biological or chemical weapons should count on a rendezvous with their stone-age ancestors.   On the other hand, the argument from the left, that we have moved the hands of the doomsday clock back several minutes, seems like wishful thinking.  America and the world is not safer… not yet, anyway.

Some of those who have been the biggest critics of our Iraq, Afghanistan and anti-terror policies, and whose main motivation in life seems to be to prove George Bush’s policies were wrong contend that Iran or North Korea may, as a result of the new policy, be incentivized to abandon their plans to build nuclear arsenals and now comply with the nuclear non-proliferation agreement.  This seems more the stuff of Saturday Night Live than serious foreign-policy thinking.   We do not expect that the President will ever answer the phone in the oval office to,.. “Hello, Barack, this is Mahmoud Admadinejad.  Sorry I haven’t responded earlier to your outstretched hand, but your new nuclear policy made me realize that I owe you an apology.”  Or “Hi there Mr. President, Kim Jong-Il calling to let you know that your new policy is so impressive that I, today, personally ordered the dismantling of all our nuclear forces.”

And in the real world, Syria, which not too many months ago had their North Korean supplied nuclear program blown away by Israel, is at it again and has blown a loud new raspberry our way with news that they have started shipping longer-range scud missiles to their proxies, Hezbollah in Lebanon.  These nations have demonstrated repeatedly that their goal is not to reduce world terrorism but to expand their influence vis-à-vis their regions and the world.  A nation like Iran that has frequently made clear that it believes  “Israel should be wiped off the map” won’t abandon its evil intentions because it is less, rather than more, fearful of U.S. retaliation.

The forty-seven-nation nuclear summit meeting that convened last week in Washington, D.C. really hasn’t changed the calculus either.  Even though Iran is the biggest destabilizing threat in areas which are already a tinder box, the Chinese continue to take the position that they are against sanctions that are too punitive and that they would be opposed to any sanctions that inconvenienced (they said harmed) other nations that were doing legitimate business with Iran.  This is not exactly an example of the world getting tough with rogue nations.

As to the 47-nation nuclear-risk-reduction summit, as with all summits, the devil is in the details and this summit produced little in the way of details.  It was, in our view, important that the president reestablished American leadership on this vital issue.  It also accomplished what seems to be a serious commitment to continue the Reagan, Bush (41), Clinton, Bush (43) policies to reign in inventories of highly enriched nuclear material, and that is good.  But Pakistan continues to produce plutonium and it not only lives in a neighborhood influenced by Al Qaeda, but also has members of its own government sympathetic to that lethal terrorist organization.  And, as Charles Krauthammer pointed out in the April 17 edition of the Washington Post, the hoopla about the transfer of loose nuclear materials to the U.S. by Ukraine and Canada is old news.  It had been agreed to, but not announced, quite some time ago.

It would also do us well to recognize that pledges and agreements are no better than the resolve or the intentions of the signatories.  In the last century Germany and Japan both were signatories to treaties and protocols that should have made it highly unlikely that either country would, just a few years later, be responsible for unleashing world war.

A few earlier treaties are also worth considering.  At the beginning of the twentieth century battleships were the ultimate weapons.  The nations with the biggest and best fleets quite literally ruled the seas.  Japan devastated Russia in 1904 by sinking its entire navy in the short-lived Russo-Japanese war.  In an effort to reign in the growing Japanese threat the Washington Conference of 1921 was convened and Japan and the United States ultimately agreed to reduce their respective fleets of battleships…an earlier version of a non-proliferation treaty.

As with all such conferences, each participating nation came with its own agenda and special interests. America’s interest was simply to slow or halt the expansion of Japan into the western Pacific.  The United States believed the best way to protect its interests was to secure an agreement that would establish an agreed upon ratio of naval tonnage between Japan and The United States.

Great Britain saw the 1921 conference primarily as an opportunity to protect its interests in Singapore, Hong Kong and other colonial areas.  Japan, on the other hand, wanted British and American recognition of their interests in Mongolia and Manchuria and a treaty that might limit America’s growing naval presence in the Pacific.

And so, America and Japan actually sank their own ships reducing their fleets to agreed-upon tonnages. There was no other example in history of nations intentionally sinking their own ships. But, as we observed earlier, it is the intentions of the signatories that really count, not the words on the document.  Battleships were, indeed, sunk as a result of the Washington Conference, so Japan shifted gears and began building aircraft carriers, which were not covered by the treaty.  Those aircraft carriers were to sink most of what was left of the American fleet at Pearl Harbor less than two decades later.

Of course there is probably no better example of an all-inclusive pact to end war than the 1928 Kellogg-Briand Treaty. Its formal name was the General Treaty for the Renunciation of War. It was the ultimate arms limitation treaty.

Great Britain was there, France was there, America was there and even Germany was there.  Talk about non-proliferation.  Representatives of virtually all of the nations that would soon be combatants in World-War Two scratched their signatures onto a document that committed their nations to eschew war as an instrument of national policy. Following the initial signing of the treaty on August 27, 1928 in Paris by the representatives from: Australia, Belgium, Canada, Czechoslovakia, France, Germany, India, the Irish Free State, Italy, Japan, New Zealand, Poland, South Africa, the United Kingdom and the United States, many other nations, including the Soviet Union joined the pact.  Within five years Germany was preparing for war and by 1938 World-War Two was raging throughout Europe, North Africa and Asia.

We are not suggesting that treaties and disarmament conferences are a waste of time.  Quite the contrary. In fact, when the time is right, such efforts must be vigorously pursued.  And, in many respects, the time may very well be right.  The United States and Russia have, in fact, been reducing their nuclear arsenals for several years.  Twenty years ago the United States is reported to have had ten thousand nuclear warheads deployed and aimed at Soviet targets. Under the terms of the Moscow Treaty signed by President Bush (43) during his second year in office, we had cut that number down to only two thousand warheads by the time President Obama assumed office. The treaty the President just signed with Russia’s President Medvedev actually only reduces the allowable number of warheads agreed to in the Moscow Treaty by another 150 warheads.

We have reservations about the details of any commitments made in side protocols regarding the defensive missile shield which the U.S. planned to deploy in Poland and the Czech Republic, and we would like to know whether the Administration plans to upgrade our remaining nuclear forces as the Russians have been doing  for years. The treaty, however, is an additional right step in the direction set by President Obama’s predecessors.

