McCain for President, Part II

Charles Krauthammer

Last week I made the open-and-shut case for John McCain: In a dangerous world entering an era of uncontrolled nuclear proliferation, the choice between the most prepared foreign policy candidate in memory vs. a novice with zero experience and the wobbliest one-world instincts is not a close call.

But it's all about economics and kitchen-table issues, we are told. OK. Start with economics.

Neither candidate has particularly deep economic knowledge or finely honed economic instincts. Neither has any clear idea exactly what to do in the current financial meltdown. Hell, neither does anyone else, including the best economic minds in the world, from Henry Paulson to the head of the European Central Bank. Yet they have muddled through with some success

Both McCain and Barack Obama have assembled fine economic teams that may differ on the details of their plans but have reasonable approaches to managing the crisis. So forget the hype. Neither candidate has an advantage on this issue.

On other domestic issues, McCain is just the kind of moderate conservative that the Washington/media establishment once loved—the champion of myriad conservative heresies that made him a burr in the side of congressional Republicans and George W. Bush. But now that he is standing in the way of an audacity-of-hope Democratic restoration, erstwhile friends recoil from McCain on the pretense that he has suddenly become right wing.

Self-serving rubbish. McCain is who he always was. Generally speaking, he sees government as a Rooseveltian counterweight (Teddy with a touch of Franklin) to the various malefactors of wealth and power. He wants government to tackle large looming liabilities such as Social Security and Medicare. He wants to free up health insurance by beginning to sever its debilitating connection to employment—a ruinous accident of history (arising from World War II wage and price controls) that increases the terror of job loss, inhibits labor mobility and saddles American industry with costs that are driving it (see: Detroit) into insolvency. And he supports lower corporate and marginal tax rates to encourage entrepreneurship and job creation.

An eclectic, moderate, generally centrist agenda in a guy almost congenitally given to bipartisanship.

Obama, on the other hand, talks less and less about bipartisanship, his calling card during his earlier messianic stage. He does not need to. If he wins, he will have large Democratic majorities in both houses. And unlike 1992, Obama is no Clinton centrist.

What will you get?

(1) Card check, meaning the abolition of the secret ballot in the certification of unions in the workplace. Large men will come to your house at night and ask you to sign a card supporting a union. You will sign.

(2) The so-called Fairness Doctrine—a project of Nancy Pelosi and leading Democratic senators—a Hugo Chavez-style travesty designed to abolish conservative talk radio.

(3) Judges who go beyond even the constitutional creativity we expect from Democratic appointees. Judges chosen according to Obama's publicly declared criterion: "empathy" for the "poor or African-American or gay or disabled or old"—in a legal system historically predicated on the idea of justice entirely blind to one's station in life.

(4) An unprecedented expansion of government power. Yes, I know. It has already happened. A conservative government has already partially nationalized the mortgage industry, the insurance industry and nine of the largest U.S. banks.

This is all generally swallowed because everyone understands that the current crisis demands extraordinary measures. The difference is that conservatives are instinctively inclined to make such measures temporary. Whereas an Obama-Pelosi-Reid-Barney Frank administration will find irresistible the temptation to use the tools inherited—$700 billion of largely uncontrolled spending—as a once-in-a-lifetime opportunity to radically remake the American economy and social compact.

This is not socialism. This is not the end of the world. It would, however, be a decidedly leftward move on the order of Lyndon Johnson's Great Society. The alternative is a McCain administration with a moderate conservative presiding over a divided government and generally inclined to resist a European social-democratic model of economic and social regulation featuring, for example, wealth-distributing growth-killing marginal tax rates.

The national security choice in this election is no contest. The domestic policy choice is more equivocal because it is ideological. McCain is the quintessential center-right candidate. Yet the quintessential center-right country is poised to reject him. The hunger for anti-Republican catharsis and the blinding promise of Obamian hope are simply too strong. The reckoning comes in the morning.

Biden's Foot in Mouth Disease

Wall Street Journal

Well, will families making less than $250,000 get a tax cut under President Obama, or not? Senator Obama has been saying this for months, but on Monday Joe Biden put the tax-cut income threshold at $150,000 in an interview with a TV station in his beloved Scranton, Pennsylvania. The Biden campaign later clarified -- or at least tried to clarify -- the matter by saying that anyone making between $150,000 and $250,000 wouldn't get a tax cut but also wouldn't pay higher taxes.

We suspect what's going on here is more than Mr. Biden's normal gift of gaffe. As with his admission that a President Obama would quickly be tested by our enemies, the Delaware rambler was stumbling into the truth. An Obama Administration couldn't possibly pay for a tax cut for 95% of Americans by raising taxes on a mere 5%. Those 5% don't make enough money, or at least they won't after they find ways to shelter more of their income when their tax rates rise.

Just as Bill Clinton promised a "middle-class tax cut" in 1992 only to raise taxes on the middle class in 1993, Mr. Obama will quickly find that his tax-revenue math doesn't add up. Add in the demands on Capitol Hill to spend more and to offset the Alternative Minimum Tax, and our bet is that even $150,000 would soon prove to be a moving tax target. Remember when the AMT was only supposed to hit 21 millionaires? Next year, without relief, it could hit 26 million taxpayers. Tax increases always hit the middle class because that's where the money is.

A Canadian Votes for McCain

David Warren

Obama has presented himself from the start as a messianic, "transformational" leader—and thus played deceitfully with ideas that belong to religion and not politics. That he has done this so successfully is a mark of the degree to which the U.S. itself, like the rest of the western world, has lost its purchase on the Christian religion. Powerful religious impulses have been spilt, secularized.

For all the figurative heat of crashing markets, impending recession numbers, carnage in the commodities, the flying squirt-bomb of the American dollar, the cat's cradle of international political crises, humanitarian disasters across Africa, the usual Islamist terrorism, and the deep winter freeze portended by a flatlined solar magnetic low—there is Hope. But that is of another world. Hope, in this world, must be for the right things.

My column today may be read as an extension of what I wrote Wednesday for this page. I concluded those remarks by noting that if, by a surprise that is not implausible, McCain wins, we may have riots across the United States starting in Grant Park, Chicago, and an unprecedented outpouring of anti-American venom across 24 time zones. (Take France, for example, where support for McCain was clocked in a recent poll at one percent.)

I had doubts about John McCain—not as a man, but as a presidential candidate—from the beginning. I preferred George W. Bush in the Republican primaries of 2000, because he was not McCain. I preferred Rudy Giuliani at the beginning of this year's cycle, despite my considerable distaste for his views on social issues. But given a choice between McCain and Obama—were I entitled to vote in an American election—I would now pull the lever for the Republican slate without the slightest compunction.

Moreover, McCain has grown in my estimation, as circumstances have changed. He has in many ways earned his maverick reputation, together with a reputation for incorruptible patriotism. He's the guy to make politically risky and potentially unpopular decisions, in face of the recessionary slide; and crucially, he's the guy to make America's most loathsome and unpredictable enemies (who are also our enemies, lest we forget) not want to test him. In his appointment of Sarah Palin, for all the sneers of the urbane and over-educated, he has suggested a way forward in which America retrieves her "core values," which include cutting through the blather of conventional "expertise," and distinguishing right from wrong. And she can articulate what McCain mumbles.

McCain is a man of action and accomplishment, Obama a man of "charisma" and pretty words, whose only real accomplishment has been his remarkable self-advancement. And Obama's policy outlook, so far as it can be discerned from the usual electoral pronouncements, consists of the same snake oil the pre-Clinton Democrats had been selling continuously since they chained the Great Society to America's ankle: that is, a constantly expanding Nanny State. I am hardly reassured by Obama's last-lap rhetorical reassurances: you don't send a man to Washington with a trillion dollars of candy-shop promises on medicare, education, government job-creation, "spreading the wealth"—especially when the economy has just tanked.

