Thursday, April 7, 2011

Time To Re-Brand!

For the last several memos I have been posting what I deem are the more informative e mails I monitored while I was away. In the next several days I will return to my format of posting articles that I find on my own along with those sent to me by others. I have had some computer glitches and some of the more recent memos were posted without spacing. I am not sure I have solved the problem. --- Stratfor's Friedman discusses Japan, the Persian Gulf and energy. (See 1 below.) --- Gingrich deciphers Obama's Libyan Speech. (See 2 below.) --- Obama campaigned pledging he would not tax the middle class on those earning less than $250.000. No need to tax them directly since he is doing it indirectly through his administration's inflationary policies. (See 3 below.) --- Whether this investment advisor is right or not remains to be seen but he tracks my thinking. (See 4 below.) --- Growth in government and the pernicious increase in government power, to some degree, began with WW 1 and President Wilson's socialistic philosophical tendencies. Then the Great Depression hit and Roosevelt extended this trend by leaps and bounds. WW 2 helped accelerate Roosevelt's push for government dominance. Again Roosevelt and his famous Cabinet were basically Socialists. Today states have literally become mendicants standing in line with their cap in hand waiting for federal bureaucrats to redistribute their citizen's money back to them. So what have we to show for the last 100 years? Unpayable debt and rising deficits, accompanied by extreme intrusions into health care, education, business and the list is endless. Meanwhile, resulting trends are mostly unfavorable, costs have surged. We have lost our competitive edge in many areas we once dominated, urban family structure has mostly disintegrated and many of our citizens, like our states, have become dependent on government dole. It would appear progressive thinking has produced retrogressive results. Are we better off? In some ways we are because we are living longer but that is not because of government. We are wealthier but again that is not because of government. We have basically eliminated discrimination and that is because of government. Much of what was a moral obligation on the part of citizenry, however, has been codified into law because of government and with mixed results. Ethical standards have declined and I suspect government roadblocks and restrictions have played a part. If becoming more like Europe is desirable, then government has been successful but I am not sure our Founders would approve. This leads me to the following thought: I believe the Republican Party should re-brand itself as the Constitutional Party. This name more closely aligns the party with its basic principles and would remind voters the party's roots are constitutionally based. In essence is that not the Tea Party's core message? The Republican Party has strayed so far from its philosophical moorings that I believe it would be a healthy for it to re-name itself. But then it could result in simply putting a new shirt on the same body. --- The current political clash has probably been manipulated by Obama who has never quit campaigning. When Democrats controlled government they failed their moral obligation to present a budget and now Obama and his clan want to pin the tail on the Republicans for their own failings. It might work if the Republicans, cave as they generally do. A shut down in government is fraught with dire consequences because of what I said above - government has become amoebic. But I would bet we will find out we can do without half the government we have and we will probably not only survive but also thrive. (See 5 below.) --- Have a nice weekend Dick ----------------------------------------------------------------------------------------------------------------------- 1)Japan, the Persian Gulf and Energy By George Friedman Over the past week, everything seemed to converge on energy. The unrest in the Persian Gulf raised the specter of the disruption of oil supplies to the rest of the world, and an earthquake in Japan knocked out a string of nuclear reactors with potentially devastating effect. Japan depends on nuclear energy and it depends on the Persian Gulf, which is where it gets most of its oil. It was, therefore, a profoundly bad week for Japan, not only because of the extensive damage and human suffering but also because Japan was being shown that it can’t readily escape the realities of geography. Japan is the world’s third-largest economy, a bit behind China now. It is also the third-largest industrial economy, behind only the United States and China. Japan’s problem is that its enormous industrial plant is built in a country almost totally devoid of mineral resources. It must import virtually all of the metals and energy that it uses to manufacture industrial products. It maintains stockpiles, but should those stockpiles be depleted and no new imports arrive, Japan stops being an industrial power. The Geography of Oil There are multiple sources for many of the metals Japan imports, so that if supplies stop flowing from one place it can get them from other places. The geography of oil is more limited. In order to access the amount of oil Japan needs, the only place to get it is the Persian Gulf. There are other places to get some of what Japan needs, but it cannot do without the Persian Gulf