The Enterprise Blog

How would President Romney handle another bank crisis?

By James Pethokoukis

November 9, 2011, 1:34 pm

For me, this was the best bit of the Republican debates by far:

BLOOMBERG’S GOLDMAN: Governor Romney, it’s 2013, and the European debt crisis has worsened. Countries are defaulting. Europe’s largest banks are on the verge of bankruptcy. Contagion has spread to the U.S. And the global financial system is on the brink. What would you do differently than what President Bush, Henry Paulson, and Ben Bernanke did in 2008?

ROMNEY:  Clearly, if you think the entire financial system is going to collapse, you take action to keep that from happening. … But I can tell you this—I’m not interested in bailing out individual institutions that have wealthy people that want to make sure that their shares are worth something. I am interested in making sure that we preserve our financial system, our currency, the banks across the entire country. …  There is no question but that the action of President Bush and that Secretary Paulson took was designed to keep not just a collapse of individual banking institutions, but to keep the entire currency of the country worth something and to keep all the banks from closing, and to make sure we didn’t all lose our jobs. My experience tells me that we were on the precipice, and we could have had a complete meltdown of our entire financial system, wiping out all the savings of the American people. So action had to be taken.

Mitt Romney and the other GOPers might get a similar question tonight given what’s happening in EU credit markets. I wonder if Romney, if he gets a second bite at the apple, might suggest a plan created by his economic adviser Glenn Hubbard of Columbia, as well as Hal Scott of Harvard and Luigi Zingales of the University of Chicago. If not, he should.

Here are basics (via the WSJ): It is basically a version of the good bank/bad bank—also incorporating a debt-equity swap—solution run by the FDIC. The Bad Bank would assume all the troubled assets and long-term debt, and would also received a loan from the Good Bank. The Good Bank would have all the remaining assets, as well as insured deposits and  FDIC-guaranteed short-term debt as liabilities. After the split, the good bank could be cut loose from FDIC receivership. Long-term debtholders would get equity in the Good Bank, old shareholders would get equity in the Bad Bank.

The debate version of that plan: “I would have the FDIC take over the failed bank, fire the top execs, split it in two and put the healthy half back on the market ASAP.”

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Why Republicans should insist on dynamic scoring

By James Pethokoukis

November 9, 2011, 12:23 pm

So Super-Committee Republicans have put $300 billion (over ten years) in so-called revenue raises on the table. The LA Times breaks it down (bold is mine):

The GOP plan would essentially swap lower tax rates … for new limits on itemized tax deductions used primarily by wealthier households, such as the mortgage interest deduction on second homes. Republicans estimate that closing or limiting such itemized deductions would generate $250 billion in new tax revenue over 10 years, some of which would be applied to the deficit, with the rest used to lower income tax rates across all brackets.

The top income tax rate under the GOP proposal would drop permanently to 28 percent from the current 35 percent enacted under Bush. …  Republicans believe the lower tax rate would generate economic growth that would lead to additional tax revenue.

Democrats argue against assuming that tax cuts would—at least to some extent—pay for themselves. In fact, they have been making that “static scoring” argument for 30 years. They want higher revenues from higher tax rates, not lower. But why not accept at least a modest dynamic scoring effect and assume some feedback effect from tax cuts on national income? The data suggest the Super Committee should do just that. As an analysis from the National Bureau of Economic Research notes:

According to the researchers, the neoclassical growth model and all of its variants indicate that the dynamic response of the economy to tax changes is substantial. In almost all instances, they find, tax cuts are at least partly self-financing.  …  They find that, in the long run, about 17 percent of a cut in labor taxes is recouped through higher economic growth. The comparable figure for a cut in capital taxes is about 50 percent. This means that the true revenue cost of a cut in capital taxes is only half of the cost estimated with static scoring.

Beyond the Super Committee, Republicans should push for measures that move the U.S. tax system away from taxing income and toward taxing consumption. As one well-regarded study found: “The model predicts significant long-run increases in output from replacing the current U.S. federal tax system with a proportional consumption tax. For our base case, output would rise eventually by more than 9 percent.” Indeed, even if added output was just half that level, it would increase revenue as a share of GDP by a full percentage point. The way to get more revenue—if more revenue is even needed—is by faster economic growth.

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Nick Schulz

Yes, Warren Buffett is confusing the tax debate

By Nick Schulz

November 9, 2011, 12:19 pm

Former Clinton econ adviser Alicia Munnell asks “Is Warren Buffett Confusing the Tax Debate?” Her answer is “yes” (that’s Phil Levy’s answer, too, btw).

She writes:

Warren Buffett has been making the point whenever possible that he pays a smaller percent of his income to the federal government than his secretary. President Obama regularly incorporates the plight of Mr. Buffett and his secretary into his speeches. The problems with Mr. Buffett’s statement are [that] his tax situation is not representative of high-income people generally…

Munnell goes on to point out that America has quite a progressive tax system. This surprises many people given the posturing of OWS and the Obama administration (although it is not a surprise to readers of this blog). Munnell argues that America as a whole is undertaxed (meaning she thinks the middle class is undertaxed). That’s a debatable point, but her other points about the Buffett sideshow and the progressivity of America’s tax code are worth keeping in mind.

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Seven reasons why Italy may be in worse shape than you think

By James Pethokoukis

November 9, 2011, 11:51 am

Italian bond yields are spiking. U.S. stocks are tumbling, and fears of a global financial meltdown are rising. Here is my pal Ryan Avent of the Economist:

The euro zone is in a death spiral. Markets are abandoning the periphery, including Italy, which is the world’s 8th largest economy and 3rd largest bond market. This is triggering margin calls and leading banks to pull credit from the European market. This, in turn, is damaging the European economy, which is already being squeezed by the austerity programmes adopted in every large euro-zone economy. A weakening economy will damage revenues, undermining efforts at fiscal consolidation, further driving away investors and potentially triggering more austerity. The cycle will continue until something breaks. Eventually, one economy or another will face a true bank run and severe capital flight and will be forced to adopt capital controls. At that point, it will effectively be out of the euro area. What happens next isn’t clear, but it’s unlikely to be pretty.

Can this cycle be interrupted? I think so. I think that an ECB guarantee to backstop sovereign debt, coupled with massive purchases to establish credibility and a substantial easing in monetary policy, could change the dynamic, particularly if quickly followed up with a major fiscal commitment from core economies to support bail-out efforts and invest in peripheral economies while peripheral economies focus on substantial labour market, public-sector, and tax reforms. How likely does all of that sound? Could the ECB even commit to the above bold actions without facing debilitating criticism, and perhaps intervention, from national governments?