I wish that were the worst I could say about the man, who has survived nearly two years of campaigning for President without serious cross-examination from either the media or his media-chastened opponents. A man who, should he win the election and serve one term, will have been President of the United States longer than he has held any steady job.

In my world, you don't humour a politician who presents "Change," "Unity," and especially, "Hope," as hypnotic mantras, with the power of enchantment over very large crowds. And you especially don't humour such a politician at a time when both country and world are unstable, and hard decisions will have to be made.

Deeper than this: Obama has presented himself from the start as a messianic, "transformational" leader—and thus played deceitfully with ideas that belong to religion and not politics. That he has done this so successfully is a mark of the degree to which the U.S. itself, like the rest of the western world, has lost its purchase on the Christian religion. Powerful religious impulses have been spilt, secularized.

In this climate, people tend to be maniacally opposed to the sin to which they are not tempted: to giving Christ control over the things that are Caesar's. But they are blind to the sin to which they are hugely tempted: giving Caesar control over the things that are Christ's.

"Faith, hope, and charity" are Christ's things. They apply, properly, outside time —to a "futurity" that is not of this world. They must not be applied to any earthly utopia. A Caesar who appropriates otherworldly virtues, is riding upon very dangerous illusions. Follow him into dreamland, and you'll be lucky to wake up.

McCain for President

Charles Krauthammer

Contrarian that I am, I'm voting for John McCain. I'm not talking about bucking the polls or the media consensus that it's over before it's over. I'm talking about bucking the rush of wet-fingered conservatives leaping to Barack Obama before they're left out in the cold without a single state dinner for the next four years.

I stand athwart the rush of conservative ship-jumpers of every stripe—neo (Ken Adelman), moderate (Colin Powell), genetic/ironic (Christopher Buckley) and socialist/atheist (Christopher Hitchens)—yelling "Stop!" I shall have no part of this motley crew. I will go down with the McCain ship. I'd rather lose an election than lose my bearings.

First, I'll have no truck with the phony case ginned up to rationalize voting for the most liberal and inexperienced presidential nominee in living memory. The "erratic" temperament issue, for example. As if McCain's risky and unsuccessful but in no way irrational attempt to tactically maneuver his way through the economic tsunami that came crashing down a month ago renders unfit for office a man who demonstrated the most admirable equanimity and courage in the face of unimaginable pressures as a prisoner of war, and who later steadily navigated innumerable challenges and setbacks, not the least of which was the collapse of his campaign just a year ago.

McCain the "erratic" is a cheap Obama talking point. The 40-year record testifies to McCain the stalwart.

Nor will I countenance the "dirty campaign" pretense. The double standard here is stunning. Obama ran a scurrilous Spanish-language ad falsely associating McCain with anti-Hispanic slurs. Another ad falsely claimed McCain supports "cutting Social Security benefits in half." And for months Democrats insisted that McCain sought 100 years of war in Iraq.

McCain's critics are offended that he raised the issue of William Ayers. What's astonishing is that Obama was himself not offended by William Ayers.

Moreover, the most remarkable of all tactical choices of this election season is the attack that never was. Out of extreme (and unnecessary) conscientiousness, McCain refused to raise the legitimate issue of Obama's most egregious association -- with the race-baiting Rev. Jeremiah Wright. Dirty campaigning, indeed.

The case for McCain is straightforward. The financial crisis has made us forget, or just blindly deny, how dangerous the world out there is. We have a generations-long struggle with Islamic jihadism. An apocalyptic soon-to-be-nuclear Iran. A nuclear-armed Pakistan in danger of fragmentation. A rising Russia pushing the limits of revanchism. Plus the sure-to-come Falklands-like surprise popping out of nowhere.

Who do you want answering that phone at 3 a.m.? A man who's been cramming on these issues for the last year, who's never had to make an executive decision affecting so much as a city, let alone the world? A foreign policy novice instinctively inclined to the flabbiest, most vaporous multilateralism (e.g., the Berlin Wall came down because of "a world that stands as one"), and who refers to the most deliberate act of war since Pearl Harbor as "the tragedy of 9/11," a term more appropriate for a bus accident?

Or do you want a man who is the most prepared, most knowledgeable, most serious foreign policy thinker in the United States Senate? A man who not only has the best instincts, but has the honor and the courage to, yes, put country first, as when he carried the lonely fight for the surge that turned Iraq from catastrophic defeat into achievable strategic victory?

There's just no comparison. Obama's own running mate warned this week that Obama's youth and inexperience will invite a crisis -- indeed a crisis "generated" precisely to test him. Can you be serious about national security and vote on Nov. 4 to invite that test?

And how will he pass it? Well, how has he fared on the only two significant foreign policy tests he has faced since he's been in the Senate? The first was the surge. Obama failed spectacularly. He not only opposed it. He tried to denigrate it, stop it and, finally, deny its success.

The second test was Georgia, to which Obama responded instinctively with evenhanded moral equivalence, urging restraint on both sides. McCain did not have to consult his advisers to instantly identify the aggressor.

Today's economic crisis, like every other in our history, will in time pass. But the barbarians will still be at the gates. Whom do you want on the parapet? I'm for the guy who can tell the lion from the lamb.

Write to the author to: letters@charleskrauthammer.com

Obama as Saviour

David Warren

That we cannot solve, or even assuage, any problem, on the basis of wrong information, is one of those articles of faith to which I continue to subscribe, along with the Nicene Creed, and the proposition that two plus two will always equal four—not only in this world, but in all possible worlds.

This admits of the "exception that proves the rule," however, under my also oft-repeated "iron law of paradox." For information is just information, there is always more to be had, and it sometimes happens that a problem goes away, notwithstanding our best efforts to take the wrong end of the stick, and beat it until it gets much worse. In my Catholic Church, we have a variety of little prayers that turn on the logic, "Lord, don't send us the fate we deserve," and I utter it quite earnestly at times like this—when, to cite the daily rubric in James Taranto's excellent Wall Street Journal web column, "Everything Seemingly Is Spinning Out of Control."

The hysteria over global warming, the hysteria over the banking crisis, the hysteria over Barack Obama's presidential candidacy—to name just three hysterias in a rich international field, and not even mention Islamist terrorism or the word "Eurabia"—combine in strange ways to make a reading tour of any major newspaper (or Internet news aggregator for that matter) into a simulated space flight.

We live in a country that just re-elected a Conservative Party that has tried very hard to remain boring, generally; and more specifically, inoffensive to our media, bureaucratic, academic, and legal elites. They barely limped home, owing largely to the fact that the principal opposition party was led by a man (I wouldn't be so cruel as to name him) who could not formulate sound bites in English (or any other language).

But had we recently joined those United States of America, in some alternative universe, Mr. Obama would be in no need of the estimated $700 million he will have raised, in total, to pump into swing states in the final fortnight of the U.S. election. For according to casual polls up here, Obama would sweep all ten hypothetical ex-Canadian states by breathtaking margins, without a nickel of advertising.

Hypotheticals are not actuals, however. Were we in fact part of the United States, we might prove no more Democrat than Alaska—for our whole attitude towards the election would be changed by the prospect of living with the results.

The same comment goes for almost every other country, for with the exception of several ex-Communist corners of central Europe, the whole world overwhelmingly wants Obama to win. That the whole world is hardly interested in the alternative policies of U.S. Democrats and Republicans, and knows little if anything about the real stakes, should go without saying. Everyone has an opinion about what someone else should do.

The idea of "Obama as Saviour"—cultivated by the man himself in the earlier laps of his marathon campaign, and expressed forthrightly in his remarkable memoir, The Audacity of Hope—has seized hold of the planet, though not entirely of the United States.