The newly announced strategic nuclear policy is, to us, troublesome on two counts.  First, it eliminates ambiguity.  Keeping our adversaries from knowing what any U.S. response to an attack on our allies or on us should be an important element in our overall security.  Our response to the attacks on the World Trade Center that took three thousand innocent lives was to chase from power the Taliban who had given Al Qaeda refuge in Afghanistan.  What if an enemy that was otherwise in compliance with NPR, or a force harbored within their borders, was to attack New York again, this time with anthrax or an equally deadly agent that took three million lives instead of three thousand.  Are we wise to declare what we won’t do in such a circumstance, or is it better to keep such an adversary guessing?

Second, we question whether it is wise to reduce or eliminate the nuclear option without simultaneously beefing up our conventional capability.  By all accounts we are stretched pretty thin right now.   By taking the nuclear option off the table, or by making it less accessible, we increase the risk that potential adversaries might become more adventuresome, especially if they calculate that we don’t have the resources to adequately respond.

It is hard to imagine any nation militarily challenging the United States one-on-one anytime soon.  Russia lacks both the resources and the reason to engage in hostilities with the United States and too much of China’s bread is buttered with American dollars for war with America to make any sense. In other words, neither country’s interests would be served by inordinate tension with America.  Iran, Syria, North Korea or Hugo Chavez’s increasingly troublesome Venezuela are not likely directly to attack America either.  However, they all represent a potential direct threat to nations with which we have close ties or with which we share vital interests.  Each of these nations is also a potential haven for terrorist organizations such as Al Qaeda and it is within this sphere of thugacracies that the nearest dangers probably lay.

We believe that any nation that provides aid or comfort to any terrorist organization that threatens US interests should live in dread of what we might do if such a rogue group launched an attack against us.  No new American policy should lessen that sense of dread.

Obama’s Peace Process: No Process, No Peace

The first foreboding came during President Obama’s inaugural address when he announced to the Muslim world, “…we seek a new way forward, based on mutual interest and mutual respect…we will extend a hand if you are willing to unclench your fist.”  Who can quarrel with such a goal? But with the benefit of 15 months of hindsight, those words were an early warning signal to Israel the sole steadfast American ally in the region surrounded by Muslim nations essentially sworn to its destruction.

There was also, of course, the much heralded Cairo speech which was loaded with good-sounding, even pseudo-historic, platitudinous remarks but which lacked the one statement that mattered…that both sides agree to enter peace talks, the publically avowed purpose of which would be to reach a settlement that would end the Israel-Palestinian dispute once and for all, a settlement that would mean no new demands directed by one party against the other.

Israel has been paraded, often reluctantly, to center stage by a succession of American Administrations to perform much like a dancing bear for a variety of Presidents who wanted to add “peacemaker” to their legacy and who demanded of Israel a succession of concessions each of which was called a “confidence building measure” to show the Arab nations Israel’s good faith intentions.

Since its inception as a Jewish state in 1948, the only one by the way, effectively created by the United Nations (many of the remainder of which being creations of British map drawing after World War I), Israel has been the only true democracy and a steadfast ally of the United States.  It has enjoyed the support, in varying degrees, of American governments from Truman through Bush, including even Jimmy Carter while he was president.

Barack Obama is different.  Notwithstanding his campaign rhetoric about America’s unshakeable friendship with Israel when he speaks at public forums or before Jewish audiences at his or fellow Democratic fundraising events, his actions once taking office have been ambiguous at best and downright hostile at worst.

He has visited the Mideast with visits to Egypt and Jordan, notably snubbing Israel.  Even before the recent trip by Vice President Biden to Israel, during which Israeli municipal authorities made a clumsy and poorly timed announcement of procedural progress in a long process toward further construction in Jerusalem, he has treated Israel’s Prime Minister Netanyahu like a pariah, a treatment he reinforced by his actions during Netanyahu’s recent visit to Washington.  It also appears clear in the aftermath of the Jerusalem construction imbroglio that Washington knew the ill-timed announcement was not of Netanyahu’s making and that it was, in fact, a calculated move by one of Israel’s 38 political parties to embarrass the Prime Minister. Nonetheless it provided an opportunity for the Administration to fire a gratuitous broadside salvo at a worthy ally.

A careful look at what passes for Obama policy reveals a desire to curry favor with the Islamic world, and if that means distancing America from Israel then so be it and damn the consequences.

The president seems to have adopted the view that the borders that emerged following the 1967 six-day war, and the so-called “settlements” in Jerusalem are the reason for the historic enmity the 22 Islamic countries of the Mideast have toward Israel.  If that were so, this dispute would have been settled long ago.  At both the middle-east summits hosted by President Clinton in 2000 and later by President Bush in 2007, Israeli prime ministers Ehud Barak and Ehud Olmert, respectively, offered to return to essentially the 1967 borders (with some land swaps) and to share Jerusalem as the capital of two states.  On both occasions PLO Chairman Arafat in 2000 (to the amazement of Clinton’s principal Mideast advisor, Dennis Ross) and Palestinian Authority President Abbas in 2007 rejected the offers.

Arafat, who was offered these terms with the proviso that the Arab states would recognize Israel’s right to exist as a nation and that there would be no further future demands, was quoted as saying “if I agree to that, I will be signing my own death warrant.”  In contrast, not once since 1948 have the Arabs offered their outline of the terms of a permanent peace with Israel except upon conditions such as those in the so-called Saudi Plan that demanded the right of all Palestinian refugees and their descendants to return to the homes they fled, which would amount to the destruction of Israel as a Jewish state.

The position taken by almost all the Islamic nations regarding Israel, which is held to this day by Hezbollah, Hamas and even Fatah (the so-called moderate wing of the Palestinian Authority) is that Tel Aviv, Herzliya, Safed, Haifa, etc. are also occupied territory.  Even in the face of that uncompromising position, the United States and the European nations have persisted in pursuing, since the date of the Oslo accords in 1993, a so-called roadmap to peace also referred to as the “peace process.”  We know the results.

