Wednesday, March 30, 2011

The global economy

Another year of living dangerously

Turmoil in the Middle East and disaster in Japan arouse economic angst. Central banks must not make it worse

THIS was supposed to be a stress-free year for the global economy. By January the financial crisis had faded and Europe’s sovereign-debt crisis seemed less acute. America’s economy was resurgent. Investors piled into equities and sold some of the government bonds they’d bought for troubled times. If there was a worry, it was that emerging economies would grow too quickly, inflating commodity prices.

The year without crisis is not to be. First, Arabian upheaval put oil markets on edge. Then earthquake, tsunami and a nuclear accident clobbered the world’s third-largest economy. How much of a setback to growth do these twin crises represent? And how should economic policymakers react to them?

Japan’s share of world output has been shrinking for decades, but at 9% it remains large enough for the hit to the country’s growth to subtract noticeably from global output. Then there are the ripple effects on the rest of the world. Japan is a large—in some cases the sole—supplier of intermediate goods to the world’s electronics and automotive industries, from the hardened glass on Apple’s iPad to gearboxes in Volkswagens. Many makers of such parts have had to slow or halt shipments because of damaged roads, power cuts or the loss of components from their own suppliers. The effects have spread well beyond Japan, causing shutdowns from South Korea to Spain. Still, the history of such disasters is that much of that lost production is eventually recovered and reconstruction delivers a fillip to subsequent growth.

Pinpointing the impact of Arab political turmoil is complicated by the fact that oil prices were already rising thanks to a brighter global economic outlook. Nonetheless, a good portion of this year’s 25% increase seems due to worries over supplies. A rule of thumb holds that a 10% increase in the price of oil trims 0.2 percentage points from global growth. At the start of the year, the world looked likely to grow by 4-4.5%. A crude estimate is that the two crises will subtract between a quarter and half a percentage point from that.

That may not capture the full effect. Crises by their nature generate clouds of uncertainty (see article). Businesses postpone capital spending and hiring until the clouds clear. Investors seek the safety of bonds and lose their taste for equities.

Economic policymakers can’t make peace between Arab rulers and their people or stabilise Japan’s nuclear reactors, but they can minimise the collateral damage. The greatest burden is on the Bank of Japan. Its efforts to cure deflation over the past 15 years have too often been timid. That could not be said of its rapid response to the tsunami. It poured cash into the banking system in a pre-emptive strike against panic hoarding. And it expanded its purchases of government and corporate debt and equities. Still more “quantitative easing” can keep bond yields from rising as the government borrows for reconstruction, and help the fight against deflation.

What should the rest of the world do? In a show of sympathy the G7 joined the Bank of Japan in selling the yen after it spiked dramatically. Such actions should be limited, however. Japan is too dependent on exports and its priority should be stimulating domestic demand and ending deflation, not cheapening the yen. A better way for outsiders to help is to ensure that concerns over radiation in Japanese products do not become an excuse for protectionism.

Avoidable aftershocks

Other central banks face a more complicated task. Even as higher oil prices and hobbled Japanese production reduce growth they add to mounting inflation risks (Britain is now fretting over inflation of 4.4%). But most rich-world economies have ample economic slack, and in several countries fiscal tightening will tug at recovery. Britain’s coalition government has reaffirmed its commitment to austerity with this week’s budget (see article), and America has begun to cut spending. Both the Bank of England and the Federal Reserve should resist the temptation to tighten soon.

The European Central Bank seems intent on raising interest rates next month. That would be a mistake. In the euro zone underlying inflation and wage growth are both subdued and inflation expectations are under control. By raising rates the ECB would strengthen the euro and frustrate the efforts of countries like Greece, Ireland and—the next in line for bailing out—Portugal to grow their way out of their debts.

There is only so much economic policymakers can do about crises that spring from war or nature. In this case, the priority should be not making matters worse.

Marx, Mervyn or Mario?


Marx, Mervyn or Mario?

What is behind the decline in living standards?

ARE you better off than you were two years ago? Although the economic recovery in the developed world is almost two years old, the average Westerner would probably answer “No”.

The authorities have applied shock and awe in the form of fiscal and monetary stimulus. They have prevented the complete collapse of the financial sector—bankers’ pay has certainly held up just fine. The corporate sector is also doing well. Even if banks are excluded, the profits of S&P 500 companies were up by 18.7% last year, says Morgan Stanley.

But the benefits of recovery seem to have been distributed almost entirely to the owners of capital rather than workers. In America total real wages have risen by $168 billion since the recovery began, but that has been far outstripped by a $528 billion jump in profits. Dhaval Joshi of BCA Research reckons that this is the first time profits have outperformed wages in absolute terms in 50 years.

In Germany profits have increased by €113 billion ($159 billion) since the start of the recovery, and employee pay has risen by just €36 billion. Things look even worse for workers in Britain, where profits have risen by £14 billion ($22.7 billion) but aggregate real wages have fallen by £2 billion. A study by the Institute for Fiscal Studies, a think-tank, found that the median British household had suffered the biggest three-year fall in real living standards since the early 1980s.

Are these trends a belated vindication of Karl Marx? The bearded wonder wrote in “Das Kapital” that: “It follows therefore that in proportion as capital accumulates, the situation of the worker, be his payment high or low, must grow worse.” But Marx also predicted a decline in profit margins in capitalism’s dying throes, suggesting some confusion in his analysis.

A more positive view of this divergence between capital and wages is that developed economies had become too dependent on consumption and had to switch to an export- and investment-led model. That was the view of Mervyn King, the governor of the Bank of England, when he said in January that “the squeeze in living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies.”

That reasoning might work for Britain and America. But it is hard to apply to Germany, where unit labour costs have been held down for a decade and where, if the economy does need to be rebalanced, it is arguably in favour of consumption.

There is also a longer-term trend to explain. Wages still account for a much greater slice of income than profits, but labour’s share has been in decline across the OECD since 1980. The gap has been particularly marked in America: productivity rose by 83% between 1973 and 2007, but male median real wages rose by just 5%.

The decline in labour’s share has also been accompanied by an increased inequality of incomes, something that economists have struggled for years to explain. Mean wages, which include the earnings of chief executives and sports stars, have risen much faster than the median. This premium for “talent” may reflect globalisation as the elite are able to move to the countries where their skills are most appreciated. Or it may reflect changes in technology, which have generated outsize rewards for those people most able to take advantage of them.

An alternative explanation has been to blame the decline in trade-union membership. In the 1960s and 1970s powerful unions in manufacturing industries like cars were able to demand higher wages. But high-paying blue-collar jobs have been in decline since then. John Van Reenen, the director of the Centre for Economic Performance at the London School of Economics, reckons that privatisation has also led to a decline in labour’s share of the cake. Managers of newly privatised industries tend to lay off workers as their focus shifts from empire-building to profit maximisation.

One factor that should perhaps get more emphasis is the role of the financial sector. Central banks have repeatedly cut or held down interest rates over the past 25 years in an attempt to boost bank profits and prop up asset prices. With this subsidy in place, is it surprising that earnings in finance have outpaced wages for other technologically skilled jobs?

Attempts to remove that subsidy are met by threats from international banks to move elsewhere. This is a little reminiscent of the protection rackets run by the gangsters in Mario Puzo’s “The Godfather”. It is as if the finance sector is saying: “Nice economy you got there. Shame if anything should happen to it.”

Japan's nuclear crisis

Japan's nuclear crisis

In hot water

by H.T. | TOKYO

FRUSTRATION is mounting once again about the dangers emerging from the stricken Fukushima Dai-ichi nuclear power plant. This is partly due to new evidence: that there may have been a partial melting of nuclear fuel within the reactors’ protective structures and that radiation, including small doses of plutonium, has since leaked into the surrounding area. But fanning this anxiety is a grave new worry: that it may take months, rather than days or weeks, to bring this poisonous situation under control.