for its oil. This past week, we saw that this was a potentially vulnerable source. The unrest that swept the western littoral of the Arabian Peninsula and the ongoing tension between the Saudis and Iranians, as well as the tension between Iran and the United States, raised the possibility of disruptions. The geography of the Persian Gulf is extraordinary. It is a narrow body of water opening into a narrow channel through the Strait of Hormuz. Any diminution of the flow from any source in the region, let alone the complete closure of the Strait of Hormuz, would have profound implications for the global economy. For Japan it could mean more than higher prices. It could mean being unable to secure the amount of oil needed at any price. The movement of tankers, the limits on port facilities and long-term contracts that commit oil to other places could make it impossible for Japan to physically secure the oil it needs to run its industrial plant. On an extended basis, this would draw down reserves and constrain Japan’s economy dramatically. And, obviously, when the world’s third-largest industrial plant drastically slows, the impact on the global supply chain is both dramatic and complex. In 1973, the Arab countries imposed an oil embargo on the world. Japan, entirely dependent on imported oil, was hit not only by high prices but also by the fact that it could not obtain enough fuel to keep going. While the embargo lasted only five months, the oil shock, as the Japanese called it, threatened Japan’s industrial capability and shocked it into remembering its vulnerability. Japan relied on the United States to guarantee its oil supplies. The realization that the United States couldn’t guarantee those supplies created a political crisis parallel to the economic one. It is one reason the Japanese are hypersensitive to events in the Persian Gulf and to the security of the supply lines running out of the region. Regardless of other supplies, Japan will always import nearly 100 percent of its oil from other countries. If it cuts its consumption by 90 percent, it still imports nearly 100 percent of its oil. And to the extent that the Japanese economy requires oil — which it does — it is highly vulnerable to events in the Persian Gulf. It is to mitigate the risk of oil dependency — which cannot be eliminated altogether by any means — that Japan employs two alternative fuels: It is the world’s largest importer of seaborne coal, and it has become the third-largest producer of electricity from nuclear reactors, ranking after the United States and France in total amount produced. One-third of its electricity production comes from nuclear power plants. Nuclear power was critical to both Japan’s industrial and national security strategy. It did not make Japan self-sufficient, since it needed to import coal and nuclear fuel, but access to these resources made it dependent on countries like Australia, which does not have choke points like Hormuz. It is in this context that we need to understand the Japanese prime minister’s statement that Japan was facing its worst crisis since World War II. First, the earthquake and the resulting damage to several of Japan’s nuclear reactors created a long-term regional energy shortage in Japan that, along with the other damage caused by the earthquake, would certainly affect the economy. But the events in the Persian Gulf also raised the 1973 nightmare scenario for the Japanese. Depending how events evolved, the Japanese pipeline from the Persian Gulf could be threatened in a way that it had not been since 1973. Combined with the failure of several nuclear reactors, the Japanese economy is at risk. The comparison with World War II was apt since it also began, in a way, with an energy crisis. The Japanese had invaded China, and after the fall of the Netherlands (which controlled today’s Indonesia) and France (which controlled Indochina), Japan was concerned about agreements with France and the Netherlands continuing to be honored. Indochina supplied Japan with tin and rubber, among other raw materials. The Netherlands East Indies supplied oil. When the Japanese invaded Indochina, the United States both cut off oil shipments from the United States and started buying up oil from the Netherlands East Indies to keep Japan from getting it. The Japanese were faced with the collapse of their economy or war with the United States. They chose Pearl Harbor. Today’s situation is in no way comparable to what happened in 1941 except for the core geopolitical reality. Japan is dependent on imports of raw materials and particularly oil. Anything that interferes with the flow of oil creates a crisis in Japan. Anything that risks a cutoff makes Japan uneasy. Add an earthquake destroying part of its energy-producing plant and you force Japan into a profound internal crisis. However, it is essential to understand what energy has meant to Japan historically — miscalculation about it led to national disaster and access to it remains Japan’s psychological as well as physical pivot. Japan’s Nuclear Safety Net Japan is still struggling with the consequences of its economic meltdown in the early 1990s. Rapid growth with low rates of return on capital created a massive financial crisis. Rather than allow a recession to force a wave of bankruptcies and unemployment, the Japanese sought to maintain their tradition of lifetime employment. To do that Japan had to keep interest rates