Obama's message to the middle east

In a press conference focused mainly on the stimulus bill and the economy, Obama seized on a terse (and slighly bizarre) question from Helen Thomas to send a strong signal to Iran, the middle east, Russia and the world at large that the U.S. will take a fundamentally different approach to its relations with other nations.

Thomas asked, "do you know of any country in the Middle East that has nuclear weapons?" Obama's response:

With respect to nuclear weapons, you know, I don't want to speculate. What I know is this: that if we see a nuclear arms race in a region as volatile as the Middle East, everybody will be in danger.

And one of my goals is to prevent nuclear proliferation generally. I think that it's important for the United States, in concert with Russia, to lead the way on this.

And, you know, I've mentioned this in conversations with the Russian president, Mr. Medvedev, to let him know that it is important for us to restart the -- the conversations about how we can start reducing our nuclear arsenals in an effective way so that...... so that we then have the standing to go to other countries and start stitching back together the nonproliferation treaties that, frankly, have been weakened over the last several years.

Obama seems to be signaling a few moves on the chessboard here. First, that he might expect to get more cooperation from the Russians in pressuring Iran to halt nuclear weapons development if we first work with the Russians toward reducing our own arsenals. That's a good-faith move that points in two directions: toward Russia, by foregrounding work on a matter of bilateral interest that's less fraught than issues of NATO expansion or missile defense (though it comes near the latter and might encompass it) -- and toward Iran, for which a nuclear reduction move by the U.S. and Russia might might provide face-saving cover for a curb on nuclear enrichment.

This unprompted proposal picked up on the conciliatory undercurrent in Obama's response to a prior question, whether there were any signs that Iran was interested in dialogue. Obama responded pretty much as he had in the campaign -- with an obligatory litany of Iran's "unhelpful" actions, a vow to "take an approach with Iran that employs all of the resources at the United States' disposal, and that includes diplomacy," and an affirmation of "the possibility at least of a relationship of mutual respect and progress."

But coming from a sitting U.S. president, the tone and context in which Obama placed the nuclear threat was a real departure. In two references to Iran's nuclear proliferation, Obama emphasized not any affront to the U.S. but the destabilizing effect on the region. He also implicitly suggested mutual responsibility for the "mistrust" between the U.S. and Iran. My emphasis below :

I said during the campaign that Iran is a country that has extraordinary people, extraordinary history and traditions, but that its actions over many years now have been unhelpful when it comes to promoting peace and prosperity both in the region and around the world; that their attacks or -- or their -- their financing of terrorist organizations like Hezbollah and Hamas, the bellicose language that they've used towards Israel, their development of a nuclear weapon or their pursuit of a nuclear weapon -- that all of those things create the possibility of destabilizing the region and are not only contrary to our interests, but I think are contrary to the interests of international peace.....

There's been a lot of mistrust built up over the years, so it's [a change of policy] not going to happen overnight.

And it's important that even as we engage in this direct diplomacy, we are very clear about certain deep concerns that we have as a country, that Iran understands that we find the funding of terrorist organizations unacceptable, that we're clear about the fact that a nuclear Iran could set off a nuclear arms race in the region that would be profoundly destabilizing. So there are going to be a set of objectives that we have in these conversations, but I think that there's the possibility, at least, of a relationship of mutual respect and progress

There's nothing remarkable in asserting that a nuclear Iran would destabilize the region. What's notable is the absence of posturing, the removal of the dispute from the realm of one-on-one confrontation. The big stick is not invisible, but Obama speaks soft.

And to step back and rub one's eyes for a moment: a U.S. President, asked about nuclear proliferation in the middle east, responds that the U.S. has to lead by example on the nonproliferation front. Can we have the audacity to hope that the Obama Administration will also strive to lead by example in other efforts where international cooperation is essential, such as climate change and coordinated response to the economic crisis?

Obama's meta mea culpa, cont.

Taking questions at a town-hall meeting in Indiana today, Obama reiterated his oddly elusive confession of error in connection with the Daschle appointment:

The woman asked how Americans could trust him if “those you have appointed to your cabinet are not trustworthy,” referring to his nomination of several officials who did not pay all of their taxes until the prospect of working in his administration. ...

“I think these were honest mistakes,” Mr. Obama responded. “If you’re not going to appoint anybody who’s not made a mistake in their life, then you’re not going to have anybody take a job.” But he agreed that he erred by not seeing that it would look like a double standard. “I made a mistake because I don’t want to send the signal that there are two sets of rules,” he said.

As it did when Obama delivered his initial, riveting "I screwed up," the mea culpa seems peculiarly meta, admitting to a failure to recognize how his defense of Daschle would be perceived rather than to an error in judging Daschle himself. Obama didn't want to look like he was setting a double standard by defending Daschle after Daschle admitted to a failure to report use of a car and driver as income. But was he setting one? If Obama were the only person who knew of Daschle's tax error, would he have been wrong to stick with him?

Assuming not, was Obama wrong to bow to the perception of a double standard? Would it have been impossible to credibly elaborate the defense of Daschle above - these were honest mistakes...If you’re not going to appoint anybody who’s not made a mistake in their life, then you’re not going to have anybody take a job? Is it fair for Obama to confess that the whole gestalt of three nominees' tax reporting failures plus Daschle's lucrative quasi-lobbying interregnum trumped his personal conviction that Daschle was the best person for the job? And does the confession suggest that Obama should have pushed Daschle before he jumped?

Depends what your definition of "screwed up" is

The country has been ga-ga over Obama declaring "I screwed up" in connection with the Daschle nomination. So refreshing, such a break with the prior administration. But what exactly did Obama mean?

Did he mean that Daschle was the wrong pick to head HHS and the effort to reform healthcare? No....

Tom, I think, is an outstanding individual. I am absolutely convinced that he would've been the best person to help shepherd through what's going to be a very difficult process to get health care for American families.

Did he mean that his vetting process was somehow wanting? No...

Well, I, you know, don't think there's something wrong with the vetting process.

Did he mean that Daschle's tax error, once revealed, should have disqualified him? Or that, once the error (and Daschle's quasi-lobbying activities) came to light, Obama should have asked him to resign immediately? Maybe, kinda:

I think that what happened, certainly, let's just take Tom as an example. I made a judgment that he was the best person possible for the job. I was very eager to make sure that we can deliver on a commitment that I have to deliver healthcare for the American people. I think I messed up. I screwed up in not recognizing the perception that even though this is an honest mistake, I believe, on Tom's part, that, you know, ordinary people are out there paying taxes every day and whether it's an intentional mistake or not, it was sending the wrong signal. So again, this was something that was my fault. I continue to consider Tom Daschle an outstanding public servant, uh, and what we're going to do now is make sure we get somebody confirmed and start moving forward.

I screwed up in not recognizing the perception. Was the perception wrong or right? Did Daschle violate an ethical standard to an extent that made him unfit for the office? If not, was the perception wrong? If wrong, should Obama have tried to change it?

I think Obama "screwed up" in setting the ethical bar too high. He's absolutely right that lobbyists' grip on U.S. politics needs to be weakened. But the focus should be on rules in effect going forward, not on selecting only people who are simon-pure by a new standard. And while it's true that "ordinary people are out there paying taxes," it's not true that "ordinary people" with any discretionary items routinely pay all taxes they could be construed to owe. How many of those condemning Daschle, or Killefer, or Geithner for their tax misdemeanors hold themselves to a higher standard? Ask their accountants, if they're reasonably affluent, or the people who paint their houses, if they're middle class, or the people whom they serve privately, in unsalaried positions, if they're poor.

Yes, public officials should be held to a higher standard. But perhaps we've arrived at the point, to paraphrase AIG's Hank Greenberg, where footfaults are treated as a murder charge.

Frank Rich is probably right that populist rage at the excesses of Wall Street and Washington are going to be a formidable political force in the years ahead, and that Obama needs to "get in front of the mounting public anger." But Obama also demonstrated a rare ability through the endless campaign to explain nuance, and to articulate two sides of a matter in dispute. Sometimes he may need to stand between his subordinates and the public rage.

Poison pill in the stimulus bill

Suppose the Democratic Congress passes and President Obama signs a stimulus bill that triggers a worldwide Depression rather than forestalling one? We may be on the brink.

Like many Obama supporters, I've spent a lot of time lately fretting about what Republican opposition might do to the stimulus. Will they cut out $200 billion? Will they raise the ratio of tax cuts to spending?

But those concerns pale beside the "buy American" provisions in the bill. In the House version, these stipulate that any iron and steel used for projects funded by the bill be produced in the U.S. The current Senate version extends the requirement to all manufacturing products.

Leaders in Europe and Asia are warning that these provisions could trigger a global trade war -- a cascade of "beggar-thy-neighbor" protectionist measures. Economists and financiers across the political spectrum echo that warning (two are noted in the prior post). As the world looks to the Obama Administration for leadership, a protectionist stimulus would cause swift and widespread disillusion -- and equally widespread retaliation.