And little of this analysis from IHS Global insight will make him or you feel any better (bold is mine.):

1. We continue to assume there is no bailout for Italy because of its size. But we argue Italy appears to be less vulnerable than Portugal and Ireland before they admitted defeat and asked for financial assistance.

2. We believe Italy has more time and can endure several quarters of expensive debt auctions. However, we accept the risks to solvency have risen appreciably since the focus switched to Italy in early July.

3. Although rising bond yields will not affect Italy’s current debt structure as most of the public debt is held under fixed interest rates, it will be an increasing burden on the economy with Italy facing a prolonged period of heavy financing needs as its public debt ratio peaks at just over 120 percent of GDP. Given that the average yield on current government debt stands at 4.125 percent, bond yields higher than 7 percent would present a significant jump in the cost of rolling over sovereign debt in the next few years.

4.  The outlook for Italy has worsened steadily, with the latest economic data and survey evidence suggesting the economy is sliding towards a recession in early 2012. Therefore, real GDP is projected to grow by just 0.6 percent in 2011 before contracting by 0.5 percent (revised down from a drop of 0.2 percent) in 2012 in the yet to be released November forecast. The more challenging economic backdrop is a significant risk to the government’s flagship goal of eradicating the public-sector budget deficit by 2013, especially with the official fiscal projections based on seemingly optimistic real GDP growth forecasts of 0.7 percent in 2011 and 0.6 percent in 2012.

5. A key risk is that the government expects a marked improvement in the primary budget surplus (general government budget balance minus interest expenditure) in 2012/13, with modest but continued growth helping to reinforce the impact of latest fiscal tightening measures. According to the Ministry of Economy and Finance, the primary budget surplus is expected to grow from an estimated 0.9 percent of GDP in 2011 to 3.7 percent in 2012 and 5.4 percent in 2013, which could be derailed should a stalled economic recovery strangle the projected growth in tax receipts.

6. Italian financial investors, who under normal circumstances are the main buyers of Italian government debt, are under pressure to limit their exposure, which could contribute to the vacuum in which bond yields have risen (bond prices have fallen). This can ignite a dangerous downward cycle of deteriorating sovereign and bank credit quality. The Bank of Italy reports that 33 percent of Italian government debt was held by Italian financial institutions in the first quarter of 2011, with roughly 18 percent held by domestic banks and the remaining 15 percent in the hands of the other financial institutions.

7. Clearly, bond yields need to fall to more sustainable levels, but this will require Italy launching an aggressive growth-boosting reform agenda.  …  However, the political outlook remains confused. After appearing to lose his parliamentary majority, Berlusconi has agreed to stand down after introducing structural economic reforms to parliament in mid-November. However, the danger of course is the potential for weeks of dysfunctional politics that settles nothing before elections are forced in February. In that worst-case scenario the elections could return a weak coalition government that will then have to tackle entrenched trade unions to implement austerity measures.

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What to consider when evaluating teachers

By Jenna Schuette Talbot

November 9, 2011, 11:41 am

If we don’t have a good system to evaluate teachers, how can we assess progress or reward the best ones? Yesterday, the Senate Health, Education, Labor, and Pensions (HELP) Committee held a hearing on the Harkin-Enzi bill to reauthorize the Elementary and Secondary Education Act (ESEA)—the nation’s largest federal education law. Despite the controversy around mandating these systems during the committee negotiations, there was little mention of this during the hearing.

The original version of the Harkin-Enzi ESEA bill sought to require all states to develop teacher evaluation systems that relied in part on student achievement. However, as part of the tireless effort to dial back federal involvement in education, the GOP successfully insisted that these requirements apply only to those states who participate in the voluntary Teacher Incentive Fund. The Fund federally supports states and districts who want to develop performance-based teacher and principal compensation systems.

As new evaluations become more promising, states and districts are likely to opt in to the Fund to receive resources and political cover for building better systems. These more comprehensive and objective ways of evaluating teachers allow leaders to better identify the best teachers.

Right now, more than 99 percent of our 3.4 million teachers are categorized as “good” or “great” teachers, even in schools where students fail year after year—a fact that has confirmed skepticism about the efficacy of our current teacher evaluations. However, as we start systematizing these evaluations, many fear that we have yet to get it right.

But there’s a way forward. Harvard researchers Heather Hill and Corinne Herlihy provide policy  makers with recommendations to consider when designing teacher evaluation systems in their just released Education Outlook, “Prioritizing Teaching Quality in a New System of Teacher Evaluation.”

Here are steps we can take:

1.    Invest in a system that assesses individuals directly on teaching, not teacher, quality.

2.    Use multiple criteria to evaluate teachers—including student growth, contributions to the school community, and parent feedback.

3.    Be cautious of systems that rely too heavily on teacher’s value-added scores.

4.    Worry less about the tools used to evaluate teachers, and more about which data schools are using to evaluate.

As teacher evaluations continue to be lauded—at both the federal and state level—Hill and Herlihy’s recommendations should be thoughtfully considered by policy makers and education leaders.

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Michael Auslin

AEI Debate Prep: Assuring U.S. allies

By Michael Auslin

November 9, 2011, 10:49 am

This post is part of an ongoing series preparing for the AEI/CNN/Heritage National Security & Foreign Policy GOP presidential debate on November 22. See the rest of the posts here.

Regular visitors to Asia constantly hear from our allies and friends that they are worried equally about China’s rise and America’s decline. Like us, all of them are dependent on China for trade, raw and finished materials, and increasingly for financial assistance. Yet it is China’s more assertive attitude, as it has grown stronger, that worries them. They see a more capable navy and air force, and a regular Chinese presence in the region’s waters. They worry that China has little or no interest, from their perspective, in settling the various territorial disputes they have. They worry that smile diplomacy has turned to hectoring and sometimes threats.

At the same time, they see an America that seems fundamentally unserious about putting its fiscal house in order. They read that our military will be cut by hundreds of billions of dollars. They have watched the past decade or so as Washington has failed to respond to most Chinese provocations or breaches of public conduct in Asia’s commons. What they fear most is having to make a choice between following a declining America or accommodating a rising China.

For presidential candidates, my questions are: What will be your policy to arrest America’s perceived decline in the region? How will you assure allies that our security guarantees remain credible? What balance of U.S. forces in the region do you believe we need and how much is sufficient? In short, do you believe that America is a Pacific power, and if so, how will you maintain our presence in the world’s most dynamic region?