extremely low and accept little or no economic growth. It achieved its goal, relatively low unemployment, but at the cost of a large debt burden and a long-term sluggish economy. The Japanese were beginning to struggle with the question of what would come after a generation of economic stagnation and full employment. They had clearly not yet defined a path, although there was some recognition that a generation’s economic reality could not sustain itself. The changes that Japan would face were going to be wrenching, and even under the best of circumstances, they would be politically difficult to manage. Suddenly, Japan is not facing the best of circumstances. It is not yet clear how devastating the nuclear-reactor damage will prove to be, but the situation appears to be worsening. What is clear is that the potential crisis in the Persian Gulf, the loss of nuclear reactors and the rising radiation levels will undermine the confidence of the Japanese. Beyond the human toll, these reactors were Japan’s hedge against an unpredictable world. They gave it control of a substantial amount of its energy production. Even if the Japanese still had to import coal and oil, there at least a part of their energy structure was largely under their own control and secure. Japan’s nuclear power sector seemed invulnerable, which no other part of its energy infrastructure was. For Japan, a country that went to war with the United States over energy in 1941 and was devastated as a result, this was no small thing. Japan had a safety net. The safety net was psychological as much as anything. The destruction of a series of nuclear reactors not only creates energy shortages and fear of radiation; it also drives home the profound and very real vulnerability underlying all of Japan’s success. Japan does not control the source of its oil, it does not control the sea lanes over which coal and other minerals travel, and it cannot be certain that its nuclear reactors will not suddenly be destroyed. To the extent that economics and politics are psychological, this is a huge blow. Japan lives in constant danger, both from nature and from geopolitics. What the earthquake drove home was just how profound and how dangerous Japan’s world is. It is difficult to imagine another industrial economy as inherently insecure as Japan’s. The earthquake will impose many economic constraints on Japan that will significantly complicate its emergence from its post-boom economy, but one important question is the impact on the political system. Since World War II, Japan has coped with its vulnerability by avoiding international entanglements and relying on its relationship with the United States. It sometimes wondered whether the United States, with its sometimes-unpredictable military operations, was more of a danger than a guarantor, but its policy remained intact. It is not the loss of the reactors that will shake Japan the most but the loss of the certainty that the reactors were their path to some degree of safety, along with the added burden on the economy. The question is how the political system will respond. In dealing with the Persian Gulf, will Japan continue to follow the American lead or will it decide to take a greater degree of control and follow its own path? The likelihood is that a shaken self-confidence will make Japan more cautious and even more vulnerable. But it is interesting to look at Japanese history and realize that sometimes, and not always predictably, Japan takes insecurity as a goad to self-assertion. This was no ordinary earthquake in magnitude or in the potential impact on Japan’s view of the world. The earthquake shook a lot of pieces loose, not the least of which were in the Japanese psyche. Japan has tried to convince itself that it had provided a measure of security with nuclear plants and an alliance with the United States. Given the earthquake and situation in the Persian Gulf, recalculation is in order. But Japan is a country that has avoided recalculation for a long time. The question now is whether the extraordinary vulnerability exposed by the quake will be powerful enough to shake Japan into recalculating its long-standing political system. ---------------------------------- --------------------------------------------------------------------------------------- 2)Measuring Obama’s Speech By Newt Gingrich Monday morning, I posted to Facebook a five question checklist by which to measure President Obama’s speech on our military engagement in Libya. Here is my analysis of how effectively the president answered those questions: Does President Obama cite working with Congress more than working with the Arab League or the United Nations? No. President Obama mentioned Congress just once in a 3,400 word speech. In contrast, he mentioned the United Nations Security Council and Arab league eight times. Furthermore, he dedicated a significant portion of his speech to the importance of cooperation between Western and Arab allies. As I have said, I do think having allies in this effort is valuable, especially Arab ones. However, that desire must be appropriately balanced against the obligation the president has to respect Congress’ role, as well as the objectives of the mission at hand (more on this later). President Obama made it remarkably clear in his speech that he places a much higher value on gaining the approval of the United Nations and the Arab League than he does on consulting Congress. By