Friday, January 21, 2011

Our Fundamental Duty: Doing the People's Business While Living Within the People's Means

By Gov. Mitch Daniels

JANUARY 11, 2011

Mr. Speaker, members of the Assembly, Hoosier friends and neighbors, thank you yet again for the privilege of this platform.

For most of us, one of the strongest memories of our youth is that great school teacher, that magical man or woman who somehow reached us, and stretched us, and in the process left indelible recollections. For me, one of those was Bob Watson-still, today, Mr. Watson to me-who introduced us to the mysteries of the periodic table in high school chemistry. In addition to mixing potions that suddenly turned purple, and terrifying pop quizzes, Mr. Watson was famous for his aphorisms, little sayings so often repeated that his students still smile and recite them to each other decades later. And the most frequently applied of all Watson's wisdoms was: "Good things come to those who wait. Patience is the essence of life."

Patience does not come easily to a teenager. Or to adults, for that matter. At the grocery store, the airport scanner, or the BMV, none of us likes to wait. Like all Americans, Hoosiers are waiting tonight for a national economic recovery. Far too many are without work and, even worse than their number, is how long many have been waiting, waiting for that next job, waiting for the basic human fulfillment of knowing you are standing on your own feet, providing for yourself and your family.

The deep frustration of unemployed Hoosiers is shared by those of us charged with public duties in these times. The best efforts of our state, or any one state, to break free of recession's suffocating clutch, are never adequate, and we can't wait for better times.

Building one of the best job climates in the country isn't enough. Breaking the all-time record for new job commitments isn't enough. Adding new jobs at twice the national average isn't enough. We did all those things in 2010, but it couldn't offset the terrible drag of a national economic ebb tide that continues to leave too many boats stuck in the muck.

We Hoosiers don't like to wait, when we can act. If we cannot overcome a nationwide job hemorrhage, we can fight back better than others. Again in 2010, we broke all records for road building and bridge building, for the fourth year in a row, and put thousands to work doing so.

As the final installment of our 2008 property tax cuts took effect, hard-pressed Hoosier home and business owners found an additional $600 million still in their bank accounts. Tonight, because of our action, Indiana's property taxes are the lowest anywhere in America. And thanks to a ringing 72 percent verdict by our fellow citizens, who voted in referendum to protect those cuts in our constitution, they're going to stay that way.

And in the clearest example of Hoosier resolve, we handled a two billion dollar drop in state revenues as any family would, as any small business would. We decided what is most important, separated the "must do's" from the "nice to do's," and matched spending to income.

Across the country, state spending, despite the recession, is still up sharply the last six years. But here, it is virtually flat, one-third the rate of inflation. Elsewhere, state government payrolls have grown, but here, we have the nation's fewest state employees per capita, fewer than we did in 1978. During this terrible recession, at least 35 states raised taxes, but Indiana cut them. Since '04, the other 49 states added to their debt, by 40 percent; we paid ours down, by 40 percent. Many states exhausted any reserves they may have had, and plunged into the red, but our savings account remains strong, and our credit AAA.

What we did in 2008, and 2009, and 2010, we will do again this year. We will take the actions necessary to limit state spending to the funds available. We will protect struggling taxpayers against the additional burden of higher taxes. We will continue improving our jobs climate by holding the line on taxes as our competitors take the easy way and let theirs rise. We say tonight, whatever course others may choose, here in Indiana we live within our means, we put the private sector ahead of government, the taxpayer ahead of everyone, and we will stay in the black, whatever it takes.

In two days, I will send to this Assembly a proposed budget for the next biennium. As always, I know that our final product will be a mutual one, and I welcome your amendments and improvements, so long as they live up to the following principles:

One, I just mentioned; no tax increases. Can I get an "amen" to that?

Two, we must stay in the black at all times, with positive reserves at a prudent level throughout the time period.

Three, the budget must come into structural balance, meaning that no later than its second year, annual revenues must exceed annual spending, with no need for any use of our savings account.

Four, no gimmicks. We put an end to practices like raiding teacher pension funds, and shifting state deficits to our schools and universities by making them wait until the state had the cash to pay them. That's a form of waiting we should never impose again.

And, to hasten the return of an even stronger fiscal position, I again ask you to vote for lasting spending discipline by enacting an automatic taxpayer refund. When the day comes again when state reserves exceed 10 percent of annual needs, it will be time to stop collecting taxes and leave them with the people they belong to. Remember what the Hoosier philosopher said: "It's tainted money. ‘Taint yours, and ‘taint mine." Beyond some point, it is far better to leave dollars in the pockets of those who earned them than to let them burn a hole, as they always do, in the pockets of government.

Doing the people's business while living within the people's means is our fundamental duty in public service. Redrawing our legislative lines without gerrymandering, and adjusting an out of balance Unemployment Insurance system, are other examples of duties we must meet this year. I know you'll do so, head on.