When Barack Obama became president, he tipped his hand in his Cairo address regarding his approach to this seemingly intractable dispute.  There, a careful reading made it clear that the United States would, in effect, stand on its head to placate world Islam.  And since then his outstretched hand to Islam has been spurned, and in the case of Iran, spat upon.  But, the president in his effort to restart peace negotiations imposed a condition only on Israel demanding that it stop building settlements in the West Bank and Jerusalem, the eastern portion of which was conquered by Jordan in 1948 but annexed to Israel after the 1967 war.  Leave aside that Jerusalem is the capital of Israel (Obama said so himself many times) and building in one’s capital is hardly the building of settlements, the president has asked Israel to concede a principal point of contention in advance of negotiations even being restarted.  No preconditions have been imposed on the Palestinians.

Not surprisingly, every Arab nation jumped on this condition giving PA President Abbas an excuse not to negotiate until he “pockets” an Israeli concession.  This has never before been a precondition of the PA to negotiations, which, by the way, doesn’t even control Gaza, so it isn’t clear Abbas can even speak for the Palestinians in peace talks.  Hamas, which does control Gaza, has made clear time and again, that they will never come to a peace table or recognize Israel.  Why don’t we believe them?  Why wouldn’t the president ask Abbas, Hamas, and their Arab allies, as a precondition to full negotiations, to agree that upon resolution of border issues, they will recognize Israel as a Jewish nation living side by side with its neighbors?

Instead the President has laid down a requirement that asks only the Israelis for a gesture of good faith.  Never mind that Israel has released hundreds of Palestinian prisoners, many of whom engaged in violent acts of terrorism against it, eased West Bank roadblocks, and, in the greatest concession of all, dismantled settlements and withdrew unconditionally from Gaza (and southern Lebanon a few years earlier).  In return they were met with daily rocket bombardments from Gaza, war from Lebanon, and the continuous importation into those areas of weaponry to resume attacks.  Israel’s military invasion into Gaza in 2008 to eliminate this threat ended with condemnation by our craven European allies who were strangely silent during the daily rocket attacks.

As Charles Krauthammer noted in a recent column in the Washington Post:

“Under Obama, Netanyahu agreed to commit his center-right coalition to acceptance of a Palestinian state; took down dozens of anti-terror roadblocks and checkpoints to ease life for the Palestinians; assisted West Bank economic development to the point where its gross domestic product is growing at an astounding 7 percent a year; and agreed to the West Bank construction moratorium, a concession that Secretary Clinton herself called “’unprecedented.’”

What reciprocal gesture, let alone concession, has Abbas made during the Obama presidency?  Not one.

Indeed, long before the Biden incident, Abbas refused even to resume direct negotiations with Israel.  That’s why the Obama administration has to resort to “proximity talks” — a procedure that sets us back 35 years to before Anwar Sadat’s groundbreaking visit to Jerusalem.

And Clinton demands that Israel show its seriousness about peace?  Now that is an insult.

This brings us to another unyielding demand that Arab states have made of Israel — the so-called “right of return.”  In 1948 after the UN approved the partition of Palestine and the creation of the state of Israel, Arab armies from all surrounding countries attacked the new nation.  Hundreds of thousands of Palestinians fled their homes, hoping to return once the Israelis had been swept into the sea, as promised by the invading Arab nations. This, as we know, did not come to pass and since then these Palestinians have been kept in refugee camps in the West Bank and Lebanon but not absorbed in any of the 22 Arab countries with 800 times the landmass of Israel.  Contrast this with the millions of displaced people all over Europe after World War II who were absorbed and resettled within three years.

The nations of the world, while crying crocodile tears for Palestinian refugees (keep in mind there has never been in recorded history a nation called Palestine) an estimated 800,000 to one million Jews were forced out of Arab countries after 1948 most of whom were absorbed by Israel.  But in every peace conference the Arabs have demanded the right of Palestinians to return to the land they abandoned in 1948 and a cash payment of compensation to boot.  The “World Organization of Jews from Arab Countries” estimates that the aggregate size of the real estate left by fleeing Jews was over 100,000 square kilometers (four times the size of Israel) and that the value of Jewish property then taken by the Arabs would be worth $300 billion today.  This fact is never mentioned in the mainstream press.  All we hear about is the plight of Palestinians still living in refugee camps.

And what about Jordan?  After the UN’s 1947 partition, the West Bank was captured by Jordan, which claimed sovereignty there in 1950 and extended citizenship to all its residents.

Jordan, however, severed its administrative ties to the West Bank and abandoned its claim of sovereignty in 1988.  Since that time, without a peep from the world press, Jordan has been systematically stripping citizenship from Palestinians rather than providing them shelter within its borders (land much larger than Israel) even though last year King Abdullah launched a housing initiative to build 120,000 housing units for low income Jordanians.

And while the Administration condemned Israel for its poorly timed announcement of building plans in Jerusalem during Vice President Biden’s visit (which the president knew was leaked by one of 38 parties comprising Israel’s Knesset legislature to try and embarrass Netanyahu) neither he nor the State Department has raised a word of protest over the ceremonies in which Mr. Abbas took part following the Biden visit to the West Bank honoring and glorifying Datal Mughrabi who was responsible for the 1978 massacre of 37 Israelis.

The Jerusalem Post said it well in its March 16, 2010 edition:

[President Obama’s] strategy of “engaging” Islamic rogue states has been disastrous.  The effort to prevent the nuclearization of Iran by appeasing the Iranian tyrants backfired with the ayatollahs literally mocking the US.  The response of Syrian President Bashar Assad to US groveling and the appointment of an ambassador to Damascus was to host a summit with Iranian President Mahmoud Ahmadinejad and Hezbollah terrorist leader Hassan Nasrallah and ridicule the US demand that he curtail his relationship with Iran.  President Obama did not consider this “insulting,” prompting the editor of the Lebanese The Daily Star to write that “the Obama administration these days provokes little confidence in its allies and even less fear in its adversaries.”

President Obama is traveling the road of appeasement to the Arabs.  He seems to believe that every grievance of Islam is attributable to the Arab-Israeli conflict.  This theory has been demonstrated to be wrong time and again.  Its adherents over the years have attributed everything from Soviet influence in the Mideast, the first Gulf War, the attacks on 9/11, the Ft. Hood attack, Iran’s quest for nuclear weapons … everything except Islam’s inability to build viable democratic nations which respect pluralism and human rights … to the Israeli-Palestinian conflict.  They believed, and continue to believe, that all Islamic grievances would vanish and Islam would truly be a religion of peace if only Israel would make one further concession after another.  This is a dangerous theory, for it only emboldens Arab states to demand more and more without giving anything in return.  How absurd this all is, as if peace would reign if only Israel stopped building apartments in its capital.