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Gary Schmitt

AEI Debate Prep: Getting Taiwan policy right

By Gary Schmitt

November 9, 2011, 10:44 am

This post is part of an ongoing series preparing for the AEI/CNN/Heritage National Security & Foreign Policy GOP presidential debate on November 22. See the rest of the posts here.

The Taiwan Relations Act, which Congress passed in the spring of 1979 after the Carter administration had ended formal ties to the Republic of China in favor of the People’s Republic, succinctly states that “the United States will make available to Taiwan such defense articles and defense services in such quantity as may be necessary to enable Taiwan to maintain a sufficient self-defense capability.” There are no “ifs,” “ands,” or “buts” in the law. The U.S. government has an obligation, a legal duty, to provide or sell Taiwan what it needs to defend itself. Yet, as the latest Pentagon report on China’s growing military power and other independent analyses indicate, the military balance (especially in the air and on the sea) across the Taiwan Strait has largely shifted in China’s favor. It appears that neither the Obama administration, nor previous White Houses for that matter, have followed the letter of the law when it comes to Taiwan’s defenses.

Similarly, the current government in Taiwan under President Ma has undertaken policies toward China intended to reduce tensions between his country and the mainland. They are policies that both Republicans and Democrats in the United States have long supported. Yet, to date, and for all its efforts, Taipei would be hard-pressed to say what significant, tangible benefit it has received from Washington in response to its efforts to ease relations. On important substantive issues, such as concluding a free trade agreement between the United States and Taiwan, help from the United States in creating more international diplomatic space for Taiwan, or (as noted above) providing sufficient military assistance, the response from Washington has been at best underwhelming.

Taiwan is a vibrant, young democracy, a major trading partner of the United States, and a critical designer and supplier of computer- and information-related technologies. Taiwan also sits astride a key geographical corridor whose loss to China (either by force of arms or through a process of “Finlandization”) would be a major blow to America’s own strategic position in the Asia-Pacific theater.

Putting U.S. policy toward Taiwan back on the right and statutorily correct path should be a priority for any new administration. China will undoubtedly complain but a failure to rebalance ties with Taiwan has longer-term consequences, not the least of which is a China that thinks it can call the shots in this key area of the world.

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AEI Elsewhere—Hugo Chavez’s big lie, prioritizing teacher quality, and more

By The Editors

November 9, 2011, 10:39 am

• Roger F. Noriega: “Hugo Chávez’s Big Lie”
• Heather Hill and Corinne Herlihy: “Prioritizing Teaching Quality in a New System of Teacher Evaluation”
• Michael Barone: “Working for Fun Is No Laughs in Capitalism”
• Norman J. Ornstein: “Medicare Linked to the Health Care Overhaul”
• Marc A. Thiessen: “The WikiLeaks That Show Enhanced Interrogation Worked”
• Jonah Goldberg: In looking for culprits for today’s terrible tone in American politics, you can start with “voice of God” news anchors such as Tom Brokaw. “Blame It on Brokaw“

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Michael Mazza

AEI Debate Prep: Top four national security challenges that China poses

By Michael Mazza

November 9, 2011, 10:36 am

This post is part of an ongoing series preparing for the AEI/CNN/Heritage National Security & Foreign Policy GOP presidential debate on November 22. See the rest of the posts here.

While the United States has more or less effectively taken advantage of the opportunities afforded by China’s rise (namely, by expanding the countries’ economic relationship), its record on addressing the challenges posed by that rise is shakier. These challenges, of course, are great and threaten to directly impinge on U.S. national security interests. Here are, perhaps, the top four national security challenges that China poses:

  1. China’s military modernization is enabling it to challenge the American military’s unimpeded access to Asia’s maritime and air commons and to directly threaten U.S. territory in the Pacific. It is similarly threatening access to the cyber and space commons.
  2. The People’s Liberation Army likewise poses growing coercive threats to U.S. allies and partners, such as Japan and Taiwan, and other friendly countries in the region. It is intentionally stirring up trouble in the South China Sea in hopes of eventually settling territorial disputes on its own terms. China, in short, increasingly threatens the long peace that has held in Asia for the past three decades.
  3. Beijing is growing and modernizing its strategic weapons arsenal and developing its nuclear doctrine, both in an opaque manner. The transparency necessary for assuring stable mutual deterrence is disturbingly lacking.
  4. China is making the world safe for autocracies, like North Korea and Iran, by maintaining or deepening economic ties with those states amid their international isolation (thus, in a way, subsidizing their nuclear weapons programs) and by exercising its veto threat on the United Nations Security Council to water down potentially effective resolutions. Beijing similarly makes efforts to stifle freedom in countries that are already democratic. In so doing, the People’s Republic is impeding the spread of liberal democracy, the proliferation of which is a key U.S. interest.

The challenges that the United States faces in dealing with China—whether of direct concern to U.S. national security or not—are of course much more numerous and include gross human rights violations, unfair trading practices, serious and widespread environmental degradation, active and harmful espionage, arms proliferation, and energetic efforts to alter long-standing international norms. It is the president’s charge to address all of these challenges while at the same time nourishing the dynamic economic ties that benefit both countries.

Yet disturbingly, with continued economic troubles both at home and abroad, the ongoing and perhaps more pressing threats of terrorism and failing states, and a smaller defense budget (and thus a smaller military), the next U.S. presidential administration may well find this task—one at which the United States cannot afford to fail—more difficult than ever.

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Charles Murray

Maybe it’s journalists who have an IQ problem

By Charles Murray

November 9, 2011, 10:32 am

A few days ago, the Washington Post ran an article on the “gifted gap” whereby white students in gifted programs around Washington are highly overrepresented. It was an unremarkable article—gifted programs throughout the country are overrepresented with whites, East Asians, Southeast Asians, and South Asians. But toward the end of the article came this remarkable sentence:

In nearly every local system, white students are disproportionately represented, even though most gifted programs explicitly target students with natural talents and aptitude, which are spread evenly across racial groups and social classes.

Ignore the assertion about racial groups. I am told that disputing that assertion can get one into trouble. Just think about the assertion that natural talents and aptitudes are evenly spread across social classes.

In what kind of society is it possible that natural talents and aptitudes are evenly spread across social classes? One option is a society inhabited by humans who do not pass their talents and aptitudes along to their children. But there is no such thing. Children’s abilities are correlated with their parents’ abilities throughout the world and have been known to be correlated for as long as humans have been observing and writing about other humans. A large part of that transmission of abilities is genetic. Regarding IQ, geneticists have now established beyond serious dispute that fluid intelligence—similar to the famous g, general mental ability—is at least 51 percent heritable.