So we had a little election last November. It changed a few things, like the seating arrangement in this chamber. One thing it didn't change at all: our common duty to take every action possible to make this a better state, a more progressive state, a standout and special and distinctive state. That election, like all elections, was not a victory for one side, it was an instruction to us all. It was not an endorsement of a political party, it was an assignment to everyone present. By itself, it accomplished nothing, but it threw open the door to great accomplishment. Starting tonight, we must step through that door, together.

One opportunity lies in reform of our criminal justice system. Helped by the nation's most respected experts, a bipartisan task force of police, judges, prosecutors, and others fashioned a package of changes to see that lawbreakers are incarcerated in a smarter way, one that matches their place of punishment to their true danger to society. We can be tougher on the worst offenders, and protect Hoosiers more securely, while saving a billion dollars the next few years. Let's seize this opportunity, without waiting.

Two years ago, the bipartisan commission led by two of Indiana's most admired leaders presented to us a blueprint to bring Indiana local government out of the pioneer days in which it was created and into the modern age. Of their 27 proposals, seven have been enacted in some form. That leaves a lot of work to do. Indiana is waiting.

Some of the changes are so obvious that our failure to make them is a daily embarrassment. The conflict of interest when double-dipping government workers simultaneously sit on city or county councils, interrogating their own supervisors and deciding their own salaries, must end. The same goes for the nepotism that leads to one in four township employees sharing a last name with the politician who hired them.

Township government, which does not exist in most states, made some sense on the Indiana frontier. Many township lines were laid out to accommodate the round-trip distance a horse could travel in a day. We've come a little ways since then.

Today, over 4,000 politicians, few of them known to the voters they represent, run over a thousand different township governments. They are sitting on hundreds of millions of dollars in reserves. Some have eight years of spending needs stashed in the bank, yet they keep collecting taxes. Some townships are awash in money, while the township next door does not have enough to provide poor relief to its needy citizens. Adjacent townships each buy expensive new fire trucks when one would suffice to cover them both.

Those serving in township government are good people, and well motivated. We thank them for their service. Our problem lies not with those holding all these offices, but with the antique system that keeps them there. I support the clear and simple recommendation of the Kernan-Shepard Commission that we remove this venerable but obsolete layer of government, and assign what little remains of its duty to elected city and county officials.

Likewise, our strange arrangement of a three-headed county executive should change. No business has three CEOs; no football team has three head coaches; no military unit would think of having three coequal commanding officers. We should join the rest of America in moving to a single, elected county commissioner, working with a strengthened legislative branch, the County Council, to make decision making accountable and implementation swift and efficient.

As in the last two sessions, I look forward to constructive cooperation with the Assembly in bringing reform about. The only outcome that is unacceptable is no action at all. Hoosiers have waited for decades for our governmental design to catch up to society. Let's not keep them waiting any longer.

In no realm is our opportunity larger than in the critical task of educating our children. The need for major improvement, and the chance for achieving it, is so enormous tonight that opportunity rises to the level of duty.

Advocates of change in education become accustomed to being misrepresented. If you challenge the fact that forty-two cents of the education dollar are somehow spent outside the classroom, you must not respect school boards. If you wonder why doubling spending didn't produce any gains in student achievement, you must be criticizing teachers. If your heart breaks at the parade of young lives permanently handicapped by a school experience that leaves them unprepared for the world of work, you must be "anti-public schools."

So let's start by affirming once again that our call for major change in our system of education, like that of President Obama, his education secretary and so many others, is rooted in a love for our schools, those who run them and those who teach in them. But it is rooted most deeply in a love for the children whose very lives and futures depend on the quality of the learning they either do or do not acquire while in our schools. Nothing matters more than that. Nothing compares to that.

Some seek change in education on economic grounds, and they are right. To win and hold a family-supporting job, our kids will need to know much more than their parents did. I have seen the future competition, every time I go abroad in search of new jobs for our state, in the young people of Japan, Korea, Taiwan, China. Let me tell you-those kids are good. They ought to be. They are in school, not 180 days a year like here, but 210, 220, 230 days a year. By the end of high school, they have benefited from two or three years more education than Hoosier students. Along the way, they have taken harder classes. It won't be easy to win jobs away from them.

It's not just tomorrow's jobs that are at stake. The quality of Indiana education matters right now. When we are courting a new business, right behind taxes, the cost of energy, reasonable regulation, and transportation facilities comes schools. "What kind of school will my children, and our workers' children attend?" is a question we're always asked. Sometimes, in some places, it costs us jobs today. There is no time to wait.

In 1999, Indiana passed a law that said schools must either improve their results or be taken over by new management. The little ones who entered first grade then, full of hope and promise, are eighteen now. In the worst of our districts, half of them will not be graduating. God bless and keep them, wherever they are and whatever life now holds for them. For those children, we waited too long.