For in the U.S., contrary to bullying media impressions, the polls still show the two presidential tickets surprisingly close—five or six points between them in the RealClearPolitics national average, and more like two points when the numbers are re-sorted to represent those most likely to vote. Those points could easily disappear after discounting the systemic bias towards Obama in polls that over-sample urban Democrats, to say nothing of the next few days. Meanwhile, the proportion of "undecideds" seems to be growing.

This is the classic set-up for a Truman-beats-Dewey "November surprise." Alternatively, it is the classic set-up for a Reagan-beats-Carter-in-landslide—for over the last weekend before the election, the "undecideds" may indeed swing decisively for the apparently revolutionary candidate, on the principle that you only live once.

The Democrats, and their running dogs in the mass media, have tried repeatedly to present the competition for votes as a referendum on race—that is to say, the only thing that could possibly explain an Obama defeat, would be, "America is racist." (Behind that lies the culture wars, writ very large.) I think anyone in his right mind should be able to see through that imposture, but then, I'm not sure how many Democrats are currently in their right minds.

The world, however, is anti-American enough to accept that analysis at face value. In a moment of international hysterias (note plural), the notion of Obama as Saviour (simply in being Obama, regardless what he might subsequently do), carries no rational restrictions. And while I am confident that the fallout from a McCain victory could be contained by the National Guard in the U.S., I'm beginning to worry about the international ramifications.

My Kind of Bishop

Laura Leggere

Local and national Catholics reacted Tuesday to statements by Diocese of Scranton Bishop Joseph F. Martino apparently discounting teachings of the national body of bishops during a political forum at a Honesdale Roman Catholic Church this weekend.

Martino arrived unannounced in the midst of a panel discussion on faith issues and the presidential campaign at St. John’s Catholic Church on Sunday. According to people who attended the event, the bishop chastised the group for holding the forum and particularly took issue with the discussion and distribution of excerpts from the U.S. Conference of Catholic Bishops’ position on voting issues. The document defines abortion and euthanasia, as well as racism, torture and genocide, as among the most important issues for Catholic voters to consider.

“No USCCB document is relevant in this diocese,” he was quoted as saying in the Wayne County Independent, a Honesdale-based newspaper. “The USCCB doesn’t speak for me.”

Thomas Shepstone, a local businessman and Catholic who spoke about his opposition to abortion rights during the event, recalled Tuesday that Martino also told the audience that he voted against the U.S. Bishops’ statement and described it as a consensus document “written to mean all things to all people.”

According to participants, Martino expressed dismay that the panelists did not discuss the pastoral letter he directed all priests in the Diocese to read in place of their homilies on Oct. 4 and 5. In that letter, he called on Catholic voters to consider abortion above all other issues, except those he defined as having equal moral weight, like euthanasia and embryonic stem-cell research.

“The only relevant document ... is my letter,” he said at the forum, according to the Independent. “There is one teacher in this diocese, and these points are not debatable.”

According to the Independent, the bishop also said he no longer supports the Democratic Party.

A diocesan spokesman on Tuesday confirmed the bishop’s comments as reported in the Independent.

The spokesman, William Genello, also released a statement that noted the bishop attended the event because he “was concerned because of the confusion and public misrepresentations about Catholic teaching on the life issues.

“Certain groups and individuals have used their own erroneous interpretations of Church documents, particularly the U.S. Bishops’ statement on Faithful Citizenship, to justify their political positions and to contradict the Church’s actual teaching on the centrality of abortion, euthanasia and embryonic stem cell research,” the statement said.

“When Bishop Martino heard how some of these issues were being presented at the forum, he determined that he must address the forum to fulfill his obligation as the authentic teacher of the Catholic faith in his diocese.”

Professor Douglas Kmiec, a Catholic constitutional legal scholar who advises Democratic presidential contender Sen. Barack Obama, said Tuesday he respects Martino’s passionate speech about life and doubts the bishop intended to separate himself from the larger church.

“That said, we have to be faithful to the church as the church universal exists,” he said. “And the church universal exists in places other than Scranton. It’s everywhere. Its teaching is timeless.”

Participants at the event described a spirited exchange of ideas that was either interrupted or invigorated by the bishop’s arrival.

Gene Tagle, the moderator of the event, said the bishop “torpedoed” the forum, even though he had been told about the event as early as May 27 this year.

“If the bishop disapproved, it seems all he had to do was have his secretary pick up the phone, call our parish pastor and tell him not to go ahead with the forum,” he said. “Instead he came in at the midpoint of the meeting and totally surprised everyone.”

Tagle said the bishop criticized the resident pastor, Rev. Martin Boylan, for holding the forum and “seemed to justify his presence there by stating that he owned the building.”

He also described the bishop’s tone as “angry and admonishing” and said his words created a surprising level of emotion in the audience.

“When he left it was chaotic,” Tagle said. “He incited his supporters to wild applause and shouting. And some individuals were castigating others for supporting pro-choice candidates. It was pretty wild there for a while.”

The bishop left shortly after his remarks and many audience members — some put the number at two-thirds of the group, others say a quarter — left after him.

Shepstone, the panelist, was one who left.

“I left because it was singularly inappropriate to continue the meeting after the bishop had spoken,” he said Tuesday, explaining that the bishop had made it clear he wanted the meeting to stop.

“He spoke eloquently and he spoke forcefully and there was nothing else to be said.”

Wendell Kay, another panelist and a Wayne County commissioner, stayed for the scheduled question-and-answer session after the bishop left, despite being startled by the interruption.

“He’s my bishop and I accept what he says, but I was a little bit surprised at the turn of events,” he said, “and thought if there had been an objection from the diocese in advance we probably would not have held the forum.”

To contact the author: llegere@timesshamrock.com

Jobs and Taxes: We Can’t Have Both

Brian Sullivan

Higher taxes and job creation are the oil and water of economics. They simply don’t go together.

It’s a basic concept. The more a business gives to the government, the less free cash it has to use on new salaries. It’s why John McCain wants to cut the corporate tax rate to 25% from 35%. That extra 10% can go toward hiring a lot of workers and keeping jobs in the U.S. Remember America has the 4th highest corporate tax rate in the world. It’s no wonder jobs continue to move overseas.

This is not a partisan argument. Many Democratic leaders feel the same way and understand the damage higher taxes will mean for job creation. Consider this excerpt from today’s Wall Street Journal:

The Obama plan is an incentive to hire fewer workers. Barack Obama declared last week that his economic plan begins with “one word that’s on everyone’s mind and it’s spelled J-O-B-S.”. This raises the stubborn question that Senator Obama has never satisfactorily answered: How do you create more jobs when you want to levy higher tax rates on the small business owners who are the nation’s primary employers? Loyal Democrats have howled over the claim that small businesses will get soaked by the Obama tax plan, so we thought we would seek an authority they might trust on the issue: Democratic Senate Finance Chairman Max Baucus of Montana.

Here is what Mr. Baucus wrote in a joint press release with Iowa Republican Charles Grassley on August 20, 2001, when they supported the income tax rate cuts that Mr. Obama wants to repeal: “. . . when the new tax relief law is fully phased in, entrepreneurs and small businesses — owners of sole proprietorships, partnerships, S corporations, and farms — will receive 80 percent of the tax relief associated with reducing the top income tax rates of 36 percent to 33 percent and 39.6 percent to 35 percent.”. Then they continued with a useful economics tutorial: “Experts agree that lower taxes increase a business’ cash flow, which helps with liquidity constraints during an economic slowdown and could increase the demand for investment and labor.”. Twelve Senate Democrats voted for those same tax cuts. And just to be clear on one point: An increase in “the demand for investment and labor” translates into an increase in J-O-B-S.