Most galling, as a new Peterson Institute study makes clear, the provision would trade U.S. global credibility for a pittance -- approximately 1,000 steel industry jobs in a labor force of 140 million people.

The negative effects of the provision may be moderated in various ways. It may be jiggered to remain in nominal compliance with WTO and NAFTA commitments. Specifically, additional cover could be built into its current public interest waiver, stating that the "buy American" provision will be waived where it proves "inconsistent with the public interest." The Peterson brief suggests that negative effects could be mitigated "by stating explicitly...that the public interest waiver is intended to be used to avoid violations of US trade obligations." Another option, according to the Peterson brief, is a presidential statement (signing statement?) that the U.S. will respect its international obligations.

Even with such a caveat, however, as the Peterson brief and Jagdish Bhagwati point out, the provision would cut out major steel suppliers hat have not signed the WTO's Agreement on Government Procurement -- namely China, India and Brazil. Yes, the measure with the appropriately positioned waiver could be used to "encourage" those countries to sign on. But it will more likely prompt them to impose their own import restrictions.

It's distressing that the Peterson brief appears to assume that the political imperative to include this poison bill is too strong to resist. What an opportunity this is for Obama to walk the bipartisan walk and outflank even most Republicans from the "right" -- though part of his broader political message should be that getting a free trade/fair trade balance right does not fall into "the tired categories of left and right." The real issue, framed trenchantly by the Peterson brief, is leadership:

Buy American provisions would particularly damage US reputation abroad since they would come just a few months after the United States pledged to reject protectionism at the G-20 summit on November 15, 2008. The world is carefully watching the first moves of President Obama to gauge the tone of the new administration's trade policy...

Based on our economic and legal analysis, the Buy American provisions would violate US trade obligations and damage the United States' reputation, with very little impact on US jobs. In a country of 140 million workers, with millions of new jobs to be created by the stimulus package, the number of employees affected by the Buy American provision is a rounding error.

In other words, there is little bang for the buck, and on balance the Buy American provisions could well cost jobs if other countries emulate US policies. Most importantly, the Buy American provisions contradict the G-20 commitment not to implement new protectionist measures--a commitment that was designed to forestall a rush of "beggar-thy-neighbor" policies.

Very early in his presidency, George W. Bush's free trade credibility was gutted when he kowtowed to the steel industry and imposed tariffs on steel imports. What a bitter irony if Obama makes the same mistake in his first month in office - selling the U.S.'s global leadership birthright for a mass of protectionist pottage.

UPDATE: Buy American provision has been softened but not dissolved - FT:

The Senate narrowed the Buy American provisions, which require that federal money be spent on goods from US companies, to ensure they would be compatible with US commitments under existing trade treaties. But it rejected an amendment from John McCain, the defeated Republican presidential candidate, to strike Buy American from the bill altogether.

The head of the European steel industry trade group said the Senate had not done enough to head off a potential trade war. “Unfortunately the Senate’s vote does not go further and overturn the Buy American clause,” said Gordon Moffat, director of Eurofer. Countries such as China, India, Russia, the Ukraineand Turkey, which have not signed the World Trade Organisation’s government procurement agreement, would still be excluded, he said.

The "softening" was prompted by Obama, who had this exchange with Charlie Gibson on Feb. 3:

CHARLES GIBSON: A couple of quick questions. There are "Buy America" provisions in this bill. A lot of people think that could set up a trade war, cost American jobs. You want them out?

PRESIDENT OBAMA: I want provisions that are going to be a violation of World Trade Organization agreements or in other ways signal protectionism. I think that would be a mistake right now. That is a potential source of trade wars that we can't afford at a time when trade is sinking all across the globe.

CHARLES GIBSON: What's in there now? Do you think that does that? Do you want it out?

PRESIDENT OBAMA: I think we need to make sure that any provisions that are in there are not going to trigger a trade war.

But Obama stopped short of calling for the provision to be removed entirely. Clive Crook explains why the "softening" is not enough:

President Obama and his spokesmen said this week that the bill's language will be changed as necessary to prevent a trade war. The revised Senate language is helpful, but does not go far enough. Protectionism that is technically consistent with treaty obligations is still an attack on trading partners. The spirit of co-operation is as important as the letter. In the current climate, legal protectionism could quickly degenerate into a cycle of illegal retaliation and counter-retaliation.

What Republicans should be good for

Andrew Sullivan has recently written something to the effect that we need Republicans to referee spending and hack fat off the stimulus bill. I seriously doubt the party's ability for constructive input on that front (so does Andrew; today he writes that they should understand that they have no crediblity on fiscal discipline). But Republicans could do the country a real service right now by standing up for one of the party's historic core principles: free trade. Today, Jagdish Bhagwati in the FT and Burton Malkiel in the WSJ sound the alarm about starting a Depression-triggering cascade of protectionist actions worldwide with the "buy American" provisions in the stimulus bill. Those warnings are timely and should be a matter of bipartisan consensus.

Update: the FT reports this afternoon that the buy American provisions have been softened but may still do harm:

The Senate narrowed the Buy American provisions, which require that federal money be spent on goods from US companies, to ensure they would be compatible with US commitments under existing trade treaties. But it rejected an amendment from John McCain, the defeated Republican presidential candidate, to strike Buy American from the bill altogether.

The head of the European steel industry trade group said the Senate had not done enough to head off a potential trade war. “Unfortunately the Senate’s vote does not go further and overturn the Buy American clause,” said Gordon Moffat, director of Eurofer. Countries such as China, India, Russia, the Ukraine and Turkey, which have not signed the World Trade Organisation’s government procurement agreement, would still be excluded, he said.

Moffat's criticism tracks with Bhagwati's:

Yet some do worry about thus undermining the WTO, which has inherited from the General Agreement on Tariffs and Trade the many roadblocks to re-enacting that history of mutually harmful outbreaks of trade barriers. They have argued, therefore, that the US can enact WTO-consistent procurement rules by excluding from US procurement China and India, among other developing countries, which have not signed the optional procurement code. But remember that these nations can also retaliate in WTO-consistent ways. They often have “bound tariffs” – ceilings, which are significantly above the “applied”, that is, actual, tariffs; and it is possible to raise the applied tariffs towards the bound levels without any restraint at all.

Nothing would prevent India and China from choosing to raise tariffs thus on items of export interest to the US. Besides, they could shift their own purchases of aircraft away from Boeing to Airbus, and of nuclear reactors from American to French companies. The response would, of course, be for the enraged US congressmen to start enacting their own retaliation. The game would become lively.

While I have found Bhagwati's free trade championing a bit imperious at times (and been imperiously slapped back), his warning now is timely and well-informed. Not passing a strong stimulus bill could be disastrous. But so could passing one with this poison pill.

Was losing Daschle a 'catastrophic' cost?

Assenting to the sacrifice of Tom Daschle on the altar of political reform, Joe Klein, it seems to me, views that sacrifice from the wrong end of the telescope:

The excesses of wealth, throughout the country, have become an American problem. The extremely rich have detached themselves from the rest of society, which was the point of Obama's story about private jets. In Washington, it is a bipartisan phenomenon. Democrats have their special interests too, and their lobbyists are terrific at what they do. A guy like Daschle, who knows the system cold, who could talk to both the insurance companies and the liberal advocates, would have been invaluable to Obama in bringing health insurance to everyone who needs it. But, as the man said, we're all going to have to sacrifice, and it now seems clear that Obama's sacrifice, if he wants to reattach Washington to a nation sick with cynicism about its government, will be to detach himself from the lobbyist élites who might have helped grease the skids for his policy goals.

The key phrase here is would have been invaluable to Obama in bringing health insurance to everyone who needs it. This country cannot restructure its economy and get a grip on future spending without reforming healthcare effectively. We can't roll back the great risk shift without shielding Americans from catastrophic medical costs and ending the risk of exposure every time a person loses or changes jobs. Daschle's understanding of healthcare policy is of the highest order, and his political skills and knowledge of the legislative process are matchless. Losing him could prove catastrophic to the most important policy initiative of Obama's first term.

It's true that Obama based his campaign on the premise that we can't reform our policies effectively until we reform our politics. It's also true that he has a unique opportunity now to break the lobbyist culture that Klein outlines. But Obama may have miscalibrated his ethics message and policies to a degree. In limiting lobbying and lobby-like entanglements, it's impractical to start from scratch. To rule out anyone who didn't now meet the kind of standards that make sense going forward is as constraining as trying to pick a cabinet that "looks like America."

The tax issues are tougher. You'd think that by this point anyone with ambition for high office would regard a "when in doubt, report and pay" principle as indispensable career protection if
nothing else. These "screw it, I'll keep it" tax reflexes are hard to excuse, particularly in the current climate, as the country reacts to decades of ever-increasing self-licensing excess from elites of all stripes. But they're also near-universal. What percentage of Americans with non-salaried income really chose to pay taxes on all income that would not readily show up if they didn't declare it?