And it's not just about the most failing of our schools. The last couple years have seen some encouraging advances, after years of stagnation. But the brute facts persist: only one in three of our children can pass the national math or reading exam. We trail far behind most states and even more foreign countries on measures like excellence in math: at the recent rate of improvement, it would take twenty-one years for us to catch Slovenia, and that's if Slovenia stands still. That's too long to wait. That's too many futures to lose.

In every discussion, someone says "This is very complicated." Then someone says, "These changes won't be perfect," and then you hear "The devil is in the details." All true. But we can no longer let complexity be an excuse for inaction, nor imperfection the enemy of the good. When it comes to our children's future, the real devil is not in the details, he's in the delay, and 2011 is the year the delay must end.

We know what works. It starts with teacher quality. Teacher quality has been found to be twenty times more important than any other factor, including poverty, in determining which kids succeed. Class size, by comparison, is virtually meaningless. Put a great teacher in front of a large class, and you can expect good results. Put a poor teacher in front of a small class, do not expect the kids to learn. In those Asian countries I mentioned, classrooms of thirty-five students are common, and they‘re beating our socks off.

We won't have done our duty here until every single Indiana youngster has a good teacher every single year. Today, 99 percent of Indiana teachers are rated "effective." If that were true, 99 percent, not one-third, of our students would be passing those national tests.

Today's teachers make more money not because their students learned more but just by living longer and putting another certificate on the wall. Their jobs are protected not by any record of great teaching but simply by seniority. We have seen "teachers of the year" laid off, just because they weren't old enough. This must change. We have waited long enough.

Teachers should have tenure, but they should earn it by proving their ability to help kids learn. Our best teachers should be paid more, much more, and ineffective teachers should be helped to improve or asked to move. Today, the outstanding teacher, the Mr. Watson whose kids are pushed and led to do their best, is treated no better than the worst teacher in the school. That is wrong; for the sake of fairness and the sake of our children, it simply has to end. We have waited long enough.

We are beginning to hold our school leaders accountable for the only thing that really matters: Did the children grow? Did the children learn? Starting this year, schools will get their own grades, in a form we can all understand: ‘A' to ‘F.' There will be no more hiding behind jargon and gibberish.

But, in this new world of accountability, it is only fair to give our school leadership full flexibility to deliver the results we now expect. Already, I have ordered our Board of Education to peel away unnecessary requirements that consume time and money without really contributing to learning. We are asking this Assembly to repeal other mandates that, whatever their good intentions, ought to be left to local control. I am a supporter of organ donation, and cancer awareness, and preventing mosquito-borne disease, but if a local superintendent or school board thinks time spent on these mandated courses interferes with the teaching of math, or English, or science, it should be their right to eliminate them from a crowded school day.

And, while unions and collective bargaining are the right of those teachers who wish to engage in them, they go too far when they dictate the color of the teachers' lounge, who can monitor recess, or on what days the principal is allowed to hold a staff meeting. We must free our school leaders from all the handcuffs that reduce their ability to meet the higher expectations we now have for student achievement.

Lastly, we must begin to honor the parents of Indiana. We must trust them, and respect them enough, to decide when, where, and how their children can receive the best education, and therefore the best chance in life.

Visiting with high school seniors, I discovered one new option we should be offering. A significant fraction of our students complete, or could complete, their graduation requirements in well under twelve years. We should say to these diligent young people, and their families, if you choose to finish in eleven years instead of twelve, we will give you the money we were going to spend while you cruised through twelfth grade, as long as you spend that money on some form of further education. In this year's survey of high school students, three out of four said they would like to have that option. Let's empower our kids to defray the high cost of education through their own hard work, by entrusting them with this new and innovative choice.

Another new kind of choice has come to Indiana parents the last couple years, as a byproduct of our property tax reductions. Families are now able to choose public schools outside the districts they reside in, tuition-free. Schools have begun advertising campaigns, touting their graduation rates and higher test scores. This competition is a highly positive development, as long as it is fair. I ask you to protect our families against any possibility of discrimination by requiring that any school with more applicants than room fill it through a lottery or other blind selection process.

Indiana has lagged sadly behind other states in providing the option of charter schools. We must have more of them, and they must no longer be unjustly penalized. They should receive their funding exactly when other public schools do. If they need space, and the local district owns vacant buildings it has no prospect of using, they should turn them over.

Widening parents' options in these ways will enable the vast majority of children to attend the school of their choice. But one more step is necessary: For families who cannot find the right traditional public school, or the right charter public school for their child, and are not wealthy enough to move near one, justice requires that we help. We should let these families apply dollars that the state spends on their child to the non-government school of their choice.