So if lowering these tax rates creates jobs, then it stands to reason that raising these taxes will mean fewer jobs. From 2003 to 2007 with the lower tax rates in place, the U.S. economy added eight million jobs, or about 125,000 per month. The Small Business Administration says small business wrote the paychecks for up to 80% of new jobs in 2005, for example. Mr. Obama’s tax increase would hit the bottom line of small businesses in three direct ways.

Since Senator Baucus is on the record agreeing lower taxes are good for jobs, why has he and the other Democratic leaders who voted for this suddenly clammed up? They have either done the world’s greatest flip-flop on the impact of tax hikes on jobs, or have spoken up privately and been ignored by the Obama camp.

So that’s small business. But what about the big boys? If you believe the hype that big business doesn’t pay taxes, consider this: last year ExxonMobil paid more in taxes than the bottom 50% of the entire population of American taxpayers. So if you are one that has come to believe you should hate “big oil,” consider what your tax burden would be if that $30+ billion (which is on its way to $40 billion for 2008) in tax revenue paid by Exxon suddenly dried up.

So since the Congressional record proves that many Democrats understand the relationship between jobs and taxes as well as any supply-side Republican, their silence surrounding the proposed tax increases speaks volumes about where their true interests lie.

The Dangers of a Diminished America

Aaron Friedberg

In the 1930s, isolationism and protectionism spurred the rise of fascism.

With the global financial system in serious trouble, is America's geostrategic dominance likely to diminish? If so, what would that mean?

One immediate implication of the crisis that began on Wall Street and spread across the world is that the primary instruments of U.S. foreign policy will be crimped. The next president will face an entirely new and adverse fiscal position. Estimates of this year's federal budget deficit already show that it has jumped $237 billion from last year, to $407 billion. With families and businesses hurting, there will be calls for various and expensive domestic relief programs.

In the face of this onrushing river of red ink, both Barack Obama and John McCain have been reluctant to lay out what portions of their programmatic wish list they might defer or delete. Only Joe Biden has suggested a possible reduction -- foreign aid. This would be one of the few popular cuts, but in budgetary terms it is a mere grain of sand. Still, Sen. Biden's comment hints at where we may be headed: toward a major reduction in America's world role, and perhaps even a new era of financially-induced isolationism.

Pressures to cut defense spending, and to dodge the cost of waging two wars, already intense before this crisis, are likely to mount. Despite the success of the surge, the war in Iraq remains deeply unpopular. Precipitous withdrawal—attractive to a sizable swath of the electorate before the financial implosion—might well become even more popular with annual war bills running in the hundreds of billions.

Protectionist sentiments are sure to grow stronger as jobs disappear in the coming slowdown. Even before our current woes, calls to save jobs by restricting imports had begun to gather support among many Democrats and some Republicans. In a prolonged recession, gale-force winds of protectionism will blow.

Then there are the dolorous consequences of a potential collapse of the world's financial architecture. For decades now, Americans have enjoyed the advantages of being at the center of that system. The worldwide use of the dollar, and the stability of our economy, among other things, made it easier for us to run huge budget deficits, as we counted on foreigners to pick up the tab by buying dollar-denominated assets as a safe haven. Will this be possible in the future?

Meanwhile, traditional foreign-policy challenges are multiplying. The threat from al Qaeda and Islamic terrorist affiliates has not been extinguished. Iran and North Korea are continuing on their bellicose paths, while Pakistan and Afghanistan are progressing smartly down the road to chaos. Russia's new militancy and China's seemingly relentless rise also give cause for concern.

If America now tries to pull back from the world stage, it will leave a dangerous power vacuum. The stabilizing effects of our presence in Asia, our continuing commitment to Europe, and our position as defender of last resort for Middle East energy sources and supply lines could all be placed at risk.

In such a scenario there are shades of the 1930s, when global trade and finance ground nearly to a halt, the peaceful democracies failed to cooperate, and aggressive powers led by the remorseless fanatics who rose up on the crest of economic disaster exploited their divisions. Today we run the risk that rogue states may choose to become ever more reckless with their nuclear toys, just at our moment of maximum vulnerability.

The aftershocks of the financial crisis will almost certainly rock our principal strategic competitors even harder than they will rock us. The dramatic free fall of the Russian stock market has demonstrated the fragility of a state whose economic performance hinges on high oil prices, now driven down by the global slowdown. China is perhaps even more fragile, its economic growth depending heavily on foreign investment and access to foreign markets. Both will now be constricted, inflicting economic pain and perhaps even sparking unrest in a country where political legitimacy rests on progress in the long march to prosperity.

None of this is good news if the authoritarian leaders of these countries seek to divert attention from internal travails with external adventures.

As for our democratic friends, the present crisis comes when many European nations are struggling to deal with decades of anemic growth, sclerotic governance and an impending demographic crisis. Despite its past dynamism, Japan faces similar challenges. India is still in the early stages of its emergence as a world economic and geopolitical power.

What does this all mean? There is no substitute for America on the world stage. The choice we have before us is between the potentially disastrous effects of disengagement and the stiff price tag of continued American leadership.

Are we up for the task? The American economy has historically demonstrated remarkable resilience. Our market-oriented ideology, entrepreneurial culture, flexible institutions and favorable demographic profile should serve us well in whatever trials lie ahead.

The American people, too, have shown reserves of resolve when properly led. But experience after the Cold War era -- poorly articulated and executed policies, divisive domestic debates and rising anti-Americanism in at least some parts of the world -- appear to have left these reserves diminished.

A recent survey by the Chicago Council on World Affairs found that 36% of respondents agreed that the U.S. should "stay out of world affairs," the highest number recorded since this question was first asked in 1947. The economic crisis could be the straw that breaks the camel's back.

In the past, the American political process has managed to yield up remarkable leaders when they were most needed. As voters go to the polls in the shadow of an impending world crisis, they need to ask themselves which candidate—based upon intellect, courage, past experience and personal testing—is most likely to rise to an occasion as grave as the one we now face.

Mr. Friedberg is a professor of politics and international relations at Princeton University's Woodrow Wilson School. Mr. Schoenfeld, senior editor of Commentary, is a visiting scholar at the Witherspoon Institute in Princeton, N.J.

‘Bride’ and ‘Groom’ Back in California

Robin Rohr

‘Party A’ and ‘Party B’ Could Tip Scales in Marriage Fight

Do young couples about to get married want to be known as “Party A” and “Party B?” Or would they rather check off “bride” and “groom” on their marriage license application?

The very fact that the question is being asked may drive Californians to the polls Nov. 4 to reaffirm the decision they made eight years ago — to legally define marriage as the union between one man and one woman.

Though California voters in 2000 had defined marriage as exclusively between a man and a woman, in May, the state Supreme Court decided to redefine marriage themselves. And when same-sex “marriage” became legal in California, the state amended marriage license applications to reflect a new reality.

When Rachel Bird and Gideon Codding went to get their marriage license from Placer County, they noticed the form said “Party A” and “Party B.” Nowhere did it say “bride” and “groom.”

“We did not cross out ‘Party A’ and ‘Party B,’” said Rachel Bird-Codding. “We just wrote in next to them the words ‘Bride’ and ‘Groom.’”

Bird’s father, Pastor Doug Bird of Roseville’s Abundant Life Fellowship, officiated at the wedding Aug. 16, signed the form and sent it in, and the couple took a honeymoon trip. They thought they were legally married.

But when they got home in early September, the couple received a phone call from Placer County: The state had rejected the application because of the alteration the couple had made on it. Placer County returned the license to Pastor Bird, as the officiator of the marriage. The couple had 10 days to complete a duplicate form.

They brought the matter to the attention of the press, and Californians have been sympathetic to their plight.

Their fight had another effect in the state: Ever since the marriage license issue has been reported in the press, poll numbers for support of Proposition 8 have risen.