As Ezra Klein points out, "The endlessly long vetting forms forcing deep tax and income transparency... in turn uncovered embarrassments that would never have emerged under past regimes." He also provides important perspective on the mode of Daschle's cashing in:

In recent days, there's been an effort to paint Daschle as one of Washington's most corrupt creatures. Jack Abramoff with an electoral history. But so far as sell-outs go, Daschle's sins were almost modest. His path frequently diverged from money. He never registered as a lobbyist or did any lobbying, even though you get paid more to ensure access than offer advice. He spent huge chunks of time working with the Center for American Progress and writing a technical book on health reform. None of that proved lucrative (his book advance was $22,000; poor for a political pundit, much less a former Senate majority leader). He endorsed Obama in February of 2007, when Clinton was far ahead in the polls. If she'd won -- and most thought she would -- his access to the White House would be close to nonexistent, and his value to clients would be greatly diminished.

Ultimately, though, Klein (Ezra) too embraces the Daschle withdrawal as the price of reform:

But it turns out that Obama's words, well, mattered. They made it harder to ignore scandal, as the Bush administration had done. The endlessly long vetting forms forcing deep tax and income transparency, which in turn uncovered embarrassments that would never have emerged under past regimes. This has made for a more troubled transition, but will probably also result in a cleaner administration. For all the embarrassments, this, in a concrete sense, is what change looks like. It's not an administration that decides to be clean so much as one that has little choice in the matter.

Cleanliness is never absolute, however, and it never lasts. The cycle of reform and corruption and new reform is eternal -- or rather, it's only broken when corruption becomes so endemic that reform is impossible, at which point democratic choice becomes an illusion. Our politicians will never be monks, and we shouldn't want them to be (in fact, monkish orders endure their own cycles of corruption and reform). Perhaps those vetting forms shouldn't have cut so deep; perhaps the lobbying guidelines should have been more forward-looking, more forgiving of past conduct. Obama should not have lost the people he's lost.

Obambi chorus rising again...

This lament by Michael Hirsch is well-informed, but it also reminds me a bit ofDemocratic hand-wringing in the dark days following the Republican Convention:

Obama's desire to begin a "post-partisan" era may have backfired. In his eagerness to accommodate Republicans and listen to their ideas over the past week, he has allowed the GOP to turn the haggling over the stimulus package into a decidedly stale, Republican-style debate over pork, waste and overspending. This makes very little economic sense when you are in a major recession that only gets worse day by day. Yes, there are still some very legitimate issues with a bill that's supposed to be "temporary" and "targeted"—among them, large increases in permanent entitlement spending, and a paucity of tax cuts that will prompt immediate spending. Even so, Obama has allowed Congress to grow embroiled in nitpicking over efficiency when the central debate should be about whether the package is big enough.

Impression seconded by Nate Silver:

with the important caveat that there are many more chapters to be written in this saga -- the final bill is likely to come out looking closer to what the Greg Mankiw's of the world might have advocated for and less the Paul Krugman's.

Perhaps it was inevitable that this would happen once the details of the bill became known and the Republicans began to pick over them like vultures. Perhaps the bill could have been better written. Still, in essentially passing off both narrative and literal control of the contents of the package to the Congressional Democrats, the Obama administration may have played it too cute by half. Obama is popular; Nancy Pelosi and Harry Reid aren't. The trajectory of the bill might have been different if Obama had devoted a prime time speech toward selling it, with graphs and pie charts and the like. But there hasn't been a Big Obama Moment like that -- a show of force -- something that really resonated outside the Beltway. The closest Obama came, oddly enough, was during his inaugural address, but the references to the stimulus there were abstract, oblique.

I'm a rather nervous and pessimistic sort myself, but I also feel that we've learned by experience that Obama is a master of timing, and strategy, and rhetoric. My hope is that he's gamed out when to weigh in heavily on this debate, and that the stimulus will look far less Mankiwist that Nate Silver fears.

On the other hand: Obama has never been President before, and I don't want to do this overwhelming-faith-in-one-man routine. But I've been watching for two years, and my trust has only grown.

Obama realigns bailout bankers' incentives

Today, Obama made headlines for capping executive pay at banks that accept "major" bailout funds at $500,000. Here, though, is the real news in his statement:

Finally, these guidelines we’re putting in place are only the beginning of a long-term effort. We’re going to examine the ways in which the means and manner of executive compensation have contributed to a reckless culture and quarter-by-quarter mentality that in turn have wrought havoc in our financial system. We’re going to be taking a look at broader reforms so that executives are compensated for sound risk management and rewarded for growth measured over years, not just days or weeks.

That promise gets at the core problem, nicely framed last January in the FT by Raghuram Rajan, former chief economist at the IMF:

True alpha [the value the investment manager's abilities contribute to the investment process] can be measured only in the long run and with the benefit of hindsight – in the same way as the acumen of someone writing earthquake insurance can be measured only over a period long enough for earthquakes to have occurred. Compensation structures that reward managers annually for profits, but do not claw these rewards back when losses materialise, encourage the creation of fake alpha. Significant portions of compensation should be held in escrow to be paid only long after the activities that generated that compensation occur.

A week later, FT columnist Martin Wolf elaborated:

the only way to deal with this challenge is to address the incentives head on and, as Raghuram Rajan, former chief economist of the International Monetary Fund, argued in a brilliant article last week ("Bankers' pay is deeply flawed", FT, January 9 2008), the central conflict is between the employees (above all, management) and everybody else. By paying huge bonuses on the basis of short-term performance in a system in which negative bonuses are impossible, banks create gigantic incentives to disguise risk-taking as value-creation.

We would be better off with Jupiter's 12-year "year", since it takes about that long to know how profitable strategies have been. The point is that a year is an astronomical, not an economic, phenomenon (as it once was, when harvests were decisive). So we must ensure that a substantial part of pay is better aligned to the realities of the business: that is, is made in restricted stock redeemable over a run of years (ideally, as many as 10).

Yet individual institutions cannot change their systems of remuneration on their own, without losing talented staff to the competition. So regulators may have to step in. The idea of such official intervention is horrible, but the alternative of endlessly repeated crises is even worse.

The big points here are, first, we cannot pretend that the way the financial system behaves is not a matter of public interest - just look at what is happening in the US and UK today; and, second, if the problem is to be fixed, incentives for decision-makers have to be better aligned with the outcomes....

All bonuses and a portion of salary for top managers should be paid in restricted stock, redeemable in instalments over, say, 10 years or, if regulators are feeling generous, five. I understand that the bankers will not like this. Yet one thing is surely now quite clear: just as war is too important to be left to generals, banking is too important to be left to bankers, however much one may like them.

For bailout recipients, that kind of long-term tie-up begins today. In addition to the $500,000 salary cap, Obama announced:

And if these executives receive any additional compensation, it will come in the form of stock that can’t be paid up until taxpayers are paid back for their assistance.

Incentive pay for reducing your bank's contribution to the national debt. Will anyone collect?

UPDATE: Some timely further perspective on distorted pay incentives today from Thomas Frank, lone liberal on the WSJ op-ed page:

...Wall Street's compensation system isn't just aesthetically displeasing to liberal snobs. It is the very heart of the problem. According to Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on dysfunctional financial systems, "It is the compensation system that has proved to be the weak point in everything critical that went wrong, that has produced a global catastrophe."

At each stage of the disaster, Mr. Black told me -- loan officers, real-estate appraisers, accountants, bond ratings agencies -- it was pay-for-performance systems that "sent them wrong."

The need for new compensation rules is most urgent at failed banks. This is not merely because is would make for good PR, but because lavish executive bonuses sometimes create an incentive to hide losses, to take crazy risks, and even, according to Mr. Black, to "loot the place through seemingly normal corporate mechanisms." This is why, he continues, it is "essential to redesign and limit executive compensation when regulating failed or failing banks."

Footnote: Obama ought to keep the malign effects of distorted pay incentives in mind when the subject of pay for performance for teachers comes up. Otherwise, our kids' diplomas may have all the value of an AAA mortgage-backed security.

Did a health insurance meltdown prick the housing bubble?

Via Ezra Klein, results from a study by Harvard Fellow Christopher T. Robertson of the causes of foreclosure:

Based on our study of homeowners going through foreclosures in four states... we find that half of all foreclosures have medical causes, and we estimate that medical crises put 1.5 million Americans in jeopardy of losing their homes last year.

Half of all respondents (49%) indicated that their foreclosure was caused in part by a medical problem, including illness or injuries (32%), unmanageable medical bills (23%), lost work due to a medical problem (27%), or caring for sick family members (14%). We also examined objective indicia of medical disruptions in the previous two years, including those respondents paying more than $2,000 of medical bills out of pocket (37%), those losing two or more weeks of work because of injury or illness (30%), those currently disabled and unable to work (8%), and those who used their home equity to pay medical bills (13%). Altogether, seven in ten respondents (69%) reported at least one of these factors.