In that gallery and outside sit the most important guests of the evening. They are children, and parents of children, who are waiting for a spot in a charter or private school. They believe their futures will be brighter if they can make that choice. Look at those faces. Will you be the one to tell the parents "tough luck"? Are you prepared to say to them "We know better than you do"? We won't tell you where to buy your groceries or where to get your tires rotated, but we will tell you, no matter what you think, your child will attend that school, and only that school. We have the money to send our children where we think best, but if you don't, well, too bad for you.

These children, and their parents, have waited long enough, for a better chance in life. And Indiana has waited long enough for the kind of educational results that a great state must achieve. I have spoken of the economic implications. But, at bottom, this is not about material matters. It is about the civil right, the human right, of every Indiana family to make decisions for its children. It's about the right of all Hoosier children to realize their full potential in life. Will you join me in saying, the waiting is over, change has come, and Indiana intends to lead it?

For us sports fans, recent times have brought a frustrating string of "almosts". At 60, Tom Watson almost won the British Open. The Colts almost won the Super Bowl. Little Butler almost won a national basketball championship. Besides the disappointment of coming so close, the bad thing about "almosts" is knowing that you may never get that close to victory, and history, again.

This cannot be the "almost" General Assembly. We are on the 18th hole, in the red zone, on the final possession of a chance for historic greatness. Indiana has waited long enough for local government that fits the realities of the 21st Century. We have waited long enough for an education system known for excellence in teaching, and accountable schools that deliver the results our kids deserve. Our parents have waited long enough for the freedom to decide which school is best for their children. We cannot "almost" end the waiting.

One thing is certain. The rest of the world will not wait on us. Other nations, and other states, are forging ahead with the kind of reforms I have proposed here. Indiana is now a leader in business climate, fiscal integrity, transportation, property taxes, and so many other respects. Now comes the chance to lead in ways that, long term, may matter more than all of those.

Wishing won't make it so. Waiting won't make it so. But those of you in this Assembly have a priceless and unprecedented opportunity to make it so. It's more than a proposal, it's an assignment. It's more than an opportunity, it's a duty.

Our children are waiting. Our fellow citizens are waiting. History is waiting. It's going to be a session to remember. You're going to do great things. I can't wait.

God bless this Assembly and this great state.

Mitch Daniels is the Governor of Indiana.

Will the Republicans Really Cut This Time?

Will the Republicans Really Cut This Time?

By John Stossel

The Republicans promise less intrusive, less expensive government. But will they deliver? In the past, they have said they would shrink the state, but then they came into power and spent more. Consider George W. Bush's eight horrendous years: The budget grew 89 percent -- from $1.86 trillion to $3.52 trillion.

Two Republican House members, Scott Garrett of New Jersey, No. 2 on the budget committee, and Bill Huizenga, a freshman from Michigan, say that they really mean to cut.

"I sure plan to," Garrett said.

I asked him to name three things he'd cut.

He paused for a beat, then said, "We spend about a million dollars for mohair subsidies. We need to eliminate that." We sure do. The subsidies were created to make sure America had enough mohair for soldiers' uniforms during World War I. Yet even though uniforms are no longer made of mohair, my former colleague Sam Donaldson collected subsidies because he once raised sheep and goats on his New Mexico ranch. All farm subsidies are a disgusting scam. Get rid of them.

But the mohair scam is a million bucks. It's nothing.

"So let's go up larger then," said Garrett. "How about foreign aid? (C)ut that out, and you would save around $1.3 billion. Right now, we basically pay federal employees ... who are parts of a union to engage in union activity. How about eliminating those dollars? ... (S)ave about $1.2 billion.

"We have come up with a list of over some $2 trillion."

The ones Garrett named, however, are less than 1 percent of $2 trillion. I understand their reluctance to mention the big stuff, given the political opposition, but when will politicians bite that bullet? They need to!

I'm glad the House leadership has talked about cutting spending back to 2008 budget levels. Garrett said: "Some of us would say let's roll it back even further -- to '07 or '06 levels."

Why not? Why not cut back to the first Bush budget, in 2002, before his spending orgy? I never got a clear answer to that. "Let's figure out what constitutionally we must be doing and where we have started coloring way outside the lines," Huizenga suggested. "Two, are (programs) being effective? ... If they are, fund them. If they're not, let's de-fund them."

The Republicans' promised spending cuts are directed at "nondefense discretionary" spending. Fine. Cut that. But "nondefense discretionary" spending is just 15 percent of the budget. The Republicans' pledge leaves out the big stuff: Social Security, Medicare, Medicaid and what the government calls defense. That's where the big money is.

"Exactly," Garrett said. You could eliminate all nondefense discretionary spending, and you wouldn't solve the problem. You have to go a lot further than that, and that's why we have to touch those other areas."

I pointed out that I don't hear much talk about that.

"Some of us talk about it. You have to touch on each one of these areas and until the American public is cognizant ... that we have to have shared sacrifice."