In the simplest terms, the latest bad news is that traces of plutonium have been found in soil samples near the stricken reactors. If fears of radioactive iodine-131, which loses half its potency every eight days, are bad, imagine how people may feel about plutonium-239, which has a “half-life” of 24,000 years. Tokyo Electric Power Company (TEPCO), the private monopoly that owns Fukushima, cannot say where the plutonium comes from: it may be from reactors No. 1 or 2, as a by-product of spent uranium, or from reactor No. 3, which has plutonium in its mixed-oxide fuel. That is the first indication of just how little the authorities know for certain about the situation.

It is a similar story with the pools of radioactive water that have been found sloshing around turbines near the reactors; it is not clear where these came from either. The worst case, near reactor No. 2, is 100,000 times more radioactive than water at a nuclear power plant is supposed to be. Wherever the excess radiation came from, and that is not clear, it has hampered ongoing efforts to hook up power supplies to the plant. Electricity is needed for cooling and monitoring systems, so that TEPCO can keep the nuclear fuel rods from overheating. By keeping work crews at bay, the radiation also stymies TEPCO’s ability to tell how badly pipes, pressure vessels and fuel rods have been damaged since the earthquake and tsunami on March 11th, which in turn makes it impossible to know how much more radiation can be expected to leak out. Then there are the pools for spent fuel rods, near the reactors. TEPCO cannot see whether these have been the site of any sort of meltdown, because there is too much debris piled on top.

For now, the authorities are partially reassured by the fact that what TEPCO can measure—heat and pressure within the reactors—has, by and large, remained stable, indicating there has been no meltdown of the potentially catastrophic sort. But the temperature in the first reactor rose to 323 degrees centigrade on Tuesday March 29th, which was not a good sign. Workers are having to balance the need to keep water flowing over the fuel rods, to prevent their overheating, against the risk of radioactive spillage into the sub-soil—and potentially the sea beyond. Making their work more complicated still, when a pool of water is suddenly found with potentially lethal doses of radiation, the other measurements are thrown into doubt.

To be fair to TEPCO, which has been getting all the bad press lately, it at least appears to be aware of how serious the threats are. When asked when the cooling systems might be brought under control, a spokesman says: “We just don’t know how long it will take.” That sounds like an honest assessment.

But candour at this stage will only get TEPCO so far. Its relationship with the government, which is directing disaster efforts from within the utility’s darkened headquarters in Tokyo, is about as tainted as Fukushima’s turbine water. On Tuesday Koichiri Gemba, the minister for national strategy, left open the possibility of nationalising TEPCO (or at least its nuclear arm). Presumably, that is partly to reassure potential claimaints from the vicinity of Fukushima, who may have lost everything as a result of radiation. TEPCO is already now under intense scrutiny to see whether it cut corners on safety prior to the disaster. Its president, Masataka Shimizu, is being lambasted for falling ill (some say going AWOL) during the emergency; the company has yet to explain his absence. And its emergency staff (some of them poorly paid outside contractors) are suffering miserable conditions on-site to carry out some of the most dangerous work on the planet; not only do they have insufficient food, they have to sleep on the floor under a single blanket.

With all these problems, it is no wonder TEPCO’s shares fell to a 47-year low on Tuesday. But the problem is not just TEPCO’s; it is Japan’s. The longer this crisis drags on and the more radiation spews out, the more the area around the plant may be irretrievably damaged and the higher the costs will mount—in psychic and physical terms. That bodes ill for the government. According to a Kyodo opinion poll this week, 58.2% of those surveyed do not approve of the government’s handling of the nuclear disaster. Naoto Kan’s administration has taken the reins from TEPCO to assert its authority over the disaster. It may have to raise its crisis response to a new level—probably involving international experts—to get ahead of the relentless cycle of bad news.

Senator Coburn Plan to End Ethanol Credit

Senator Coburn Plan to End Ethanol Credit Tests Republican Tax Principle

Proposal to End Ethanol Credit Tests Republicans

Senator Tom Coburn's proposal to end a tax credit for ethanol is slated to reach the U.S. Senate floor for a vote this week. Photographer: Somodevilla/Getty Images

Senator Tom Coburn is trying to challenge the proposition that all tax breaks are created equal.

The effort by the Oklahoma Republican to end a tax credit for ethanol places him in conflict with farm-state senators who want to keep the tax incentive. It also puts him at odds with tax-cut advocates in the Republican Party, who argue that eliminating the tax break would result in an unacceptable tax increase. The proposal could reach the Senate floor this week.

A vote would force many Republicans to choose between their no-tax-increase pledge and their desire to reduce the budget deficit by cutting what they view as waste. Coburn’s amendment reaches beyond the ethanol debate and draws attention to tax expenditures, which reduce federal revenue by more than $1 trillion a year. They range from the mortgage interest deduction to tax credits for security cameras in fertilizer warehouses.

“Continuing to issue blanket defenses of all tax expenditures is a profoundly misguided embrace of progressive, activist government and a strategy for tax complexity, tax deferment, excessive spending and unsustainable deficits,” Coburn wrote yesterday to Grover Norquist. He is president of Americans for Tax Reform, a Washington advocacy group that established the “no-new-taxes” pledge.

Norquist’s group, which opposes ending tax breaks that aren’t paired with offsetting tax cuts, responded later in the day. In a letter, the group stated its opposition to the ethanol tax credit but said Coburn’s amendment would violate the no-tax- increase pledge because it would increase federal revenue. Coburn is among 40 Republican senators who have signed the pledge, according to the group.

Meaningful Distinction

The philosophical debate between Coburn and Norquist turns on the question of whether there is a meaningful distinction between targeted tax breaks and targeted spending.

“If the government lets Tom Coburn keep a dollar of his own money, that is not the same thing as the government stealing a dollar from Ryan Ellis and giving it to Tom Coburn,” wrote Ryan Ellis, the group’s tax policy director. “The differences between tax relief and spending are unambiguous.”

Pledges to prevent tax increases are akin to pledges to prevent changes to Social Security, because they create barriers to discussion of the government’s alternatives, said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a Washington group that supports deficit reduction.

“Ending mistargeted tax breaks should be a conservative’s dream,” she said. “This is exactly what you want to be doing to improve how capital’s allocated in the economy.”

In an interview, Ellis said proposals such as Coburn’s amendment weaken Republicans’ negotiating position.

‘Blood in the Water’

“If Republicans are supporting a net tax increase, that will limit their ability to have a strong hand in any of their future budget dealings,” he said. “Democrats will then smell blood in the water.”

Congress last extended the ethanol tax break in December 2010 as part of a package of extensions of expiring tax cuts. The main tax credit, which provides 45 cents a gallon to blenders, is scheduled to expire at the end of the year. Coburn’s proposal would eliminate it upon enactment of the legislation he seeks to amend -- a small-business measure.

Coburn maintains that the credit is a giveaway to ethanol refiners. He points to a report issued by the Government Accountability Office, saying that the credit duplicates the government’s biofuels production mandate.

Republican Senator John Thune of South Dakota said ending the credit in the middle of the year would hurt businesses’ plans and create uncertainty in the market.

“I think we’re better served talking about the types of issues that unite us,” he said.

Tax Pledge

It’s not yet clear if Coburn’s amendment will be voted on or when it will occur. He said yesterday that he would ultimately get a vote.

Coburn has an ally in Arizona’s Jon Kyl, the Senate’s second-ranking Republican. Kyl, who is listed as a no-new-taxes pledge signer, said in an interview yesterday he would support Coburn’s proposal, though it would mean a tax increase for those affected.

“I absolutely support striking the subsidy,” he said. “In fact, I support striking any of the so-called tax expenditures, which are just another way for taxpayers to be writing a check. They are spending by the government, and we shouldn’t have those in the tax code.”