The study suggests that almost a quarter of those who lost their homes did so at least in part because of medical debt. That actually looks like less than the percentage reported by Jacob Hacker in The Great Risk Shift (2006) -- perhaps because Hacker grouped together bankruptcies and foreclosures. Medical debt probably triggers a higher share of bankruptcies than foreclosures, since in most states, the home is protected in a bankruptcy. Here are Hacker's figures on the impact of medical debt on Americans' financial distress:

...if you add the ranks of the uninsured to those without adequate coverage, you have more than 40 percent of the working-age population in an immediate economic bind because of medical costs. About half these people--slightly more of the uninsured than the underinsured, but not much more--report severe problems paying their medical bills. These are the families accounting for the 40 percent to 50 percent of people in bankruptcy or foreclosure who say health care is the number one reason for their plight.

In any event, whatever the impact of exotic adjustable-rate mortgages and soaring home prices (to 2006) on foreclosures, it seems clear that soaring medical costs and ever more porous health insurance are having a major effect on Americans' ability to stay solvent and keep their homes.

Down girl, down! Dowd sics herself on Wall Street

Oh dear. Maureen Dowd's gone demagogue, as she occasionally does when her rhetorical weaponry is set loose in a target-rich environment.

On Wednesday she unloosed a fearsome smart-bomb barrage against banking mogul excess. Today, she carpet-bombed Wall Street. Making money from money "must unhinge you." Those who awarded bonuses should be prosecuted, the money disgorged.

Reality check:

1) Done right, allocating capital efficiently is as important as making good widgets. You don't get good new widgets made without the capital. The problem was regulation gone awry (or AWOL), not the existence of people whose function is to make money from money. Like lawyers, they're unpopular but useful. You could argue that poor regulation made the field so lucrative that there's too many of them, but that's different.*

2) Dowd quotes Barney Frank without comment: "Paulson let the cat out of the bag...and it can't be gotten back." Frank's right. You can't claw back, let alone prosecute, unless someone broke a law. TARP was riddle with holes. The Obama Administration and Congress can fix the second half but not siphon back what's been pissed away.

3) Dowd ridicules Rudolph Giuliani for saying that cutting Wall Street bonuses would mean less spending in restaurants and stores. Restaurants, schmestraurants. The bonuses constitute a huge chunk of New York's decimated tax base.

There's a balance to be struck with regard to bonuses. They're more than half of a lot of financial people's yearly compensation, they're supposed to be based on the money you make, and some people did make money for their firms. Yes, TARP should radically limit them, particularly for those with 7-figure compensation and more. More to the point, as first Raghuram Rajan* and then Martin Wolf (hardly a pair of flaming radicals) wrote in the FT a year ago, the bulk of bonus money should be tied to long term performance -- locked up for up to 10 years and clawed back if today's bets wreak mass destruction tomorrow. But the whole system can't be obliterated at a stroke.

*As an index investor, I find them only indirectly useful, as there'd be no indexes without paid professional investors vainly trying to beat them.

**Former chief economist, IMF

David Brooks shadows forth a conservative Obama

As part of his Big Thoughts Boiled Down series, David Brooks gives us Hugh Heclo's On Thinking Institutionally:

As we go through life, we travel through institutions — first family and school, then the institutions of a profession or a craft.

Each of these institutions comes with certain rules and obligations that tell us how to do what we’re supposed to do. Journalism imposes habits that help reporters keep a mental distance from those they cover. Scientists have obligations to the community of researchers. In the process of absorbing the rules of the institutions we inhabit, we become who we are.

New generations don’t invent institutional practices. These practices are passed down and evolve. So the institutionalist has a deep reverence for those who came before and built up the rules that he has temporarily taken delivery of. “In taking delivery,” Heclo writes, “institutionalists see themselves as debtors who owe something, not creditors to whom something is owed.”

Funny that Brooks did not relate his paean to institutional norms to the current state of the union. He was writing just a week after a new President took office promising to "restore science to its rightful place," to judge each Federal program by a standard of "whether it works," and to "reject as false the choice between our safety and our ideals" while prosecuting war and anti-terror measures -- while tapping into the New Testament for his moral underpinnings.

Nor did Brooks mention the Bush Administration's wholesale assault on the precious norms of government built up over two centuries -- such as prosecutors eschewing political concerns in their investigations, armed forces eschewing torture, industrial policymakers respecting science, and Presidents obeying the law.

An "institutionalist" as defined by Heclo is conservative in the best sense, saving the acquired wisdom that institutions are designed to capture. In these terms, Obama is conservative and Bush is a scorched-earth radical.

I guess this was one of Brooks's "apolitical" columns. Why?

What "restoring honor and dignity to the White House" really meant

From the New York Times today, a slice of life from the Bush Administration. Told that Obama had issued "business casual" dress guidelines for the White House on weekends, and had arrived for a Saturday briefing in "slacks and a gray sweater over a white buttoned-down shirt,"

Veterans of the Bush White House are shocked.

“I’ll never forget going to work on a Saturday morning, getting called down to the Oval Office because there was something he was mad about,” said Dan Bartlett, who was counselor to Mr. Bush. “I had on khakis and a buttoned-down shirt, and I had to stand by the door and get chewed out for about 15 minutes. He wouldn’t even let me cross the threshold.”

So, for Bush & co., what constituted an honorable and dignified Administration? Politicizing federal prosecutors?- Check. Suppressing scientific conclusions that undercut favored policies? Check. Letting corporate lobbyists rewrite Federal regulations? Check. Torturing enemy combatants and gutting Americans' core civil liberties? Check. Cooking intelligence and lying relentlessly to the public about the motives underlying policy? Check. Doing it all in jackets and ties? Double check.

Perhaps their memory will put the final kabosh on formal western attire.

The Gospel according to Obama

Update: Original Sin at Notre Dame

Christianists insist that the United States is a Christian nation. Obama is not a Christianist. He told us in his inaugural address that "our patchwork heritage is a strength, not a weakness. We are a nation of Christians and Muslims, Jews and Hindus, and nonbelievers. We are shaped by every language and culture, drawn from every end of this Earth." While he believes that moral values absorbed through religion have a place in the public sphere, he imposes strict ground rules on those who would invoke religious teachings:

What our deliberative, pluralistic democracy does demand is that the religiously motivated translate their concerns into universal, rather than religion-specific, values. It requires that their proposals must be subject to argument and amenable to reason (The Audacity of Hope).

Obama's religious allusions accordingly are usually of the most universal kind: I am my brother's keeper, I am my sister's keeper. And yet, a second look at his inaugural address made me feel that his thinking is more specifically informed by Christian scripture than I had previously believed. Early in the speech, he swerved into slightly less familiar Biblical language -- the Apostle Paul's "when I became a man, I put away childish things." The full context of that Pauline dictum, I believe, opens a window on the extent to which Obama's understanding of America's secular scriptures, the Declaration and the Constitution, are underpinned by his reading of Christian scripture.

Here is Obama's allusion to 1 Corinthians 13:

On this day, we come to proclaim an end to the petty grievances and false promises, the recriminations and worn-out dogmas that for far too long have strangled our politics.

We remain a young nation, but in the words of Scripture, the time has come to set aside childish things. The time has come to reaffirm our enduring spirit; to choose our better history; to carry forward that precious gift, that noble idea, passed on from generation to generation: the God-given promise that all are equal, all are free, and all deserve a chance to pursue their full measure of happiness.

The call to put away childish things had a simple denotation, familiar to anyone who has followed Obama's speeches: to get past the Rovian attack politics that according to Obama have paralyzed our policymaking -- "a politics that breeds division, and conflict, and cynicism," as he put it in his March speech on race. The way he followed that thread, identifying other "childish"political tenets and practices he asked us to move past, is worth a separate post.

But here, I'm more interested in a family likeness between Obama's historiography and Paul's theology. For Paul, becoming a man means achieving, to borrow a favorite phrase of Obama's, a more perfect union:

1If I speak in the tongues^[a] of men and of angels, but have not love, I am only a resounding gong or a clanging cymbal. 2If I have the gift of prophecy and can fathom all mysteries and all knowledge, and if I have a faith that can move mountains, but have not love, I am nothing. 3If I give all I possess to the poor and surrender my body to the flames,^[b] but have not love, I gain nothing.

4Love is patient, love is kind. It does not envy, it does not boast, it is not proud. 5It is not rude, it is not self-seeking, it is not easily angered, it keeps no record of wrongs. 6Love does not delight in evil but rejoices with the truth. 7It always protects, always trusts, always hopes, always perseveres.

8Love never fails. But where there are prophecies, they will cease; where there are tongues, they will be stilled; where there is knowledge, it will pass away. 9For we know in part and we prophesy in part, 10but when perfection comes, the imperfect disappears. 11When I was a child, I talked like a child, I thought like a child, I reasoned like a child. When I became a man, I put childish ways behind me. 12Now we see but a poor reflection as in a mirror; then we shall see face to face. Now I know in part; then I shall know fully, even as I am fully known.

13And now these three remain: faith, hope and love. But the greatest of these is love.

For Paul, to become a man means to become perfect in love. It means to fulfill a human potential that can never be completely fulfilled in this life: to love God perfectly. This life is a quest for a more perfect union that will be attained in the next.