Given that parent-child relationship, the only society in which talent in children would be evenly spread across social classes is a totalitarian state in which ability has no relationship to success in life. It is a logical necessity that in a society in which ability has any relationship to success, children of the most successful people will be overrepresented among the gifted. In a society that is pretty good at rewarding ability with success, that overrepresentation will be large. In a highly meritocratic society, it will be huge. This is not a political statement nor one that relies on a particular definition of ability. It’s just the way things inevitably work out in a world where parent-child correlations on ability are as large as the world we live in. To think that children’s natural talents and aptitude will be spread evenly across social classes in a country like the United States is breathtakingly silly.

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The chart that closes the case on the inequality myth

By James Pethokoukis

November 9, 2011, 9:00 am

U.S. income inequality has exploded to levels not seen since the 1920s or perhaps even the Gilded Age of the late 19th century. At least that’s the oft-repeated claim from the Obama White House, Occupy Wall Street, and a horde of liberal policy makers and pundits—not to mention their fellow travelers in the media. (You can see my some of my counter arguments here.)

And to prove their point—that the 1 percent has gotten amazingly richer in recent decades—the inequality alarmists will inevitably trot out a study produced by economists Emmanuel Saez and Thomas Piketty that includes the following:

Case closed, right? But income has a tendency to fluctuate a lot from year to year and seems a narrow way of looking at inequality. Why not instead look at wealth—all financial and nonfinancial assets? Economist Saez has done research on that subject, too. And he even created a revealing chart documenting the ups and downs of U.S. wealth over the past century. But it’s a chart the inequality alarmists never show you (nor Saez’s conclusions). First, the chart illustrating the wealth of the top 1 percent:

And here is Saez and co-author Wojciech Kopczuk: “Our series show that there has been a sharp reduction in wealth concentration over the 20th century: the top 1 percent wealth share was close to 40 percent in the early decades of the century but has fluctuated between 20 and 25 percent over the last three decades.”

Saez and Kropczuk cite a number of possible reasons for the big decline: a) the democratization of stock ownership, b) the emergence of a large middle class in the post-World War II period, c) higher income and estate taxes, and d) the equalization of wealth across genders.

But the big point here, I think, is that inequality hasn’t exploded. The top 1 percent aren’t doing abnormally well by U.S. historical standards. And that if you want to go back to the Gilded Era of equality, you need to time travel to the 1930s and 1970s—two of the worst decades ever for the U.S. economy.

Oh, but wait, the chart only goes up to 2000. What about after that? Probably made little difference as suggested by this handy analysis from the Cato Institute, which shows various estimates of wealth inequality (the Federal Reserve’s Survey of Consumer Finances, the Economic Policy Institute, and Kopczuk/Saez):

Indeed here is Kopczuk in 2009: “There is no compelling evidence that wealth concentration has significantly increased, in fact it does not appear to have changed much since the early 1980s.”

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Opportunity knocks for postal reform

By Rick Geddes

November 9, 2011, 6:00 am

This morning the Senate Homeland Security and Governmental Affairs Committee will consider S. 1789, the 21st Century Postal Service Act of 2011. Sponsored by Senators Collins, Lieberman, Brown, and Carper, this bill would prohibit the USPS from reducing delivery to 5 days a week and would return $7 billion in over-funding of retirement payments to the Postal Service. In the House, the Oversight and Government Reform Committee’s Representatives Issa and Ross have introduced a very different piece of legislation. H.R. 2309, the Oversight Committee Postal Reform Act of 2011, would allow the USPS to switch to 5-day delivery and would consolidate post offices under a BRAC-like system (thus reducing the effect of politics on the facility closure process). The speed with which each bill has been introduced and—pending today’s Senate markup—voted out of committee signals the November 18 deadline’s approach, when the Postal Service must pay the Treasury $5.5. billion. But the USPS’s problems started long before its current fiscal woes.

In 2010, the USPS saw an $8.5 billion loss, and it is projected to lose $9.5 billion this year. As shown above, its losses are more dramatic than ever seen in the Postal Service’s 40+ years of existence. Further, the USPS earns three times the profit for first-class mail than it does for standard mail, but first-class mail is down about 25 percent since its 2001 peak. In addition, the USPS still employs 700,000 people, and labor costs account for 80 percent of total costs.

In short, the Postal Service’s structure is unsustainable.

Whatever legislation is enacted must put the Postal Service on a fiscally and structurally sustainable path and provide it with the flexibility to operate more like a business. In my recently released paper, I argue that the solution lies in de-monopolizing and corporatizing the USPS, which includes subjecting it to de-monopolization and U.S. corporate law, and allowing it to make independent business decisions. Washington cannot continue to ignore the demand-driven market realities inherent in the Postal Service’s decline by refusing to allow it to decrease its costs in response to the inevitable loss in volume. The hard truth is that friends and family now choose to send a quick email or text rather than spend 44 cents on a stamp. Indeed, 90 percent of all mail now originates outside the household and is primarily commercial material.

The time is ripe for bold, structural reform of the U.S. Postal Service.

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Thomas P. Miller

ObamaCare’s legal opponents fail to score in federal appeals court

By Thomas P. Miller

November 8, 2011, 7:36 pm

Some of the Washington Redskins’ offensive woes appear to have rubbed off on the latest local team challenging the constitutionality of the Patient Protection and Affordable Care Act (PPACA) in court. Earlier today, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit posted a shutout in dismissing the latest significant case claiming that the law’s individual mandate is unconstitutional (the current won-lost record at the federal appellate level is either 1 and 2 or 1 and 4, depending on whether you score dismissals for lack of standing as a tie).

Initial hopes that an apparently favorable panel of two judicial “conservatives”—Judge Lawrence Silberman and Judge Brett Kavanaugh—would agree with an earlier anti-mandate ruling in the 11th circuit were dashed when Silberman and Judge Harry Edwards upheld the mandate as a constitutional exercise of the powers of Congress to regulate interstate commerce. Kavanaugh’s “dissenting” opinion did not reach the constitutional merits because he found that federal courts lacked jurisdiction over the issue at this time, concluding that they cannot enjoin the collection of mandate penalties by the Internal Revenue Service in advance of when they first are collected (in 2014).

In the battle between quick-kick punts (Silberman—hardly devoting ten pages to the main constitutional law argument in the lead opinion) and overheated waffles (Kavanaugh—firing up the iron at the International House of Judicial Pancakes), no one stepped up to the need to overturn 70 years of chronically bad Supreme Court precedent, which centers on the New Deal era case of Wickard v. Filburn (1942).