his own account, he committed the United States to action with a United Nations resolution before consulting with Congressional leaders, which he did only just before the bombing began. The president also never seemed to consider the fact that allies – including Arab ones – could have been assembled faster in a way that bypassed the corruption of the United Nations. Does President Obama define replacing Qaddafi as our clear and explicit goal? Having said Qaddafi “needs to leave" that has to be the goal of this war. No. In fact, he said quite the opposite, that our mission was to stop an imminent humanitarian catastrophe and that “broadening our military mission to include regime change would be a mistake.” There are two problems with the president’s argument. The first goes back to the disproportional value the president places on gaining the approval of the United Nations. The president tried to make the case Monday night that our military engagement was justified in order to protect human life. Yet, the first reports of Qaddafi’s forces firing on the Libyan people, including with his air force, arose in late February. On March 5th the Libyan dictator’s army fired on unarmed protesters. On March 6th, his forces laid siege to the rebel-held town of Zawiyah. The president, however, chose to wait almost two weeks, until March 19th, for a diplomatic consensus to emerge and resolutions to be passed in the U.N. Security Council before taking action. The disturbing conclusion one can draw from President Obama’s actions is that he believes the special duty he spoke of, for the United States to not turn a blind eye to atrocities committed by dictators, ranks lower on his list of priorities than gaining approval from the United Nations to do something about them. He clearly favors muddled coalition consensus to moral leadership. The second problem is that leaving Qaddafi in power will not stop the humanitarian crisis; it simply drives it underground. In the face of overwhelming military superiority, Qaddafi will most likely conclude that his best option is to retaliate in ways that cannot be stopped with air power. In fact, hearing the President of the United States publicly say he would not use the military to drive him out of power will almost certainly convince Qaddafi his best option is to dig in. The United States is signaling that all he has to do is wait it out because the president has explicitly told Qaddafi that we are not going to force him to leave power. This leaves us with an open ended commitment to enforce a no-fly zone. The Iraq no-fly zone lasted a dozen years and did not remove Saddam Hussein from power. The simple fact is that so long as Qaddafi remains in power, the people of Libya remain at risk of violence by their government. That’s why the president’s “mission accomplished” message rings so hollow. 3. Does President Obama pledge to send a request to Congress to pay for the cost of the war so our men and women in uniform are not asked to take it out of an already stretched budget while they are still engaged in two other wars and several small campaigns? No. The president did not mention how this effort was going to be paid for. All indications are that it will come directly from the Pentagon’s budget, leaving our men and women in uniform who are already stretched with even fewer resources. 4. Does President Obama acknowledge the danger of Al Qaeda allies among the anti-Qaddafi forces and pledge to work for a moderate replacement government without extremist factions? Partial credit. The president never acknowledged the likelihood of the presence of al-Qaeda within the rebel forces but did speak vaguely about diplomatic efforts to “support a transition to the future that the Libyan people deserve.” He then concluded his speech with a more specific commitment that the United States would find ways to help those around the world that believe in core American principles. 5. Does President Obama describe clearly the coalition command structure, the American role, and an allied commitment to defeat Qaddafi? No. In fact, his explanation of handing off command to NATO made it seem as if NATO was some sort of separate country with its own military resources. In fact, NATO is simply a military alliance and command structure through which our allies conduct joint military operations. In practice, handing off control of the operation to NATO only means that command will be transferred from American General Carter Ham (Commander of U.S. Africa Command) to American Admiral James Stavridis (Supreme Allied Commander-Europe). The president also failed to mention there is currently another engagement being commanded by NATO – the mission in Afghanistan. Of course, mentioning that would have exposed the smokescreen he was trying to create, since the United States continues to pay a heavy financial and human toll in Afghanistan every day. The president’s long overdue explanation to the country was unsatisfactory in providing clear objectives for Libya. He did not explain why he valued the consensus of the international community over the Congress. His previously stated goal of removing Qaddafi is not in line with the goals of the coalition. He has placed the U.S. military in the position of refereeing a civil war under the auspices of a humanitarian effort without a definition of success. Lastly, the president cannot say today when our commitment to enforcing the no-fly