Obama Says ‘Days Are Numbered’ for Qaddafi'

Obama Says ‘Days Are Numbered’ for Qaddafi's Regime to Keep Power in Libya

U.S. President Barack Obama

U.S. President Barack Obama. Photographer: Dennis Brack/Pool via Bloomberg

Obama Says ‘Days Are Numbered’ for Qaddafi’s Regime in Libya

President Barack Obama said Libyan leader Muammar Qaddafi ’s reign is nearing its end under pressure from sanctions and the intervention of an international military force. Photographer: Aris Messinis/AFP/Getty Images

President Barack Obama said Libyan leader Muammar Qaddafi’s reign is nearing its end under pressure from sanctions and the intervention of an international military force.

The “noose has tightened” around Qaddafi as “people around him are starting to recognize that their options are limited and their days are numbered,” Obama said on the “CBS Evening News,” one of three interviews he gave to broadcast networks yesterday.

“We’ve got to ratchet up our diplomatic and our political pressure on him,” Obama said. “So that at some point he makes a decision to leave.”

Obama’s network interviews follow a March 28 nationally televised address in which he said the U.S. committed its armed forces to a United Nations-backed mission in Libya to protect civilians from troops loyal to Qaddafi, who has been battling opposition groups for control of the country.

In the interviews with the news shows on ABC and NBC, along with CBS, Obama said the criteria he outlined for military involvement in Libya cannot be compared with the situation in Syria, another site of anti-government protests, or elsewhere in a region that has been swept by anti-government protests.

‘Unique Situation’

“Each country in this region is different,” Obama told NBC. “Libya was a unique situation.”

In the interview with ABC, Obama said it is time for Qaddafi to show that he understands he has lost legitimacy in the eyes of the Libyan people, and that it would then be up to the international community to help determine how he should leave power.

“I certainly will be supporting him being removed from power, and we’re going to have to examine what our options are after that,” Obama said. “The process of actually getting Qaddafi to step down is not going to happen overnight.”

On NBC, Obama said the U.S. and its allies are still assessing the individuals and groups leading the revolt against Qaddafi. He said he has neither ruled in nor ruled out the option of arming the rebels.

“We’re not taking anything off the table at this point,” he said.

London Meeting

U.S. Secretary of State Hillary Clinton was in London yesterday meeting with representatives from other nations that are trying to forge a postwar blueprint for Libya as troops loyal Qaddafi dug in to block rebels advancing on his hometown of Sirte.

Clinton today is to be among the administration officials giving U.S. lawmakers classified briefings in Washington about the military mission in Libya. Republicans and Democrats alike have raised questions about the operation’s costs, goals and time frame.

Obama taped all three interviews in New York, where he was attending a dedication of the U.S. mission to the United Nations, named for former Commerce Secretary Ronald H. Brown.

In his remarks at the building’s dedication ceremony Obama said that “our conscience and our common interests” compelled the U.S. and allies to act in Libya and uphold the responsibility of all nations to promote peace and protect human rights.

“History teaches us that nations are more secure and the world is more peaceful when nations meet these responsibilities,” he said. “That’s what we’re doing in Libya.”

While in New York, Obama attended two events for the Democratic Party. He helped raise $1.5 million at a dinner for the Democratic National Committee and then thanked about 250 donors at a separate event.

At the first event, Obama told supporters the U.S. was going through “a challenging time,” and that he wouldn’t be able to do his job as president “if I didn’t know that I have a lot people rooting for me.”

Only Fed Ensures Inflation Won't Happen Here

Only Fed Ensures Inflation Won't Happen Here: Caroline Baum


Caroline Baum

(Corrects spelling of Schaumburg in 16th paragraph.)

Consumers expect inflation of 3.2 percent in the next five-to-10 years. Investors expect 2.8 percent.

Who’s right? And why should we care?

We don’t know the answer to the first question. I will try to answer the second in 800 words or less.

When I listen to academics and Federal Reserve policy makers talk about inflation expectations, seemingly imbuing them with a life of their own, it sounds like something out of a textbook that’s suited for an econometric model.

What a surprise to learn that it is! Inflation expectations evolved from something called rational expectations theory, the idea that people make economic decisions based on previous experience and expectations about the future.

Rather than a school of economic thought, rational expectations should be viewed as “a ubiquitous modeling technique used widely throughout economics,” economist Tom Sargent explains in an essay in the Concise Encyclopedia of Economics.

He should know. Sargent, a professor at New York University, is one of the pioneers of rational expectations theory, on which much of modern macroeconomics is based. It underlies efficient-markets theory, the permanent income hypothesis and the augmented Phillips curve, which describes the relationship between inflation and unemployment.

The theory is a central tenet underlying the debate about government intervention in the economy. Opponents of fiscal stimulus claim that the public’s expectation of higher taxes will offset any temporary benefit from government spending.


That’s because human beings behave rationally. Never mind that we just lived through the mother of all housing bubbles, with folks buying homes they couldn’t afford with loans they couldn’t repay. Human beings are rational. Quod erat demonstrandum.

If businesses expect raw materials prices to rise, they will buy more today and stockpile them for the future.

The notion of inflation expectations affecting behavior has been extended to consumers, erroneously in most cases. If households expect gasoline prices to rise, they don’t go out and purchase a 1,000-gallon storage tank for the front lawn. At best, most of us keep two gallons in a gas can to fill the lawn mower.

“Who do I negotiate with when I fill the tank?” says Jim Glassman, senior economist at JPMorgan Chase & Co. “I’m a price taker. The more we are price takers, the less inflation expectations matter.”

Which Prices?

Years ago, I was so agitated by the Fed’s fixation on inflation expectations at the expense of policies that affect actual inflation, I decided to test my theory that the public doesn’t know or doesn’t care.

I conducted a simple survey on inflation, present and future, that confirmed my suspicions. You can read about it here.

For their part, businesses care a lot about prices: the prices of things they buy and sell.

“A rise in raw materials is a sign of inflation to the businessman,” says Sandra Westlund-Deenihan, president and design engineer at Quality Float Works Inc., a 96-year-old family run business in Schaumburg, Illinois, that makes liquid level-control devices.

The company adjusted to soaring input costs by ordering in bulk, shopping around, even asking customers to send customized boxes “so we aren’t bearing the shipping costs,” she says.

Different Strokes

Right now any manufacturer that purchases crude materials - - everything from cotton to steel scrap -- is bound to have an inflated set of inflation expectations. So will consumers whose major purchases are food and energy.

“I can’t believe the news there’s no inflation,” Westlund-Deenihan says. “They’re not touching it. We have a bottom line.”

Lastly, financial markets telegraph investors’ inflation expectations via the spread between nominal and inflation- indexed Treasuries. This measure is imperfect as well, influenced as it is by preferences for the most liquid (nominal) Treasuries when safety concerns are paramount.

Inflation expectations, then, mean different things to different people.

I did find two academics to walk me through the Fed’s inflation expectations fog. Former Fed governor Randall Kroszner, now a professor at the University of Chicago’s Booth School of Business, and Michael Bordo, an economics professor at Rutgers University in New Brunswick, New Jersey, patiently explained a situation where the public’s inflation expectations, if unaligned with the Fed’s goal, could have an undesirable effect on the economy.

Doubting Thomases

Three decades ago, when Paul Volcker arrived at the Fed determined to wring inflation out of the system, businessmen didn’t believe him. They’d heard that story before. They offered employees wage increases in line with past inflation, not with what Volcker promised for the future.

When inflation fell, companies found themselves caught between higher costs and lower prices. The cost structure forced many out of business. Others had to fire workers. The recession was deeper than it would have been if the public had been convinced of Volcker’s intent.

Point taken, although I’m still not sure inflation expectations are as important as they’re cracked up to be.

What is important is Fed credibility. And actions speak louder than words. Policy makers may be comfortable that inflation expectations are well anchored and the output gap, or degree of economic slack, is large enough to drive a semi through. But overnight interest rates at zero are creating speculative demand for real and financial assets. The Fed ignores these expectations at its own risk.