Obama, like Lincoln, and the Transcendentalists before him, and countless Americans afterward, asserts a similar movement in American history. The Declaration and the Constitution express political principles as perfect in their way (so Obama's invocations of them imply) as Paul's love. Indeed, Obama has asserted that they are in effect political translations of that love. Here's how he put it in his great speech on race in Philadelphia on March 18:

In the white community, the path to a more perfect union means acknowledging that what ails the African-American community does not just exist in the minds of black people; that the legacy of discrimination - and current incidents of discrimination, while less overt than in the past - are real and must be addressed. Not just with words, but with deeds – by investing in our schools and our communities; by enforcing our civil rights laws and ensuring fairness in our criminal justice system; by providing this generation with ladders of opportunity that were unavailable for previous generations. It requires all Americans to realize that your dreams do not have to come at the expense of my dreams; that investing in the health, welfare, and education of black and brown and white children will ultimately help all of America prosper.

In the end, then, what is called for is nothing more, and nothing less, than what all the world’s great religions demand – that we do unto others as we would have them do unto us. Let us be our brother’s keeper, Scripture tells us. Let us be our sister’s keeper. Let us find that common stake we all have in one another, and let our politics reflect that spirit as well.

The title of that speech was "A More Perfect Union." The premise was that the principles expressed in the Constitution have not been fulfilled but are in process of being fulfilled -- that what distinguishes America is the country's constant progress toward fulfilling them:

This union may never be perfect, but generation after generation has shown that it can always be perfected.

In the inaugural address, Obama portrayed our progress toward realizing our ideals as being in midstream, and projected their eventual fulfillment beyond our shores to encompass the world:

And because we have tasted the bitter swill of civil war and segregation and emerged from that dark chapter stronger and more united, we cannot help but believe that the old hatreds shall someday pass; that the lines of tribe shall soon dissolve; that as the world grows smaller, our common humanity shall reveal itself; and that America must play its role in ushering in a new era of peace.

Once again, his core message was hope. Faith. Love. Those three. Ultimately, Obama keeps it simple.

Getting used to change

In "It's a Wonderful Life," after a highly eventful day at the office, newlywed George Bailey gets a buzz from his altered life condition when he's told that "Mrs. Bailey is on the line" and realizes that it's his wife, not his mother, calling.

I got a similar frisson from the very ordinariness of this lede:

Jan. 25 (Bloomberg) -- White House officials warned Americans that economic prospects are darkening as they sought to ensure rapid Congressional approval of President Barack Obama’s $825 billion stimulus package.

Vice President Joe Biden told the CBS program “Face the Nation” that “it’s worse, quite frankly, than everyone thought it was.” Larry Summers, Obama’s top economic adviser, said the economy faces “very difficult” months, speaking today on NBC’s “Meet the Press.”

"White House officials" triggers a conditioned reflex: skepticism, wariness, brace for outrage. Don't want to entirely let go of that. All administrations spin, and screw up, and yield to the wrong pressures. But the distrust reached pathological proportions over the past eight years -- across the political spectrum, eventually. Now hope is fresh that most of the time at least we'll credit the rationality and good faith of what we hear from "Administration officials."

Bring on the realists: on attaining "very concrete things" in war zones

Joe Klein flags this "significant shift in tone from the Bush Administration" from Secretary of Defense Robert Gates:

I think one of the -- one of the points where I suspect both administrations come to the same conclusion is that the goals we did have for Afghanistan are too broad and too far into the future, are too future-oriented, and that we need more concrete goals that can be achieved realistically within three to five years in terms of reestablishing control in certain areas, providing security for the population, going after alQaeda, preventing the reestablishment of terrorism, better performance in terms of delivery of services to the people, some very concrete things.

Compare Obama, pushing Ryan Crocker toward an attainable definition of success in Iraq last April:

And, see, the problem I have is if the definition of success is so high, no traces of Al Qaida and no possibility of reconstitution, a highly-effective Iraqi government, a Democratic multiethnic, multi- sectarian functioning democracy, no Iranian influence, at least not of the kind that we don't like, then that portends the possibility of us staying for 20 or 30 years.

If, on the other hand, our criteria is a messy, sloppy status quo but there's not, you know, huge outbreaks of violence, there's still corruption, but the country is struggling along, but it's not a threat to its neighbors and it's not an Al Qaida base, that seems to me an achievable goal within a measurable timeframe, and that, I think, is what everybody here on this committee has been trying to drive at, and we haven't been able to get as clear of an answer as we would like.

Gates and Obama have long implicitly differed - and probably continue to differ - about the pace of withdrawal from Iraq. But they have long been on the same page when it comes to setting realistic goals and priorities with an eye to available resources.

Our bankers sell a cow

Reading this morning about new proposals for the Federal government to buy and "ring-fence" banks' bad assets,' and reflecting briefly on the whole phenomenon of banks being stuck with billions in nearly worthless securities, I was reminded of a folk tale about a man who sets out to sell a cow:

...when he had gone a bit of the way, a man met him who had a horse to sell, so Gudbrand thought 'twas better to have a horse than a cow, so he swopped with the man. A little farther on he met a man walking along and driving a fat pig before him, and he thought it better to have a fat pig than a horse, so he swopped with the man. After that he went a little farther, and a man met him with a goat; so he thought it better to have a goat than a pig, and he swopped with the man that owned the goat. Then he went on a good bit till he met a man who had a sheep, and he swopped with him too, for he thought it always better to have a sheep than a goat. After a while he met a man with a goose, and he swopped away the sheep for the goose; and when he had walked a long, long time, he met a man with a cock, and he swopped with him, for he thought in this wise, " 'Tis surely better to have a cock than a goose." Then he went on till the day was far spent, and he began to get very hungry, so he sold the cock for a shilling, and bought food with the money, for, thought Gudbrand on the Hill-side, " 'Tis always better to save one's life than to have a cock."

But the story doesn't end there. Like many of our bank chiefs, the man pulls out an ace in the hole. Here's what happens when he turns in at his neighbor's on the way home:

"Well," said the owner of the house, "how did things go with you in town?"

"Rather so so," said Gudbrand. "I can't praise my luck, nor do I blame it either," and with that he told the whole story from first to last.

"Ah!" said his friend, "you'll get nicely called over the coals, that one can see, when you get home to your wife. Heaven help you, I wouldn't stand in your shoes for something."

"Well," said Gudbrand on the Hill-side, "I think things might have gone much worse with me; but now, whether I have done wrong or not, I have so kind a good-wife, she never has a word to say against anything that I do."

"Oh!" answered his neighbour, "I hear what you say, but I don't believe it for all that."

"Shall we lay a bet upon it?" asked Gudbrand on the Hill-side. "I have a hundred dollars at the bottom of my chest at home; will you lay as many against them?"

Who says that credit default swaps are always risky? Our peasant was trading on (fully disclosed) inside information:

Yes, the friend was ready to bet; so Gudbrand stayed there till evening, when it began to get dark, and then they went together to his house, and the neighbour was to stand outside the door and listen, while the man went in to see his wife.

"Good evening!" said Gudbrand on the Hill-side.

"Good evening!" said the goodwife. "Oh, is that you? now God be praised."

Yes! it was he. So the wife asked how things had gone with him in town.

"Oh! only so so," answered Gudbrand; "not much to brag of. When I got to the town there was no one who would buy the cow, so you must know I swopped it away for a horse."

"For a horse," said his wife; "well, that is good of you; thanks with all my heart. We are so well to do that we may drive to church, just as well as other people; and if we choose to keep a horse we have a right to get one, I should think. So run out, child, and put up the horse."

"Ah!" said Gudbrand, "but you see I've not got the horse after all; for when I got a bit farther on the road I swopped it away for a pig."

"Think of that, now!" said the wife; "you did just as I should have done myself; a thousand thanks! Now I can have a bit of bacon in the house to set before people when they come to see me, that I can. What do we want with a horse? People would only say we had got so proud that we couldn't walk to church. Go out, child, and put up the pig in the stye."

"But I've not got the pig either," said Gudbrand; "for when I got a little farther on I swopped it away for a milch goat."

"Bless us!" cried his wife, "how well you manage everything! Now I think it over, what should I do with a pig? People would only point at us and say, 'Yonder they eat up all they have got.' No! now I have got a goat, and I shall have milk and cheese, and keep the goat too. Run out, child, and put up the goat."

"Nay, but I haven't got the goat either," said Gudbrand, "for a little farther on I swopped it away, and got a fine sheep instead."

"You don't say so!" cried his wife; "why, you do everything to please me, just as if I had been with you; what do we want with a goat! If I had it I should lose half my time in climbing up the hills to get it down. No! if I have a sheep, I shall have both wool and clothing, and fresh meat in the house. Run out, child, and put up the sheep."

"But I haven't got the sheep any more than the rest," said Gudbrand; "for when I had gone a bit farther I swopped it away for a goose."

"Thank you! thank you! with all my heart," cried his wife; "what should I do with a sheep? I have no spinning-wheel, nor carding-comb, nor should I care to worry myself with cutting, and shaping, and sewing clothes. We can buy clothes now, as we have always done; and now I shall have roast goose, which I have longed for so often; and, besides, down to stuff my little pillow with. Run out, child, and put up the goose."