As a way to get the public involved, Majority Leader Eric Cantor set up "YouCut" back in May -- "a first-of-its-kind project ... designed to defeat the permissive culture of runaway spending in Congress. It allows you to vote, both online and on your cell phone, on spending cuts that you want to see the House enact. Each week, we will take the winning item and offer it to the full House for an up-or-down vote."

People voted to eliminate things like federal pay raises and subsidies for Amtrak sleeper cars. But with the House under Democratic control, none of those programs was cut. We'll see if things are different now.

"We'll be able to make those cuts," Garrett said.

I hope so. I wish they'd pass what I call the Stossel Rule: For every new law, Congress has to repeal two old ones.

America is on a path to bankruptcy. It's easy to get bogged down arguing about lots of small cuts, but we'll only make progress by abolishing whole departments and entire missions. I hope the public understands it has to be done.

Budget Crisis Rhetoric

Budget Crisis Rhetoric

By Thomas Sowell

Government budget crises can be painful, but the political rhetoric accompanying these crises can also be fascinating and revealing. Perhaps the most famous American budget crisis was New York City's, back during the 1970s. When President Gerald Ford was unwilling to bail them out, the famous headline in the New York Daily News read, "Ford to City: Drop Dead."

President Ford caved and bailed them out, after all.

The rhetoric worked. That is why so many other cities and states-- not to mention the federal government-- have continued on with irresponsible spending, and are now facing new budget crises, with no end in sight.

What would have happened if President Ford had stuck to his guns and not set the dangerous precedent of bailing out local irresponsibility with the taxpayers' money?

New York would have gone bankrupt. But millions of individuals and organizations go bankrupt without dropping dead.

Bankruptcy conveys the plain facts that political rhetoric tries to conceal. It tells people who depended on the bankrupt government that they can no longer depend on that bankrupt government. It tells the voters who elected that bankrupt government, with its big spending promises, that they made a bad mistake that they would be wise to avoid making again in the future.

Legally, bankruptcy wipes out commitments made to public sector unions, whose extravagant pay and pension contracts are bleeding municipal and state governments dry.

Is putting an end to political irresponsibility and legalized union racketeering dropping dead?

Politics being what it is, we are sure to hear all sorts of doomsday rhetoric at the thought of cutbacks in government spending. The poor will be starving in the streets, to hear the politicians and the media tell it.

But the amount of money it would take to keep the poor from starving in the streets is chump change compared to how much it would take to keep on feeding unions, subsidized businesses and other special interests who are robbing the taxpayers blind.

Letting armies of government employees retire in their fifties, to live for decades on pensions larger than they were making when they were working, costs a lot more than keeping the poor from starving in the streets.

Pouring the taxpayers' money down a thousand bottomless pits of public and private boondoggles costs a lot more than keeping the poor from starving in the streets.

Bankruptcy says: "We just don't have the money." End of discussion. Bailouts say: "Give the taxpayers a little rhetoric, and a little smoke and mirrors with the book-keeping, and we can keep the party rolling."

One of the political games that is played during a budget crisis is to cut back on essential services like police departments and fire departments, in order to blackmail the public into accepting higher tax rates. Often, a lot more money could be saved by getting rid of runaway pension contracts with public sector unions.

Bankruptcy can do that. Bailouts cannot.

What the public needs are current policemen and current firemen, not retired policemen and retired firemen, much less bureaucrats retired on inflated pensions.

The political temptation to create extravagant pensions is always there, not only at state and local levels, or at the federal level, but in countries around the world. Why? Because pensions are benefits that can be promised for the future, without raising the money to pay for them.

Politicians get the votes of those to whom pensions are promised, without losing the votes of taxpayers-- and they leave it up to future government officials to figure out what to do when the money is just not there. It is a sure-fire guarantee of political irresponsibility.

All of this works politically only so long as the voting public accepts budget crisis rhetoric at face value, without bothering to stop and think about what it means and implies.

How to Combat an Arrogant China?

How to Combat an Arrogant China?

By Larry Kudlow

Is there a new Cold War developing between China and the United States? That's a question hovering over President Hu Jintao and his entourage as they come to Washington to discuss military, trade and financial flash points with the Obama administration.

Hu told The Wall Street Journal that "we should abandon the zero-sum Cold War mentality." But is he to be believed?

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Everyone agrees that this is a new, muscular and more aggressive China. The more the Chinese strengthen economically, the more rambunctious they become with their foreign policy. Americans are increasingly irritated by this arrogance.

Just last week -- and just as the Pentagon plans to cut back on the modernized F-22 stealth fighter -- China insulted Defense Secretary Robert Gates by test-flying its own J-20 stealth bomber during his visit. Adm. Mike Mullen, head of the Joint Chiefs of Staff, wondered out loud why China is boosting its high-tech weaponry. He said, "Many of these capabilities seem to be focused very specifically on the United States."