zone might end. What Should Have Been Done versus What Must Be Done Now On February 24, I stated that U.S. military force was not necessary to remove Qaddafi. He was clearly in a weak position and we could have worked with our allies, particularly our Arab allies, who want to see a post-Qaddafi Libya, using quiet, covert, and indirect action to get rid of Qaddafi. On March 3rd the president took that option off the table when he unambiguously declared that Qaddafi must step down from power and leave. This statement put the authority and prestige of the United States against a dictator, committing the United States to that objective. Anything less would be seen as a defeat for the United States. In that new reality, I commented on March 7th that we should declare a no-fly zone in support of the president’s public commitment to oust the dictator. By March 19th, however, the president had dropped his objective of getting rid of Qaddafi and adopted the U.N.’s objective of enforcing a no-fly zone for a humanitarian cease-fire. I said at that time I did not support using the U.S military if it was not for the expressed purpose of removing Qaddafi from power. I reiterated that prior to March 3rd, I would not have intervened militarily, but after March 3rd the only reason to use military force was to get rid of Qaddafi. World events are becoming more complicated, intertwined, and fast paced. As such, our leaders need to be able to adjust their analysis and prescriptions as the facts dictate. ------------------------------------------------------------------------------------------------------------------------- 3)Obama’s Monetary Policy: Stick It to the Middle Class Inflated federal egos drive real-world inflation ever higher. By Kyle-Anne Shiver It’s a rare day when I, a self-confessed macroeconomics ninny, dare to write about anything so weighty as federal monetary policy. My husband of four decades loves to joke that I know nothing about money except how to spend it. (Ha. Ha.) He fails to mention that I have been the chief financial officer of my household budget for 41 years now — that I have managed to put wholesome, safe meals on our family’s table through some of the most treacherous-to-the-middle-class periods of inflation in American history. Or that I take only cash to purchase nearly 100 items every single week and am never off my cost estimate by more than a few dollars at checkout. These are feats of which I am quite proud. In the process of weekly grocery shopping over four decades, I have become an expert at spotting inflation before my financial-guru husband has the slightest clue what’s around the bend. I’ve been sounding the hyperinflation alarm for more than a year — to rolling eyes and shrugs, and the all-too-familiar “you just want a raise” discounting tactic. So when I read this little piece in the Wall Street Journal last week, I would have been downright giddy at the validation, if I weren’t so utterly depressed by the reality. It seems that one heck of a prestigious dude — William Dudley, president of the New York Federal Reserve — decided to have a little tête-à-tête with local consumers, no doubt sensing a need to bolster their confidence in the Fed’s more-fishy-by-the-hour monetary policy. Mr. Dudley gave a nice PR speech highlighting “improvements” in the economy and the Fed’s “successes.” Then came the questions. One guy had the audacity to hope he could make some sense out of the government’s insistence that inflation remains minimal despite the largest monthly increase in food costs in 36 years — and gas spiking so much that soon the cost of getting to work may exceed one’s wages. Dudley made use of a skill they must have taught him at Berkeley, proceeding to ram his Goldman Sachs resume, along with his Gucci loafer, right through his front teeth: “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful,” he replied. “You have to look at the prices of all things.” To which one truly great American responded: “I can’t eat an iPad.” He might as well have added, “I can’t drive an iPad to work either.” And at the rate grocery and gas prices are rising, by the end of this year, I couldn’t afford that iPad’s monthly service fee even if I had enough discretionary income to purchase the little piece of dazzling technology in the first place. If you ask me, Ms. typical American middle-class consumer, I would have to say that Mr. Dudley’s current yearly salary of $410,000 in taxpayer money is just a tad inflated as well. That $410,000 of our money is mere chicken-feed to a man of Mr. Dudley’s stature, I’m told. When he was at Goldman Sachs, he was pulling in millions every year. I’m sure he was worth every penny. If inflation really were down in the 2% range on the genuine necessities of life for us little people, then I wouldn’t begrudge the guy his half-million in wages and benefits. But Dudley’s salary, along with Geithner’s and Bernanke’s and even Obama’s, are all based on lying statistics that mean nothing in the real world where inflation is actually rampant. ObamaCare alone has caused a nearly 40% hike in insurance premiums for individual policies such as the one my self-employed husband and I have. The Democrats’ save-the-deadbeats credit card law caused an immediate rise in interest rates for us always-pay-on-time consumers to cover the cost of the mandated write-offs. Right here, in the real world, Obama’s monetary policy is starting to look like