"Ah!" said Gudbrand, "but I haven't the goose either; for when I had gone a bit farther I swopped it away for a cock."

"Dear me!" cried his wife, "how you think of everything! just as I should have done myself. A cock! think of that! why it's as good as an eight-day clock, for every morning the cock crows at four o'clock, and we shall be able to stir our stumps in good time. What should we do with a goose? I don't know how to cook it; and as for my pillow, I can stuff it with cotton-grass. Run out, child, and put up the cock."

"But after all I haven't got the cock," said Gudbrand; "for when I had gone a bit farther, I got as hungry as a hunter, so I was forced to sell the cock for a shilling, for fear I should starve."

"Now, God be praised that you did so!" cried his wife; "whatever you do, you do it always just after my own heart. What should we do with the cock? We are our own masters, I should think, and can lie a-bed in the morning, as long as we like. Heaven be thanked that I have got you safe back again; you who do everything so well that I want neither cock nor goose; neither pigs nor kine."

Then Gudbrand opened the door and said,—

"Well, what do you say now? Have I won the hundred dollars?" and his neighbour was forced to allow that he had.

And like a good neighbor, Treasury's there....

Tina Brown catches a vibe

A bit of emotional intelligence from Tina Brown:

A mysterious exchange has already taken place between our burdens and the president's demeanor. The more joyous we have become, the more sobriety Obama has assumed. His inaugural speech was free of literary exhibitionism. It was a litany of our challenges and his solemn promise to meet them. His words were purposeful, almost business-like, with the tautest of poetical flourishes.

True dat.

Obama responds to Osama

At one point in his inaugural address, Obama seemed to respond to a taunt from Osama bin Laden, delivered in the audiotape that was released last Wednesday. As reported by the BBC:

President Bush, the message said, was leaving his successor with a "heavy inheritance" and he doubted that the US could continue fighting al-Qaeda for decades.

"If he withdraws from the war, it is a military defeat. If he continues, he drowns in economic crisis."

Osama, who believes he brought down the Soviet Union, also thinks with some reason that he's bankrupting the U.S. To my ears, this from Obama today was an answer to the prophet of imperial overstretch:

And for those who seek to advance their aims by inducing terror and slaughtering innocents, we say to you now that, "Our spirit is stronger and cannot be broken. You cannot outlast us, and we will defeat you."

Obama's Inaugural: dark skies, stark challenges

Obama's tone in his acceptance speech on Nov. 4 was somber. Today, it was almost apocalyptic -- the dangers evoked tonally overshadowing strong assertions of "yes we can" confidence. Early on, after the by-now-familiar litany of formidable challenges, he raised a stark specter:

These are the indicators of crisis, subject to data and statistics. Less measurable but no less profound is a sapping of confidence across our land - a nagging fear that America’s decline is inevitable, and that the next generation must lower its sights.

That's painting it a bit dark, isn't it? Obama's long been saying that the American dream feels like it's slipping away, but I would have thought 'decline' a rather Carteresqe third rail.

Of course there was Obama's signature counterpoint of confidence:

For everywhere we look, there is work to be done. The state of the economy calls for action, bold and swift, and we will act - not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together. We will restore science to its rightful place, and wield technology’s wonders to raise health care’s quality and lower its cost. We will harness the sun and the winds and the soil to fuel our cars and run our factories. And we will transform our schools and colleges and universities to meet the demands of a new age. All this we can do. And all this we will do.

But at the end, again, Obama framed "our common dangers" in the starkest terms:

So let us mark this day with remembrance, of who we are and how far we have traveled. In the year of America’s birth, in the coldest of months, a small band of patriots huddled by dying campfires on the shores of an icy river. The capital was abandoned. The enemy was advancing. The snow was stained with blood. At a moment when the outcome of our revolution was most in doubt, the father of our nation ordered these words be read to the people:

"Let it be told to the future world...that in the depth of winter, when nothing but hope and virtue could survive...that the city and the country, alarmed at one common danger, came forth to meet [it]."

America. In the face of our common dangers, in this winter of our hardship, let us remember these timeless words. With hope and virtue, let us brave once more the icy currents, and endure what storms may come. Let it be said by our children’s children that when we were tested we refused to let this journey end, that we did not turn back nor did we falter; and with eyes fixed on the horizon and God’s grace upon us, we carried forth that great gift of freedom and delivered it safely to future generations.

Whoa. We are facing a deeply alarming economic seize-up. But we're not exactly bleeding in the snow. Does Obama know something we don't?

In the 'yes we can' vein, there was perhaps an echo of Martin Luther King in a compressed version of Obama's familiar historical argument: that we shall overcome because we have overcome in the past, that 'courage is having been there before':

For we know that our patchwork heritage is a strength, not a weakness. We are a nation of Christians and Muslims, Jews and Hindus - and non-believers. We are shaped by every language and culture, drawn from every end of this Earth; and because we have tasted the bitter swill of civil war and segregation, and emerged from that dark chapter stronger and more united, we cannot help but believe that the old hatreds shall someday pass; that the lines of tribe shall soon dissolve; that as the world grows smaller, our common humanity shall reveal itself; and that America must play its role in ushering in a new era of peace.

The perfect tense here -- "we have tasted the bitter swill...and emerged stronger" -- holds the mirror up to King looking forward from the Lincoln Memorial in 1963:

Now is the time to rise from the dark and desolate valley of segregation to the sunlit path of racial justice.

Obama always presents our quest for a more perfect union as being in mid-course: much injustice still to overcome, much already overcome. Here, he affirms that we have got at least some of that bitter swill digested -- leaving him free to extend King's dream of a nation free from prejudice and tribalism from the U.S. to the world.

There was also a deep confidence underlying Obama's unequivocal rejection of the Bush Administration's malign perversions of executive authority - torture, suspension of habeas, kangaroo courts -- coupled with a message to the entire world that as we reject these abuses we will reassert our leadership:

As for our common defense, we reject as false the choice between our safety and our ideals. Our Founding Fathers, faced with perils we can scarcely imagine, drafted a charter to assure the rule of law and the rights of man, a charter expanded by the blood of generations. Those ideals still light the world, and we will not give them up for expedience’s sake. And so to all other peoples and governments who are watching today, from the grandest capitals to the small village where my father was born: know that America is a friend of each nation and every man, woman, and child who seeks a future of peace and dignity, and that we are ready to lead once more.

Finally, to match his raising of the threat level, Obama raised his call "change our politics" to the level of Biblical injunction:

We remain a young nation, but in the words of Scripture, the time has come to set aside childish things. The time has come to reaffirm our enduring spirit; to choose our better history; to carry forward that precious gift, that noble idea, passed on from generation to generation: the God-given promise that all are equal, all are free, and all deserve a chance to pursue their full measure of happiness.

We elected an adult. In the primary, Obama made the Clintons look small; in the general election, he made McCain look small. Now, he's calling on all to follow his example -- of magnanimity to opponents, focus on substantive issues, and disinterested pursuit of policies likely to work. And he's warning us: the consequences will be dire if we don't.

Stone made flesh at the Lincoln Memorial

Speaking at yesterday's pre-inaugural concert at the Lincoln Memorial, Obama found a rather lovely way to physically connect the crowd, and more generally Americans living at this moment, with the historical narative he always invokes in his speeches.

Throughout his campaign and the transition, Obama has framed the change he's calling for as a continuation of American traditions of overcoming injustice in an ongoing struggle to form a more perfect union. Standing in front of tens of thousands of radiant supporters lining the reflecting pool,, he pivoted from the stories encased in the surrounding stone monuments to the living history embodied in the crowd:

What gives me that hope is what I see when I look out across, this mall. For in these monuments are chiseled those unlikely stories that affirm our unyielding faith — a faith that anything is possible in America. Rising before us stands a memorial to a man who led a small band of farmers and shopkeepers in revolution against the army of an Empire, all for the sake of an idea. On the ground below is a tribute to a generation that withstood war and depression — men and women like my grandparents who toiled on bomber assembly lines and marched across Europe to free the world from tyranny’s grasp. Directly in front of us is a pool that still reflects the dream of a King, and the glory of a people who marched and bled so that their children might be judged by their character’s content. And behind me, watching over the union he saved, sits the man who in so many ways made this day possible.

And yet, as I stand here today, what gives me the greatest hope of all is not the stone and marble that surrounds us today, but what fills the spaces in between. It is you — Americans of every race and region and station who came here because you believe in what this country can be and because you want to help us get there....

You proved once more that people who love this country can change it. And as I prepare to assume the presidency, yours are the voices I will take with me every day I walk into that Oval Office — the voices of men and women who have different stories but hold common hopes; who ask only for what was promised us as Americans — that we might make of our lives what we will and see our children climb higher than we did.

It is this thread that binds us together in common effort; that runs through every memorial on this mall; that connects us to all those who struggled and sacrificed and stood here before.