History Backs Bernanke Betting Volatility Variable Won’t Hurt

History Backs Bernanke Betting Volatility Variable Won’t Hurt

Federal Reserve Chairman Ben S. Bernanke

Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg

March 1 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke speaks about the surge in oil and other commodity prices and the potential impact of the rising prices on the U.S. economy. Bernanke, in his semi-annual testimony before the Senate Banking Committee, says the rise probably won't cause a permanent increase in broader inflation and repeated borrowing costs are likely to stay low. (Excerpts. Source: Bloomberg)

U.S. Federal Reserve Chairman Ben S. Bernanke

Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: David Maung/Bloomberg

Federal Reserve Chairman Ben S. Bernanke is betting that surging prices for food and fuel won’t wind up breaking the cost of living for Americans. The historical record shows the odds are in his favor.

The Fed watches two key measures of inflation, known to economists as headline and core. The first is based on a basket of goods and services bought by the average American consumer. The second strips out volatile food and energy prices, providing a better picture of long-term trends.

While both have averaged about 2 percent a year since 1996, based on the personal-consumption expenditures index, headline inflation has jumped as high as 4.5 percent and fallen to minus 1 percent. In the same period, changes in core prices ranged from increases of 0.7 percent to 2.6 percent.

“From an economist’s perspective, it’s right to focus on the core,” said Vincent Reinhart, a former Fed official who is now a resident scholar at the American Enterprise Institute in Washington. “Appropriately, the Fed’s goal is headline inflation, but it’s headline inflation in the future, and therefore core is the good predictor.”

The rate of “pass-through from commodity-price increases to broad indexes of U.S. consumer prices has been quite low in recent decades,” Bernanke, a 57-year-old former Princeton University professor, said March 1 in his semiannual monetary- policy testimony to Congress. That points to a “temporary and relatively modest increase in U.S. consumer-price inflation,” he said.

Testing an Assumption

Surging prices of oil, corn and other commodities are testing that assumption. Crude oil has jumped 35 percent in the past six months, corn is up 38 percent and cotton is up 89 percent.

“If you talk to an average family in New Jersey and you say, ‘What is your food bill? What is your gas price? What is your tuition?’” they are “not going to tell you there’s deflation,” said Senator Robert Menendez, a New Jersey Democrat, when he questioned Bernanke after his testimony. “In a real context, I’m wondering how this macroeconomic policy is going to get to the average person in a way that changes their lives in a more positive way.”

A gallon of gasoline averaged $3.587 on March 28, the highest since October 2008, according to Heathrow, Florida-based AAA, the nation’s largest motoring organization. The increase helped push consumer confidence to the lowest level since August, as the Bloomberg Consumer Comfort Index dropped to minus 48.9 in the week to March 20.

Rise and Fall

David Resler, chief U.S. economist at Nomura Securities International Inc. in New York, says prices of commodities can fall just as quickly as they rise. Corn jumped 21 percent from the start of the year to March 3 before dropping 8 percent. Oil fell 8 percent between Jan. 1 and Feb. 15, then rose 25 percent by March 7. Since then, it has declined about 1 percent.

Bernanke is “saying the rate of change is temporary or transitory, and he’s almost certainly right,” said Resler, the second most-accurate forecaster of the inflation rate in the past two years, according to Bloomberg News calculations. Oil may “move sharply lower” once the crisis in the Middle East passes, he said. “It’s hard to envision prices continuing to rise at these rates.”

Rapid moves in oil were even more pronounced in 2008, when the price of a barrel reached $145 in July because of possible supply constraints from Middle East conflicts and production disputes in Russia. The price dropped to $34 a barrel in December as tensions eased.

Extremely Rapidly

If the Fed had focused strictly on headline inflation, which rose to 4.5 percent in July 2008, it likely would have raised rates in the midst of the recession that began December 2007 and then had to drop them extremely rapidly as overall prices turned negative, according to Paul Ashworth, chief U.S. economist at Capital Economics Ltd. in Toronto. Instead it continued cuts it began in September 2007, when the federal funds target rate was 5.25 percent, eventually slashing its benchmark to near zero by December 2008.

“You can make errors,” Ashworth said. “In 2008 if you’d followed strictly headline, then you’d look like idiots when headline inflation was actually below zero in 2009.”

The bond market agrees with Bernanke’s assessment. Investors anticipate inflation of 2.7 percent in the next 12 months, as measured by the difference between yields on nominal bonds and Treasury Inflation Protected Securities. That reflects their expectation that the current surge in commodities is temporary and modest; in the next five years, investors estimate inflation will average 2.3 percent annually.

Even though the budget deficit has grown, the cost of financing it is now lower than it was before the credit crisis began in August 2007.

Slack in Economy

Bernanke has said the level of slack in the economy makes it difficult for companies to raise prices, as 14.5 million workers remain unemployed. The manufacturing, mining and electric-and-gas-utilities industries also are using only 77 percent of their capacity, according to Fed data. While core prices rose 0.9 percent in February from a year earlier, the most since October, they remain near record lows.

Bernanke and the Federal Open Market Committee said March 15 they will continue to keep interest rates near zero and maintain record monetary stimulus with purchases of $600 billion in Treasury securities through June. Rising commodity prices will prove “transitory” and “measures of underlying inflation have been subdued,” the FOMC said.

Trichet Surprise

The Fed’s approach sets it apart from the European Central Bank and Bank of England. ECB President Jean-Claude Trichet surprised investors earlier this month when he announced the central bank may raise its benchmark rate in April from a record low 1 percent. In the United Kingdom, a 4.4 percent consumer- price increase in February from a year earlier is pressuring policy makers to consider raising England’s target rate above its record low of 0.5 percent.

“The implication is that, unless U.S. underlying inflation begins to rise, the Fed will continue to lag behind the ECB and the BOE, both of which are much more sensitive to the impact from commodities-driven headline CPI rates on inflation expectations,” said Lena Komileva, the global head of G-10 strategy in London for Brown Brothers Harriman & Co.

Maury Harris, chief U.S. economist in New York at UBS Securities LLC, says Bernanke may be falling behind the curve.

“There ought to be some questions about whether the Fed is on the right track when they say core inflation will be contained,” he said. His team at UBS Securities, the best inflation forecasters for the past two years according to Bloomberg calculations, see prices excluding food and energy rising 1.4 percent this year, compared with the median forecast of 1.1 percent in a Bloomberg survey.

‘Totally Implausible’

The Fed’s credibility also is at risk, Harris said. Ordinary people “find it totally implausible that somebody from the Fed would play down inflation,” he said.

Inflation expectations among U.S. consumers for the year ahead jumped to 4.6 percent this month from 3.4 percent in February, according to a Thomson Reuters/University of Michigan survey. Expectations for five years from now rose to 3.2 percent from 2.9 percent.

Reinhart agrees that concepts like core inflation have little meaning for consumers watching the price of gasoline and groceries rise from one week to the next.

“When you talk about core, you disconnect yourself from the public who think ‘What, you don’t drive or eat?’” he said. Even so, Bernanke is right when he says “the pass-through has been essentially non-existent” for the last several decades, Reinhart said.

Shut the government down

Shut the government down

GOP’s timid strategy of incremental cuts betrays conservative values

It’s time Republicans play political hardball. If they do not, they will soon dangerously alienate large chunks of their conservative base. Negotiations have stalled. A fiscal showdown is looming. Congressional Republicans and Democrats are trying to pass a budget to fund the government for the current fiscal year. Two short-term appropriation extensions have been enacted. The latest one is set to expire April 8. Both sides are beginning to dig in their heels. If a budgetary agreement is not reached, the government will shut down.

The GOP leadership fears that the public will blame them - as it did in 1995, when the Gingrich Republicans forced a shutdown, helping to revive then-President Clinton’s sagging electoral fortunes. Republicans are rightly worried history may repeat itself.

The Democrats own a bad economy and several failing wars. The political wind is at the GOP’s back heading into 2012. Many Republicans are asking a simple question: Why risk everything over a budget fight when the Democrats are poised to be crushed in next year’s elections?