Surely the J-20 flight was a snub to Washington. Surely China's whole military buildup is aimed directly at us. And surely China is of no particular help when it comes to the nuclear operations of North Korea and Iran.

Then, of course, are the numerous trade violations being committed by China. Commerce Secretary Gary Locke wants a level playing field on trade. As a strong free-trader myself, I recognize the many benefits free and open trade offers both China and the United States. But like many others, my free-trade patience with China is wearing thin.

They're stealing our technology, violating all sorts of patent-protection laws, hacking into Google and infringing on intellectual-property rights. In fact, 80 percent of Chinese software is reportedly pirated from American companies.

A new Chinese requirement for joint ventures with the U.S. -- where China gets 51 percent, and our companies only 49 percent -- looks like another attempt to snake our technology. Chinese local-content prescriptions prevent our firms from doing business with China's state and local governments. The China curb on rare-earth materials, important both for U.S. technology and defense security, is yet another free-trade violation.

Everyone wants cooperation rather than confrontation. Creating trade barriers for Chinese exports would damage American consumers and businesses, each of whom enjoy access to decent quality, low-cost Chinese goods. But if China continues to violate World Trade Organization rules, something has to be done.

On the financial side, the great yuan debate goes on. I have never believed the yuan value should be linked to the U.S.-China trade deficit. Two-way trade is exploding. That's good for growth. However, Treasury Sectary Tim Geithner's new angle on the China inflation bubble has merit.

In order to hold down the yuan, China's foreign-exchange reserves jumped another $200 billion in the fourth quarter of 2010. Those reserves now total $2.85 trillion. With these massive foreign-reserve purchases, China's money supply is growing by 20 percent. Its inflation rate is rising above 5 percent.

Surely, if the Fed were not printing so many excess dollars -- which circulate to China -- the Chinese money-supply problem wouldn't be so great. Nevertheless, holding back the yuan is creating what looks suspiciously like a big asset bubble. When that bubble is finally punctured, it could do great damage to the economies of China, the U.S. and the rest of the world.

Both the Chinese yuan and the U.S. dollar have depreciated substantially relative to gold. That tells me each currency is way undervalued because money is too loose in both countries. As Columbia University economics professor Robert Mundell has counseled, U.S.-China currency stability is greatly to be desired. That desire can only be accommodated with a high degree of currency- and monetary-policy cooperation, however -- of a sort that is nowhere on the radar screen. Why not look to a gold reference point for both currencies?

At the end of the day, the best thing the U.S. can do to protect its own interests with respect to China is to adopt Ronald Reagan's strategy toward the Soviet Union. The Gipper knew that maximum security abroad requires maximum economic growth at home. That's why the new Republican Congress, hopefully doing business with a more centrist President Obama, must follow through on its pledge to reduce spending, lower the corporate tax rate and roll back unnecessary regulations.

China has gotten cocky because it is growing at 10 percent while our unemployment rate is close to 10 percent. But greater economic strength at home will give the U.S. more leverage to deal with China on all fronts.

This was Reagan's great lesson.

Lawrence Kudlow is host of CNBC's The Kudlow Report and co-host of The Call. He is also a former Reagan economic advisor and a syndicated columnist. Visit his blog, Kudlow's Money Politics.

China: The Immovable Object

China: The Immovable Object
By Robert Robb

Managing the U.S.-China relationship requires two qualities for which American foreign policy is not usually known: circumspection and patience.

Right now, the United States is irritated with China on many fronts.

We are worried about how much U.S. debt the Chinese own, but also that they will not want to buy any more. We believe that China undervalues its currency to cheat in trade.

The United States is alarmed at China's increased military capability and the threat it poses to U.S. supremacy in the Pacific. We find China's territorial claims provocative.

The U.S. believes that China is not doing enough to restrain the nuclear ambitions of Iran and, particularly, North Korea.

Some of this irritation comes from a lack of perspective. China's trade with the rest of the world is roughly in balance, it imports about as much as it exports. The trade surplus with the United States is not due to currency differences. China loosely pegs its currency to the U.S. dollar, which is the opposite of manipulation.

In fact, China has a much more valid currency complaint than does the United States. Extraordinarily loose U.S. monetary policy is devaluing China's dollar reserves.

China's large dollar reserves are insurance against its own immature banking and finance system, not a calculated effort to gain leverage over the United States. As a percentage of GDP, China actually owns less U.S. government debt than does Britain or Switzerland.

Some of the concern about China is real. China is clearly seeking to neutralize U.S. military supremacy in the Pacific. And it will succeed. That is a reality to which other regional powers - Japan, South Korea, Taiwan - will have to adjust.