In short, Mr. Obama’s policy, previewed in the Cairo speech, amounts to nothing less than an effort to rehabilitate Islam’s image in the world.

Bret Stephens in a recent op-ed piece in the Wall Street Journal summarized the absurdity of this thinking:

“There may well be good reasons for Israel to dismantle … [settlements] assuming that such an act is met with reciprocal and credible Palestinian commitments to suppress terrorism and religious incitement, and accept Israel’s legitimacy as a Jewish state.  But to imagine that the settlements account for even a fraction of the rage that has inhabited the radical Muslim mind … is fantasy.  The settlements are merely the latest politically convenient cover behind which lies a universe of hatred.”

The president’s approach to the Arab-Israeli question is consistent with his entire foreign policy, which can be summarized as follows:

* He makes nice to our sworn enemies.

* He dithers and delays taking any firm action against Iran, allowing their demented leaders further time to build nuclear weapons and a delivery system to threaten its neighbors and make good on its threat to wipe Israel off the map.  Nuclear weapons in Iran’s hands, said candidate Obama “would be a game changer.”  The momentum in this game has changed and not in our favor.

* He apologizes for our outrageous arrogance to the nations of Europe who owe their very existence to America.  Our allies like England, Poland, the Czech Republic, Columbia, Honduras and now Israel get slapped in the face.

* He claims America was embarrassed by Israel during Biden’s visit there.

If America was indeed embarrassed, it is nothing compared to what an embarrassment the policies of our president are to those who have been steadfast in their support of us.  They, and others are surely watching and wondering whether, if we treat our friends this way, what kind of a trusted ally will we be when push comes to shove.

Is There A USPIGS In Our Future?

In the vernacular of financial commentary, “PIGS” is the term recently coined by the financial markets to refer to sovereign countries whose economies are virtually bankrupt and whose bonds are virtually worthless. These are the basket cases of the international economic system — Portugal, Italy (also Ireland ), Greece and Spain.  Recent evidence suggests that the fiscally irresponsible PIGS may soon have a new applicant for membership in their club.  Membership in this particular club is somewhat reminiscent of Groucho Marx’s famous remark that “I wouldn’t belong to any club that would have me for a member.” The new expanded club’s acronym is shaping up to be (you guessed it) USPIGS.  No, the United States is not about to go bankrupt.  Not yet, anyway. We are, however, pursuing the very same types of vast spending policies that brought the PIGS of Europe face to face with that real possibility.

What have we done recently to be considered for membership in this club of dubious distinction?  Last week, government budget personnel revised their estimate of when Social Security would begin running in the red from 2017 to, essentially, “right away.”  Yes, Social Security is broke…right now!  So much for government estimates.

The announcement of this distressing news was, it appears, kept well under wraps until Nancy Pelosi and Harry Reid along with a shamelessly compliant Democratic Congress safely ramrodded Obamacare, with its astonishing price tag, into law. The entitlement sinkhole just got an order of magnitude bigger.  “But,” one might ask,  “haven’t we been accumulating all the excess funds paid into Social Security all these years in a special trust fund.”  Well, not exactly.  In fact, not even almost exactly.  You see, the government has been vacuuming out the excess cash as soon as it comes in and spending the money (the money we all paid in) to pay the government’s current bills.  The trust-fund cash has been replaced all this time with IOU’s (that’s internal Treasury debt), which are now being called to meet current payment obligations.  These IOU’s are being replaced, of course, with even more IOU’s but this time there is no more cash to divert from payroll taxes to fund government operations. We have to borrow more.

The timing just couldn’t have been worse, with the multi-trillion-dollar Obamacare entitlement enacted into law by the Democrats, and Moody’s having just announced that our AAA credit rating could be in jeopardy if we don’t meet our economic growth projections. Those are the very same growth projections being compromised by our ever-spiraling deficits, our ever-growing national debt and by the federal and state tax collectors about to go on a government-mandated, national pick-pocketing binge.

We have, in a number of previous essays, cited the spending plans of the current Administration as irresponsible.  Not that there is anything inherently irresponsible with borrowing against future receipts to accomplish needed and worthwhile objectives so long as there is a credible repayment plan.  But when anyone, especially the government, spends borrowed money based on future expectations, then the principles upon which those expectations of future revenue are based have to be realistic and grounded in sound economic theory.  Sadly, the chickens have come home to roost on the past projections upon which Congress and the Administration have relied. And just as we have previously claimed they were doing (“cooking the books” with unrealistic forecasts to justify passage of the Obamacare legislation), the evidence is in that Congress has justified its profligate spending habits by basing expenditure decisions upon demonstrably unrealistic optimistic projections of economic growth while also understating the future costs of the laws they enact.

Entitlement costs, like those for greatly expanded health care, get baked into the annual budget (referred to in budget speak as non discretionary spending), even though the revenue going forward is quite variable.  As proof of that, the fact that Social Security is in the red seven years earlier than the government projections anticipated, is largely the result of the economic downturn.  The benefits are fixed while the economy, which produces the receipts from payroll taxes, is, extremely variable.  Picture a graph with two lines, moving from left to right, one to illustrate benefits (costs) and the other to illustrate income (social-security tax receipts). Obviously you would want the lines to move in tandem, ideally with the income line running ahead (above) the cost line.  When they run counter to one another, that is, when the cost line turns up and the income line turns down you have what we’ll call an insolvency gap.  Our current social-security insolvency gap is more than very troublesome. It has put us on the road to a fiscal train wreck. This is the type of wide-yawning gap that has driven Greece to its knees and threatens the other “PIGS” countries as well.

To be sure, this mess has been building for a long time and we can’t blame past irresponsibility on President Obama.  He, as the junior senator from Illinois, was still trying to find the way to his Senate office when the current crisis began to build during the Bush years. But now he is president and it is his responsibility to provide the leadership to resolve the mess, not to make it worse. Unfortunately, the president and his ill-timed redistributive policies are exacerbating, not alleviating our economic problems by rushing headlong to squeeze money out of the private sector and into the hands of a wide array of government programs essentially designed to redistribute private wealth. With fewer resources in the private sector it is almost axiomatic that government tax revenues from private economic activity will be constrained. Of course, at the same time, that the government continues to spend at an accelerated rate, Congress and the Administration project steady economic growth with no further downturns. We have seen how reliable those projections have been in the past.  Our national priority should be to do everything we can to foster economic growth.  Instead, we are doing just the opposite.