Perhaps this trope will find its way into Obama's Inaugural Speech, which will overlook the same 'monumental' landscape from the other end. A few days ago, Obama defined his inaugural challenge like this:

I think that the main task for me in an inauguration speech, and I think this is true for my presidency generally, is to try to capture as best I can the moment that we are in...

For Obama, capturing the moment has always meant framing it within his idealized version of U.S. history. There was a magic in that stone-made-flesh and flesh-making-history moment yesterday. I suspect he'll conjure it again tomorrow.

In a related vein: James Fallows has complained recently about Obama submitting to the wearisome political imperative of ending every speech with the formulaic "God bless America" - the verbal equivalent of the flagpin. In yesterday's speech Obama varied the formula -- and again, in a sense, made stone flesh. Here was the signoff:

Thank you, America. God bless you.

"America" was the crowd, and the larger electronic crowd beyond. He was not blessing an abstraction, but rather the faces in front of him. Let's see if that makes it in tomorrow, too.

Gates the knife?

In today's Financial Times, Clive Crook argues bluntly that Obama's call for "shared sacrifice" means -- must mean -- new taxes. He proposes a 4-point fiscal reform program for the U.S:

Here is what needs to be done, starting in 2011, but to be announced and enacted as soon as possible. First, raise the retirement age. Second, phase out income tax relief on new mortgage loans. Third, introduce a carbon tax. Fourth, introduce a national value added tax, tied to healthcare reform.

Raising the retirement age and and taxing energy consumption are no-brainers. Reducing state support of homeownership violates U.S. taboos but makes sense at least on the margins, e.g. for second homes or for mortgages over a certain amount. A VAT to fund healthcare reform would be, to borrow a pet Obama phrase, a steep hill to climb in political terms, but makes sound fiscal sense.

Crook did not, however, address a spending target that looms as large as social security: defense. Obama stressed throughout the campaign that drawing down the U.S. occupation of Iraq would save an unspecified portion of a $120 billion yearly tab. Even if the withdrawal goes more or less as planned, some of that money will support tens of thousands of remaining troops and some will go to the Afghanistan/Pakistan morass -- where Obama doubtless aims to spend some of his international political capital on obtaining more help from allies.

Most fundamentally, however, Obama will likely take aim at the Pentagon's long-term procurement programs. And in this struggle he will have a no less formidable and savvy ally than Defense Secretary Robert Gates, who has already been working to reign in the Pentagon's deep-rooted penchant to overinvest in a vast array of high-tech hardware designed to win a prospective World War III.

In a series of speeches and writings this year, Gates has outlined the need to shift spending toward counterinsurgency capability -- pilotless drones, well-armored vehicles, more soldiers. These things are not cheap, but they're a lot cheaper than massive procurements of next-gen hardware designed to fight a militarily competitive nation-state. Here's Gates speaking to the Heritage Foundation, on May 13, 2008:

In a world of finite knowledge and limited resources, where we have to make choices and set priorities, it makes sense to lean toward the most likely and lethal scenarios for our military. And it is hard to conceive of any country confronting the United States directly in conventional terms – ship to ship, fighter to fighter, tank to tank – for some time to come.

Two days later, speaking to military contractors, Gates highlighted the Herculean task of turning Pentagon priorities:

A common mantra at Defense is that the rest of the government isn't at war. Well, a lesson I learned fairly early on was that important elements of the Defense Department weren't at war. Preoccupied with future capabilities and procurement programs, wedded to lumbering peacetime process and procedures, stuck in bureaucratic low-gear. The needs of those in combat too often were not addressed urgently or creatively.

More recently, outlining the National Defense Strategy in the current Foreign Affairs, he cast Pentagon budgeting as a problem of risk management:

The most likely catastrophic threats to the U.S. homeland -- for example, that of a U.S. city being poisoned or reduced to rubble by a terrorist attack -- are more likely to emanate from failing states than from aggressor states...It is true that the United States would be hard-pressed to fight a major conventional ground war elsewhere on short notice, but as I have asked before, where on earth would we do that? U.S. air and sea forces have ample untapped striking power should the need arise to deter or punish aggression -- whether on the Korean Peninsula, in the Persian Gulf, or across the Taiwan Strait. So although current strategy knowingly assumes some additional risk in this area, that risk is a prudent and manageable one.

For forty years, it's been politically toxic for a Democrat to make cuts in military spending. Obama doubtless recognizes the need. And Gates gives him essential cover as well as unmatched know-how.

I should add that I don't know whether Gates sees his calls for "balance," risk management and triage as a means to cut defense spending or simply to control its growth. Note, however, that while lamenting 1990s reductions in "national security" capabilities in the Foreign Affairs article, Gates focused not on military spending per se but on the instruments of soft power:

In many ways, the country's national security capabilities are still coping with the consequences of the 1990s, when, with the complicity of both ends of Pennsylvania Avenue, key instruments of U.S. power abroad were reduced or allowed to wither on the bureaucratic vine. The State Department froze the hiring of new Foreign Service officers. The U.S. Agency for International Development dropped from a high of having 15,000 permanent staff members during the Vietnam War to having less than 3,000 today. And then there was the U.S. Information Agency, whose directors once included the likes of Edward R. Murrow. It was split into pieces and folded into a corner of the State Department. Since 9/11, and through the efforts first of Secretary of State Colin Powell and now of Secretary of State Condoleezza Rice, the State Department has made a comeback. Foreign Service officers are being hired again, his and foreign affairs spending has about doubled since President Bush took office.

And while Gates' list of spending priorities is not short, his sense of finite resources is acute:

When it comes to procurement, for the better part of five decades, the trend has gone toward lower numbers as technology gains have made each system more capable. In recent years, these platforms have grown ever more baroque, have become ever more costly, are taking longer to build, and are being fielded in ever-dwindling quantities. Given that resources are not unlimited, the dynamic of exchanging numbers for capability is perhaps reaching a point of diminishing returns. A given ship or aircraft, no matter how capable or well equipped, can be in only one place at one time.

In any case, on the broadest strategic question - whether and how much to cut the Pentagon budget -- Gates is not "the decider." Obama is.

Related posts:
Back from the shadows: Can Gates steer the surge?
Goo-goo under Gates
Gates repudiates Rumsfeld's "army you have" doctrine
Gates: Have the army you'll go to war with

Deflation nation?

Most Americans lucky enough to own any assets have lost - and are still in process of losing - a significant portion of their wealth in the current crisis. Home values will probably have dropped at least 30-40% before bottoming out. People with half their savings in stock funds have lost in the neighborhood of 20% since the fall 2007 peak-- often more, since most bond funds lost too, and most managed funds have outpaced the broad indexes in the downward dive. Those lucky enough not to have lost jobs or gotten seriously ill probably have lost/will lose about quarter of their nominal net worth.

At the same time, wealth is a fluid and relative thing. What we've lost -- if it doesn't reach the level of something that massively impacts current life, like a home or health -- won't be clear for a long time, and may even turn to gain, if we build on more sustainable foundations. That is, if our collective wealth is more equitably and efficiently shared, if we succeed in reforming education and rebuilding effective public safety nets and fostering innovation in sustainable industries. . Life is long, as Salman Rushdie characters bent on revenge like to say -- and so are our economic biographies.

One large set of variables in assessing economic losses is the potential upside of deflation, broadly understood. Deflation, as officially defined by economists, is both a very bad thing -- perhaps the main precondition of a true Depression -- and relatively modest in percentage terms. Like headline inflation over the last two decades, any official deflation we undergo is likely to register in low single digits.

But headline inflation has not captured a far more rapid inflation in the "Three H's" of economic well-being -- homes, higher education, and healthcare. Add to those high costs the increase of major risk in middle class American life -- job loss, loss of health insurance (or loss of adequate health insurance), loss of defined benefit pensions -- and we've clearly suffered a major "inflation" in the sense that solvency and security are more difficult to obtain than they were a generation ago. The convergence and bursting of our several debt bubbles has made it clear that much of our national wealth was illusory.

If real inflation has outstripped officially measured inflation, perhaps a more broadly understood deflation, enabled in part by good policy, will not only far outstrip any official cost-of-living deflation (or co-exist with official inflation), but actually make prosperity and security more attainable. The linchpins of economic well-being should become relatively easier to obtain:

• Housing: In my New Jersey suburb, 20 miles from New York City, small starter homes scraped $600,000 in 2005. How could even affluent young couples afford, say, a $550,000 mortgage? Probably by taking on some exotic interest-only loan, with the rate escalating in 2-3 years - taken on the assumption that the couple could then either refinance or trade up, financing a more expensive home with profits from the first one. In a year or two or five, that same starter home may cost $400,000 or less, with a mortgage -- if the couple can obtain one -- at a fixed rate under 5%.
• Higher education: I've never really understood the massive runup in college costs, topping out today at over $50,000 per year at prestigious private colleges. Today it's hard to imagine schools, themselves slammed by the fiscal crisis, lowering costs. What should improve fast, though, is the disgustingly exploitive privatization of the student loan business, whereby schools have steered students into loans with opaque terms and usurious rates, sometimes scraping 20% for students in trade schools training for relatively low-wage professions. Expanded opportunities to trade tuition aid for service commitments should also help to bring college within reach for many. At the same time, a swift, massive cultural shift away from all kinds of spending, stemming from economic hardship, should at least slow tuition inflation.
• Healthcare: Effective health insurance reform that provides affordable coverage for the uninsured and mandates adequate coverage of catastrophic costs will halt an enormous source of wealth destruction for Americans. If we can't get this done, and at least bring our healthcare costs and outcomes to the levels enjoyed by most advanced democracies, there's simply no hope for continued American prosperity. Can we afford it in the midst of the economic meltdown? As Obama asked in a Dec. 11 press conference: How can we afford not to?
  