Today’s forecast from this legal meteorologist predicts that the eventual Supreme Court decision next June will come down to how Justice Anthony Kennedy (not Chief Justice John Roberts) lines up. If the anti-mandate legal team’s targeted appeal to Kennedy’s past embrace of structural federalism as a bulwark of constitutional liberty doesn’t work, the chief justice is most likely to resist staying in the minority (four justices appointed by Democratic presidents are “in the bank” to uphold the PPACA with few questions asked) and instead join Kennedy in a 6-3 vote to keep the PPACA alive (before it dies of other, politically self-inflicted wounds?).

But if Kennedy stays in line with some of his past opinions (and doesn’t read the NY Times the day before voting in conference), Roberts would be “inspired” to join a 5-4 decision to strike down just the individual mandate, and perhaps a few related health insurance regulatory provisions—in order to shape the scope of such a ruling more narrowly. And, if you don’t like today’s prediction, just wait. There undoubtedly will be other ones forthcoming as the constitutional arguments and surrounding political atmospherics swing back and forth in the months ahead.

What those of us who fondly remember a previous vintage of the U.S. Constitution (the one with enumerated powers that limited the scope and scale of the federal government) actually need are justices willing to be less deferential to bad court precedents and more willing to take some public heat. That’s how the Warren Court created such a long line of periodically outrageous, new constitutional “law.” Reversing it, and rolling back similar extensions of the federal government’s powers, cannot be expected to look very pretty. But getting legally cute and finding new exceptions to past contortions (activity vs. inactivity, economic vs. non-economic, penalty vs. tax) is just as hard (although more tempting; hence the many indecipherable 5-4 decisions authored by former Justice O’Connor and other judicial weathervanes in the past).

Elections have consequences, too, and there’s a particularly ugly one coming up next year. Instead of hitting the pause button while wishing that five Supreme Court justices will deliver fleeting relief from the pain of ObamaCare, it looks like it’s time to diversify the investment portfolio and think about a return to regular politics by more transparent means. Repeal, replace, revise, rewind. Any of the above might be better than none of the above.

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Danielle Pletka

Obama: What Iranian nuclear weapons program?

By Danielle Pletka

November 8, 2011, 5:35 pm

Here’s what the IAEA had to say today about an Iranian nuclear weapons program:

The information indicates that Iran has carried out the following activities that are relevant to the development of a nuclear explosive device:

• Efforts, some successful, to procure nuclear related and dual use equipment and materials by military related individuals and entities (Annex, Sections C.1 and C.2);

• Efforts to develop undeclared pathways for the production of nuclear material (Annex, Section C.3);

• The acquisition of nuclear weapons development information and documentation from a clandestine nuclear supply network (Annex, Section C.4); and

• Work on the development of an indigenous design of a nuclear weapon including the testing of components (Annex, Sections C.5–C.12).

While some of the activities identified in the Annex have civilian as well as military applications, others are specific to nuclear weapons.

The information indicates that prior to the end of 2003 the above activities took place under a structured programme. There are also indications that some activities relevant to the development of a nuclear explosive device continued after 2003, and that some may still be ongoing.

Here’s what a “senior administration official” said in reaction:

The IAEA does not assert that Iran has resumed a full scale nuclear weapons program nor does it have a program about how advanced the programs really are.

 Two points:

1)       I have long wondered whether Obama, desperate to distract the electorate from his feckless economic policies, would consider the military option to strike Iran’s nuclear weapons program. The answer to that appears to be no, if not hell no.

2)      The IAEA has managed to summon up more outrage about Iran’s illicit weapons programs than the Obama administration, which seems to view its role as chief obfuscator for Tehran. Astonishing.

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Disability fraud: A pain in the … musculoskeletal?

By Matthew McKillip

November 8, 2011, 5:34 pm

Last week, the New York Times reported that the FBI broke up a scheme that distributed fraudulent disability payouts to hundreds of Long Island Rail Road (LIRR) workers—and the total cost of the fraud could amount to more than $1 billion if fully dispersed.

The extent of the abuse is disturbing; it is not hard to summon outrage at the two doctors who were arrested in the sting:

The doctors were paid—often in cash—$800 to $1,200 for each fake assessment and narrative, in addition to the millions of dollars in health insurance payments they received for unnecessary medical treatments and fees for preparing false medical records to support the disability claims.

The daily activities pursued by the supposedly disabled are numerous and equally outrageous. There’s the man with “disabling back pain” who took a 400-mile bike tour or a woman who claimed she couldn’t stand without pain for more than a few minutes shoveling her driveway for over an hour.

The list of fraudulent injuries gives insight into a difficulty that is plaguing disability policy even in less malicious circumstances: “severe pain when gripping objects, bending, or crouching,” “complained of significant neck, shoulder, and hand pain caused by sitting at a desk and using a computer, and leg pain caused by standing for more than five minutes,” and “claimed to be suffering from severe and disabling back pain.”

What do these all have in common? They are musculoskeletal conditions.

Musculoskeletal conditions are “hard-to-measure impairments” that Richard Burkhauser and Mary Daly identify as a contributor to the exploding costs of SSDI. Administrative discretion in this murky area allows individuals to rapidly enter the disability rolls. It is very difficult to determine what threshold of back pain prevents work and there’s certainly no simple way to determine it through a medical listing. The result is that there is an exceptionally high number of marginal cass; recent data show that 25 percent of admissions to SSDI are based merely on the relative ease of the evaluator.

The LIRR case proves that fraud cases can be a devastating financial drain, but as long as disability policy relies so heavily on administrative discretion, expect the rolls to continue their growth (and the disability trust fund to plunge towards insolvency).

While the long-term outlook is still bleak, the bust may have at least come in time to save taxpayers another financial blow: a lawsuit by another former Long Island Rail Road employee with “injuries to her wrist, back and neck” was postponed after the doctor who diagnosed her condition was arrested in the sting.

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Banter #30: An interview with Commentary’s John Podhoretz

By Stuart James

November 8, 2011, 5:20 pm

The editor of Commentary magazine John Podhoretz sits down with Stu and Andrew to discuss his Bradley Lecture and essay entitled “The Case for Optimism.” They also discuss a counter essay penned by Mark Steyn called “The Case for Pessimism,” and why Steyn’s thoughts on China might be wrong. Finally the guys talk movies and John gives a movie recommendation. You can listen here and subscribe on iTunes here.