Further complicating the matter is that Obamacare imposes very substantial new costs on the states, nearly all of which are struggling mightily with their own budgets.  As we write this essay, The Sunday New York Times reports on its front page how states are now seeking to tax services, “…From Head To Toe.”  The federal government and the state governments are embarking on a colossal revenue chase to squeeze more and more taxes from the nation’s taxpayers.

It has been demonstrated that when public debt reaches 90% of GDP economic growth begins to deteriorate.  Add non-public debt (when we borrow from our own “lock boxes or trust funds”) such as what we owe to Social Security and our other totally unfunded liabilities, and the picture really starts to become very troublesome.  CBO now estimates that our deficits over the next ten years will be $1.2 trillion more than the Obama administration projected (why do these type of corrections always seem to come out right after we legislate massive new entitlement commitments?); and that we will have reached that 90% public debt to GDP ratio within the next ten years.

This is not simply academic or esoteric chatter.  It matters and it matters a lot to every American family.   That $1.2 trillion miscalculation by the Obama Administration represents an additional debt of $10,000 per household above and beyond the federal debt each household is already carrying according to Heritage Foundation budget analyst Brian Riedl.  Keep in mind the federal public debt was a gaping $6.3 trillion or $56,000 per household when President Bush left office. Today, it stands at $8.2 trillion or $72,000 per household and, according to the CBO estimates, in less than ten years it looks like it could reach $20.3 trillion.  That would be $170,000 per household!  When we talk about the Administration or Congress passing debt onto our children that’s exactly what we are talking about.  Ultimately, our kids and their kids will pay to service that debt with additional taxes the government extracts from them or through vastly decreased value of their currency. Either way, their standard of living and their quality of life is certain to suffer.

James R Horney, a federal-budget analyst with the liberal Center on Budget and Policy Priorities acknowledges that lower tax revenue resulting from economic performance that is lower than government projections accounts for the biggest part of the deficit gap between the Administration’s estimates and the CBO’s. “The administration assumes GDP and incomes will be higher, and that translates into higher revenues than CBO expects. Relatively small differences in economic assumptions can add up to big differences over 10 years,” says Horney.

Budget analysts Riedl and Horney, one conservative and one liberal, both offer very worthwhile observations.  Their comments are also very instructive.  They illustrate how minor errors or miscalculations in projections can, over time, compound into major problems.  They also suggest the ease with which government staff can game the system to influence the score the CBO comes up with on any piece of legislation.  When constructing the assumptions that accompany a bill to the CBO for scoring, a little tinkering here and there can pretty much produce the score one wants.  The Administration’s Office of Management and Budget (OMB) can play the same game. Plug in a half percent more growth and more tax revenue here and there and PRESTO you can make a projected budget deficit neutral or even reduce a shortfall.

We, of course, don’t know if such chicanery was at work in the case of the healthcare bill.  We do, however, find it disheartening that the CBO didn’t discover, until two days after President Obama signed the healthcare bill into law, the disparity between the growth projections the Administration made and those that CBO considers to be realistic.  And as stated earlier in this essay, that turned out to be a $1.2 trillion late discovery.

The bad news is that in a little less than ten years our public debt will reach 90% of estimated GDP (sort of like the PIGS of Europe).  At the time Mr. Obama was elected President our public debt stood at 40% of GDP.  The good news is (well not exactly good news) we have time to do something about it.  The government can rethink the statist, redistributive course we are on and begin focusing on policies designed to grow the economy…to encourage private investment and sound risk taking…to leave as much wealth in the hands of the people as possible.

Based on his actions since he took office, President Obama is not of a mind to view the sudden insolvency of Social Security or the Administration’s $1.2 trillion miscalculation of the nation’s deficit over the next decade with alarm and rethink the course he is plotting. Rather, he and the Democratic Congress seem to be of a mind, instead, to think damn the torpedoes, full speed ahead. Their rhetoric and actions suggest that, given the current control they exercise, they see this as a once in a lifetime chance to vastly increase the role of government and to let the debt problem slide further down the road. It is far more satisfying to engage in expensive social engineering than in the hard choices necessary to cut spending.

We suspect, however, we do know what the mind of the voting public will be once the hard reality sinks in of where we are, where we are headed and the consequences to the nation of being a fiscal basket case where debt backed by the “full faith and credit” of the United States (our Treasury bonds), long viewed as the refuge of investor’s seeking safety, could be salable only if America paid much higher rates of interest.

What has happened to Portugal, Italy, Greece and Spain is not hard to fathom.  It is a mystery to no one who understands basic economics, unencumbered by partisan political philosophy.  The PIGS have borrowed to spend (and are committed to spend) more than they can ever hope to repay.  It’s that simple. In the case of Greece, they need some form of a bailout. The other three nations are not far behind unless they treat their current crisis as a wakeup call and quickly take painful remedial measures. It appears to us when we look at what Congress has just legislated and the president has signed into law, together with what the president’s other priorities seem to be, that we are about to follow the path well traveled by the basket cases of Europe.  Why in the world would we do that?

Liberty and Equality: Are They Compatible?

Both represent ideals we Americans hold dear. But they aren’t really the same thing and as we have seen in the still acrimonious national debate over the issue of health care and the government’s proper role in providing it, the two concepts come into stark relief.  Moreover, a tension between the meaning of freedom and the meaning of equality will be tested further as President Obama and his newly muscular acolytes in Congress, still intoxicated by the success of their battering-ram legislative strategy, begin to eye other opportunities to (as our president likes to remind us) transform America.  And make no mistake about it; the transformation “party” the president is hosting has only just begun. Think card check, think cap and trade, think compensation control, think regulatory expansion and think, REALLY THINK, about the greatest search in the history of America, through every nook and cranny of our economy, for new sources of tax revenue to pay for the transformation.

To us the word “freedom” embodies the individual right of free choice. The word equality encompasses the bedrock principle that every person should have the same rights to all the protections and rights granted under our Constitution.  Thus, the rallying cry of Patrick Henry, “give me liberty or give me death” exists side by side with the proposition best enunciated by Martin Luther King’s I Have a Dream speech where he envisioned a world “where people would be judged by the content of their character and not the color of their skin.”   In other words, the concept of  “equality” defined as Dr. King stated it can, and should, live side by side with the concept of “liberty (an individual’s right to personal choice) as enunciated by the famous remark of Patrick Henry. But with regard to the expansion of government into the private sector the two words can run into conflict.