They argue that such a strategy is reckless and could pave the way for Mr. Obama’s re-election. Democrats are hoping to paint the GOP as a party of right-wing extremists who cannot be trusted with the reins of power. Hence, the likes of House Speaker John A. Boehner, Ohio Republican, are saying that forcing a shutdown will play into the liberals’ hands.

Instead, he is pursuing a strategy of incrementalism - push small spending cuts, hoping to make Democrats defend some of their unpopular pet projects, such as when Senate Majority Leader Harry Reid recently warned that Nevada’s cowboy poetry festival risked being defunded. Establishment Republicans think they have found the winning formula: Force the White House and Democrats to accept minor spending reductions while keeping the government operating. Some recent polls seem to bear them out.

Yet good politics can also be bad morality. So far, the GOP has managed to get the administration to accept $10 billion in spending reductions. Republicans are now seeking to wring another $20 billion in cuts from congressional Democrats. This is what both sides are now quibbling over. It is fantasy masquerading as high drama; they are simply rearranging the deck chairs on the Titanic. For there is one dominant fact of American life, a fact that subsumes all others: We are going broke. And unless we address it immediately and decisively, the U.S. ship of state is going to sink under the weight of massive debt. No political strategizing - no matter how cunning or clever - can change this.

This year’s federal deficit alone is projected to be a record-breaking $1.65 trillion. The national debt has just passed $14 trillion and is approaching 100 percent of gross domestic product (GDP) - the point where economists say the debt level is so high and burdensome in proportion to GDP there is no return to fiscal solvency. In short, America is on the ruinous path of Greece, Ireland and Portugal.

The GOP was elected in 2010 to stop Mr. Obama’s fiscal carnage. They were not given a second chance to play amateur Machiavellians, positioning themselves politically while nibbling around the edges of an unsustainable nanny state. If the GOP cannot stand for deep spending cuts and real entitlement reform - in other words, pulling the nation back from the abyss - then what good are they?

America is at a watershed. It desperately needs bold, principled leadership - a fiscal Winston Churchill, someone who is willing to tell the country that real sacrifices must be made if the American experiment in self-government and liberty is to survive.

The difference between now and 1995 is simple and stark. We live in a different age. Amid a decade of peace and prosperity, a government shutdown struck voters as juvenile and senseless.

Story Continues →

‘Freelance jihadists’ join Libyan rebels

‘Freelance jihadists’ join Libyan rebels

Ex-al Qaeda member speaks out

A Libyan rebel waves a A Libyan rebel waves a “magic box” bracelet thought to have been captured from a foreigner fighting with Col. Moammar Gadhafi’s troops, on the frontline outside of Bin Jawaad on Tuesday. The wearers believe the bracelets will protect them from injury. (Associated Press)

A former leader of Libya’s al Qaeda affiliate says he thinks “freelance jihadists” have joined the rebel forces, as NATO’s commander told Congress on Tuesday that intelligence indicates some al Qaeda and Hezbollah terrorists are fighting Col. Moammar Gadhafi’s forces.

Former jihadist Noman Benotman, who renounced his al Qaeda affiliation in 2000, said in an interview that he estimates 1,000 jihadists are in Libya.

On Capitol Hill, Adm. James Stavridis, the NATO commander, when asked about the presence of al Qaeda terrorists among the rebels, said the leadership of the opposition is made up of “responsible men and women.”

“We have seen flickers in the intelligence of potential al Qaeda, Hezbollah,” the four-star admiral said. “We’ve seen different things. But at this point, I don’t have detail sufficient to say that there’s a significant al Qaeda presence, or any other terrorist presence, in and among these folks.”

The military is continuing to “look at that very closely,” he said, because “it’s part of doing due diligence as we move forward on any kind of relationship” with the opposition.

Outside observers generally estimate the number of trained Libyan fighters to be about 1,000.

Concern over the makeup of opposition forces surfaced Tuesday as representatives from 40 governments and international organizations met in London and stepped up efforts to oust the Gadhafi regime and prepared for a hoped-for transition to a democratic state.

Col. Gadhafis forces, meanwhile, launched counterattacks Tuesday against rebels advancing westward toward the capital, Tripoli.

Mr. Benotman told The Washington Times that al Qaeda’s North African affiliate, Al Qaeda in the Islamic Mahgreb, has tried without success to co-opt the leadership of Col. Gadhafi’s opposition. But Mr. Benotman said the interim council leading Libya’s opposition is seeking democratic elections, not an Islamic republic.

“We have freelance jihadists,” he said. “But everything is still under control of the interim national council. There is no other organization that says, ‘We are leaders of the revolution with this emir,’ like al Qaeda would. Everyone is afraid to do this; they would be labeled as undermining the people.”

Story Continues →

Washington in Fierce Debate on Arming Libyan Rebels

Washington in Fierce Debate on Arming Libyan Rebels

Anja Niedringhaus/Associated Press

A Libyan rebel urged people to leave as government forces shelled an area near Bin Jawad in northern Libya on Tuesday.

WASHINGTON — The Obama administration is engaged in a fierce debate over whether to supply weapons to the rebels in Libya, senior officials said on Tuesday, with some fearful that providing arms would deepen American involvement in a civil war and that some fighters may have links to Al Qaeda.

Mark Landler on The Takeaway Radio Program

Did the president articulate a new blueprint for American involvement in foreign wars?

The debate has drawn in the White House, the State Department and the Pentagon, these officials said, and has prompted an urgent call for intelligence about a ragtag band of rebels who are waging a town-by-town battle against Col. Muammar el-Qaddafi, from a base in eastern Libya long suspected of supplying terrorist recruits.

“Al Qaeda in that part of the country is obviously an issue,” a senior official said.

On a day when Libyan forces counterattacked, fears about the rebels surfaced publicly on Capitol Hill on Tuesday when the military commander of NATO, Adm. James G. Stavridis, told a Senate hearing that there were “flickers” in intelligence reports about the presence of Qaeda and Hezbollah members among the anti-Qaddafi forces. No full picture of the opposition has emerged, Admiral Stavridis said. While eastern Libya was the center of Islamist protests in the late 1990s, it is unclear how many groups retain ties to Al Qaeda.

The French government, which has led the international charge against Colonel Qaddafi, has placed mounting pressure on the United States to provide greater assistance to the rebels. The question of how best to support the opposition dominated an international conference about Libya on Tuesday in London.

While Secretary of State Hillary Rodham Clinton said the administration had not yet decided whether to actually transfer arms, she reiterated that the United States had a right to do so, despite an arms embargo on Libya, because of the United Nations Security Council’s broad resolution authorizing military action to protect civilians.

In a reflection of the seriousness of the administration’s debate, Mr. Obama said Tuesday that he was keeping his options open on arming the rebels. “I’m not ruling it out, but I’m also not ruling it in,” Mr. Obama told NBC News. “We’re still making an assessment partly about what Qaddafi’s forces are going to be doing. Keep in mind, we’ve been at this now for nine days.”

But some administration officials argue that supplying arms would further entangle the United States in a drawn-out civil war because the rebels would need to be trained to use any weapons, even relatively simple rifles and shoulder-fired anti-armor weapons. This could mean sending trainers. One official said the United States might simply let others supply the weapons.

The question of whether to arm the rebels underscores the difficult choices the United States faces as it tries to move from being the leader of the military operation to a member of a NATO-led coalition, with no clear political endgame. It also carries echoes of previous American efforts to arm rebels, in Angola, Nicaragua, Afghanistan and elsewhere, many of which backfired. The United States has a deep, often unsuccessful, history of arming insurgencies.

Mr. Obama pledged on Monday that he would not commit American ground troops to Libya and said that the job of transforming the country into a democracy was primarily for the Libyan people and the international community. But he promised that the United States would help the rebels in this struggle.

In London, Mrs. Clinton and other Western leaders made it clear that the NATO-led operation would end only with the removal of Colonel Qaddafi, even if that was not the stated goal of the United Nations resolution.