it has a bottom line screw-the-middle-class philosophy. For the president’s information, the most dreaded word in every middle-class household’s budget confab is — all together now — INFLATION. And just because a few golden-boy hotshots in the jet set can somehow ignore the cost of groceries and gas when they do their little on-paper tallies of deceptive figuring does not mean that a real family can get by without taking these vital things into account. When inflation drives up the cost of food to fuel the little human bodies sitting around the dinner table every night, then the family must get the money from somewhere else in the budget. Otherwise children go hungry. We don’t have money-printing presses in our living rooms. When inflation drives up the cost of gas — and gas is necessary to get to work and school and all the other places we must go — then that extra money has to come from somewhere else. The yearly vacation, which has been cut down to a couple of days close by, has to go entirely. Or that summer camp we were planning to send the kids to is out. Or the braces will have to go on the credit card whose interest is way above “prime rate.” There isn’t a middle-class family in this entire country who does not live in dread of the I-word. Inflation stalks like a thief in the night, filling the nightmares of homemakers and breadwinners alike. Inflation is the invisible beast that steals the long-awaited raise before it has a chance to hit the bank account. Inflation is the disease that ravages the arduously saved dollars of decades. Inflation is the bandit that steals from the poor while hardly ever even noticed by the likes of the politicians who guilefully prod its crime spree. Inflation is the monster who gobbles up the goodies of responsible citizens no matter their station. So, when Obama and Bernanke and all the Fed gurus like Mr. Dudley put their little heads together and formulate a monetary policy, it would really be nice if they remembered — just once — that while the iPads and the Guccis and the golf clubs they love so much are simply wonderful if they cost a little less, the rest of us do have to worry about the rising cost of our groceries and our gas. In our world, the necessities of life don’t get paid for with other people’s money. We in the middle class pay the most taxes and fuel the government engine. It would be nice if we weren’t told to eat our iPads when we notice that our government has set out to deflate the middle class. Kyle-Anne Shiver is an independent journalist and a frequent contributor to American Thinker. ------------------------------------------------------------------------------------------------------------------------- 4) The Worst Fears Are Coming True By Dr. Steve Sjuggerud Aren't you tired of "experts" warning about U.S. debts and the dollar? I've heard the warnings of many of these "experts" for literally decades. But fortunately, I never bought into the fearmongering. Instead, I stuck with what I do best: finding great investment opportunities for my readers. It's worked out darn well – and my readers have even made money multiple times by betting on a RISE in the dollar when the fearmongering got too great. But times just changed, and the implications are serious… To this point in my near-two-decade career in the investment business, I haven't worried much about the debt. It's primarily because in my research, I've found there is no way to get the timing right on when these problems will come home to roost. The sky might fall someday, but predicting which day is tough. I found that, for decades, the "action" in the financial markets didn't add up with predictions from the "experts"… Every time the sky would fall in the financial markets, investors would BUY the U.S. dollar, and they'd BUY U.S. government debt. Far from teetering on the brink, the U.S. was the safe haven for decades. But for the first time I can remember, investors did NOT flee to dollars or U.S. government bonds after a crisis. I'm talking about the Japanese disaster… Nobody has talked about it. But today, the dollar is lower – and U.S. government bond prices are lower (interest rates are higher) – than they were before the disaster. In short, for the first time, investors didn't flee to the safety of the dollar. You can argue that Japan's disaster didn't devastate Main Street USA, so we shouldn't have expected investors to run to the dollar anyway. But I think this drop is significant… This is the first time I've seen that the U.S. dollar and U.S. government bonds are no longer the world's "safe haven" investment. While the U.S. dollar and U.S. government bonds are down, commodity prices (like gold, silver, and oil) are up. And stock prices are up. The U.S. government has made no secret that it's cut interest rates to zero and it's "printing money" to prop up the economy. That has fueled bull markets in stocks and commodities. As an investor, I expect the existing trend to continue from our government… which is bad for the dollar and U.S. bonds. I can't know the day of reckoning when it comes to the debt and the dollar, but it is closer than ever. Until the day of reckoning arrives, the Bernanke Asset Bubble is in full effect in the financial markets. So as strange as it may sound, you want to stay invested in stocks and commodities until you can't stand it anymore. Just have an exit strategy of some kind – like trailing stops – in