Those of us who were, and are, appalled by last week’s heavy-handed spectacle of one-party rule mandating the biggest expansion of government in the lifetime of almost everyone reading this essay are alarmed about the ramifications of almost tyrannical rule by a ruling class seeking to expand government into the furthest reaches of what has always been within the domain of the private citizen’s personal choices. Our friends on the left say that we are on the wrong side of history, but it is they who occupy that space.  It is they, including our president and his party, who are racing full speed backwards to emulate societies with entitlement systems that threaten to hobble one nation after another. Think Portugal, Italy, Greece, Spain, Great Britain, France, Ireland, Japan and on and on.  The governments and economies of Greece, Portugal, Italy and Spain are hanging on by their finger tips, more or less, counting on the healthier members of the EU (e.g. Germany) to bail them out although “not so fast” say the Germans).  We could go back into history a little further and romanticize the failed egalitarian dreams of the Soviet revolutionaries or, perhaps, Chairman Mao’s People’s Republic of China.  But the Soviet Union crashed nearly a generation ago and China abandoned Chairman Mao’s dream as soon as he died (and they have had nothing but robust economic growth to show for it).  So exactly who is on the wrong side of history here?

Make no mistake; the transformation that the left has in mind for America is nothing more than a grab for the redistribution of wealth. They disdain the creation and broadening of wealth. And that is where liberty and equality may very well come into conflict. The left wants to create a society based on some expanded notion of egalitarianism which has nothing to do with equal opportunity under the law, and throw under the bus the ordered liberty which has been the bedrock principle which every generation of Americans has enjoyed, and countless others around the globe have envied. It is what Ronald Reagan had in mind when he correctly described our country as the shining city on the hill. Unfortunately the leftists who now run this nation only know one hill and of course that is Capital Hill from which they dictate their ever-expanding mandates.

We believe that individual liberty, that radical Lockean idea which our founders bequeathed to us, has produced the greatest, most vibrant and most promising society man has ever known and, in fact, actually provides the greatest amount of equality for the greatest number of people.  Our society has prospered because so many Americans were willing to fully participate, to the best of their ability, in pursuing the proverbial American dream.  Wave after wave of immigrants who escaped oppressive regimes or societies that afforded no real hope of achieving their highest aspirations for their children have invigorated our nation and been an engine for constant economic growth and the creation and expansion of private wealth to the betterment of all our citizens. A national policy such as that which appears to be unfolding in America today, the cornerstone of which is the promotion of economic egalitarianism (as we said above, nothing more than a fancy term for the redistribution of wealth) can only be pursued by vastly limiting the personal freedom of individuals to chart their own course through life.

The radical 17th century thinker, John Locke, whose writing so influenced our founding fathers, advanced the notion that the role of government should, more or less, be confined to protecting the people…and their liberty.  His writing, Second Treatise Concerning Civil Government could have served as a template for our own Constitution (and it probably did) with its formulations of checks and balances and representative government. He equated government encroachment on individual liberty as tyranny.  To our founding fathers, that said it all.

Washington, Adams, Hamilton, Jefferson, Franklin, Madison, George Mason and others enshrined the thinking and, indeed, the exquisite wisdom of Locke in our founding documents including the Declaration of Independence and the Constitution of the United States. That radical thinking generated the energy that enabled a newborn country of mostly poor people to make a dash to freedom and prosperity the likes of which the world had never seen. The peoples and governments of Europe, much of Asia and even many in Latin America were quickly inspired by the American experience.

As we watched the well-orchestrated farce played out from the US House of Representatives last Sunday night, we couldn’t help but think of the choices being stripped from the people and their state governments throughout the land.  As has been frequently written in recent months, many healthy, young families choose to allocate their limited resources to other needs besides health insurance. Many of us would view that as a poor choice.  But the choice to buy or not to buy health insurance has always been theirs to make, and the argument that if the uninsured fall ill it is a burden on our economy is not nesessarily true. Friends, families, private charities often cushion the impact.  Not anymore. “You will buy and you will buy the coverage we say you must buy, or we will fine you,” our government will, in effect, soon tell them.  And just in case anyone thinks that might be an overstatement, the government is now authorized to hire nearly 17,000 new IRS personnel to monitor which individuals are, and are not, complying with these and a plethora of other new rules.

An individual or a small business making over $200,000 is now deemed to be wealthy, which is Obamacare speak for those who will find the government’s hand in their pockets to grab extra tax money to help fund this newest of entitlements.  And, if those same people have worked hard enough and have saved some money to invest in dividend or interest-bearing securities, well, thank you very much, the government will tax that income over and above the higher tax already paid on it under the now higher personal income tax they have now legislated for these wealthy citizens.  A variety of businesses will also be (pardon the term) shaken down to help fund the new health-care “entitlement”.  Pharmaceutical companies, medical device companies, tanning salons, medical cosmetic surgery practices, insurance companies and other industries who we presume will be added will be charged fees to help fund the program.

We will leave it for now to others to pick apart the new so-called health-care  “reform.” There is no end to the writers and commentators who are already doing that.  We do, however, wish to advance the thought that the reported 30 million Americans who are uninsured and are, therefore, according to the government’s case for taking control of the nation’s health care, denied adequate medical treatment, can be doctored up for a lot less than the trillions this enormous new medical entitlement is going to cost.  In fact, the government could hire 30,000 new doctors at $200,000 per doctor (more than the earnings of the average physician) each managing 1000 patients a year (less than the average number of charts per physician) and provide doctors for all of the uninsured for about $6 billion per year. And yes, we recognize there will a few billion more required for various tests and procedures, but the trillion-plus-dollar takeover, for the medical-care makeover is an enormous and irresponsible burden to place on the American economy.  We can’t afford it, just as Europe can’t afford it.  But as the President said, that’s what he came to Washington to do.

Perhaps the ubiquitous Reverend Al Sharpton who seems to insinuate himself into every high-profile controversy said it best on Fox as the infamous vote was being tallied. When rhetorically asked by the equally ubiquitous Geraldo Rivera whether he was concerned that the vote was a big step toward socialism, Reverend Al happily responded that when America voted for Barack Obama, America voted for socialism. And he was right…only most Americans who voted for Obama really didn’t know or believe that.