Mrs. Clinton — who met for a second time with a senior opposition leader, Mahmoud Jibril — acknowledged that as a group, the rebels were largely a mystery. “We don’t know as much as we would like to know and as much as we expect we will know,” she said at a news conference.

In his testimony, Admiral Stavridis said, “We are examining very closely the content, composition, the personalities, who are the leaders of these opposition forces.”

The coalition members discussed other ways to help the rebels, like humanitarian aid and money, Mrs. Clinton said. Some of the more than $30 billion in frozen Libyan funds may be channeled to the opposition.

But a spokesman for the rebels, Mahmoud Shammam, said they would welcome arms, contending that with weaponry they would already have defeated Colonel Qaddafi’s forces. “We ask for political support more than arms,” Mr. Shammam said, “but if we have both, that would be good.”

So far, the rebels have obtained arms from defecting Qaddafi loyalists, as well as from abandoned ammunitions depots.

A European diplomat said France was adamant that the rebels be more heavily armed and was in discussions with the Obama administration about how France would bring this about. “We strongly believe that it should happen,” said the diplomat, who spoke on the condition of anonymity to discuss internal deliberations.

Senator Carl Levin, a Michigan Democrat and chairman of the Armed Services Committee, said he had had conversations with two senior administration officials about this issue. Mr. Levin said he was most concerned about how the rebels would use the weapons after a cease-fire. “Would they stop fighting if they had momentum, or would they be continuing to use those weapons?” he asked.

Gene A. Cretz, the American ambassador to Libya, said last week that he was impressed by the democratic instincts of the opposition leaders and that he did not believe that they were dominated by extremists. But he acknowledged that there was no way to know if they were “100 percent kosher, so to speak.”

Bruce O. Riedel, a former C.I.A. analyst and a senior fellow at the Brookings Institution, said some who had fought as insurgents in Iraq and Afghanistan were bound to have returned home to Libya. “The question we can’t answer is, Are they 2 percent of the opposition? Are they 20 percent? Or are they 80 percent?” he said.

Even if the administration resolves these concerns, military officials said it was unclear to them how an effort to arm the rebels would be carried out.

They said the arms most likely to be of use were relatively light and simple shoulder-fired anti-armor weapons for defense against tanks, as well as rifles like Soviet AK-47s and communications equipment. Although these weapons are not especially sophisticated, months, if not years, of on-the-ground training would still be necessary.

Even with training, anti-armor weapons and rifles would allow the rebels only to consolidate their gains and hold the territory they have, said Nathan Freier, a senior fellow at the Center for Strategic and International Studies.

One crucial voice, Defense Secretary Robert M. Gates has experience in the unintended consequences of arming rebels: As a C.I.A. official in the late 1980s, he funneled weapons to the Islamic fundamentalists who ousted the Soviets from Kabul. Some later became the Taliban fighting the United States in Afghanistan.

Mark Landler and Elisabeth Bumiller reported from Washington, and Steven Lee Myers from London.

Pro-Qaddafi Forces Push Rebels Into Chaotic Retreat

Pro-Qaddafi Forces Push Rebels Into Chaotic Retreat

BREGA, Libya — Forces loyal to Col. Muammar el-Qaddafi advanced rapidly on Wednesday, seizing towns they ceded just days ago after intense allied airstrikes and hounding rebel fighters into a chaotic retreat.


Having abandoned Bin Jawwad on Tuesday and the oil town of Ras Lanuf on Wednesday, the rebels continued their eastward retreat, fleeing before the loyalists’ shelling and missile attacks from another oil town, Brega, and falling back on the strategic city of Ajdabiya. On Wednesday afternoon, residents of Ajdabiya were seen fleeing along the road north to Benghazi, the rebel capital and stronghold that Colonel Qaddafi’s forces reached before the allied air campaign got underway nearly two weeks ago.

There were few signs of the punishing airstrikes that reversed the loyalists’ first push. But military experts said they expected the counterattack to expose Colonel Qaddafi’s forces to renewed attacks, and an American military spokesman said that coalition warplanes resumed bombing the pro-Qaddafi units on Wednesday, without specifying the timing or locations.

“The operation is continuing and will continue throughout the transition” to NATO command, said Capt. Clint Gebke. There were 102 airstrikes over a 24-hour period ending at 12 a.m. Eastern time, according to the United States Africa Command.

But the airstrikes, such as they were, did little to reverse the momentum of the battle. On the approaches to Brega, hundreds of cars and small trucks heading east clogged the highway as rebel forces pulled back toward Ajdabiya, recaptured from loyalist troops only days ago. Some rebels said Colonel Qaddafi’s forces, pushing eastward from Ras Lanuf, were within 10 miles of Brega.

The retreating force seemed rudderless, a sea of vehicles and fighters armed with rudimentary weapons that have proved no match for Colonel Qaddafi’s better trained and better armed forces, that have intimidated the rebels with long-range shelling.

As rebels clustered at a gas station and small mosque between Brega and Ajdabiya, a single artillery shell or rocket exploded several hundred yards away, causing the rebels, who were chanting “God is great” and waving assault rifles, to jump into their vehicles and speed eastward.

Last week along the same highway, allied airstrikes pounded loyalist forces, enabling the rebels to undertake a lightning advance that carried them toward the Libyan leader’s hometown of Surt — a symbolic and strategically important objective on the long, coastal highway leading to Tripoli. But the advance stalled when pro-Qaddafi forces counterattacked, apparently, seemingly in response to President Obama’s speech Monday night.

The allies began the air campaign after the United Nations Security Council authorized military intervention on March 16 to protect civilians — a decision that Western leaders say spared the rebels looming defeat as pro-Qaddafi forces closed on Benghazi. Military analysts said that even after days of airstrikes, loyalist forces have enough resources to defend Colonel Qaddafi’s urban strongholds, like the coastal city of Surt where the dense civilian population precludes air attacks.

Henry Boyd, an analyst at the International Institute for Strategic Studies in London, said that the Qaddafi forces consist of only two trusted militias led by two of his sons, and numbering about 10,000 men, many of them drawn from the Warfalla, Margaha and Qaddafa tribes that form the backbone of Colonel Qaddafi’s support.

Mr. Boyd said that while Colonel Qaddafi’s equipment advantage had been “significantly degraded” by the allied airstrikes, his troops still had hundreds of tanks and armored personnel carriers, as well as scores of heavy weapons like mortars, long-range artillery and missile launchers.

That compares with a rebel force variously estimated at 1,000 and armed with rifles and some antiaircraft guns and light missile launchers mounted in the beds of pickup trucks.

But as they extend their lines east along the coast toward the rebel redoubts, Colonel Qaddafi’s forces risk opening themselves to renewed allied strikes from above. Indeed, military experts said, Western planners may be hoping that loyalist forces will find themselves caught in a vice, with Colonel Qaddafi pushing them forward and the airstrikes forcing them back, until they abandon him.

In Beijing, the Chinese president, Hu Jintao, criticized France’s president, Nicolas Sarkozy, in China for a meeting of finance officials, saying the Western air campaign he championed risked killing even more civilians than the attacks it was meant to stop.

“If the military action brings disaster to innocent civilians, resulting in an even greater humanitarian crisis, then that is contrary to the original intention of the Security Council resolution,” Mr. Hu is said to have told Mr. Sarkozy, state news media reported.

A new element also entered the military campaign on Wednesday when a prominent human rights watchdog urged Colonel Qaddafi’s forces to abandon the alleged use of landmines, outlawed in many parts of the world.

In a statement from Benghazi on Wednesday, Human Rights Watch, based in New York, said Colonel Qaddafi’s forces have laid both antipersonnel and antivehicle mines.

Libya should immediately stop using antipersonnel mines, which most of the world banned years ago,” said Peter Bouckaert, the emergencies director at Human Rights Watch. “Qaddafi’s forces should ensure that mines of every type that already have been laid are cleared as soon as possible to avoid civilian casualties.”