Proposition 8 is a ballot initiative that would place into the California Constitution the same language voters approved in 2000 (“only marriage between a man and a woman is valid or recognized in California”). But it was not doing well in public opinion polls. A CBS 5 (San Francisco) poll released in mid-September showed that 38% of likely voters backed Proposition 8, while 55% opposed it.

The couple sued the state on Oct. 6. They are being represented by Brad Dacus of the Pacific Justice Institute. Since the lawsuit has been in the press, Proposition 8 support percentages have risen to 47%. Those opposed have fallen to 42%.

Now that the state reversed its policy, the Placer County Clerk-Recorder notified the Coddings that their application will be resent to the state.

Bird-Codding is delighted.

“These are legal documents recorded for generations to come,” she continued. “Our descendants may look up those records some day to know who we are. We are not Party A and Party B; we are a bride and groom.”

“Within two hours of filing the lawsuit, the State of California announced they would be changing the marriage license form, although they deny this was their reason,” Dacus said. “This is an attempt to make this a non-issue for Prop 8. However, the state has declared the new form will not be adopted until after the election. This is suspect, as this agency has done everything to further homosexual policies. We are very cautious. We will continue with our litigation to get a legally binding resolution affirming protection for every future bride and groom in the State of California.”

California’s Office of Vital Records’ policy at the time of the Bird-Codding wedding was that any alteration of the license application was grounds for rejection, and the application would be returned to the originating county.

Suanne Buggy, from the Office of Vital Records, said the office “heard from a lot of Californians that they wanted to identify as bride and groom, and we have been working on options that would be consistent with the Supreme Court ruling.”

The new forms will offer check boxes for bride and groom, and couples can check whichever combination applies — including bride and bride or groom and groom. The terms “Party A” and “Party B” will be removed. The new forms will be in use beginning Nov. 17.

“The current policy regarding marriage licenses, until the new form is in use, advises couples wishing to identify as bride and groom to speak with their local county clerk, and the issue will be handled on a case-by-case basis,” Buggy continued.

Until the matter is resolved, Bird-Codding is unable to legally use her husband’s last name, apply for spousal health benefits, or enjoy marriage’s property benefits.

Tradition Overturned

Pastor Bird expressed his own frustration with the ordeal. “When we got the letter, we felt violated as people with traditional values,” he said. “Bride and groom have been used for thousands of years and are mentioned throughout Scripture, in both the Old and New Testaments. To have them taken away in order to give rights to a minority leaves this tradition behind.”

Jennifer Roback Morse, founder and president of the pro-marriage Ruth Institute, said, “The Supreme Court has changed the definition of marriage for everyone. This case shows that marriage can be either a gender-based institution or a gender-neutral institution.

“Sacramento told this nice couple that they can not have a gendered marriage: They are Party A and Party B, whether they like it or not,” said Morse, a Register columnist. “We need to be prepared for the gay lobby to spin our opposition as ‘see how it feels’. But this is not correct. There is no neutral ground. It is either a gender institution or it is not, and it will be for everybody. Pretending that it treats everyone the same is fundamentally dishonest and should not fool anyone.”

Judy Barrett, chairwoman of Respect Life for the Diocese of Santa Rosa, stated, “Passing Proposition 8 is of such crucial importance. I think many people [including a lot of our fellow Catholics] don’t have a clue as to the far-reaching consequences if it fails — beginning with what kids would be taught about marriage in public schools. Proposition 8 will restore the definition of marriage for the good of society and especially for children. Proposition 8 will overturn the court’s decision, reestablish the will of the people, and return to parents the right to educate their children concerning marriage according to their own values and religious beliefs.”

Said Dacus, “Those who oppose Proposition 8 say there is no way homosexual ‘marriage’ impacts those who wish to be man and wife. Well, we have a smoking gun to the contrary.”

The author is based in Willits, California.

Ominous Growth

David Warren

It does not matter how you voted yesterday, or how, if you are an American with the prospect still ahead, you will vote Nov. 4th. You have voted, or you will soon vote, for a lot more government. That you will be impoverished by this decision, should go without saying.

Since we cannot alter the past, I take the current trend as inevitable. But even the inevitable comes in different flavours, and what most distresses me about the various "bailout" or "rescue" packages now being negotiated among rulers of the leading economic powers is their very "comprehensiveness."

We began with a relatively simple proposal for the U.S. government to acquire as much as $700 billion-worth of bad debt, to clear the banks' liquidity problem. This after the same government had, over a couple of decades, pushed them to extend foolish mortgage and other consumer lending, for the sake of the government's own social engineering priorities (e.g. more home ownership for the poor and minorities), while on the other hand not pushing them to top up their reserve requirements against the inevitable disaster.

While the acquisition of bad debt was itself a bad idea -- allowing banks to dump their most toxic assets onto the taxpayer is an invitation to recklessness, not a discouragement; it was moreover a reward to the worst-managed banks; and an encouragement to the best to feign illness -- it had the advantage that the government (and hence the taxpayer) might actually see some of the money again. After all, a certain proportion of bad debtors do eventually pay up.

Worse quickly followed, as the imagination of the U.S. Congress became fully engaged in negotiating the terms of the "rescue." All kinds of irrelevant stipulations were added, but more to the point, the entire international banking system was put in a position to go on strike by a display of government weakness. By a quick freeze of interbank lending, they had the politicians lining up to offer that "more comprehensive package." The governments of the U.S., Britain, France, Germany, Italy, Spain are now taking equity positions in their respective major banks, to "shore up the system." Government deposit insurance schemes are being vastly extended, "temporarily" -- which means permanently, in our jaundiced experience. And other governments -- including the Canadian, watching over the world's most stable and cautiously regulated banking system -- are now under pressure to leap in.

The American theory is that governments will buy preferred, non-voting shares, so to minimize bureaucratic intervention in business decisions, and leave the field clear for private investors to join in. The European theory is murkier; governments there have a long history of shamelessly nationalizing banks. But in either case the practice is different from the theory, for from the moment a government has assumed a huge stake, a government has also assumed a huge share of extra-regulatory power, together with the irresistible temptation to mix regulatory with non-regulatory measures to steer banks away from business decisions and into political benders.

A gorilla is a gorilla even when he honestly claims to be vegetarian. He may eat only leaves, bark, pith, roots, vines, and wild celery, but he eats a lot.

There are persons of an optimistic disposition -- President George W. Bush appears to be one -- who think, ah well, with the U.S. national debt and deficit where they already are, and the amount of future taxpayer money just now being flushed into the banking system, there'll be no money left for a Democrat president and Congress to indulge extravagant and ultimately ruinous schemes in medicare, welfare, daycare, schoolcare, climate care, and so on. Do not underestimate them.

Even if McCain wins, we can expect another "stagflation party," of the kind we attended in the 1970s, though quite possibly on a 1930s scale. For in the time-hallowed tradition of party competition, the Republicans may now be offering even bigger giveaways than the Democrats in the hope of buying off swing voters.

And while there is no unanswerable logical reason why the Canadian government should follow the rest of the West down the next plughole of the Nanny State, we heard the sucking sound throughout our short northern campaign season. The era of Thatcher and Reagan is over, and the era of Herbert Hoover has resumed.

Of course I have only touched on money, and the freedom to retain your earnings and spend or invest as you think wise, in your own interest and that of your family, is only one aspect of freedom. It is a key aspect, however, for money talks, and a government that has appropriated most of it will have a lot to say about the rest of your habits.

Through the last generation the consistent trend has been towards "liberal fascism": constantly escalating legal and quasi-legal pressure on people who do not agree with the direction society is taking. Look for more.

Everyone Gets a Trophy

John Tamny

“The ultimate result of shielding men from the effects of folly is to fill the world with fools."—Herbert Spencer

Any conversation with parents of school-aged children often turns to activities in the classroom and on the field. In U.S. schools today there’s a concerted effort afoot to make everyone as equal as possible. While various affirmative action programs have been around for decades to compensate for unequal abilities, in school seemingly no one loses anymore.