• Debt and consumption: Harsher bankruptcy laws were supposed to discipline borrowers. Now, a massive wave of bankruptcies is disciplining lenders. In hard times, people will take on less discretionary debt and save more. That's bad for the economy short-term, but it will mean less money spent on debt service for many Americans. Debt servicing aside, spending less money on what you don't need makes you wealthier. And while vast numbers of Americans have been driven deep into debt and bankruptcy by circumstances beyond their control, such as uninsured or underinsured illness, there's no doubt that we've all been culturally inclined to spend more than we need to on nonessentials.
  

I've always daydreamed occasionally about being offered fairy tale choices, such as Achilles' choice between a long and happy or short and glorious life. One such imagined supernatural game show question that I posed to myself at various points in the election cycle: would you give up, say, a quarter of your worldly wealth to see Obama elected? That is, to have a shot at this country rolling back the shredding of our civil liberties, belligerent adventurism abroad, growing economic inequality at home, accelerated global warming, etc. etc.? Framed as a purely economic choice: would you stand for a drastic downward revaluation of your assets this year, as part of a national and indeed worldwide revaluing and rebalancing, forcing national and international efforts to restructure on a more sustainable footing? To get even deeper into the realm of nonsensical cosmic planning, this time from a future vantage: was it worth eight years of Bush to get us to Obama?

What's the point of framing up supernatural pseudo-choices? Only to get somehow at this: democracy's saving grace is the capacity to self-correct. In the past, the country has recovered from horrendous mistakes to move on toward renewed prosperity, and, as Obama likes to say, progress toward a more perfect union. The election suggests that American democracy has retained that capacity for self-correction. Will we be able to dig ourselves out the hole we've dug. Obama says "yes we can." For this long lovely moment, the country seems disposed to agree.

Make it thirteen...accomplishments of George W. Bush

As media and electorate kick W. unceremoniously out the door, thoughts turn to a perhaps misguided thought experiment I posted in July, "11 accomplishments of George W. Bush," reposted below. At this late date I'd make it a baker's dozen, adding the auto industry stopgap and close collaboration with the incoming Obama Administration on the transition. Without further ado:

Eleven accomplishments of George W. Bush

July 10, 2008

Like most Americans, I think of George W. Bush as a failed President. Worse than that, I think him not simply as a President who chose unwise policies but as one who assaulted the foundations of American democracy and federalism -- by institutionalizing torture, suspending habeas, violating FISA, corrupting intelligence, and politicizing the Justice Department, the CIA, the EPA and probably every other federal agency.

Nonetheless: our institutions are strong, though weaker when he took office; good people have served during his tenure; and not all of his own impulses and goals were warped. After seven and a half years, the Bush Administration has some accomplishments under its belt. Arrayed together, they look like the pillars of an impressive presidency -- if you discount the incoming missiles of multiple disaster. Here's an equivocal list:

1. Disarmament deal with North Korea - five years and maybe 10 bombs late, but there would seem to be at least a reasonable chance that this rogue will be effectively disarmed. After poking the polecat Kim Jong II and stimulating North Korea's successful weaponization, the Bush Administration has patiently tread a multilateral path that's yielded at least the potential of a good outcome.

2. Bringing Gaddafi in from the cold: a long process with an array of carrots and sticks, but the invasion of Iraq may have concentrated this dictator's mind.

3. Massive increase in AIDS aid: perhaps thanks to Christianist prodding, Bush has showed admirable focus and follow-through on one of the greatest threats to global prosperity.

4. Prescription drug benefit: too expensive, the donut hole is inefficient, private insurers have too great a role, and the drug companies got a giveaway. But seniors do have substantial help in paying their drug bills.

5. No Child Left Behind: the mandate's unfunded and the loopholes in assessment are ridiculous. But we have the halting beginnings of assessing where we're at, state-by-state and district-by-district, in educational achievement.

6. No terror attack on U.S. soil since 9/11: no one will ever know all the reasons why, and many of Bush's "antiterror" measures have come at a dreadful price. But preventing another attack was probably Bush's top priority -- quite a heartfelt one. And there has not been another attack -- here -- on his watch.

7. The FISA bill he wanted: Bush has to know that he's gone all out on this front probably to hand expanded capabilities to a Democratic President. He's probably been motivated partly by the need to obtain cover for his own crimes in breaking FISA. But again, he's doubtless convinced that the intelligence agencies need the powers he's obtained for them. And they probably do need most of them.

8. Decent stewardship of the China relationship: China-bashing on the economic front is mostly demagoguery; it's in everyone's interest that China continue on a peaceful path to first-world economic stature and attendant global influence. The Bush crew has maintained trust and cooperation; it's doubtful whether more pressure could have shaped Chinese economic or geopolitical decisions more to our liking.

9. Deposing the Taliban: yes, the caveats outweigh the accomplishment: we let bin Ladin escape, we took our eye off the ball, we allowed al Qaeda to regroup and left a foundling government in a shattered country to its own devices. But who's to say the initial campaign couldn't have been botched? The Taliban went down swiftly, with a minimum of blood.

10. Deposing Saddam: again, the price paid and the terms chosen were catastrophic. This was not a job to be undertaken on false pretenses, without winning our chief allies' assent or the world's acceptance; it was the wrong war at the wrong time, and it gave new life to our worst enemies. But Saddam was a threat to stability in the middle east and therefore in the world. Iraqis would have had to cope with his end at some point, and who's to say the transition would have been better without the heavy hand of the hegemon? There is now at least a reasonable hope that a non-monstrous national government will assert control over Iraq. Which suggests another accomplishment:

11. The Surge: if a hedge fund manager loses $700 million out of a $1 billion, do we credit him with decisions that bring the balance back up to a half billion? A poor analogy. Money is easily accounted; lives can't be, and actual historical outcomes can't be compared with might-have-beens. Nonetheless, whatever you think of the decision to go to war or of the first four years of its execution, the surge was an extraordinarily difficult decision that's worked better than basically anyone expected. It was also something of a reversal for Bush, who had lived and died by the Rumsfeld doctrine to that point. I don't think anyone can deny that the opportunity for a decent outcome in Iraq is far greater now than in fall 2006; to deny the surge's centrality in the turnaround is deep denial. Yes, those who designed and executed it got lucky - but they made their own luck. The surge enabled the Sunni Awakening, the Sadr rope-a-dope, and the long-delayed beginnings of legislative progress.

So there you have it. I have not convinced myself that Bush was a good President, or even not a monstrous President -- I consider the institutionalization of torture as established U.S. policy a truly monstrous legacy. So what exactly is the point of this exercise? Perhaps its this: in a long-established democracy, there's almost an institutional inertia toward some constructive action. After a Rumsfeld, institutional pressures and norms will push up a Gates. While stalwart nonpolitical appointees like Richard Clarke may get pushed out, others, like Christopher Hill will remain. Even a bad crew remains accountable to a large degree to voters. As long as people don't vote away their civil liberties or other Constitutional protections, the system self-regulates and self-corrects.

Obama, drinkin' Lincoln

Obama may be taking this Lincoln thing a bit far. Today, he told George Stephanopoulos that in preparation for his inaugural address he's been reading Lincoln, and

Every time you read that second inaugural, you start getting intimidated...

Okay, so in his own terms, how does Obama frame the challenge?

And so, I think that the main task for me in an inauguration speech, and I think this is true for my presidency generally, is to try to capture as best I can the moment that we are in...

Wait...what moment is it 'that we are in'? March 4, 1865:

...let us strive on to finish the work that we are in...

As Obama elaborates, it's clear that the moment that he's in -- deep -- is that damned speech...

I mean, I think that when you have a successful presidential speech of any sort, it's because that president is able to say -- is able to put their finger on here's the moment we're in. This is the crossroad that we're at. And then to project confidence that if we take the right measures that we can once again be that country, that beacon for the world.

Something like this?

With malice toward none, with charity for all, with firmness in the right as God gives us to see the right, let us strive on to finish the work we are in, to bind up the nation's wounds, to care for him who shall have borne the battle and for his widow and his orphan, to do all which may achieve and cherish a just and lasting peace among ourselves and with all nations.

Of course, the optimism that became de rigeur for presidents along the way was not exactly Lincoln's style. I doubt Obama will be wondering aloud on Jan. 20 whether it's God will that all the wealth piled up by the credit card shall be sunk before we pull ourselves out of the financial mess "that we are in."