Mostly, however, U.S. irritation with China results from the difficulty the United States is having in adjusting to a diminished role in the world. The United States just isn't used to a country that really doesn't seem to care what we think or do, as China generally does not.

For the United States, China is the immoveable object. Blandishments don't work. Importuning doesn't work. Threats don't work. And as the Obama administration will learn, holding state visits and dinners don't work either.

China does what it perceives to be in its best interests, irrespective of what the United States thinks about it.

There is deep anxiety in the United States that we will be eclipsed by China. This is another area in which perspective is missing.

China does seek to reduce U.S. geo-political influence in its part of the world. But economically, China wishes us no harm. At the state visit, President Obama told China President Hu that, "We want to sell you all kinds of stuff." The Chinese want to do the same to us.

The Chinese believe they have built an economic model that serves as an alternative to America's democratic capitalism. Many in the United States fear that they have.

But they haven't. China is still very much a developing country. China's approach of using state-favored large commercial enterprises to expand exports is hardly new among developing countries. It's been done before.

An export sector can be developed that way. But domestic production and trade cannot be centrally controlled. There are too many moving parts.

China is headed for big problems. It has an aging population without a social welfare net. As Richard McGregor's book, "The Party," documents, everything in China, including its large commercial firms, still owes first loyalty to the Communist Party. Maintaining authoritarian control over 1.3 billion people is not easy. China is constantly rife with small-scale protests.

Sometime over the next decade or two, China's state-directed export economic model will begin to stagnate. What will happen next is impossible to foresee. But a steady continuation of China's rise as it is currently configured isn't going to happen. Simply put, China has neither a political nor an economic system compatible with a generally prosperous people.

China will do what China will do. There's not much the United States can do about it except watch and cope.
Robert Robb is a columnist for the Arizona Republic and a RealClearPolitics contributor. Reach him at Read more of his work at

Why Everything Starts with Repeal

Why Everything Starts with Repeal
Democrats are defending Obamacare with flimflammery.

Suppose someone — say, the president of the United States — proposed the following: We are drowning in debt. More than $14 trillion right now. I’ve got a great idea for deficit reduction. It will yield savings of $230 billion over the next 10 years: We increase spending by $540 billion while we increase taxes by $770 billion.

He’d be laughed out of town. And yet, this is precisely what the Democrats are claiming as a virtue of Obamacare. During the debate over Republican attempts to repeal it, one of the Democrats’ major talking points has been that Obamacare reduces the deficit — and therefore its repeal raises it — by $230 billion. Why, the Congressional Budget Office says exactly that.

Very true, and very convincing. Until you realize where that number comes from. CBO director Douglas Elmendorf explains in his “preliminary analysis of H.R. 2” (the Republican health-care repeal): “CBO anticipates that enacting H.R. 2 would probably yield, for the 2012-2021 period, a reduction in revenues in the neighborhood of $770 billion and a reduction in outlays in the vicinity of $540 billion.”

As National Affairs editor Yuval Levin pointed out when mining this remarkable nugget, this is a hell of a way to do deficit reduction: a radical increase in spending, topped by an even more radical increase in new taxes.

Of course, the very numbers that yield this $230 billion “deficit reduction” are phony to begin with. The CBO is required to accept every assumption, promise (of future spending cuts, for example), and chronological gimmick that Congress gives it. All the CBO then does is perform the calculation and spit out the result.

In fact, the whole Obamacare bill was gamed to produce a favorable CBO number. Most glaringly, the new entitlement it creates — government-subsidized health insurance for 32 million Americans — doesn’t kick in until 2014. That was deliberately designed so any projection for this decade would only cover six years of expenditures — while that same ten-year projection would capture ten years of revenue. With ten years of money inflow versus six years of outflow, the result is a positive — i.e., deficit-reducing — number. Surprise.

If you think that’s audacious, consider this: Obamacare does not create just one new entitlement (health insurance for everyone); it actually creates a second — long-term-care insurance. With an aging population, and with long-term care becoming extraordinarily expensive, this promises to be the biggest budget buster in the history of the welfare state.

And yet, in the CBO calculation, this new entitlement to long-term care reduces the deficit over the next ten years. By $70 billion, no less. How is this possible? By collecting premiums now, and paying out no benefits for the first ten years. Presto: a (temporary) surplus. As former CBO director Douglas Holtz-Eakin and scholars Joseph Antos and James Capretta note, “Only in Washington could the creation of a reckless entitlement program be used as [an] ‘offset’ to grease the way for another entitlement.” I would note additionally that only in Washington could such a neat little swindle be titled the “CLASS Act” (the Community Living Assistance Services and Supports Act).

That a health-care reform law of such enormous size and consequence, revolutionizing one-sixth of the U.S. economy, could be sold on such flimflammery is astonishing, even by Washington standards. What should Republicans do?

Make the case. Explain the phony numbers, boring as the exercise may be. Better still, hold hearings and let the CBO director, whose integrity is beyond reproach, explain the numbers himself.