The statement said two dozen antivehicle mines and three dozen antipersonnel mines had been found in the coastal town of Ajdabiya, now in rebel hands, after government forces held it from March 17 to March 27. Authorities in Tripoli had no immediate comment on the statement.

C.J. Chivers reported from Brega, Libya, and David D. Kirkpatrick from Tripoli. Alan Cowell contributed reporting from Paris, Ed Wong from Beijing and J. David Goodman from New York.

Ivory Coast rebels loyal to Alassane Ouattara advance on capital from 2 directions

Official: Ivory Coast rebels loyal to Alassane Ouattara advance on capital from 2 directions

ABIDJAN, Ivory Coast — Rebel forces backing the internationally recognized winner of Ivory Coast’s disputed election advanced toward the capital from two different directions Wednesday as residents bracing for fighting took refuge in their homes.

  • In this photo taken on Tuesday, March 29, 2010, people of different nationalities gather at a station as they leave Abidjan, Ivory Coast. Rebel forces backing Ivory Coast’s internationally recognized president were advancing toward the capital Wednesday after seizing two more towns in the center of the country. (AP Photo/Emanuel Ekra) ( The Associated Press )
  • In this photo taken on Tuesday, March 29, 2010, people walk with their belongings towards a railway station as they leave Abidjan, Ivory Coast. Rebel forces backing Ivory Coast’s internationally recognized president were advancing toward the capital Wednesday after seizing two more towns in the center of the country. (AP Photo/Emanuel Ekra) ( The Associated Press )

/ The Associated Press - In this photo taken on Tuesday, March 29, 2010, people walk with their belongings towards a railway station as they leave Abidjan, Ivory Coast. Rebel forces backing Ivory Coast’s internationally recognized president were advancing toward the capital Wednesday after seizing two more towns in the center of the country. (AP Photo/Emanuel Ekra)

Two witnesses separately confirmed seeing security forces fleeing the capital of Yamoussoukro, which resembled a ghost town as news of the rebels’ advance spread.

If the fighters take the capital, it would be a largely symbolic trophy as the real seat of power is in the biggest city, Abidjan. But if Yamoussoukro falls, it would open up the main highway to the commercial capital, only 143 miles (230 kilometers) away.

Supporters of internationally recognized leader Alassane Ouattara hope that would prompt incumbent Laurent Gbagbo to finally accept an offer of exile four months after the disputed presidential election unleashed political chaos in this West African nation. At least 462 people have been killed and up to 1 million have fled their homes since the vote.

“Blitzkrieg seems to be the strategy, rather than fighting to clear every inch and hamlet,” said Christian Bock, senior security analyst at Avascent International.

“It will take an enormous amount of restraint to hold these forces back from moving onto Abidjan,” he said of the rebels’ momentum.

Residents in Yamoussoukro braced for conflict, shutting down shops throughout downtown.

“Since last night we haven’t seen any FDS (pro-Gbagbo security forces) in town,” said one resident, who requested anonymity for fear of reprisals.

Capt. Leon Alla, a defense spokesman for Ouattara, said pro-Ouattara forces already had taken control of two towns just west of the capital — Bouafle and Sinfra. Another front, coming down from the north, was also advancing toward the capital and had taken the town of Tiebissou Wednesday morning.

A priest in Tiebissou, who spoke on condition of anonymity for fear of reprisals, said Gbagbo’s forces tried to fight off the rebels for 3½ hours before fleeing.

Another priest said he saw the bodies of three dead soldiers in the town, which is 21 miles (35 kilometers) from the capital. Many wounded fighters were being taken to a nearby hospital. People were looting public buildings in Tiebissou, including the police station, witnesses said.

A third front from the east of the country was advancing south, with combat taking place in Akoupe on Wednesday. The rebels secured Bondoukou and Abengourou along the Ghana border on Tuesday, and seemed poised to strike directly at Gbagbo on this front as Akoupe is only 70 miles (113 kilometers) from the country’s biggest city of Abidjan.

As the rebels advanced from three directions, a Gbagbo spokesman called for a cease-fire and mediation. Spokesman Don Mello told Radio France Internationale the army has adopted a strategy of tactical withdrawal. He warned, however, that Gbagbo’s forces could use their “legitimate right of defense.”

A statement read on state television Tuesday night declared that the thousands of youth who enlisted in Gbagbo’s army last week would be called up for service starting Wednesday morning.

Asked about the cease-fire offer, a Ouattara ally said it was necessary to resort to legitimate force.

“President Alassane Ouattara was patient and gave Mr. Laurent Gbagbo every possibility to leave power peacefully. He refused every offer made to him,” Ivory Coast’s ambassador to France, Ali Coulibaly, said on French radio France Inter Wednesday.

A statement put out by Ouattara’s RHDP party late Tuesday said “all peaceful avenues to convince Laurent Gbagbo of his defeat have been exhausted.”

The Vatican announced that it was sending a representative to Ivory Coast Wednesday to encourage a peaceful reconciliation to the conflict.

Ouattara, who is from northern Ivory Coast, had long tried to distance himself from the rebels based there who fought in a brief civil war almost a decade ago that left the country split in two. However, rebels have been stepping up their offensive to install him in power in recent weeks.

Many believe a bloody final battle for the presidency will take place in the commercial capital of Abidjan, which is split into pro-Gbagbo and pro-Ouattara neighborhoods.

Fighting in these areas has been almost daily, with mortars and machine guns being used against civilians. In the past several weeks, fighters loyal to Ouattara have taken effective control of several northern districts in the city.

At least one body lay bloated in the sun in the downtown Plateau business district Wednesday morning, witnesses said. Armed youth who guard nightly barricades around town have started to keep them running during the day.

“These boys are armed. They aren’t the police. They stop everyone and demand money,” said a taxi driver who asked not to be identified for fear of reprisals. “This morning I saw them pull a man out of his car and beat him with the butts of their guns.”


Associated Press writers Michelle Faul in Johannesburg; Rukmini Callimachi in Bamako, Mali; and Greg Keller in Paris contributed to this report.

Syria’s Assad offers nothing

Syria’s Assad offers nothing, blames protests on ‘big conspiracy’

REUTERS TV/ REUTERS - Syrian President Bashar Al-Assad addresses the parliament in Damascus. Al-Assad said on Wednesday that Syria is the target of a "conspiracy" to sow sectarian strife.

CAIRO — Syrian President Bashar al-Assad declared Wednesday that the wave of angry protests unfurling across his country resulted from a “big conspiracy” by unidentified enemies seeking to destabilize Syria and push it into sectarian strife.

Gallery: Egypt- and Tunisia-inspired protests spread through Middle East, North Africa: Motivated by recent shows of political strength by neighbors in Egypt, demonstrators in the Middle East and North Africa are taking to the streets of many cities to rally for change.


Middle East and North Africa in turmoil

Graphic: Middle East and North Africa in turmoil

Assad, in a nationally televised speech, did not offer any of the concessions hoped for by protesters, such as abolishing a 48-year-old emergency law that suffocates civil liberties and allows the political system to be monopolized by the ruling Baath Party.

Instead, he portrayed himself as a modernizer who has long been engaged in economic and political reforms — and who eventually will get around to altering the hated emergency rules as well.

“Some people will come up this afternoon and say, ‘This is not enough,’ ” Assad said, chuckling into his microphone as he anticipated what satellite television commentators would opine. “But I want to tell them, we are not going to destroy our nation.”

The long-awaited speech, coming after 12 days of anti-government riots, was a major disappointment for the mostly youthful demonstrators who have added Syria to a growing list of Arab countries facing unprecedented demands for democracy, civil rights and clean government.

“What he said today, it will not stop the movement,” said Haitham al-Maleh, a veteran human rights activist contacted by telephone. “There is a tsunami going across the Arab world, and it will cover Syria, too.”