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Ortega loses! (Wait a second…)

By Margaret McCarthy

November 8, 2011, 5:10 pm

This headline should make you look twice for two reasons. The first, of course, being that President Ortega did not actually lose the Nicaraguan elections last Sunday. He won his third term as president by a landslide, according to the numbers posted on La Prensa.

The second reason this headline is ridiculous is that the kind of credibility which a leader who is elected in Ortega’s fashion should lose has not been lost. In October 2009, a Corte Suprema ruling—by the Frente Sandinista de Liberación Nacional (FSLN) dominated court—decreed that the constitutional limitations restricting an individual to two terms as president, as well as outlawing consecutive presidential terms, was unconstitutional. (Subsequently, Ortega ignored the legislature’s outcry that the supreme court did not have the authority to overturn such a provision, and in a related ruling in January 2010, Ortega extended some of the FSLN judges’ terms on the court, which effectively stacked the court in his favor). Ortega was elected Sunday for his third term, and will hold this post consecutive to his second.

Reports are currently being issued about complaints of government intimidation at the polls, OAS and EU election observers being kept out of polling stations, and the subsequent non-acceptance of the election results by the opposition and independent observers. The seemingly buoyant argument that Ortega has helped the poor in Nicaragua and this is how he won the election (Nicaragua is the second poorest country in the hemisphere next to Haiti) falls flat when one explores the widespread discontent with Ortega’s rule, as well as the unsustainable nature of funds for improvement projects (the Ortega-Chavez partnership).

What should be lost to Ortega, more than simple EU reports of inadequate elections and U.S. State Department press briefings highlighting election irregularities, is his ability to conduct business in Latin America in this way. As much as the “words will never hurt me” refrain is true on the preschool playground, it is also true in this case of international diplomacy. Consider diplomatic sanctions, from the limitation of bilateral relations to limitation of Nicaragua’s rights as a member of the OAS or UN until election irregularities can be addressed. Deal with Nicaragua’s economic (ALBA) link to Venezuela under the IMF framework.

The fact that none of this is likely to be considered is just one additional way in which Ortega has won an election widely recognized as fraudulent and undemocratic.

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AEI Elsewhere—Iran’s nuclear project, the market for kidneys, livers, and lungs, and more

By The Editors

November 8, 2011, 12:36 pm

• Michael Rubin: The IAEA’s report on an Iranian nuclear bomb was predictable and inevitable. “Iran’s Nuclear Project”
• Sally Satel: It already exists, but unwise laws push it dangerously underground. “The Market for Kidneys, Livers, and Lungs”
• Andrew G. Biggs and Jason Richwine: “Public School Teachers Aren’t Underpaid”
• Marc A. Thiessen: “Why GOP Power Player Jim DeMint Isn’t Endorsing in the 2012 Presidential Primaries”
• John R. Bolton: The Obama administration bungles the Palestinians’ membership vote. “The UNESCO Follies Are Back”
• Ahmad K. Majidyar: “What Obama Considers Diplomacy, the Taliban Considers Defeat”
• Frederick M. Hess: “Are Teachers Overpaid or Underpaid? Answer: Yes”

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Marc Thiessen

Three ways to undermine WikiLeaks

By Marc Thiessen

November 8, 2011, 12:06 pm

DARPA (the Defense Advanced Research Projects Agency) has come up with a simple and ingenious scheme to defeat WikiLeaks: seeding U.S. government computer systems with fake “classified” documents. Wired magazine’s Danger Room reports:

DARPA-funded researchers are building a program for “generating and distributing believable misinformation.” The ultimate goal is to plant auto-generated, bogus documents in classified networks and program them to track down intruders’ movements, a military research abstract reveals. “We want to flood adversaries with information that’s bogus, but looks real,” says Salvatore Stolfo, the Columbia University computer science professor leading the project. “This will confound and misdirect them.”

There are a number of advantages to this strategy:

1.       DETECTION. The fake classified documents can be embedded with code that allows intelligence agencies to take a digital snapshot of the IP address of whoever has opened the file—alerting them to the breach, and allowing them follow the “digital breadcrumbs” as the documents are shared, so they can identify anyone involved in the conspiracy.

2.       DETERRENCE. The existence of the fake documents would serve as a deterrent to future leakers, who cannot know if the documents they are handling are the real thing, or simply decoys designed to identify them and their accomplices. This could deter would-be leakers from opening or sharing such documents in the first place.

3.       DENIABILITY. Perhaps most important, the existence of the fake documents creates plausible deniability the next time WikiLeaks publishes what it claims are classified documents. Even if the leaked documents are real, the U.S. government can claim they are not—and the leaking organization would be hard-pressed to prove otherwise. Foreign partners of the United States whose confidential conversations and information is exposed can similarly deny the accuracy of the information, mitigating the damage of any future leaks.

Moreover, journalists will be less likely to trust the information WikiLeaks provides them, thus undermining the organization’s effectiveness. Mainstream news organizations would be hesitant to publish information only to learn that they have reported as fact what was really a ruse. WikiLeaks would have to assume a “burden of proof” and expend resources to determine the veracity of the information the documents contain—something that could be nearly impossible.

In short, this simple strategy—combined with the financial embargo that is drying WikiLeaks of the resources it needs to operate—could be the death blow to Julian Assange’s criminal conspiracy.

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Jonah Goldberg

Obama re-election team desperate to fire up the troops

By Jonah Goldberg

November 8, 2011, 11:33 am

I got a fundraising email from Obama campaign manager Jim Messina yesterday. It’s long, so I won’t reprint the whole thing here, but I liked the opening hook:

Friend —

This weekend, The New York Times Magazine ran a long analysis of the 2012 election headlined, “Is Obama toast?”

It uses a mathematical formula to conclude who will win this race.

In other words, it says neither you nor Barack Obama has a role to play in this election, because the outcome is essentially predetermined.

We disagree.

The outcome will depend on what we do every single day between now and November 6th, 2012. And I want to give you an idea of how we know that.

Now, Messina’s right. The computer models are only accurate if the future operates like the past. And it’s totally understandable that the campaign would want to tell supporters or would-be supporters that defeat is not foreordained.

Still, there’s some fun to be had here. For starters, Obama rode in to office on the claim that he was on the right side of history. We were destined for something big. He was the one we were waiting for. Or we were. Or something.

Computer models such as these are simply a way of quantifying probabilities based upon past history. If the models say that Obama’s chances are dim, that’s a pretty dismaying diagnosis because the math is saying that Obama’s now on the wrong side of history, as it were.