Compassionate school administrators have apparently prevailed. Many children are especially sensitive to perceived slights and failures, and rather than force kids to compete, today’s schools often make sure that everyone gets a trophy.

The same unfortunate mindset meant to shield children from reality has polluted U.S. economic policy. Rather than expose Americans to the very failures that teach us how to succeed, politicians are devising more and more ways meant to protect us from failure. And, they pass laws that keep others from succeeding so those who are not rich don’t feel bad.

Taxation. Start with the presidential candidates, John McCain and Barack Obama. When McCain was asked in a November 2005 Wall Street Journal interview about his opposition to the 2003 income and capital gains cuts, he didn’t oppose them on economic grounds. Instead, he felt they were “too tilted to the wealthy and I still do.” Asked to clarify his position, McCain explained, “We have a wealth gap in this country, and that worries me.”

In April of this year, ABC’s Charles Gibson asked Barack Obama about capital gains taxes, specifically why he would seek to raise them at all “given the fact that 100 million people in this country own stock and would be affected?” Obama’s response paralleled McCain’s in that he would like higher taxes on capital formation “for purposes of fairness.”

When it comes to taxes in general, Barack Obama has made it plain that he would raise the tax rate on the highest earners, while John McCain comforts his supporters with a promise that he would penalize the earnings of the rich at a lower rate. Both candidates miss the disincentivizing nature of taxation.

Realistically, taxes should be seen as a price or a penalty against effort. This is important because no matter how many times politicians tell us they’ll stimulate the economy through income redistribution, the fact remains that economic growth is always and everywhere a function of productive work effort. Or, as Andrew Mellon (Treasury secretary under presidents Harding, Coolidge and Hoover) noted in Taxation: The People’s Business:

“when a man’s initiative is crippled by legislation or by a tax system which denies him the right to receive a reasonable share of his earnings, then he will no longer exert himself and the country will be deprived of the energy on which its continued greatness depends.”

Both Obama and McCain miss Mellon’s point because in quibbling over the correct rate for the most productive taxpayers, they’re advocating that success should be penalized at a higher rate than lack of success. That the vital, productive few create enormous opportunities for every American seems to concern neither.

Obama also embraces the notion of an earned income tax credit (first floated by free-market hero Milton Friedman) whereby those whose economic production is low will not only escape tax, but be rewarded with a rebate from the government funded on the backs of the more productive among us.

The message from our federal minders couldn’t be clearer: if you succeed your reward will be higher taxation; and if you fail, government will embrace your failure through subsidies that reward a lack of productivity. In short, the broad economic message of both political parties retards economic growth by penalizing the productive in order to coddle those who aren’t. Everyone gets a trophy whether it is deserved or not.

The pursuit of happiness. Some say that financial wealth is but one measure of success, and that it is misleading to measure success in terms of one’s bank statement. At first blush this might make some sense, but only briefly.

To the extent that many Americans choose the arts, academia or nonprofits as their path to happiness, it must be understood why they’re able to follow their passions. Indeed, behind nearly every artist is a wealthy patron whose success has enabled the painter to paint. One need only visit the various museums on New York City’s Fifth Avenue to see that commercial success (see New York’s Frick, or the board of directors for the Museum of Modern Art) is what makes the pursuit of a career in art possible.

While university teaching is often hostile to wealth creation, it’s safe to say that a great deal less would exist (see the names on the buildings at Harvard, Stanford and University of Chicago to name a few) absent the eleemosynary nature of the rich. When Joseph Schumpeter wrote in Capitalism, Socialism and Democracy that capitalism’s “very success undermines the social institutions which protect it,” he doubtless had academia in mind.

The economy’s success also governs the work of charitable organizations. In 2007, charitable donations from Americans hit a record of $300 billion. But a recent newspaper headline noted that “Nonprofits Brace for Slowdown in Giving”. Sure enough, nonprofits frequently only exist thanks to the generosity of the rich. And with the rich in many cases hurting in this uncertain economic climate, the ability of charitable organizations to continue their missions will be severely compromised.

So when it is said that the rich must give back, or that they must be taxed at a higher rate for the “greater good”, those not rich should remind themselves why they get a “trophy” despite pursuing work that has little to do with wealth creation. Rather than greedy misanthropes, the rich are society’s benefactors. Those who countenance their penalization will also pay the price.

Bailouts. As is well known now, weak-dollar mischief this decade (meant to aid ailing manufacturers) has distorted investment in favor of the “real” while fostering an investment slowdown. The bill for bad policy from Washington has in the past year brought such harm to financial institutions that many believe we’re in the midst of the worst financial crisis since the Great Depression.

Sadly, much as in the ’30s, rather than allow the prices of houses, banks and the underlying securities on bank balance sheets to reach market-clearing levels, the federal government has inserted various new rules along with taxpayer money to soften the pain. Even if we ignore the fallacious assumption that money taken from the private economy can be profitably put back in, we should at least question this “everyone gets a trophy” philosophy that says no one can fail.

Homeowners are already subsidized by preferential capital gains treatment, tax-deductible interest payments and government-funded mortgage securitization. Treasury Secretary Paulson has now asked lenders to “voluntarily” rewrite mortgage contracts, while instituting an 800 helpline to the federal government for those fearful of defaulting on payments. During the last presidential debate, McCain, presumably seeking the votes of the irresponsible, said if elected that he would "order the secretary of the Treasury to immediately buy up the bad home-loan mortgages in America and renegotiate at the new value of those homes." The nationalization of Fannie Mae and Freddie Mac was, among other reasons, done so that the federal government could more aggressively step into the housing market with taxpayer dollars.

So while 95 percent of homeowners are still making their house payments on time, the government is subsidizing many who borrowed money that they won’t be able to pay back. The tax dollars of Americans who waited out this decade’s property boom in hopes of buying amid any downswing are spent to prop up the value of homes purchased by the irresponsible.

Short-selling. Short-selling of shares is a risky, but essential, market process whereby negative sentiment is introduced into the stock prices of publicly traded companies. But with various financial firms apparently unhappy with investor opinions of late, the SEC recently banned short sales of 799 firms supposedly harmed by those bears.

Investors had grown accustomed to parking their cash with money-market funds, but after holdings of Lehman Brothers debt led to a “breaking of the buck” in the Reserve Fund, the Treasury announced a $50 billion dollar bailout of money-market firms. The money for this will come from Treasury’s exchange-stabilization fund. Somewhat ironically, the money that Treasury could have used throughout this decade to resist the dollar’s decline will be used to stabilize the very funds harmed by Treasury’s weak-dollar policies.

And with financial institutions still in trouble thanks to bad investments on their books, Treasury Secretary Paulson pushed a $700b bailout plan through Congress meant to buy non-performing assets from struggling financial institutions. Implicit here is the assumption that the federal government has a hotline to the future that private investors lack. Instead of reducing corporate taxes and other penalties on business success, the government once again coddles business mistakes rather than rewarding achievement.

Absent a policy climate that rewards economic failure and irresponsibility, much of what vexes us now would not, or at the very least would be far more contained. But thanks to a political class that believes everyone deserves a trophy, we’ll never know what private economic actors might have done minus the presence of a money-wielding government. Whatever the ultimate result, the bailouts retard the process whereby devalued assets get into the hands of intrepid investors who possess huge incentives to make that which is hurting thrive.

Worse, the bailout culture will cruelly blind most Americans to the lessons learned through failure that very necessarily tell them how to achieve. Indeed, without failure, there cannot be success. So while everyone will perhaps get a trophy from the “benevolent” hand of Washington, it will be at the expense of long-term health and wealth for all.