That is why, with this president and this Congress we are facing the possibility that the change Mr. Obama promised could be irreversible. Entitlements, once enacted, become taken for granted. Moreover, they become the baseline for future generations . To those in power, the thinking of John Locke, Adam Smith, not to mention, George Washington, Alexander Hamilton, Thomas Jefferson, Benjamin Franklin, James Madison and virtually all of the founding fathers are clearly passé. Instead our leaders, seemingly blind to the wreckage caused by regimes which followed the discredited theories of economists who preached about the wonders of state-controlled economies, are blindly heading in the wrong direction in order to take over more and more of what has always been part of the private sector and our private personal responsibilities.  In their view, government knows best.

The president’s audacious but absolutely honest campaign promise that he was going to “fundamentally change America” couldn’t have been more candid.  And as last week’s House vote was evolving toward a nearly certain majority in his favor, he, again very candidly, told the Democratic caucus (and the American people) “this is what I came here to do,” not to simply make health care a government preserve, but to fundamentally change America. Watching all of the back patting taking place following the signing ceremony last Tuesday, it is evident that the President and his administration really believe that America wants him to fundamentally change the country.  As Vice President Biden, whispered to the President (and 300 million other Americans) “this is a big f——deal.”

A Perfect Storm: Deficit Soaring…Debt Soaring…Number Who Pay No Taxes…Soaring

The “Perfect Storm,” described by author Sebastian Junger in his 1997 best-selling novel by the same name, referred to a confluence of weather conditions that produced a monster hurricane off the coast of New England. Today the term is commonly used to describe any combination of circumstances that drastically aggravate any given situation. For example, an exponential increase in the number of retired elderly Americans who require more health care being supported by a declining number of young Americans who provide the funds to cover those health care costs. With over 70 million baby boomers about to retire we, indeed, have the conditions for a perfect storm

The President and Congress seem to have no trouble grasping the logic that the more people who share the cost of health care the less the cost per capita will be. In fact, the very cornerstone of their health care program is that everyone be required to pay into the system with which we manage the nation’s health care. That same logic, however, seems to elude them when it comes to sharing the growing cost of government. They consistently propose that we compensate for the ever-diminishing number of American taxpayers by simply increasing the taxes on those who already pay the most. Their mantra for every expansion of government programs is that the wealthy should pay their fair share. How can you argue with that? Shouldn’t everyone pay his or her fair share, whatever that is?

Unfortunately, the path we have traveled in the past half century in relentlessly increasing so-called “entitlement” expenditures has put us on the horns of a dilemma in which the number of Americans who pay absolutely no taxes is soaring at the very time government spending is producing a voracious federal appetite for tax revenue. The good news is that 142 million tax returns were filed in 2008 (the last year for which data are available). The bad news is that nearly 52 million of those returns, utilizing a potpourri of deductions, exemptions and tax credits, reported zero taxes due. What is even worse is that, in just the last ten years, the number of tax filers reporting zero taxes due has increased by 60 percent. So just how did such a bizarre reality come to be? The answer is simple: politics.

We doubt that anyone would argue with the notion that those who earn more should pay more in taxes. We certainly wouldn’t. But America has been sold on the idea that the rich should not only pay more in taxes (which is only fair) and that they should also be taxed at higher rates than anyone else, but also that they should pay their “fair share” of the taxes from which many of their fellow citizens have been excused.

Who is rich, of course, is in the eye of the beholder. How much of the bill (one’s fair share) for providing government services should be sent to those who are perceived to be rich depends largely on the motivation of those who write our nation’s tax legislation. On one end of the spectrum we have those who are motivated by the politics of envy. On the other end of the spectrum we have those who appreciate the economic need to maintain an environment encouraging risk taking and entrepreneurship. Another motivating factor is, of course, the extent to which our citizens believe that government, in order to maintain a just and orderly society, must supply certain needs and desires that require income to be transferred from one set of citizens to support another set of citizens.

Government has grown tremendously over the last eighty years as politicians have embraced the idea that Washington should be a proxy for family…that we should look to government to provide more and more of what people need or desire rather than depend on our personal and family support systems and our own labor and intelligence. Thus, more and more of what we need or, perhaps, desire are not viewed as goals or objectives to be attained, but more as rights that are conferred upon us by the moral obligation one citizen owes to his or her neighbor …which morphs eventually, but assuredly, into a governmental obligation.
Before the New Deal, the role of government was more limited to services usually provided by states and cities such as police protection, firefighting, emergency ambulance services and public elementary and high schools. The federal government provided for such services as the national defense, foreign relations between nation states, regulation of interstate commerce, national banks and postal service. Basic day-to-day care, feeding and nurturing were individual and family responsibilities with strong support, when needed, from charitable organizations.

At the national level, ever since 1913 when the 16th Amendment to the Constitution was ratified, federal expenditures have been funded largely by income and excise taxes. From its inception our federal income tax system has called for a graduated rate of tax, which means that at each increase in certain stated marginal income levels, the next amount of income is taxed at a higher rate. Although many believe the tax system would work better and fairer if all deductions and exemptions from tax were eliminated and only one rate were applied, there has been widespread support for the notion that those who make more money should pay tax at increasingly higher graduated rates.

At what level of income should the highest rate apply and what should that rate be? President Obama campaigned on the promise that any tax increases proposed by his Administration would be imposed only on the highest five percent of the population and that taxes for the rest of the people would not go up by a dime. His cutoff point is often said to be $250,000 per annum.

Given our annual deficit, now running close to $2 trillion, it is clear that annual income tax collections are not sufficient to support the level of government we have, nor the debt service on the accumulated debt, which we have already incurred. Nor, even with confiscatory tax rates can we plug the gap. (More on that later.)

As we have previously written, we can service our debt and provide government services either by rolling over and expanding the nation’s debt, printing money, thereby cheapening our currency and risking massive inflation, finding more and more sources to tax, thereby taking more money from the private sector, or cutting spending. Sadly, so far the current Administration and Congress, not to mention the Bush Administration and the prior GOP congresses have shown no signs of having any spending discipline. Congress recently passed a program into law, which requires that each new expenditure be accompanied by a corresponding expenditure cut or a new source of revenue. A step in the right direction, you might say. Not more than three weeks later, however, they passed an $80 billion spending bill and waived the pay-as-you-go requirement.