More to the point, the Times essay, written by Nate Silver, employs social science which—we’ve been increasingly told—is the sole property of the reality-based community. How dare it render a verdict that offends its masters?

Then there’s the whole spectacle of the Obama administration trying to use The New York Times Magazine to stir up populist defiance. The magazine has been a Hallmark card to Obama for half a decade now. But now, because it sides with perfidious math, it’s the official newsletter of Mordor.

Oh, and one last thing. The title of the article ends with a question mark. It’s not “Obama is Toast!” but “Is Obama Toast?”

In fact, Silver concludes:

Average these four scenarios together and the probabilities come out to almost exactly 50-50. A month or two ago, when Perry and Romney appeared about equally likely to be the Republican nominee, it would therefore have been proper to think of the election as a toss-up.

With Perry having slumped in the polls, however, and Romney the more likely nominee, the odds tilt slightly toward Obama joining the list of one-termers. It is early, and almost no matter what, the election will be a losable one for Republicans. But Obama’s position is tenuous enough that it might not be a winnable one for him.

That’s hardly the iron cage door of history slamming shut on the Obama re-election campaign, now is it? But Messina and his team are quite desperate to fire up the troops any way they can. Quite desperate indeed.

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Bill Daley and the myth of Obama’s centrism

By James Pethokoukis

November 8, 2011, 11:25 am

At the start of 2011, the inside-the-beltway consensus thought President Barack Obama’s re-election chances were on the rise. It would be the Clinton Scenario all over again: After seeing his party get hammered in the midterm elections, a first-term Democratic president moves to the center, compromises with Republicans, and with the economy improving gets another four years in the Oval Office.

Back in January, a) economists thought the economy would grow by more than 3 percent this year, b) Obama had just signed a tax cut deal with Republicans, and c) “pro-business” Bill Daley was summoned from Chicago to be the new White House chief of staff and heal relations with Corporate America.

But the Clinton Scenario has gone down in flames. The economy is moribund, Obama has spent all year pushing for tax increases despite 9 percent unemployment, and Bill Daley remains chief of staff in name only. The Clinton analogy seems ridiculous in retrospect, of course. Obama saw his 2008 election as confirmation that America was ready for a generational swing to the left. More government and more redistribution. No time to turn back now.

And he still does, apparently, as the Obama White House slowly morphs into Occupy White House. No wonder a usually silent CEO like Jim Skinner of McDonald’s had decided to speak up against Washington’s anti-business policies. I thought Daley was supposed to make sure things like that didn’t happen. Then again, pundits thought a lot of things ten months ago that haven’t panned out.

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Frederick W. Kagan

AEI Debate Prep: Is this the only path to victory in Afghanistan?

By Frederick W. Kagan

November 8, 2011, 10:40 am

What do we need to achieve in Afghanistan in order to protect the security of the United States and its allies?

That core question should shape any discussion of our strategy in Afghanistan or the resources we devote to executing it. But that question is too often obscured.

Many say that pursuing any kind of “success” in Afghanistan, the supposed “graveyard of empires,” is sheer folly. Others say that is has become irrelevant, and that the death of Osama bin Laden has deprived the war in Afghanistan of continued meaning.

These facile assertions produce more palatable answers, but do not answer the core question. Presidents and candidates for president owe Americans a clear and cogent answer, at least, as well as an explanation for how their proposed strategy will accomplish the requirements for American security.

President Obama identified a number of reasons for the American presence in Afghanistan in his December 2009 speech announcing both the surge of forces there and the strategy that those forces would pursue—the strategy that continues in effect to this day. The clearest articulation of American interest in Afghanistan he offered was this one:

This is the epicenter of violent extremism practiced by al Qaeda. It is from here that we were attacked on 9/11, and it is from here that new attacks are being plotted as I speak. This is no idle danger; no hypothetical threat. In the last few months alone, we have apprehended extremists within our borders who were sent here from the border region of Afghanistan and Pakistan to commit new acts of terror. And this danger will only grow if the region slides backwards, and al Qaeda can operate with impunity. We must keep the pressure on al Qaeda, and to do that, we must increase the stability and capacity of our partners in the region.

He added later in that speech: “We’re in Afghanistan to prevent a cancer from once again spreading through that country.”

President Obama dismissed the notion that Afghanistan is simply another Vietnam.

“And most importantly, unlike Vietnam, the American people were viciously attacked from Afghanistan, and remain a target for those same extremists who are plotting along its border,” he said in that 2009 speech.

He rejected the notion that targeted strikes alone could defeat al Qaeda: “To abandon this area now—and to rely only on efforts against al Qaeda from a distance—would significantly hamper our ability to keep the pressure on al Qaeda, and create an unacceptable risk of additional attacks on our homeland and our allies.”

He thus articulated a series of objectives, the achievement of which, he argued, were vital to America’s national security:

Our overarching goal remains the same: to disrupt, dismantle, and defeat al Qaeda in Afghanistan and Pakistan, and to prevent its capacity to threaten America and our allies in the future. To meet that goal, we will pursue the following objectives within Afghanistan. We must deny al Qaeda a safe haven. We must reverse the Taliban’s momentum and deny it the ability to overthrow the government. And we must strengthen the capacity of Afghanistan’s security forces and government so that they can take lead responsibility for Afghanistan’s future.

He did announce an 18-month timeline for the start of the withdrawal of the surge forces in Afghanistan, but added, “we will execute this transition responsibly, taking into account conditions on the ground. We’ll continue to advise and assist Afghanistan’s security forces to ensure that they can succeed over the long haul.”

Some in the White House and outside it, nevertheless, oppose continued efforts in Afghanistan, and thus advocate abandoning the current strategy or reducing force levels below what is needed to execute the mission there. The question they must answer is: What part of the objective President Obama enunciated in December 2009 has become unnecessary? Do we not need to “disrupt, dismantle, and defeat al Qaeda in Afghanistan and Pakistan, and to prevent its capacity to threaten America and our allies in the future?” Do we not need to prevent the Taliban from threatening the Afghan government? Do we not need to build the capacity of our partners and allies—including Afghanistan—so that they can take responsibility for Afghanistan’s future, thus preventing the “cancer” that had taken root there from returning? Do we seriously think that the killing of one man, however important, ends the threat to the United States and thus removes the entire region from the list of America’s national security interests?

Above all, if we abandon our current efforts in Afghanistan either by accepting defeat or by declaring success before actually achieving it, what will prevent al Qaeda and its affiliates from re-establishing their bases there and resuming their efforts to attack and kill Americans?