John Tamny is editor of RealClearMarkets, a senior economist with H.C. Wainwright Economics, and a senior economic advisor to Toreador Research and Trading. He can be reached at jtamny@realclearmarkets.com

Creditors End U.S. Spending Spree

Patrice Hill

The crash unfolding on Wall Street is not just the fall of once-mighty banks and corporations that took on too much debt, but the collapse of an American economy and lifestyle that for decades has been purchased with credit cards.

The nation's creditors - many of them foreign countries such as China and Brazil with ample economic needs of their own - reached a point this summer at which they were no longer willing to extend new loans in light of burgeoning default rates.

One of every 10 American homeowners has stopped making mortgage payments, and high-flying investment banks such as Lehman Brothers and Bear Stearns that peddled American debt around the world found themselves in bankruptcy and default.

The boycott by foreign lenders is forcing U.S. businesses and consumers to live more within their means, while political leaders frantically try to find ways to keep the financial sector alive without the free flow of an estimated $3 billion a day from abroad, analysts say. The spigot of foreign money in the heyday of the credit boom earlier this decade enabled everyone from Wall Street's best and brightest to college students with no income to easily obtain cheap loans.

"The party is over," said Peter Schiff, president of Euro Pacific Capital. "The current financial storm represents the death throes of the old global economic order, and perhaps the birth pains of a new one. The sun is setting on the borrow-and-spend culture that has all but defined us for a generation. ... The sooner we come to grips with this, the better."

The nation's increasing reliance on debt to grow and prosper is manifested in the current account deficits that have increased dramatically this decade. Those deficits show how much the U.S. collectively spends more than it produces and how much money is owed to the rest of the world. The federal deficit hit an unprecedented $812 billion in 2006, at the peak of the housing bubble, before declining to $738 billion last year as the housing market crumbled.

The huge external debt was financed for years with a flow of credit from abroad, but that suddenly shut down in July, when foreigners pulled $25.6 billion out of U.S. stock and bond markets, according to the Treasury's most recent figures on international capital flows. About the same time, Fannie Mae and Freddie Mac, former favorites of Asian investors in particular, started having trouble raising funds. The government later took over the mortgage giants as they became insolvent.

"We can no longer entice foreigners into lending us their available savings," said Mr. Schiff. "Given that we are already too loaded up on existing debt that we cannot realistically repay, who can blame them for not wanting to lend us more?"

With the abrupt shutdown of the credit spigot this summer, the housing and credit markets faced an outright crisis and easy loans all but disappeared. Consumer spending reached its biggest decline in years as banks - having difficulty raising funds - severely limited access to mortgages, home-equity loans and other kinds of credit.

"The day of reckoning appears to have arrived," said Stephen Stanley, chief economist at RBS Greenwich Capital, noting that scarcer credit is forcing Americans to save more of their income and spend less. One result is that the trade deficit is now dropping at a 25 percent annual rate, he said. "As Americans retrench, the structural imbalances that the world bludgeoned us about will shrink in size all too quickly."

Political and financial leaders always knew that the inevitable end of the great debt binge would be painful, forcing Americans to dramatically cut back spending and bringing on a long, deep recession that Mr. Stanley and other economists are predicting.

"We have warned for years to be careful what you wish for on this count," he said.

Laura Nishikawa, an analyst with Innovest, a credit-research group that is predicting a major rise in credit-card defaults, said consumers took on increased debt in recent years to finance middle-income and affluent lifestyles even as their wages were stagnating and savings were dwindling.

"The mortgage problem is, in fact, a symptom of a deeper crisis of deteriorated consumer financial health," she said.

Now, big banks like Bank of America, Citibank, JPMorgan Chase, Capital One and American Express - themselves hard-pressed to get loans in bank-funding markets - are reducing consumers' credit-card limits and home-equity lines and limiting credit-card-balance transfers, putting already pinched consumers into serious binds, she said.

"When they reduce credit availability, consumers won't have the ability to roll their debt over, and the issuers will essentially force customers into default," she said.

Consumers sank deeper into debt during the housing boom, when easy initial mortgage terms allowed them to buy bigger, more expensive homes and rapid appreciation opened the door to cash-out refinancings and home-equity loans that financed other spending.

"Millions of households have been operating just like hedge funds for a long time," said Brent Wilson, analyst with Reochronicle.com, a Web site tracking foreclosed homes, describing how ever-increasing debt financed the doubling or tripling of house prices in many areas that have now deflated.

"They borrowed ever-increasing amounts of money to finance an asset whose price depends on borrowing ever-increasing amounts of money. The financial profile of hedge funds and millions of households is almost identical," he said. Now, "the financial sector is on its knees, since they financed the speculation."

But the problem was not confined to real estate, he said. "The fact is that the whole economy to some extent has been operating like a hedge fund for a long time - households, corporations, state governments, Wall Street, cities" - all leveraging assets like real estate to finance a spending binge, he said.

"It looks like a long period of consolidation has set in," he said. "Many weaker companies will go bankrupt, many more banks will go under - with or without help from the federal government, stocks will probably be weak for some time."

Many analysts find it disconcerting and ironic that the solutions offered by the Treasury, Federal Reserve and Congress rely on massive issues of debt from the Treasury to try to save cash-strapped banks, homeowners and corporations.

The Treasury is about the only American entity that still has easy access to cheap loans as investors seeking safe havens pile money into Treasury bills paying close to 0 percent interest. The Treasury, already the world's biggest debtor, has been adding to its red ink at a prodigious rate to finance rescue programs that could drive the U.S. budget deficit to an unprecedented $1 trillion next year.

"The intention of all these daily federal interventions is to keep the credit spigots open, so Americans can go even deeper into debt to buy more stuff they can't actually afford," Mr. Schiff said.

"The sad reality is that we borrowed and spent our way into this crisis, and we are not going to borrow and spend our way out of it," he said. "Savings can't be magically concocted into existence by a printing press, but can only be created by consumers who spend less than they earn."

Good Policies Can Reverse the Downturn

Lee Ohanian

President Bush argued that the passage of the Treasury rescue plan was necessary to prevent the U.S. from entering a severe downturn. Yesterday, the Federal Reserve announced it will begin buying commercial paper to, in the words of Fed Chairman Ben Bernanke, help "financial firms cope with reduced access to their usual sources of funding."

Both of these actions were designed to restore confidence in our financial markets. Unfortunately, they have created considerable fear about the underlying strength of the U.S. economy. This panic has roiled stock markets and led to comparisons between today's crisis and the Great Depression of the 1930s.

The Treasury plan and the Fed's emergency measures are certainly useful. However, their main contribution is not preventing a Depression-like scenario from evolving out of the current financial crisis. The real economy is a great deal stronger than many believe.

Despite the September employment report, there are no signs that the economy is on the verge of a depression. Real GDP rose at an annual rate of 2.7% over the last five quarters, which is on trend, once a correction is made for the decline in the growth rate of the working-age population. Productivity growth remains rapid. Consumer installment borrowing, which represents most consumer nonmortgage borrowing, is up 5% year over year, and the interest rates on these loans are equal to, or below, the levels that prevailed over the last five years. Commercial and industrial loans are up 9% year over year. And to those with good credit histories, conforming mortgages are available at 30-year fixed rates of around 6%. That represents an inflation-adjusted mortgage rate that is low by historical standards. So the current financial crisis is not as deep or as broad as some have feared.

Moreover, financial panics and crises are not as depressing as many believe. Current discussions point to the banking crises of the Great Depression as the best evidence that the financial crisis would devastate the U.S. economy. This is based on the very common misperception that the banking crises of the 1930s helped turn a garden variety recession into the Great Depression.