Malath Aumran, an exiled cyber-activist, said Assad’s response fell far short of the protesters’ demands, which included an end to the emergency laws and secret police tactics that long have instilled fear among Syrians. “I’m really disappointed by what I heard,” Aumran said. “He is totally ignoring our demands in the streets, like any other arrogant dictator.”

The Syrian protests have resulted in about 60 deaths, according to human rights groups, and raised the most serious threat to the 45-year-old Assad since he took over from his deceased father 11 years ago. He heads a one-party government based on Arab nationalism, confrontation with Israel and invasive controls by a half-dozen furtive security agencies.

Assad’s speech, at the ornate parliament building in Damascus, was frequently interrupted by legislators who stood to shout their support. One female member, wearing a scarf over her hair, rose with a coy smile to recite a short poem to Assad and the glory of Syria. Outside, pro-government demonstrators waved their fists for television cameras.

“With our souls, with our blood, we are supporting you, oh, Assad,” they cried in unison.

Assad, acknowledging the tributes, said he took heart from the noisy expressions of support in pro-government demonstrations that took place Tuesday in Damascus, the capital, and several other cities. But people should understand, he added, that it is the president himself who with his soul and his blood supports the Syrian nation.

The internationally televised proceedings, which lasted a little more than an hour, thus gave the impression of a show of support for the Syrian leadership at a time of crisis rather than the moment of serious concessions that many people — Syrian and others — had been led to expect.

Assad said reforms announced last week — wage increases and a promise that the emergency laws and political party legislation would be altered at an unspecified date — were already significant advances but were poorly communicated by his government, wrongly giving an impression that things were standing still.

Actually, he said, the reforms have already been drafted and would have been passed by parliament long ago, except that the government was too busy dealing with economic and foreign policy problems.

But Assad’s overall explanation for the violent protests was that the unnamed plotters were misleading the people. The demands for reform were legitimate, he said, but the protests were the work of enemies trying to foment discord between Syria’s Sunni Muslim majority and the Shiite-connected Alawite minority from which the Assad family springs and on which it has based four decades of iron-fisted rule.

This was particularly true, he said, in Daraa, a dusty border crossing on the road between Damascus and Amman. Known historically as the site where Lawrence of Arabia said he was sexually assaulted by a Turkish army officer, Daraa gained a new fame last week when security forces opened fire on protesters in a violent encounter transmitted around the world by cellphone cameras and the Internet.

“The people of Daraa are the people of patriotism and the people of pan-Arab nationalism,” Assad declared, adding that they would never have risen up had they not been tricked.

He said the government had given orders to security forces not to open fire in Daraa. But the confrontation escalated, Assad said, because of “chaos in the streets” fomented by the plotters seeking to bring down Syria and sabotage its role as a leader in the Arab confrontation with Israel.

“We are for supporting people’s demands, but we cannot support chaos,” the Syrian leader added. “We are all reformists. Some demands of the people have not been met. But people were duped into taking to the streets.”

House Republican leaders turn to moderate Democrats

House Republican leaders turn to moderate Democrats for budget deal

Having difficulty finding consensus within their own ranks, House Republican leaders have begun courting moderate Democrats on several key fiscal issues, including a deal to avoid a government shutdown at the end of next week.


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The basic outline would involve more than $30 billion in cuts for the 2011 spending package, well short of the $61 billion initially demanded by freshman Republicans and other conservatives, according to senior aides in both parties. Such a deal probably would be acceptable to Senate leaders and President Obama as long as the House didn’t impose funding restrictions on certain social and regulatory programs supported by Democrats, Senate and administration aides said.

The fact that Republican leaders have initiated talks with some Democrats shows some division within House Republicans just two months after taking over the House. Speaker John A. Boehner’s leadership team recognizes that legislation that meets with approval from his most conservative flank — what Democrats call the “perfectionist caucus” — would be dead on arrival in the Democratic-controlled Senate.

At the same time, conservatives have become increasingly unhappy with recent spending proposals, saying they wouldn’t cut deep enough. Fifty-four of them voted against a stopgap budget measure two weeks ago that passed with significant Democratic support. After that vote House Majority Whip Kevin McCarthy (R-Calif.) met with a conservative bloc of Democrats to discuss potential common ground on the budget and other pressing fiscal issues.

Rep. Heath Shuler (N.C.), a centrist Democratic leader, said McCarthy did not specifically ask for their votes on any legislation, saying that the conversation was taking place at “10,000 feet” and that the Republican was “feeling us out.”

The Democrats left the meeting knowing that they could provide the decisive votes, Shuler said, a role they are willing to play. “We’re looking for ways to help,” he said. “We’re for real. We’re not here for the politics.”

Although a deal with Democrats could avoid a government shutdown and point the way for future compromises, it also could come at a steep price for Republican leaders who risk the ire of some conservatives, including some attending a tea party rally Thursday on Capitol Hill demanding the deepest spending cuts possible.

What many leaders in Washington may consider a sensible compromise to ensure that the government keeps running is just the sort of dealmaking that many Republican voters view as unprincipled capitulation. Some tea party groups have promised to target any Republicans they think are not conservative enough on fiscal issues.

However, if such a bipartisan coalition emerged, the House could have a path for not only approving a spending plan for the remaining six months of the fiscal year, but for a vote later this spring on whether to increase the federal debt limit. That normally routine action is in peril this year because some Republicans have said they are unwilling to raise the ceiling without significant concessions from Democrats on spending.

Tug of war

Nonetheless, the two sides continued sparring on Tuesday over the parameters of a budget deal. Republicans blamed Senate Democrats for not passing a bill to be matched against the $61 billion in cuts approved in the House. Democrats again rejected the House legislation as a starting point for negotiations, noting that it was turned down in the Senate and arguing that they should build up from $10 billion in savings that were already agreed upon.

The rhetoric was heated enough that Boehner and Senate Majority Leader Harry M. Reid (D-Nev.) issued the same threat, refusing to “negotiate with ourselves” while in fact neither side would negotiate at all. No new face-to-face talks have been scheduled, and the two sides have until April 8 to approve a spending plan or face a government shutdown.

On top of the $10 billion in savings, Democrats are willing to offer an additional $20 billion in spending cuts. But they said they will not do so until they are assured that it would get them close to an agreement.

House Republicans want to use their bill as a starting point because it also includes provisions that limit funding for some social and regulatory issues.

“It’s just not cutting spending. There are a number of limitations that passed on the floor of the House” that must be addressed, Boehner said.

Those provisions have created a large hurdle for securing a final deal. Republican aides have said the provisions and the overall cost cutting are linked: The fewer that are attached to the bill, the bigger the cuts Republicans will seek.

Even so, if the provisions remain and spending cuts are on the lower side, Boehner could lose support from freshman lawmakers in his party. But without the provisions, some socially conservative longtime lawmakers may balk at the deal.

The Blue Dogs’ role

With 241 Republicans, GOP leaders can afford to lose 23 GOP votes before needing Democratic help. That’s why McCarthy reached out to leaders of the Blue Dog Coalition, a group of centrist Democrats — such as Shuler — from conservative-leaning districts.

The blueprint for this potential coalition was a March 15 vote to extend government funding for three weeks. The vote easily passed with 271 votes, but only because 186 Republicans were joined by 85 Democrats.

House Minority Whip Steny H. Hoyer (D-Md.) said it is too soon to tell whether that vote “was a pattern or an anomaly.” Viewed as an ally of the Blue Dogs and other moderate Democrats, Hoyer read quotes to reporters from some of the most conservative House Republicans suggesting that a government shutdown would be preferable to a compromise.

He dismissed any chance of Republicans reaching a final deal that did not include Democratic support. “John Boehner can’t get something done without us,” Hoyer said Tuesday.

As tenuous as the potential coalition is, Shuler said his group of Democrats hopes that a bipartisan deal can be reached on this year’s spending bill so that it can serve as a framework for larger issues, including next year’s budget and other reforms.

“The real debate has to begin,” he said. “I think we can be a bridge-builder between the two parties

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