The American people deserve a serious, thoughtful, and detailed answer to those questions from anyone seeking the responsibility to keep them safe.

This item first appeared on CNN’s security clearance blog.

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Sadanand Dhume

AEI Debate Prep: Should Pakistan be engaged or contained?

By Sadanand Dhume

November 8, 2011, 10:39 am

The raid in May on Osama bin Laden’s compound in the Pakistani garrison town of Abbottabad has brought intense focus on Washington’s policy toward Islamabad. Since then, the weight of informed opinion—in influential op-eds, think tank reports, and magazine articles—has coalesced around a consensus: the current policy has failed.

Ostensibly, since 2004 Pakistan has been a major non-NATO ally of the United States, a status it shares with such stalwart friends as Israel, Japan, and Australia.

In 2009, the Enhanced Partnership with Pakistan Act, also known as the Kerry-Lugar-Berman Act, boosted aid to Pakistan by $1.5 billion a year through 2013. These blandishments were meant to encourage Islamabad to co-operate with Washington in fighting terrorism.

Though Pakistani authorities have at times helped round up wanted al Qaeda leaders from their soil, their overall record has been disappointing. Of particular concern to the United States: continued Pakistani support for the Afghan Taliban, the Haqqani network, and other militants who regularly use safe havens in Pakistan to attack U.S. troops in Afghanistan.

Stepped up attacks by Haqqani Network insurgents in recent months, including an audacious assault in September on the U.S. embassy in Kabul, have added urgency to long-standing misgivings about Pakistani intentions. The country’s powerful army has long used jihadist groups to assert influence in Afghanistan and bleed India in the disputed territory of Kashmir.

One possible response to what is colloquially known as Pakistan’s double game—fighting some terrorists while helping others—is to move from a strategy of engagement to one of containment. This would place less emphasis on carrots such as aid and advanced equipment. Instead, it would rely more on sticks such as targeted sanctions against military officers involved in aiding America’s enemies, and more unilateral Abbottabad-style raids against high value targets. (Keep in mind that Al Qaeda’s Ayman al-Zawahiri and the Taliban’s Mullah Omar are believed to live in Pakistan.)

The main idea: target Pakistan’s recalcitrant military while sparing its civilian population and continuing to strengthen Pakistan’s fledgling democracy. Whether it will be implemented, and how Pakistan will respond, will be one of the most important decisions the president will have to make in South Asia.

This item first appeared on CNN’s security clearance blog.

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My must-reads for Nov. 7, 2011

By James Pethokoukis

November 7, 2011, 6:25 pm

Some of the best of what I read today:

1. Shocker: Wealth-age gap widens in era of entitlements, high unemployment—Ed Morrissey, Hot Air

First, thanks to compound interest, investments tend to gain value more rapidly in later years, which accounts for some of the disparity in these results. Adults under 35 put their cash into their homes rather than retirement accounts, which means that they don’t have investments to accumulate — and thanks to the housing collapse in 2008, don’t have a lot of equity, either, even if they still own a home. After buying homes and establishing families, younger adults then start looking to the future. Plus, high unemployment puts younger workers with less experience at arguably more risk of losing opportunities, although it also puts pressure on older workers with higher salaries as well.

2. About Mitt Romney, the Republicans Can’t Be Serious—John Tamny, Forbes

 Instead, economies are nothing more than a collection of individuals producing in order to consume, delaying consumption in order to grow wealth through the provision of capital to others, and generally looking to offer the most value to others with an eye on getting the most value. That being the case, Romney’s economic plan, if credible, would require all of one quarter of one page. With “good, American jobs” or whatever silly poll-tested phrase he might use in mind, Romney would propose an aggressive reduction in the income/capital gains tax burden, something similar as it applies to ineffective, profit eroding regulations, the ability of Americans to trade freely with all comers irrespective of country, and a stable dollar necessary to assign value to the work, trade and investment that the individuals who comprise an economy engage in.

3.  What is the future of solar power?—Tyler Cowen, Marginal Revolution

I would make a simpler but less optimistic point.  If a solar breakthrough is now likely, in which market prices do we see it reflected?  It is true that fossil fuel prices took a steep tumble in the last few months, but I’ve never heard anyone suggest that price plunge had to do with a forthcoming solar revolution.  It seems cyclical in nature, or perhaps related to the spreading news of further fossil fuel discoveries, including natural gas.  For better or worse, those shale oil and natural gas discoveries — which by the way will create lots of jobs — will further raise the bar against solar power, and it’s not just the Republicans who will promote them.

4. Courting Disaster: Two Gaping Loopholes in the Debt Deal That Will Drive Up Spending—The Foundry

Among the more egregious failings of the Budget Control Act (BCA)—the proxy fiscal plan spawned by the summer’s debt ceiling debate—are a pair of gaping loopholes allowing Congress effectively to blow through the agreement’s advertised spending limit. The Senate has already begun to exploit one of these openings. The House should not let it happen.

Loophole No. 1, little noticed when the BCA was enacted, is called “disaster relief.” It allows Congress to “adjust” the BCA’s $1.043 trillion discretionary spending cap for fiscal year (FY) 2012—that is, to simply raise the limit—for weather events the President terms “disasters” (an exceptionally popular practice in the current Administration).

Then there is Loophole No. 2: In addition to the “disaster” funds, the BCA still retains the uncapped “emergency” credit card. So Congress could obligate all the $11.3 billion for “disasters” and still spend without limit later in the year on other “emergencies”—making a total mockery of the BCA spending caps.

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How an EU recession would affect America

By James Pethokoukis

November 7, 2011, 4:38 pm

The econ team at JPMorgan seems to be sending a message (bold is mine):

The October Euro area composite PMI fell firmly into recession territory last month with large declines in both the output (46.5) and new orders components (44.7).  …  The risks associated with the Euro area’s slide into recession are meaningful. The trade drag associated with a Euro area recession is already incorporated in our forecasts for continued recovery elsewhere. … Within Europe, countries attempting to implement large fiscal adjustments face increasing difficulties in a recession. A lesson from Greece is that adjustment programs are hard to keep on track in the face of a deep recession that tears at the social fabric. … While the adjustment facing Italy is far less severe, a deep recession will heighten concern about Italy’s Achilles’ heel: it has delivered a mere 0.6% annual average growth since EMU began and needs to grow at more than twice this pace to lower its debt/GDP ratio.

But as the bank notes via a chart, Europe is an important destination for U.S. exports but hardly the only one:

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