Banking panics did not create the Great Depression, nor did the elimination of panics via the introduction of deposit insurance generate economic recovery. The first banking crisis of any national significance didn't occur until the fall of 1931. Before this, there were regional banking crises that had no measurable impact on capital markets, as the spreads between Treasurys and risky obligations changed very little. However, the Great Depression was already "great" at this point -- industrial production and employment had fallen by more than 35%. The genesis of the Great Depression was not a banking crisis.

Given my view that the crisis is not as deep as some have feared, and that the potential impact of the crisis would be smaller than what has been advertised, should we even have adopted the Treasury plan?

Absolutely. While the economy would avoid a serious downturn in the absence of the Treasury plan, recent financial market conditions left unchecked could lead to a moderate recession. And there is a real danger that even a moderate recession, along with the current perception of an economic crisis, would lead to calls from various quarters for bad economic policies -- policies that tend to either pander to special-interest groups, benefiting relatively few at the expense of many, or raising taxes, particularly on the nation's most productive citizens, many of whom create jobs through their own enterprises.

There are many historical precedents of bad policies following crises. The worst case was after the stock-market crash in October 1929, which produced a truly perfect storm of bad policies. Tax rates rose, tariffs rose (reflecting special interest groups attempting to insulate domestic producers from foreign competition), and both Presidents Herbert Hoover and Franklin Roosevelt strongly promoted industry-labor cartels that were designed to stifle domestic competition.

In the absence of these policies, the Great Depression would almost certainly have been like every other U.S. recession -- short-lived and relatively mild. Normal recovery didn't begin until the most onerous of these policies were reversed, a process that didn't begin until the end of the 1930s when antitrust activity was resumed, and during World War II when the National War Labor Board reduced union bargaining power by limiting negotiated wage increases to cost-of-living adjustments only.

Bad polices impact the two most important determinants of living standards: output per worker and the amount of time devoted to market work. We need look no further than Western Europe to see how bad policies have depressed a number of advanced market economies. Hours worked per adult in the average Western European country have declined nearly 30% since the 1960s, as tax rates on labor are up 15 to 20 percentage points.

Japan in the 1990s is an example of bad policies that depress productivity growth. Once Japan stopped subsidizing inefficient production and reformed its banking system, productivity growth resumed. Another example is Mexico. After a financial crisis in 1981, Mexico had a depression resulting from polices that depressed productivity by severely restricting competition in its banking sector and by allocating loans to preferred borrowers at artificially low rates. Chile also had a financial crisis in 1981, but in contrast to Mexico, introduced policies that fostered competition in its banking sector and streamlined bankruptcy process. These policies contributed to substantial productivity growth that has sustained Chile's growth "miracle" for the past 25 years.

I am particularly concerned about bad policies because significantly higher taxes have been proposed by Barack Obama. His plan would raise the marginal tax rate on the most productive workers more than 10 percentage points -- an increase that would bring us near Western European levels. His plan would also raise capital income taxes, taxing capital gains and dividends at 20%, compared to a 15% rate under Sen. John McCain's plan. A five percentage-point difference might strike you as small, but it is not. I have calculated that a five percentage-point difference in overall capital income taxation over the long haul is equal to a difference in the nation's capital stock of about 18%. This means a 6% difference in GDP and a 6% difference in the average wage rate. This means that real GDP and the average wage would fall, gradually but persistently declining about 6% after 25 years. That's not quite a Great Depression, but a significant step towards one.

What should be done? We should encourage the immigration of prime-age individuals. Beginning in 2007, net immigration fell to half of its level over the previous five years. Increasing immigration would increase the demand for housing and raise home prices. And note that the benefit would be immediate. Home prices -- and the value of subprime obligations -- would rise in anticipation of a higher population base. The U.S. particularly needs highly skilled workers. These workers not only would purchase homes, but would generate higher living standards for all Americans.

Will we duck a depression? We will if the principles of economic growth -- increasing the incentives to work and save, promoting competition, and fostering economic openness -- are maintained. This is the most important lesson we learned, the hard way, from the 1930s.

Playing Games

David Warren

The U.S. dollar is soaring (at least in relation to the British pound), the price of oil is plummeting, stock markets are calming in the eye of the storm, the big bad banks are going down like dominoes. At first sight, what's not to like about the failure of the U.S. House of Representatives to rubberstamp the Bush-Paulson-Pelosi-Reid financial rescue package?

Better, from a strictly Democrat point of view, Nancy Pelosi and company are squeezing every drop of partisan advantage from the process itself, by which lame-duck Republicans are trying to fix a largely Democrat-created problem that Republicans like John McCain could see coming for at least the last three years, and actually tried to do something about, over Democrat objections.

(Most readers won't know this because they are not being told by the mainstream media: but yes, McCain began pleading with the Senate Banking Committee to act on huge irregularities discovered in the accounts of Freddie Mac and Fannie Mae, back in May 2006, two years after a Bush administration initiative to improve their regulation died in Congress. McCain's efforts were ridiculed, then stifled by ranking Democrats, including the committee chairman, Chris Dodd, the leading recipient of financial contributions from lobbyists for the very banks McCain said were "gaming the system." Senator Barack Obama is incidentally the second-biggest recipient of political contributions from these sources.)

Nancy Pelosi to the U.S. House of Representatives, Monday, on the figure of $700 billion: "It is a number that is staggering, but tells us only the costs of the Bush administration's failed economic policies: policies built on budgetary recklessness, on an anything-goes mentality, with no regulation, no supervision, and no discipline in the system."

This remark was as close to the opposite of the truth as it is humanly possible to get. Even by the standards of politicians, it was shameful. That it was used by a politician who went on to pat herself and Democrat colleagues on the back for their selfless bipartisan efforts to rewrite the Bush-Paulson rescue proposal into a shopping list of Democrat attachments -- including e.g. Harry Reid's attempt to squeeze in an extension to the moratorium on oil shale drilling -- speaks to a profound unseriousness.

Ms. Pelosi's speech itself could not have been better designed to discourage Republicans in the U.S. House -- who she knew were receiving messages from their constituents 10-to-one against the rescue package -- from voting for it. One must reasonably assume she wanted the measure defeated, by those Republicans, for political advantage.

The combination of great political cleverness with moral vacuity -- cynicism, in a word -- is a plague throughout the western world. The phenomenon is hardly confined to the left-of-centre parties, and yet neither is it evenly distributed. For cynicism of that nature requires domination of the news media. Supine media, in the tank for the Democrats, make it possible in this case.

But the problem transcends left and right. We cannot solve problems, in a "bipartisan" or any other way, when the cause of the problems is concealed from us, and false explanations are substituted, whether from malice or from ignorance. We can only compound problems in this way.

The various credit crises we face are real, notwithstanding the facetiousness with which I began this column. Anyone who doubts this should look into shipping news. All over the world, ships carrying vital commodities are failing to load and sail because banks are currently too shy to extend modest, conventional credit instruments. The cumulative effect of that, and much else like that, will soon bring home the reality of failing banks even to those who keep their money in pillows.

The only thing I liked about Hank Paulson's original proposal (of three pages) was its crispness and clarity. Take $700 billion of bad debt out of the system, let the government with its greater resources carry the risk on it, and maybe, just maybe, the banking system will right itself.

It was a clean proposal to pump water out of a foundering hull, and every complication added to it (including even the ban on short-selling) reduces its effectiveness.

Moreover, if the banking system recovered, and with it the economy that depends upon it, the government would have a fairly good chance, over time, to get its money back, as debtors recovered the ability to make payments.

The question should never have been how to encumber the pumping operation. Rather, it should have been, will $700 billion be enough? For that is the fallout from the subprime crisis alone, and we have credit card, auto purchase, and several other credit crises stacked up behind it.

And if it is not enough, what would be better? To let nature take its course, like a hurricane, and then rebuild from the ground up? Or try to rebuild in the face of the hurricane?

Ivy League America assumes the latter, Main Street America the former.