Because the debt problems of the nation have reached such a critical stage, major new programs have become far more contentious. Health care reform, a cap-and-trade environmental law, expansion of college scholarship programs, even if they all were to work as envisioned, will add to the deficit and all Americans know it. The health care bill, which the president says is revenue and expense neutral, will cause a major increase in our deficit. It is neutral only because it includes ten years of taxes and contains only six years of benefits…among other accounting tricks, such as burying the “doc fix” in separate legislation — an action that will add approximately $250 billion over the next ten years.

Since the left sees 2010 as a chance to transform America into a nation almost totally dependent on government, with more and more decision making and personal responsibility taken away from private citizens and managed by Washington, let us see if, as the Pelosi/Reid/Obama axis claims, new programs can be paid for if only the wealthy would pay their fair share.

The National Center for Policy Analysis reports as follows:
• According to data from the IRS, the bottom 50 percent of income earners pay approximately 4 percent of income taxes.
• The top 25 percent of income earners pay nearly 83 percent of the income tax burden, and the top 10 percent pay 65 percent.
• The top 1 percent of income earners pays almost 35 percent of all income taxes.
• The top 400 richest Americans [out of 320 million of us] paid 1.58 percent of total income taxes in 2000.

Empirical evidence also shows that the wealthiest citizens are also paying an ever-increasing proportion of all taxes collected by the federal government. Data from the Congressional Budget Office show not only that taxes on the wealthy have risen over time, but also that the 2001 Bush tax cut barely kept their share of the tax burden from rising further.

• In 1984, after the Reagan tax cut had been fully phased in, the bottom 20 percent of income earners paid an average federal tax rate (individual, payroll, corporate and excise) of 10.2 percent.
• The top 20 percent of earners paid 24.5 percent and the top 1 percent paid 28.2 percent.
• In 2001, after the first Bush tax cut had taken effect, those in the bottom quintile paid average federal income taxes of 5.4 percent, about half of what they did 20 years ago.
• Those in the top five percent saw a slight decline in their federal tax rate (28.6 percent, down from 29.7 percent).
• The top 1 percent, however, saw their overall federal tax burden increase slightly, from 33 to 33.2 percent.
Despite the accusation that it was the very wealthiest who benefited the most from the 2001 tax cut, their federal tax burden stayed level at best and increased at worst.

Catherine Reynolds in the July 20, 2008 online edition of Economix updates those figures further reporting that in 2007 the top one percent of taxpayers paid 40-42 percent of total federal income taxes representing the second year in a row that the wealthiest one percent paid more income taxes than the bottom 95 percent.

What if we were to raise tax rates further? Again there is interesting historical evidence reported by the National Center for Policy Analysis. In the 1920s the top rate fell from 73 to 25 percent but the wealthy went from paying 44 percent of the tax burden to 78 percent during the decade. A similar result occurred when President Kennedy cut the tax rate during his administration. And in the 1980s after the Reagan tax cuts the top one percent saw their share of the income tax burden increase from 17.6 percent to 27.5 percent. Clearly, time and again, raising the marginal tax rate cuts rather than increases the federal “take.”

Conversely, tax increases reduce incentives, drive business to cut costs (read “jobs”), move outside the United States and reduce research and development expenses and innovative risk taking. This country evolved from a standing start in the 18th century with a puny population, to an international economic engine, which lifted millions of people worldwide out of poverty as a result of private effort, private capital and private risk taking. We created industry after industry and millions of jobs, yet the left focuses on anecdotes of the profligate life style of a relatively few wealthy people who publicly flaunt their opulent life style. But truthfully, do we really care if in the course of creating jobs and economic security for the “many” there are a “few” who become very rich?

There is another disincentive, which every now and then gets the public’s attention: the estate tax (or as conservatives call it “the death tax”). Prior to the Bush tax cuts the government taxed (confiscated some might say) 55 percent of a decedent’s taxable estate over $1 million. Under the Bush program the estate tax was to be phased out until there was no such tax in 2010 … only to spring back to life, just like the Bush income tax cuts, in 2011 at the 2001 rate. Everyone believed at the time that over the following ten years a compromise would be reached by Congress, not only to prevent the expiration of the tax in 2010, but also to have a lower rate and a higher exemption amount thereafter. Since Congress rarely misses an opportunity to be irresponsible, that hasn’t happened. This clumsy handling of tax policy regarding residual wealth, net of all taxes paid during someone’s working life, has cost the public billions of dollars in legal fees trying to adjust wills, trusts and marital deductions to this unresolved matter.

But let us return to the disincentive of the death tax. After having one’s income taxed at rates up to 39.6 percent, paying Social Security tax of 6.2% if you are an employee (or 12.4% if you are self employed) on the first $106,800 of earnings, state income taxes of up to 12 percent in some states, Medicare tax of 1.45 percent on total taxable income (2.9% if you are self employed going up to 3.8% on ALL income, including interest, dividends and capital gains, which the left refers to as “unearned income,” under Obamacare), sales taxes up to ten percent in some cities and states, the government under this most hideous of taxes would take 55% of anything you might have left over for the children or grandchildren.

Essentially the United States is heading toward what might be called a tipping point. Increased government takeover of historically private personal obligations initiates a vicious cycle. The more we have a society where substantial numbers of people pay no taxes (now close to 40%), the more we create a voting bloc of citizens who will inevitably support new programs for which they don’t have to pay. Business people have a term for this. They dislike investing money with partners who do not invest even a minimal amount with them. It is called having “skin in the game” another way of saying that we all need to have common incentives.

We have now gone full circle in this essay. Who is wealthy? Is it someone who has any disposable money? How much should they pay? If you are a married couple raising children in Washington, D.C., New York, Los Angeles, Boston or San Francisco, to mention a few costly places, does earning $300,000 make you wealthy so that close to 40% (more if taxes are raised by the Congressional leadership) of every additional dollar earned should go to Uncle Sam? Are you a morally bad person if you do not want to shoulder an ever-increasing government appetite to provide more and more benefits to a segment of the population who view these benefits as if they are birthrights?
In our view the questions answer themselves, but as we said earlier in this essay it is all in the mind of the beholder.

Ideas and commentary with allegiance to neither the left nor the right, but only to this sweet land of liberty.