To be sure, the effect on the deficit is not the only criterion by which to judge Obamacare. But the tossing around of such clearly misleading bumper-sticker numbers calls into question the trustworthiness of other happy claims about Obamacare. Such as the repeated promise that everyone who likes his current health insurance will be able to keep it. Sure, but only if your employer continues to offer it. In fact, millions of workers will find themselves adrift because their employers will have every incentive to dump them onto the public rolls.

This does not absolve the Republicans from producing a health-care replacement. They will and should be judged by how well their alternative addresses the needs of the uninsured and the anxieties of the currently insured. But amending an insanely complicated, contradictory, incoherent, and arbitrary 2,000-page bill that will generate tens of thousands of pages of regulations is a complete nonstarter. Everything begins with repeal.

— Charles Krauthammer is a nationally syndicated columnist

America must brace itself for turbulence

America must brace itself for turbulence

By Peter Orszag

America is experiencing the hard slog of recovering from the financial crisis. Prospects have turned more positive over the past two months. But a year ago growth was picking up too – and then it stalled, at about the same time Greece’s fiscal problems infected the global economy. The question now is whether a home-grown fiscal crisis could derail this year’s rebound.

Some analysts have reached dramatic conclusions, suggesting the near-certainty of hundreds of billions of dollars in government defaults within the US over the next 12 months. Such predictions will undoubtedly turn out to be substantially overblown. Yet the rejection of one extreme is not the affirmation of the other. International investors would be wise to pay close attention to fiscal trends within the US.

The severity of fiscal risk varies considerably depending on which level of government is under discussion. At the federal level the combination of ongoing weakness in the labour market and large structural budget deficits means that the right policy mix should be more stimulus now and much more deficit reduction, enacted now, to take effect in two to three years. Policymakers have acted on the first part, most prominently through the payroll tax holiday announced in December – one of the factors making the short-term outlook more promising.

They have not, however, undertaken the harder work needed to reduce projected deficits over the next decade. Most fundamentally it is difficult to see how the medium-term federal deficit can be reduced to sustainable levels without additional tax revenues from those earning less than $250,000 a year. And yet it is equally difficult to see the political system embracing that reality without being forced to do so by the bond market.

If policymakers will not act before we have a fiscal crisis at the federal level, a fiscal crisis we will ultimately have. Until then we will see a microcosm of this broader problem arise dur­ing debate about increasing the federal debt limit, later this spring. This will be contentious. We may have to experience some temporary market turbulence before it is resolved.

At the level of state governments, revenue remains more than 10 per cent below pre-recession levels. Public pensions are also significantly underfunded, leading to well-publicised concerns about debt defaults. As a recent paper from the Centre on Budget and Policy Priorities correctly argues, states will have to take immediate and painful action to reduce their operating deficits, while also gradually closing their pension gaps. Outright defaults are not likely, but these fiscal problems require concerted effort and political will, especially in larger states such as California and Illinois. This will impose some macroeconomic drag on the US economy as taxes are raised and spending is cut.

Facile analogies to indebted European countries, or the US mortgage crisis, however, are both misplaced. Although comparisons of debt across different levels of government are fraught with difficulties, US state debt levels are nowhere close to those of Greece. Debt service obligations are similarly much lower.

Unlike in the mortgage crisis, state debt has not generally been repackaged into opaque, complex securities. Furthermore, and contrary to what many pundits suggest, state governments cannot simply declare bankruptcy. Bondholders are also privileged creditors in almost all states. It is thus difficult for states to default: they would generally have to stop paying employees before they stopped making debt payments.

At the local level, however, the situation is different. Many US cities can declare bankruptcy – and given their numbers a severe crisis in at least one major city is both feasible and quite possible. As a thought experiment, take the top 30 or so cities. Assume any one has only a 2 per cent probability of a severe problem. Then the probability that at least one experiences a crisis is almost 50 per cent.

In such a city-level crisis, the state government could help – as has already occurred in Harrisburg, Pennsylvania. States would be wise to consider in advance their options in this kind of crisis scenario. But even if the relevant state government decides not to step in, and a city is forced to default, the direct macroeconomic consequences are unlikely to be substantial – unless that default triggers others to follow. In this scenario the possible contagion effect among investors in the debts of different cities is a crucial consideration.

The bottom line is that there may well be US public debt tremors this year, both during federal debate over raising the debt ceiling and with at least a limited number of crises in local and city governments. The bigger problem, though, lies beyond 2011, as the unsustainability of the federal government’s fiscal trajectory becomes increasingly clear. I hope it does not ultimately require a crisis to restore fiscal sustainability at the federal level, but I fear it will.

The writer is a vice-chairman of global banking at Citigroup and former director of the US Office of Management and Budget under Barack Obama

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