place. ------------------------------------------------------------------------------------ --------------------------------- 5)Who Really Wants a Shutdown? President Obama does, but the GOP's strategy is a lot less clear. For people who keep saying they don't want a government shutdown, Washington's warring parties are sure acting like they can't wait for it to happen. Since the policy stakes of this particular drama are so low, we can only assume this showdown is about Democrats and Republicans proving their relative political manhood. As we went to press last night it sure looked as if President Obama wouldn't mind a shutdown and thinks he'd benefit politically from it. The White House announced yesterday that Mr. Obama would veto the House Republican bill for a one-week temporary budget extension that would have kept federal agencies operating. That bill would have funded the military for the rest of the year, cut another $12 billion in domestic spending, and allowed more time to negotiate. The funding for the rest of this year has been a special priority of the Pentagon, which otherwise must move money around to keep funding the war effort. After meeting with Congressional leaders again on April 7, President Obama says that some progress has been made in budget negotiations but admits he is not yet ready to express "wild optimism" due to the difficulty of the issues being hammered out. Mr. Obama still said no, even though the official White House statement of policy on the bill listed no specific policy objections. So unless a deal is reached today, as of midnight tonight 800,000 government workers will be furloughed and nonessential federal operations will shut down. Keep in mind this fight is only over funding for the last six months of fiscal 2011. Democrats were supposed to pass this budget last year but failed to do so. House Republicans proceeded to cut $61 billion after two years of record spending, but Mr. Obama says he'll accept only $33 billion and most of that must come not from specific programs but from "unobligated balances" that might not be spent anyway. Republicans now want $40 billion and cuts that are real. View Full ImageAFP/Getty Images Inviting a shutdown sooner or later has looked to be the White House strategy since Mr. Obama unveiled his own budget in February that increased spending and dodged any serious budget reform. Our guess is that Mr. Obama's political advisers have concluded that the lesson from Bill Clinton's 1995 shutdown is that presidents win such showdowns. If they don't believe this, why risk a shutdown over $7 billion and a few policy differences like funding for Planned Parenthood? If Mr. Obama wants to reduce any harm from a shutdown, he also has the ability to do so. The Justice Departments of two previous Democratic Presidents, Jimmy Carter and Mr. Clinton, issued opinions with expansive views of what the executive branch could spend money on even during a shutdown. Social Security checks could still be issued, the troops could still be funded, and agencies that rely on user fees could also stay open, for example. Yet this White House is pitching this shutdown as if it will do untold damage to the country. This fits a political strategy designed to blame Republicans as reckless radicals. That said, we're not sure what the GOP strategy is at this point, if its leaders even have one. Even $33 billion in genuine cuts would reduce the budget baseline and leverage much greater cuts in future years. Republicans run the risk of going to the mattresses in pursuit of relatively small additional gains that they may not get in any case. We understand that some in the tea party and certain cable TV hosts want a government shutdown for their own reasons. But these are the same cable pundits who insist that even though $61 billion in cuts are trivial, Republicans should still shut down the government to get them. Self-contradiction is not a sound political strategy. Republicans also say that if they back down now they'll have no credibility for the bigger fights to come over the debt limit and Congressman Paul Ryan's 2012 limit. We think the opposite is more likely. Republicans will have more credibility over fights that really matter if they show they're willing to compromise now. And if Republicans back down next week after a shutdown begins, as they did in 1995, they will look even worse to their own supporters and have squandered even more political capital for very little return. We're not opposed to a shutdown showdown, but the policy stakes ought to be worth the political investment. The reforms in Mr. Ryan's just-released 2012 budget are worth such a fight, as are serious and enforceable spending restrictions in return for a debt limit increase. Republicans need to prepare voters for these major policy choices. A government shutdown over $10 billion or so in a $3.5 trillion budget will be hard for voters to understand. We know that Mr. Obama's strategy is to appear to be reasonable while portraying Republicans as fiscal lunatics. The split-the-difference politics of cutting $33 billion or $40 billion gives him a chance to pull this off. As for Republicans, if the government does shut down, they'd better stick together until they have something to show for it. Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved -----------------------------------------------------------------------------------------------------------------------

No comments: