The House Health Care Bill: Muddled Thinking and Scapegoating Insurers

The whole health care insurance debate (or debacle) just nauseates genuine problem solvers like myself. There's so much disingenuous political gameplaying going around. Part of the problem is that the Democrats are trying to hammer a solution in search of a problem. For example, what's the relative crisis in health care? Is it health care itself or the method of health care payment? Are people dying because a hospital turns them away over inability to pay? No; in fact, there are laws to guarantee emergency care. Are poor people prevented from obtaining health care insurance? No--they qualify for Medicaid. What about households filing for bankruptcies because of catastrophic expenses? No--those costs already get passed back to other health care customers. Well, then, what about the people whom don't have insurance; isn't it clear that they are much worse health risks than the general insured population? No. Many uninsured people are healthy individuals (e.g., young people or small business upper-income families easily able to obtain and afford health insurance) whom prefer to pay medical expenses out of pocket, not wanting to pay for the services of a middleman (i.e., insurers).

But, the Dems insist, there is an affordability issue, and some middle-class families run into problems involving catastrophic expenses, preexisting conditions, benefit caps, and the like. Fair enough; for example, there certainly is need for reforms in relevant underfunded state/region assigned risk pools, which may have enrollment caps. The problem is that there are a number of issues involving health care costs, many of which involve things beyond our control, e.g., a larger number of older Americans generally requiring more medical products and services. Another issue involves a perversion of the concept of insurance:  for instance, seeing a doctor over routine, minor matters simply because the visit is "free" or has a nominal cost. This constrains a doctor in terms of how many patients he or she can see; a doctor may also be affected by the below-market payments for services of government-sponsored patients (e.g., Medicare/Medicaid). There are other issues as well, in terms of unnecessary preventive testing, drug prescriptions or treatments and defensive medicine, staffing resource throughput and distribution, dysfunctional immigration policy and quotas, abusive lawsuits, etc.

However, what irritates me in particular is Speaker Pelosi's shameless, intellectually dishonest attempts to blame the problem on lack of competition and "immoral" profiteering. The "solution": public sector competition and antitrust legislation. The fact is that government is part of the problem, not the solution. Take, for instance, Texas' recent malpractice tort reform; a consequence of reform was an increased number of physicians operating in Texas, more malpractice health care insurers, and lower premiums. If Pelosi was seriously interested in competition, she would work against an anti-competitive Byzantine system of state-specific  mandates, enable small businesses to self-insure through some interstate cooperative mechanism, and eliminate a tax bias against consumer purchase of health insurance.

As someone influenced by the Chicago School, I am somewhat skeptical about the efficacy of antitrust legislation and prosecution; one of the most glaring recent examples of government incompetence dealt with the FCC's belated approval of the merger between satellite radio vendors Sirius and XM; the merged company barely staved off bankruptcy over the past year. The rapid emergence of competitive technologies over the past decade, e.g., high definition radio and wireless provider services, pressured the satellite radio vendors, given steep costs associated with satellite launching and maintenance.

Pelosi's demagoguery against the health insurance companies, implying that "special interest" federal anti-trust exemptions have protected the industry, simply doesn't bear up under scrutiny. The Associated Press did a fact check this week, showing that despite the fact that health insurance premiums have doubled over the past decade,  health insurers have not been profiteering; the sector's profit margin over the past year was 2.2%, putting it in the bottom half of industies (more typically have averaged around 6%), credit ratings have dropped, and its margins have rarely exceeded 8%--less than other types of insurance, other health sector industries (e.g., medical devices and drugs), and other private sector businesses (including high tech). But even if we concede that, say, insurance rates have been up nearly 130% over the past decade, what public policy changes account for that? Have states stopped regulating and enforcing anti-competitive behavior in insurance over the past decade? No. Has the famous antitrust exemption cited by Pelosi been passed recently? No.

The well-written conservative blog No Oil for Pacifists had a good recent post on Insurance and Antitrust. The author points out that the motivation for the 1945 McCarran-Ferguson Act was the result of a prior year Supreme Court decision classifying insurance as interstate commerce (i.e., subject to federal laws).  Let's not forget in 1945, the Congress and Presidency were controlled by Democrats. The exemption was to enable insurers to pool loss-related data for purposes of more scalable actuarial analyses and to facilitate reinsurance (i.e., insurance companies hedging their risks). This exemption, if anything, has increased industry efficiency and is pro-competitive. The post further points out that the exemption is narrow in scope, state regulation has retained its lead role and responsibilities, and the U.S. government continues to scrutinize within-industry mergers using classic antitrust criteria.

Hoffman for Congress (NY-23)

I am empathetic to the local GOP's nomination of Dierdre Scozzafava to replace long-term Republican Congressman John McHugh, whom resigned to become Obama's Secretary of the Army. Scozzafava is an accomplished Republican assemblywoman with a business background, bipartisan record, and minority leadership experience in the NY state legislature; she is intimately familiar with local issues.

Unlike many conservatives, I am supportive of the "big tent" concept; I understand that Republicans in purple or blue states need to appeal to a more diverse, independent or moderate voter base and project a more flexible, pragmatic, less ideological point of view. I believe in the free market of ideas, and I do think that Republicans who criticize Democrats over things like litmus-test evaluations of judicial nominees should set a good example of authentic tolerance versus progressive diversity doublespeak, e.g., by the Obama Administration, in its morally outrageous attempt to marginalize Fox News. The most glaring example of progressive single-issue intolerance is the 2006 move by Connecticut Democrats to deny Senate renomination of former 2000 Vice Presidential nominee Joe Lieberman over his principled stand on Iraq.

I would have liked to back Ms. Scozzafava, as have former Speaker Newt Gingrich, an unquestioned conservative, and the GOP leadership. Gingrich notes that Scozzafava opposed the Obama health care "reform" and the Democrat cap-and-trade legislation (an implicit new energy tax) and worries that a dispute between Republicans and Conservatives (Hoffman is the Conservative Party nominee) may split the vote, enabling liberal Democrat Owens to win the seat by default. The problem I have is that there is no question that the national policy positions of Scozzafava are to the left of former Representative McHugh's own political positions. Congressman McHugh has a lifetime American Conservative Union voting record of 71%, substantially higher than prototypical liberal Republicans, e.g., the Maine U.S. Senators. Even though McHugh's district stood to gain by passing of the $787B stimulus package, McHugh voted against it. In contrast, Scozzafava has supported the stimulus package, so-called gay marriage, cap-and-trade, pro-abortion choice, and union card check. What media conservatives in particular have noted is the unusual support (from a conservative's standpoint) she's attracted to her campaign, including union endorsements and the prominent left-wing portal Daily Kos founder Markos Moulitsas; in other campaigns, she has been endorsed by the Working Families Party, which promotes progressive causes like a "living wage", rent controls, "real tax solutions" (i.e., soak the rich), more public transit subsidies, and Obama's "green jobs" economic utopia.

Whereas Sarah Palin's prescient endorsement of Doug Hoffman brought the race under the national spotlight (others prominent Republicans, including Minnesota Governor Pawlenty, former Senator Fred Thompson, and former Senator Santorum, have endorsed Hoffman as well), Scozzafava's nomination was clearly out of touch with the views of most Republicans (not one of the House Republicans supported the stimulus package) and even a number of independents and moderates, whom are clearly experiencing voter's remorse just 9 months into Obama's term in office. You have a solidly Republican district which has not gone Democratic since 1871, and the GOP leadership chose a social liberal whom has taken positions on multiple issues against the Republican mainstream in Congress? You have the two parties nominating center-left candidates with only a blurred distinction on positions.

Most notably, former multi-term NY moderate Republican Governor George Pataki, widely expected to seek the Senate seat now held by Kirsten Gillibrand next year, has now endorsed Hoffman:

Simply put, we cannot afford to give another vote to Nancy Pelosi and Harry Reid, we cannot afford another vote for higher taxes, we cannot afford another vote for government-run health care, and we absolutely cannot afford another vote to take away from hard-working men and women the right to secret ballot.

Predictably, the Watertown Daily Times has endorsed Scozzafava, applying what I call the Sally Brown critique of Doug Hoffman. (Little sister Sally, in the classic Charlie Brown Christmas special, famously says, "All I want is what's coming to me. All I want is my fair share.") Hoffman has a McCain-like disdain of Congressional pork, and the newspaper editors are clearly worried that the northern district won't feed at the federal teat if a legitimate, principled conservative is elected.

Even the Daily Kos polls of the race show that over the past 2 weeks, there has been a clear shift of at least 8 points in favor Hoffman, almost entirely out of Scozzafava's support; the momentum is clearly with Hoffman, and realclearpolitics shows Hoffman now leading in 2 of the last 3 polls, with Scozzafava now running well behind Owens. I don't see how Scozzafava pulls this out; personally, I think she should withdraw to ensure the GOP retains the seat. However, I think Scozzafava's support to continue to erode as it becomes clear to GOP voters headed for the polls she can't win. As a Maryland voter, I can't vote in the race, but I do support Doug Hoffman.

Armchair Strategist: Could McCain Have Won Last November?

I am not a political strategist. I have written a few posts identifying some tactical mistakes McCain made and issues and approaches for future campaigns (e.g., "The Road to 2012"). [Whereas some of the points and arguments raised in this post are familiar, the context and discussion are different.] But if I had been running the McCain campaign, what would I have done differently? And would it have worked?

Answering the second question is inherently unknowable. Certainly the Obama campaign would have adjusted its tactics in response to alternate approaches. Other things were beyond McCain's control: the economic tsunami, his age, his past voting record and innumerable speeches and appearances, a historical bias towards White House turnover every 8 years, and President Bush's unpopularity and record.

The fact is, McCain held leads over Obama at multiple points in national polls before the tsunami, so his defeat was not inevitable. A 7-point margin of victory, given the circumstances, was not a large difference. It simply requires switching one vote out of 25. (Of course, Gore and Kerry were defeated by much narrower differences.) Note, for instance, McCain once led Obama by at least 10 points in Florida. The Obama campaign then saturated the airwaves with ads, with effectively no response from the McCain campaign.  and flipped the lead. I was also puzzled by the campaign's inability to adapt Hillary Clinton's winning strategy against Obama in the Pennsylvania primary and other states.

A Critique of the McCain Campaign

Certainly the McCain campaign executed poorly, and it goes beyond weak or ineffectual responses to Obama swing state campaigns. The campaign fundraising, use of information technology and organization were uncompetitive,  the campaign did not make good use of McCain's time after securing the nomination to the convention, McCain's messages and programs were too predictable and similar to Bush's, and some of strategic attacks were ill-focused, eclectic (e.g., the sex education kerfuffle) and seat-of-the-pants/opportunistic (Joe the Plumber). It's not clear to me why the campaign focused so much on the thin evidence of Obama's sporadic appearances with a 60's radical and professor (Bill Ayers) instead of a more established foundation in notorious Chicago politics; the campaign also failed to promote John McCain's legendary straight talk reputation and contrast it effectively with Obama's abstract meandering and doublespeak. I personally believed that many of the McCain campaign spots were overproduced and gimmicky (e.g., the 3-dimensional ads) and really didn't fit McCain's plain-spoken message and traditional conservative values (such as self-reliance, hard work, and perseverance).

--McCain's Mistakes During the General Election Campaign. Campaign strategist and advisor Steve Schmidt clearly had problems beyond acknowledged missteps on sex education and Bill Ayers. I have written some posts criticizing McCain's unforced errors, including:

•  his unilateral suspension of his campaign in a dubious attempt to facilitate passage of TARP legislation
•  his failure to respond strategically to Obama's broken promise on general election funding (leaving McCain at a permanent funding disadvantage in every prospective swing state)
• the ill-advised selection of Sarah Palin at running mate, which undermined his key expertise and experience argument against Obama. 

--McCain's Debate Performance. McCain's debate performance was not sharp; even when he had Obama on the ropes (e.g., Obama's morally indefensible stonewalling of the Illinois Born Alive Infant Protection Act), he failed to put him away. The issue of Bill Ayers was weakly handled, with Obama easily marginalizing his contacts with Bill Ayers (not to mention the obvious counterpoint that McCain had his own problems with politically inconvenient supporters (e.g., Rev. Hagee)). McCain's points and approaches were predictable; what he needed to do was to catch Obama off-stride with some novel arguments or to pose some open-ended questions, which might get Obama into one of his trademark convoluted abstract responses, characteristic of his Democratic debate performances. McCain also let several Obama charges (e.g., deregulation, Bush deficits and Iraq expenditures, Wall Street greed, health care, etc., while extolling the virtues of the Clinton economy) go without a strong response. Even the progressive Dissent Magazine points up that Clinton piled up a huge federal deficit  (a trillion dollars) during the first 6 years of his Presidency, and many things for which Obama and others have criticized the Bush Administration were a logical extension of economic policies and facts under the Clinton Administration (e.g., free trade, slow wage growth, predatory lending, asset bubbles, and deregulation of financial services). Keep in mind that the collapse of Long-Term Capital Management, a hedge fund that collapsed over its derivative trades, occurred during the Clinton Administration's watch; what's particularly egregious over Obama's use of the issue is that two of his own top economic advisors (Rubin and Summers) opposed strong federal regulation over the derivatives market.

As an aside, I do believe that there is good reason to make derivative transactions more transparent, including public/regulatory disclosure of related financial hedges (margin, collateral, etc.) One can argue that raising reserves and public disclosure discourages speculation and reduces uncertainty that transactions will be honored in good faith. But, as a matter of principle, I am sympathetic to former Senator Phil Gramm's viewpoint:

[Phil Gramm] examined financial panics of the 19th century, concluding that policy makers and economists had repeatedly misread events to justify burdensome regulation.

“There is always a revisionist history that tries to claim that the system has failed and what we need to do is have government run things,” he said.

--McCain's Failure to Address Mounting Public Concern With the Deficit. McCain's preoccupation with earmarks is understandable, but its usefulness as a campaign issue is questionable since Congressional Republicans other than McCain have been some of the worst offenders, Obama co-opted the issue by changing his position just in time for the Presidential campaign, and pointed out earmarks only amount to a minor percentage of federal expenditures. Furthermore, Obama attempted to preempt McCain's use of the deficit critique by reminding voters that Bush never balanced the budget during his terms in office. [Obama conveniently fails to point out Democrats were arguing there wasn't enough money in the bills...] 

Of course, near-trillion dollar stimulus and health care legislation in the middle of a recession and federal expenditures peaking at over 40% of GDP (for the first time since WWII), Obama's implicit argument that there wasn't a qualitative difference between the GOP and the Democrats on federal spending always was disingenuous. McCain needed to address his position on the Bush deficits and the massive reorganization and funding of Homeland Security, how he would streamline the government to operate more efficiently (and demand more than token moves against the deficit, e.g., Obama initiatives of $17B in spending or $100M in administrative cuts), and he should have been more outspoken in favor of House GOP resistance to the massive federal intervention of TARP legislation last year (not to mention demanding greater transparency of the Federal Reserve).

--McCain's Nuanced Political Stands. McCain always irritated fellow conservatives by things like using typically Democratic/progressive class warfare reasons in his initial opposition to the Bush tax cuts, his support of a version of cap and trade, his initial reluctance to support proactive border security,  and his citing as an inspiration Teddy Roosevelt, whom migrated from a conservative to a more progressive point of view during his Presidency. He also was a late convert to the cause of offshore drilling in coastal areas and even after the selection of Sarah Palin, did not back off his opposition to ANWR energy exploration. Despite Obama charges otherwise, McCain had a mixed record on regulation. Both Obama and McCain had populist streaks; McCain needed to do more to contrast his political approach with Obama's philosophy; it was embarrassing for McCain to come up with a mortgage plan that the Obama campaign argued was similar to its own.

--McCain's Inability to Leverage His "Straight Talk" Reputation. I think that the American people knew that Obama's promises to cut taxes (or cut checks) for 95% of working Americans, return the top tax bracket rates to those of the Clinton era (about 5 percentage points higher), seriously escalating domestic spending while playing lip service to the deficit, didn't add up. (Doesn't it seem like just yesterday when they were criticizing the amount being spent in Iraq--before trillion-dollar stimulus and health care programs came along? And, by the way, we aren't out of Iraq yet, but that didn't phase the Democrats' spending spree.)

The American people understand that tough times often call for shared sacrifice. They did not necessarily want or expect the major Presidential candidates to get into a pandering war to secure their votes. I don't think that anyone really expects to close a deficit gap without some combination of painful spending cuts and tax increases. The devil is in the details, of course, and the Democrats would have loved to pin McCain down on spending cuts in order to solicit the support of target companies and workers. (The Democrats did that in sabotaging Bush's attempt to fix social security in 2005.) 

Let's take as a point of discussion how the Democrats have tried to spin the earlier part of this year: Obama took over a disaster, teetering on the edge of Depression. In fact, the TARP legislation was passed before the election, and credit did not freeze. The unemployment rate was 7.6% in January; it is up over 2 percentage points since then--more than 6 months after passage of the stimulus bill. In fact, Democrats hyped the so-called stimulus bill, claiming it would keep unemployment from exceeding 8%. But the deception goes beyond that; it also sold the stimulus package on a sense of urgency--when, in fact, less than 25% had been spent in the first 6 months--and it pushed infrastructure spending as economic miracle grow (as if building a Bridge to Nowhere would pay for itself!) It also spun state bailout money as stimulus (as if the jobs "saved" this year don't have to be funded next year...)  And it argued for for bailing out GM and Chrysler over industry-destroying bankruptcy--and then, as the bailout money only deferred the day of reckoning, it suddenly realized that bankruptcy was not so bad (although Obama's concept of bankruptcy is to "spread the wealth" from bondholders to unions).

--McCain Campaign's Failure to Adapt. Obama in a number of respects attempted to adjust to adverse developments, such as the high cost of oil by softening his stands against offshore exploration and gun ownership and structuring a competing tax package that undercut McCain's for most taxpayers. To be frank, the pattern of Democrats to run left during the primaries (to avoid alienating progressive activists) and then to move to the center is not exactly a new phenomenon. 

Now one could hardly call McCain's response to the economic tsunami conservative, but I would have liked to have seen McCain tailor his ad campaign emphasizing voter priorities (versus the former radical Bill Ayers and other negative attacks) and less costly, more focused change and eliminating government scope creep. He could have answered Obama's rhetoric of a post-partisan Washington by making a preemptive announcement of bipartisan members of his own cabinet. Appearances late in the campaign, particularly involving running mate Sarah Palin, seemed aimed more at motivating the media conservative base than moving to the center, where the key swing voters were.

An Alternative Approach

--Implement a More Diversified, Flexible, Less Predictable Political Strategy. What McCain needed to do was to get away from a Reagan-formula campaign. Using a baseball analogy, one of the best weapons a baseball pitcher has is to keep the batter guessing--what pitch at what location and speed; even an average batter will find success if he is able to predict the next pitch. I think, particularly given the age issue, McCain needed to show this wasn't your grandfather's GOP, but a GOP of fresh, innovative ideas, not Obama's false assertion of the party of "no" and no ideas. For example, McCain should have considered adopting some of the ideas former Speaker Newt Gingrich has proposed or Representative Paul Ryan's "Roadmap for America's Future".


--Focus on McCain's Health and Vigor to Combat the Age Issue. One of the first rules of writing is to "know your audience". Understand their concerns and address them from the get-go. For instance, there was a concern about McCain's age. Now certainly the McCain campaign did a good job of getting his feisty 96-year-old mother Roberta in front of the camera. I would have had clips all over the airwaves showing McCain walking briskly through airports, luggage in hand, hiking in the Grand Canyon, etc.

--A Pro-Economic Growth Policy. The progressive demagoguery and promotion of massive government regulation throws the baby out with the bathwater. Economic growth depends on legitimate risk taking, e.g., venture capitalists investing in emerging companies. Bankruptcies in businesses and households occur even during periods of economic expansion. One lesson we've learned over the past generation is that global investing is apolitical; it seeks to invest where, all other things held equal, resources and infrastructure are available and the government burden of taxes, mandates and regulations is less obtrusive. McCain, in my view, should have focused on two points: the issue is not so much with innovative financial products as with incompetent participants in the markets taking on unreasonable risks--you will never be able to outlaw managerial stupidity, no matter how many restrictions on economic liberty you implement; second, the progressive attempts to respond to issues are always "a day late and a dollar short". Tell me, where were credit rating bureaus, the accountants, state and federal regulators, etc.? Where were the progressive Chicken Littles on Capitol Hill, crying about the impending doom due to "greedy Wall Street" during the housing bubble (versus an ex post facto scapegoating for what everybody else missed, too, including the Federal Reserve--when did Greenspan talk about "irrational exuberance" of the housing market?)?  When were the Democrats looking to clamp down on mortgage approvals to high-risk applicants? Where were they calling to attention implicitly government-backed mortgage-backed securities unduly weighted in volatile real estate market notes (e.g., California, Las Vegas, Florida, etc.)?

The big problem I have with the progressive critiques is they have not provided a solid case why existing regulations or oversight failed to anticipate the economic tsunami and addressed the relevant shortcomings; conservatives for years have been arguing about the increasing complexity (and according lack of responsibility and accountability) of regulation across various government agencies. It took the tragedies of 9/11 to highlight the problem of integration and turf battles among various intelligence and law enforcement agencies.So when the progressives want to scapegoat investors because AIG, for instance, wrote too many credit default swaps relative to its reserves or otherwise failed to hedge their position or contain their risk, it's ridiculous. Why did it take the federal government until the economic tsunami to determine that AIG was "too big to fail" and was not transparent about the kinds of risks to its business? I, as a conservative, would have had no problem with AIG going into bankruptcy, its relevant management being fired, and Goldman Sachs being unable to be made whole on the swaps it was holding.

In addition, McCain should have focused on the importance of business (not just household) tax incentives. He did note uncompetitive higher tax brackets, but he should have also focused on tactics like accelerating depreciation, cutting payroll taxes, freezing tax rates on the job creator classes, and in providing a more optimal simpler, more consistent environment for business investment with a moratorium on discussion of taxes, regulations, etc. in the middle of a deep recession (to reduce analysis paralysis and uncertainty over progressive initiatives to "fix" the economy).

--Less Emphasis on Biography/More on Conservative Goals. I also would have deemphasized dated clips of his Vietnam era days (this was also a mistake Kerry made during his campaign); voters have more of a "what have you done for me lately" perspective, not to mention the familiar disclaimer known to every investor: "past performance does not guarantee future results". Among other things, the POW clips pointed out the age issue, paradoxically reflected more about the past during a change election, and were largely pushing on a string; people concerned about military and foreign policy already knew about John and his record.

I would have preferred more elaboration of what George H.W. Bush famously referred to as "the vision thing". McCain should have explained better what motivated him to be conservative and why he wanted to be President. We needed to hear more about America as the land of opportunity and economic freedom, however well-intentioned, progressives' paternalistic, government-sponsored solutions in search of a problem are.

I also would have liked to hear McCain emphasize lessons learned from Iraq, including avoiding a disproportionate deployment of American forces and nation building, which would have further distinguished him from Bush.

--A Conservative Critique of a Predictable Progressive Platform. Many of the campaign issues were familiar retreads over the past 40 years: class warfare, allegations of Big Business cronyism, union protectionism, expansion of the social welfare net, government takeover of the health care sector, increased government obtrusiveness, ecological restrictions on domestic resource development and energy generation, etc. Conservatives need to point out the hubris in Obama deciding that ideological progressives understand the economics and profit potential of green energy, education and health care better than the private sector; that progressive policies of high business income, savings and investment taxes and obtrusive government reporting and regulations directly affect job-creating business creation and expansion; and that trade obstructionism, abusive lawsuits, an anti-competitive Byzantine system of state insurance mandates, and archaic work rules and tenure in education, all reflecting Democratic special interest constituencies, have adverse impacts on consumer prices, health care costs, exports and related job growth, and school performance. Conservatives have to hold progressives' feet to the fire in terms of future business growth-inhibiting effects of the cumulative national debt, program coverage creep (e.g., SCHIP) (i.e., government market share of ordinary expenses of middle-class Americans), misleading language (e.g., Obama's terming education expenditures as "investments"), out-of-control growth in bureaucracy and staffing of an increasing portfolio of government programs, and the law of unintended consequences, e.g., possible repercussions in business-based health care coverage due to a dubious government overhaul of health care (versus more targeted reforms, such as consumer vested interest in cost containment, expanding and strengthening assigned risk pools and catastrophic coverage).

I prefer using a metaphor of the federal government conglomerate, where paternalistic progressive empire-building at the federal level has outstripped the Executive Branch's ability to effectively manage it (hence, Obama's unprecedented use of unaccountable czars, which I regard as an unconstitutional power grab at the expense of the Legislative Branch's historical advise and consent responsibilities). When a conglomerate starts losing money and focus, what we  typically look to do is to spin-off or shut down those units which don't focus on core competencies--things like national defense and foreign policy, public health and safety, national financial services, public resource and infrastructure management, and our federal judiciary and interstate regulation.

Finally, I would have made it clear that the biggest risk during an economic crisis would be to misdiagnose the problem, provide an ill-suited, counterproductive response and introduce uncertainty about the nature and extent of government intervention in the private sector. Not only does it waste precious American treasure, but it defers the day of reckoning, the bottoming of the economy, and recovery.

--A Conservative Critique of the Bush Administration and Change Message. Even as it became clear that the surge policy in Iraq was working, President Bush's approval ratings did not recover to the same extent as Reagan's and Clinton's towards the end of his term. The Democratic candidates were scapegoating the Bush administration for the economic tsunami (even though the Democrats controlled the Senate for 4 (and the House for 2) of the 8 Bush years).

The Democrats were clearly looking to tie McCain to Bush and his policies, and McCain during the GOP primaries provided ammunition by linking his voting record to Bush's 2007 initiatives. (After all, Bush still was very popular with the party base.)

There are a number of things I would have done in response. McCain did point out some differences with Bush (in particular, manpower levels in Iraq). But I would have gone beyond that; I would have stressed Bush's limited federal experience (like Obama's), I would have criticized Bush's lack of proactive management style, his isolation from Congress, the growth of government operations and the federal deficit during his Presidency,  his limited use of the veto (particularly on spending), his appointments (especially the Texas and related cronyism of Harriet Miers, Alberto Gonzales, Michael "Heck of a job, Brownie" Brown, etc.), and his management style (particularly in terminating poor performers). I would have named key members of my Cabinet in advance and specific reform objectives. The idea was not to engage in Bush bashing "as usual", but to distinguish his own center-right administration as based on experience, a proven bipartisan approach in Washington, competence, and active engagement. The idea also would have been to link Bush's failures with his limited track record and note Obama's own inexperience. Focus on the fact that in the middle of an economic crisis the last thing we could afford was Obama's on-the-job training.

--Real Change is Focusing on Existing, Limited Distinctive Competencies, Emphasis on Citizen-Oriented Services, Administrative Excellence and Frugal Federal Spending. The government should live up to its commitments to existing citizen benefits and services and improve the efficiency and effectiveness of government, with streamlining and reorganizing government offices, flattening bureaucratic layers, simplifying business processes, shrinking critical paths (e.g., to drug approval), implementing rigorous quality, anti-fraud and service standards, reemphasizing operational services (e.g., more Border Patrol agents, auditors, food inspectors, etc.),  laying off surplus personnel, shutting down redundant facilities, and demanding that federal government workers share in some of the same sacrifices as workers in the private sector, e.g., early retirement packages, layoffs, temporary salary/benefit freezes or cuts, etc. Insist that any future expanded government programs leverage existing infrastructure and personnel, e.g., increases in food inspectors should be balanced by federal manpower attrition or cutbacks elsewhere (such as not filling retiring managers).  Democrats have sometimes emphasized the numbers of policemen on the beat and teachers in the classroom; conservatives focus more on right-sizing the level of qualified operational public service personnel, management control using program target quality metrics and baselines, shrinking the bureaucracy, and improving administrative flexibility (versus work rules).

At the citizen level, what needs to be emphasized is a principle of fairness: government agencies and workers are not "more equal" than private sector businesses and workers. If businesses are expected to live within their means, so must government. And if local and state governments must live within a budget, so must the federal government.

--Defining Authentic Change in Washington: Going Beyond Political Spin. I would have also pointed out what the Democrats were proposing was not real change, i.e., the way things were being run in Washington, the idea that government knew how to spend money better or more efficiently than citizens and the private sector. It was more of the same throwing money at problems. And what return had we gotten from enormous federal government social net spending? Do we have stable family structures, lower drugs and crime, higher graduation rates, robust business development and functional literacy in our urban centers? Instead, you hear the Democrats asking for more and more money, throwing good money after bad, and nothing ever fundamentally changes. All the Democrats have managed to do over the years is to aid and abet class-based paranoia, a dependency on government handouts and a feeling of entitlement. Bush, in fact, had added to the size of government, the national debt and entitlements (Medicare prescription drug coverage). If anything, the principal argument by the Democrats was that Bush didn't increase spending enough. McCain should have taken a stand of stop the madness; before we spend another dime on the backs of our grandchildren, we need to fundamentally change the way that Washington does business. Change goes beyond rhetoric or putting more money in leaky buckets.

I would have also been far more aggressive in pointing out Democratic game playing--that the same kind of phony savings arguments that were used to justify the new entitlements of the Great Society were being reintroduced to justify the government's footprint in the health sector. I would have raised doubts over Obama's smoke-and-mirrors approach to meeting and beating McCain's tax cuts to the middle class while vastly expanding government spending, paying lip service to the deficit, and saying he could pay it off by simply restoring the "magical" Clinton higher tax-bracket rates (roughly 5 percentage points higher), while at the same time knowing tax hikes effectively lower the net benefit of labor, implying a shortfall in expected tax revenue.

I would have explicitly put out there the fact that the Democrats were simply engaging in budgetary loss-leader gimmicks by artificially underestimating a program's costs to get citizens on board, much like a drug dealer tries to build his customer base by getting newbies hooked with "free" narcotics. Once the program is in place, the Democrats will then argue that the program's ineffectiveness is not intrinsic but an artifact of "insufficient funding". They have been playing the same song and dance for decades.

--Use Symbolic Scenarios to Underscore Conservative Themes. I would have used symbolic ads to make the point over Democratic tax-and-spend policies. For example:

• A Democrat puts his government program proposals in a shopping cart and paying for it using the China "Red Card" (noting that citizens will be paying off interest in the future, crowding out other government expenditures, and perhaps hearing a Chinese Red Card collection agency calling on a taxpayer's home phone, arguing they needed to make a payment now). 
• Parents or grandparents plead with a 5-year-old to co-sign their government loan paperwork. 
• A child notes that the private sector has built the best planes in the world, designed the best technological devices, and provides the best health care. What does the government do best?
• A Democrat is frustrated by his young children constantly asking questions like "How much is a trillion dollars?" and "When are you going to pay it back?"
• A young child tries to open a lemonade stand and has to deal with zonings restrictions, inspectors, high cost of ingredients, and paperwork, and then Obama stops by to take away half of his earnings and gives it to the other kids (whom are playing)
• A man goes to the gas station to fill up his tank, with the gas pump only accepting Saudi Arabia, Iran or Russia cards for payment and his young child asks why he couldn't pay with an American card.
• Obama, Reid, and Pelosi lookalikes are given the keys to US Treasury printing presses and immediately offer free samples only to those households not paying any federal income taxes... 
• An Obama lookalike in a magician's cape with smoke and mirrors pulls government programs out of his top hat. 
• You are the last private-sector homeowner in the neighborhood,  your new neighbor yet another government bureaucrat.

--Point out the Democratic Track Record and the Risk to Checks and Balances Between Branches of Government. Democratic claims of fiscal discipline are disingenuous, that a Democratic Congress has never balanced a fiscal budget in the last 40 years, and US voters, by putting the Democrats in charge of both the Executive and Legislative branches of government would be like the fox guarding the henhouse, that the Democrats would use the pretext of an economic crisis to essentially load up on nearly 30 years of pent-up spending initiatives held in check by a Republican President or House of Representatives. The one sure consequence of electing a Democratic legislature and President are massive deficits, with only a small proportion of wage earners (in particular, job creators) expected to share in the massive costs of government build out.

-- Recast Health Care Reform. I would have phrased the issues differently to voters; there were a number of false assumptions in the progressive camp, e.g., misleading statistical comparisons with countries having nationalized systems or implied financial status or unhealthiness of the uninsured. I would have also pointed out the government sector already is deeply involved with health care funding (almost half), implicitly subsidized by the private sector, i.e., government is not the solution: it is a big part of the problem, e.g., piling on trillions in unfunded mandates, inefficient pricing of services (resulting in underpayment for some necessary services and a perverse incentive of providers to maximize revenues by adding medically questionable, higher-margin reimbursable services). There have been false comparisons (between the private and public sector), since government payments typically do not cover market prices and administrative cost comparisons are misleading (e.g., the government doesn't cover certain private-sector costs, such as provider qualification, price negotiation, anti-fraud and promotional costs). Any additional market share of government in health care pushes the costs by adding incremental products and services for currently uninsured (i.e., self-insured). The idea from Obama and others that business health care options are not going to be affected by private sector insurers having to pass along implicit subsidies for a subsequently larger aggregate government reimbursement gap is patently absurd.

I would have underscored fairness issues, e.g., people who pay for health care or health care insurance get no tax break, but gold-plated health plans by managers and union workers were tax-exempt. I would have also pointed out that smaller businesses, unlike large businesses which can self-insure, are subject to high-cost state-specific mandates.

Finally, I would have pushed freedom issues. Historically, American people have not depended on the government for basic expenses (food, housing, clothing, etc.) Progressive paternalism logically knows no bounds. We have a slippery slope problem here. Americans need to engage in their own risk assessment; there is a vibrant insurance industry. You can certainly argue with household heads, as a matter of prudence, should carry life insurance, long-term care insurance, etc. Progressives, by promising to bail out financially imprudent behavior of individuals (e.g., no rainy day savings or sharing risk with others), introduce the same kind of moral hazard they condemn on an institution level by expanding government guarantees on deposits or "too-big-to-fail"  (e.g., insurers, banks or savings and loans) : if the government is going to bail me out because I don't buy insurance, what's the point of buying insurance? And if I choose to pay for basic medical expenses out-of-pocket, why should liberals care?   If I'm a good health risk, why should I be forced to subsidize the irresponsible behavior of others (e.g., heavy smokers or poor diet and exercise)? Why should I have to pay for an administrative middleman (private or public sector) or compelled to subsidize in vitro fertilization for another couple or Viagra pills to enhance an older male's sex life?

I would have also warned voters to read the fine print, especially when the Democrats conveniently "discover" cost savings in Medicare/Medicaid just in time to expand the government footprint (after 4 decades of not finding any or investing in state-of-the-art anti-fraud measures) I would have made the Democrats eat each and every failure of failed or failing related state programs (e.g., Hawaii, Oregon, Tennessee, Maine, and Massachusetts). I would have pointed out how the costs of these programs have routinely exploded beyond budget and have resulted in rationing type decisions (e.g., excluding certain medicines or treatments and limiting eligibility).

Steve Schmidt and McCain Are Wrong About Palin in 2008

Steve Schmidt, the chief strategist for the 2008 McCain campaign, is widely known to have had differences with the Palin camp during last year's fall campaign. As it became clear after the final debate that McCain, lacking resources, with bad economic news, and the Obama campaign in prevent defense with a significant lead, was going to lose, some dirty laundry became public. The McCain camp found Palin a slow study getting up to speed, resented what they interpreted as diva behavior, disliked her publicly questioning campaign tactics (e.g., robocalls and withdrawing from Michigan) and suspected by the end of the campaign, she was already trying to set herself up for the future. It's quite clear, just from the title of her forthcoming book, Going Rogue, that Palin felt that the McCain campaign was mishandling her, and I do believe her hubris was based, in part, on observing the obvious fact that she was pulling bigger crowds than McCain himself, and from her perception that the campaign was being run by the same type establishment campaigners she had gone through in her improbable path to the Alaska governor's mansion in 2006. I suspect that Schmidt will be a scapegoat in the Palin book, but did you really expect the Sarah Palin of Troopergate to rise above pettiness? She seems to have forgotten her real adversaries are the liberal Democrats, not fellow conservatives and Republicans.

Schmidt has been widely quoted in acknowledging that Sarah Palin is a talented politician and could conceivably win the 2012 nomination, but would be wiped out in a general election campaign. I don't think that the speculation about the nomination is correct. One of the key reasons McCain won the 2008 nomination is because a plurality of Republicans considered him the most electable candidate against either major Democratic adversary. I've already specified a number of reasons why Palin will never win the nomination; she received the highest unfavorable rating of any VP candidate running over the past 30 years. She will never be able to explain away her unforced resignation (I think it had more to do with declining approval ratings, a deteriorating relationship with the Alaska legislature, and a tougher-than-expected reelection, which would undermine her national ambitions). I think we can expect Palin's use of earmarks, her business tax hikes, and her disingenuous representation on the Bridge to Nowhere, not to mention the way she was skirting around Alaska public record laws by using external Internet email accounts. I also don't think she'll be able to rope-a-dope her way through GOP debates, expecting the others to direct their fire at each other, allowing her to rise above the fray.

But however personally popular she is (which I think is probably based more on empathy with her being targeted for personal attacks by progressives), she has no real core constituency within the Republican Party, beyond a certain populist streak. For example, I think many social conservatives may be concerned about the compromises between Sarah Palin's political career and her special-needs child (not to mention an illegitimate grandchild); Mike Huckabee, a minister, seems to be a more natural preference. Business conservatives are more likely to be attracted to Mitt Romney. I think that Palin has burned her bridges with moderate and independent Republicans, and her anti-intellectualism doesn't fit well with McCain's brand of pragmatic conservatives...

I want to particularly focus on the following comments Schmidt made at the University of Arkansas:

There was huge excitement that transformed the race. I believe to this day that had she not been picked as a vice presidential candidate, we would have never been ahead, not for one second, not for one minute, not for one hour, not for one day.

Let's note for the record that McCain had a 4 percentage point lead over Obama in the July 28 USA Today/Gallup Poll, one month before the Palin selection. I think that Schmidt is simply echoing McCain here. He has to say that, but in hindsight it was a terrible choice from a big picture concept; McCain had been making experience a big issue in his match-up with Obama; over 70 years old and polls showing McCain's age was a consideration, he then picks a second-year governor without any federal experience or expertise in domestic and foreign policy. What message do you think that sends to others about the meaningfulness of McCain's record of over 20 years of military experience and 26 years in Congress? If he died of a heart attack his second day as President, Sarah Palin was the second best person to be President? Better than, say, America's Mayor, Rudy Giuliani, whom earned his wings under the fire of the worst terrorist attack in American history? Better than Mitt Romney, whom served as governor of a blue state (Massachusetts) with years of success in business management and a stellar performance organizing the Salt Lake City Winter Olympics? Schmidt helped pick a governor whom was facing a Troopergate investigation report being released down the home stretch of the election; could you really afford to play Russian roulette with the uncertain outcome of an ethics investigation?

I have no doubt that Palin drew large crowds, but that was mostly preaching to large choirs. Granted, I don't doubt that it helped draw more volunteers to the campaign, but maybe all that did was pad the margin of victory in red states. She drew the highest VP candidate negatives in the history of national campaign polling, and the choice hurt the McCain campaign needing to attract swing state moderates and independents. The choice of Sarah Palin was a key reason Colin Powell had in announcing his support of Barack Obama.

Palin did not invent Joe the Plumber. McCain did not need help in raising the danger of a progressive-controlled Congress and a progressive President with a blank check to change the American way of life. If conservatives needed Sarah Palin to choose between a progressive with less than a 10% ACU rating versus a pragmatic conservative with an 26-year voting record and an over 80% ACU rating, we have even bigger problems.

Miscellany: 10/19/09

Reviewing the Polls

We are seeing the two key governor positions (Virginia and New Jersey) heading down the home stretch. It appears that McDonnell, the Virginia Republican, has a consistent lead over his centrist Democrat adversary (Deeds). The Democrats have run off a series of statewide victories for governor and US Senate, not to mention Obama's win in Virginia last fall. However, I think the issue has more to do with picking the wrong candidates and campaign strategies, along with an unpopular President Bush. I think McDonnell will pick up key support from moderate and independent voter discontent with Obama and the Democratic-led Congress.

The New Jersey race is surprising to me because polls indicate that unpopular Democratic incumbent Jon Corzine is closing in on GOP candidate Christie, largely because a third independent candidate Daggett is grabbing votes from Christie where party registrations favor the Democrat. Under ordinary circumstances, Christie would be winning in a walk, given Corzine's approval rating at 40% or below according to realclearpolitics. Clearly Christie has to convince Daggett supporters that their vote for Daggett is effectively a vote for Corzine. Corzine, on the other hand, has resorted to trying to tie Christie to Bush's policies. (My God, why are we in yet another year of Bush bashing? He's been out of office since late January...) It's difficult to see how Corzine pulls this out, but then again, a highly unpopular Gray Davis won reelection in California.

On the national scene, Obama is down to 45% approval by Harris Interactive, and 61% believe that the country is on the wrong track. Whereas Obama's missteps on health care reform are a factor, I think bigger issues are concerns about the economic recovery (in particular, the jobs picture) and the deficit. I don't think that the people are convinced that the Democratic priorities are theirs, and Obama has failed to change the tone and bitterly partisan divide in DC as promised.

The best thing Obama and Democrats could do is to set aside their current health care and cap-and-trade initiatives and focus on policies promoting business growth: this includes reducing the level of uncertainty caused by undue government interference in the private market and threats of increased business taxes, fines or regulations, addressing the need for tort reform, lightening the onerous burden of government reporting (e.g., Sarbanes-Oxley), particularly on small businesses, and providing more business-oriented incentives (e.g., more rapid depreciation write-offs and reducing upper tax bracket rates). Additional flexibility on the minimum wage (e.g., for teens and young adults) and business payroll tax relief would be helpful.

Democratic Spinning of "Bipartisan" Health Reform

There are multiple health care proposals under discussion (at least two Senate and one House), each with significant differences with the others, e.g., some with a public option and the Senate Finance one without one. But the Obama White House is attempting to portray these muddled, inconsistent Democratic proposals as "reform" and claiming "bipartisanship", principally by the Finance Committee vote by a singe liberal Republican, Senator Olivia Snowe, whom, by the way, also voted for the stimulus package and has subsequently indicated that her vote is not a lock, depending on the provisions in a finalized version. (I infer that to mean she would reject a final bill with the public option from the get-go.) They are also citing support by former legislators or non-federal Republicans, e.g., Dole, Frist, Tommy Thompson, Schwarzenegger and Bloomberg (whom is now an independent). Actually, this is disingenuous, because even these individuals are agreeing more with the concept of reform through a bipartisan approach, and none of the proposals being consider by the Congress is a legitimate bipartisan measure.

I have a number of posts identifying the outline of a legitimate bipartisan proposal: catastrophic health, assigned risk pools, malpractice tort reform, improved public access to provider availability and pricing information, equal protection tax advantages (including the right of small businesses to join together across states to self-insure), etc. Not this Democratic hubris of being able to micromanage health care; there hasn't even been a decent attempt to analyze why attempts to experiment at the state level (e.g., Hawaii, Tennessee, and Massachusetts) have failed, Democrats fail to acknowledge the role of the government in escalating health care costs and certain cost drivers beyond government control (e.g., an aging population), and it's not clear why attempting to insure the uninsured is a pressing national priority. The statistics I've seen show no significant difference in health between the insured and uninsured... And the Democrats refuse to acknowledge the importance of individual responsibility and participation in lowering health care costs; so long as participants see health care as "free", they have no incentive to keep costs down.

Will Senate Democrats Invoke the Nuclear Option on Health Care?

Last Friday Investors Business Daily posted a pessimistic prediction that the Democrats will attempt to deploy the "nuclear option"--try using the budget reconciliation, which operates by simple majority, to pass a major policy initiative. This virtually unprecedented gimmick would not only effectively be the end of any future bipartisanship in Washington under Obama, but will most likely redefine the concept of a Pyrrhic victory in politics, resulting in larger-than-expected midterm election losses for the Democrats and greatly reducing chances of success for Obama's post-election initiatives. If Obama and the Democrats have learned anything over the past few months of townhall meetings and polls is that public sentiment is solidly against the major Democratic proposals. This is still a center-right nation, with only one voter in 4 classifying himself as liberal or progressive. A number of progressives seem to be delusional, thinking that the American people will come to eventually accept their concept of reform, i.e., "act first, apologize later". This is like a Democratic Party death wish; if you think that the input of the American people, whom are fully engaged on this topic, is irrelevant, all these meetings, polls and committee hearings don't result in genuinely bipartisan legislation, and you are going to use hardball tactics to ram through partisan legislation down the throats of the objecting American public through a majoritarian abuse of power, "what goes around, comes around". Republicans will make the Democrats eat each dollar over budget and will make a play for every vote resenting an unnecessary mandate, undesired consequences of legislation on their own health care options (e.g., a business dumping its health care plan), increased costs, or related extension of the national deficit.

Miscellany: 10/18/09

Who Should Work for Free? CEO Lewis or Obama Administration Personnel?

Well, Obama pay czar Kenneth Feinberg is using his ethically and legally questionable mandate to influence private-sector executive salaries by demanding soon-to-retire Bank of America CEO Kenneth Lewis return all of this year's disbursed compensation to him (and to serve the unexpired remaining period without compensation). Quite frankly, this is an abuse of power, probably unconstitutional, and unconscionable. [I say "probably" because the plainly written text of Article 1 Clause 3 of the U.S. Constitution explicitly forbids ex post facto laws "whether . . . of a civil or a criminal nature", but the Supreme Court, in its activist wisdom, decided to ignore the plain words (i.e., only criminal nature). To quote our plagiarizing President (and Governor Patrick): "Don't tell me words don't matter."]

This decision seems to be based purely on Lewis' cumulative preexisting (to TARP) compensation (e.g., stock options) and retirement package. And I don't think Lewis, whom is financially set for life, really needs that $1.5M that the Obamaian Politics of Envy is stripping. But that's not the point; I think it's a clear violation of his contract; if the federal government wanted to demand company executives work for free in exchange for government TARP money, it should have insisted on that from the get-go. It cannot ex post facto demand a salary giveback after an executive worked in good faith.

How many executives do you think would have agreed to work for free during the most challenging banking crisis in decades? As credit was beginning to freeze in the economic tsunami and its aftermath, sudden turnover of high-ranking, experienced bank managers across the board could have had a devastating effect on an already slumping economy... I make the argument that if there ever was a time bank executives earned and were worth whatever the private sector had decided was fair compensation, it was then.

Let us remember what happened last October:

Last October, then-Treasury Secretary Henry Paulson ordered nine banks that the Treasury Department described as “healthy” financial institutions to surrender ownership interests to the government or else face regulatory action that would force them to surrender ownership interests to the government, according to an internal Treasury Department document.

These are the financial institutions that got the ultimatum:

Citigroup

JP Morgan

Wells Fargo

Merrill Lynch

Morgan Stanley

Goldman Sachs

Bank of New York

Bank of America

State Street Bank

Bank of America acquired two troubled businesses during the crisis, Countrywide Financial and Merrill Lynch; mergers can be challenging enough under ordinary circumstances. You want the CEO to do this for free? Obviously Feinberg thinks it's not worth paying a penny for any competent manager to run a $70B revenue corporation with over 200,000 employees. Never mind the fact that a single prescient decision made by Mr. Lewis could pay his $1.5M salary many times over...

Obama, who hired Feinberg, should eat his own dog food. Don't be hypocritical; let's start by having Mr. Feinberg pay back all his own accrued salary and agree to serve "free" for the rest of his term. Because that's precisely how much Feinberg's performance warrants. And while we're at it, Mr. President, why don't you agree to work without a salary unless you get the unemployment rate and the federal deficit back to the historical mean?

Obama's Pastor?

After Obama took several months to decide on a family dog (never mind national policy issues), why should we find it so hard to understand his indecision on finding a replacement pastor whom can measure up to Rev. Jeremiah Wright? What about the spiritual development of his young Christian daughters? The rumor is that Obama had attended a few services featuring the sermons of a relative of country music legend Johnny Cash, Camp David U.S. Marines Chaplain Carey Cash. Obama reportedly likes Cash's powerful sermons, but a number of progressives are unhappy with a 2005 book (A Table in the Presence) Cash wrote, finding the touch of God in the liberation of one of Saddam Hussein's palaces during the recent Gulf War (which Obama opposed). They also think that Cash's critical assessment of the violence practiced by radical Islamic sects and the religion's history is inconsistent with Obama's Cairo address. (In the meanwhile, Obama doesn't want Cash talking to the press.)

Now where exactly were these same progressive critics when Jeremiah Wright was delivering divisive, inflammatory sermons at Trinity, which were clearly inconsistent with Obama's own political methodology? Are we to expect that Obama, as Commander in Chief, is going to apply a litmus test not only to Supreme Court judicial nominees but to military chaplains whose services he may attend? Of course, it never occurred to military-hating progressives that clergy serving military personnel might have a positive perspective on the role of the U.S. military and its missions. Cash's personal opinions are simply based on what Obama's political mentor and fellow Nobel Peace Prize winner Al Gore might call "inconvenient truths".

Sarah Palin's New Book

I'm not sure what's in this book, which has already drawn heavy pre-sales. I've written a number of critical posts on Sarah Palin, and I don't want to simply repeat myself. But I do want to summarize here some of the reasons I will never support her for national office. It goes beyond her abysmal numbers with moderates and independents whom the Republicans will need to win back the swing states in 2012, her thin resume and limited background and expertise on national policy, the fact that she doesn't match up well with Obama, and the toxic nature of her unforced resignation in the third year of her first term and disingenuous explanation of her reasons (probably responsible for her recent fall to a distant third beyond Huckabee and Romney in the latest Rasmussen poll among likely Republican voters, despite her massive public exposure advantage over the past year; the same sample showed at least a fifth of GOP voters don't want her on the next ticket, multiple times higher than her more competent competitors); if she cannot handle the pressures of being governor of Alaska, the American people are not going to elect her to the nation's toughest job.

For one thing, Sarah Palin has come across to me as very thin-skinned and vindictive with a disproportionate reaction; this is very clear from the circumstances of Troopergate whereby the governor and her husband unsuccessfully pressured the public safety commissioner (Walt Monegan)  to fire her despised former brother-in-law, state trooper Michael Wooten, and dismissed him. I also cannot remember a running mate whom proved to be unprofessional with staffers, openly questioned campaign strategy with Fox News, and then tried to make herself out to be a victim of McCain staffers looking for a scapegoat.

Then, of course, there was the disproportionate response to a bad David Letterman joke suggesting a quickie during the seventh inning stretch between a  notorious baseball player and Palin's oldest daughter (an 18-year-old unwed mother whom, in fact, had taken a high-profile role with a national abstinence campaign, making herself a public figure). This is a case where the better political judgment would have been to take the moral higher ground and ignore it or simply issue an indignant release, demanding a public apology; instead, Palin rejected Letterman's offer for a show appearance so he could apologize in person, claiming Letterman's motivation was to exploit a visit for ratings. (Yeah, that's right: David was trying to take advantage of something she herself escalated; in fact, other late night comics had made prior questionable jokes about the same Palin daughter without a similar reaction.) After all, ambitious politicians hate to appear on national-audience late night shows, especially ones promising monster ratings. Feuding with late-night comedians whom make a living out of  ridiculing politicians is intemperate. This was hardly worthy of a "straight talk" running mate; she unconvincingly alleged that the joke was really about statutory rape of another (little-known, underage) daughter attending the game, implied that Letterman was a pedophile, and then asserted that the kerfuffle was not about the circumstances of her own family, but that she was fighting on behalf of female victims everywhere.

Her credibility is also questionable in other contexts. For example, she repeated, on multiple occasions, even after it had been disproved, a sound bite that she had told the Congress to keep its money allocated for the Gravina Island Bridge, i.e., the infamous "Bridge to Nowhere". In fact, she supported the bridge construction during her gubernatorial campaign, the Alaskan legislature used the money allocated for the bridge for other purposes (Congress had given them that option), and she waited several months after learning that bridge project costs had doubled before cancelling the project--only after her future running mate, John McCain, in the aftermath of the Minnesota bridge collapse, once again denounced the notorious earmark on the Senate floor. The "maverick reformer" Sarah Palin got her fair amount of earmark money as mayor and governor; to quote Charlie Brown's little sister, Sally: "All I want is what I have coming to me. All I want is my fair share..." (The reason this failure of the McCain campaign vetting process became an issue is because the McCain campaign was attacking Obama's liberal use of earmarks until election season.)

I don't know what's in the book, but I suspect that she will spin her high-maintenance behavior as virtuous, striking a blow for spunky, accomplished women everywhere. I don't suspect there's enough material of accomplishments to fill a Little Golden Book, never mind a standard nonfiction volume. Probably lots of pictures (hopefully no other previously unreleased beauty pageant swimsuit pictures or embarrassing T-shirts). Probably no chapter titles like "A Hockey Mom's Advice on Teenage Abstinence". Probably a lot of bumper-stick insights on policy issues we've been waiting for, e.g., "terrorists are evil, and we need to do something about them", "we shouldn't import so much foreign oil and gas", "federal deficits are bad, and we should cut spending", etc. (The devil is in the details.) I would find it amusing to see a pop-up, pull-out "Tasergate" insert of Sarah Palin going after Trooper Wooten, with Wooten pleading, "Don't tase me, guv!" And, of course, there's your own copy of  a winking, nodding Sarah Palin paper doll. What's her next project? A DVD of Sarah Palin doing Tina Fey doing Sarah Palin? Or perhaps a pull-string authentic licensed Sarah Palin doll? "I just LOVE Joe Six Pack!", " Drill, baby, drill!", etc. Of course, the doll will stop working after 2.5 years of purchase...

Sean Hannity Versus Michael Moore

I have a good accounting professor friend at the University of San Diego. (We first met at a religious retreat while we were both graduate students at the University of Houston.) Unlike me, Tim has remained steadfast in his liberal Democratic point of view; my point of view started shifting that first semester when I took my first graduate economics course as a part-time MBA student. [If my business professors had a political point of view, they never wore it on their sleeve.] By 1984, my principal complaint with Reagan was the large deficit he was running up.

Tim and I managed to co-exist despite our diverging political opinions, but at one point I became so annoyed with director Michael Moore's series of propaganda films, I mentioned that Michael Moore might find me a more worthy adversary. Tim laughed and said that he would buy tickets to see that show. Of course, if you saw Moore and myself side by side, not knowing I have a nutrition blog, you might think that the real argument is over who gets the last doughnut...

So over the weekend I was flipping through cable channels when I did a double-take--did I just see media conservative Sean Hannity and Michael Moore talking to each other? I think of all the media conservatives, Sean Hannity comes across as less strident and more likable, but he often repeats the same talking points.

I was instantly wary about the interview, because Moore is a professional polemicist and has made a small fortune out of ridiculing his blindsided targets, including sophomoric setups and gotcha interviews. [You have to thoroughly know progressive talking points going into an interview like this. Hannity has covered Obama enough to realize that Obama repeatedly tries to make "greedy Wall Street" the scapegoat for the economic tsunami. You also have to realize that Obama as a US Senator filed S. 1222, which would have limited charging "mortgage professionals" for fraud, not predatory borrowers engaging in "fraud for housing" (e.g., obtaining a loan by misrepresenting level of income, not disclosing other debt, etc.) In fact, a study completed through a period of low unemployment (through 2006) found up to 70% of early payment defaults involved fraudulent misrepresentations on their original loan application, and those with fraudulent misrepresentations were 5 times more likely to go into payment default.]

So when Michael Moore tried to get Hannity to agree on whether the FBI is an authoritative source, I instantly smelled a trap. To his credit, Hannity seemed to realize it and tenuously agreed. The key exchange is as follows:

Part III, start: After Hannity agrees that the FBI are “good guys,” Moore cites the FBI: “80% of the mortgage fraud has been caused by the banks and the lending institutions.”

Hannity: “Everybody got greedy.”

Greed or Victim?

It's difficult to blame these loans on bank "greed" or "recklessness". Banks are in the business of making loans, which is a competitive business; for example, mortgage brokers have gained from 60 to 70% of the marketplace with certain advantages of lower overhead and pricing flexibility, and Internet quotes are available. There is no doubt that some mortgage giants (e.g., Countrywide) were looking to maintain or increase market share and profits by adding riskier loans, loosening underwriting standards and granting exceptions. Why? Because the gross margin of servicing these loans was somewhat higher. Foreclosures occur even during a robust economy (a working spouse becomes seriously injured or ill, mounting bills, etc.)

While Michael Moore prefers to scapegoat "greedy lenders" targeting easily duped consumers, he ignores the fact that "financial institutions and the federal government are by far the biggest victims in terms of [monetary] loss". [In fact, one of the reasons that the SEC is going after former Countrywide CEO Mozilo is an allegation he had not fully disclosed to stakeholders concerns he mentioned in certain emails about fraud for housing and for some of its riskier (e.g., 80-20) products.] Other parties affected by mortgage fraud include accountants (e.g., more extended audit plans), bank regulators, community groups (abandoned homes adversely affecting nearby property values), the secondary market (mortgage-backed securities), taxpayers (losses on federally-insured loans), and future homeowners (higher costs).

What progressives, including Michael Moore, are doing is a game of blaming the victim. For example, it's the bank's fault for not detecting conspiracies of dishonest employees familiar with the ins and outs of internal mortgage approval mechanisms--what facts raise red flags, what gets checked, how it's verified, what checks might get waived under which circumstances, how checks might vary between loan products, etc. Once a criminal knows these facts, it's easy to create a strategy to game the system. For instance, a criminal could buy a property at market price, work with a dishonest appraiser to artificially inflate the value of the home, use a stolen identity's sterling credit history to secure a mortgage loan (in this case, perhaps the contact information for the stolen identity isn't cross-checked) for the phantom buyer, and pockets the difference. [Maybe some initial mortgage payments are made to deceive the bank while the criminals move on...] The bank then takes possession of the property, but it has to realize its loss (or make allowance for the loss) to reflect market value.

Dishonest activity occurs in all sorts of disciplines. I've written past posts describing some of my experiences as a university instructor or professor. In most cases, the people who cheated were among the most able students in class. Second, almost invariably they wanted to know how I caught them (their motive was rather transparent: they wanted to develop a workaround). Occasionally a student would express frustration that an unnamed classmate was cheating but declined to provide additional details or evidence; I had to follow due process procedures, including compelling evidence, in resolving academic dishonesty issues.

Many relevant professionals (e.g., mortgage brokers and accountants) have codes of conduct. Accountants should vouch and track an adequate sample of transactions, relative to perceived risk. Bank regulators have a number of relevant responsibilities, including an assessment of systemic risk. Credit rating services, security regulators, investors and business media had a right to demand that lenders were fully disclosing risks affecting ongoing viability. The secondary market has the right and obligation to scrutinize the creditworthiness of the mortgage notes it purchases; no doubt if a bank or broker was stuck with nonperforming loans, it certainly would have a natural incentive to clamp down on mortgage loan approvals. Certainly the Fed Reserve should have responded in a more proactive manner to what were clear signs of excess speculation in the housing market (condo flipping in Florida, housing prices vastly outpacing increases in household income, etc.) And obviously the federal government didn't do due diligence in the aftermath of the GSE accounting scandals earlier this decade.

Among other things, a whole lot of big mortgage money floating around and lax controls attracts organized crime and other criminal behavior much like garbage lures pests. Hannity and Moore are both wrong; it wasn't industry greed so much as collective stupidity and lack of due diligence in both the private and public sectors. Even if a sales guy is earning a commission on a mortgage deal, he does not have the authority to approve the loan; if the loan amount exceeds the market value of the property and/or if the company has to repossess in a down market, the loss can exceed any relevant generated income. Where were the credit rating agencies, the accountants, the bank regulators, the Federal Reserve, the Congress, and the President? The fact is that public policy and policymakers were part of the problem, not the solution.

The Nature of Mortgage Fraud

But hold on... Moore is deliberately (or incompetently) misstating what the FBI really said:

The FBI investigates mortgage fraud in two distinct areas: Fraud for Profit and Fraud for Housing. Fraud for Profit is sometimes referred to as "Industry Insider Fraud" and the motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties. Based on existing investigations and mortgage fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.

Now, what exactly are these "industry insiders"?

Sometimes it is just the garden variety grifter who implements a fraud, but the FBI is seriously going after mortgage fraud that involves insiders: real estate agents, loan originators, appraisers, home builders, and closing attorneys.

A more comprehensive listing:

The FBI's outlines a wide variety of mortgage fraud offenders including mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, bank account representatives, trust account representatives, investment banks, and credit rating agencies with a criminal activity which is relatively low-risk with high-yield returns.

What is a motive for collusion among these professionals?

In conjunction with the ‘White Collar Crime’ department, the FBI investigates mortgage fraud, which often involves many professionals working in collusion... All of these profit through various commissions, fictitious sales and fees – often on loans that aren’t genuine.

And what kinds of fraud are we talking about?

The report indicates that the schemes most directly associated with the escalating mortgage fraud problem continue to be those defined as fraud for profit. Popular schemes include builder bail-out, short sale, foreclosure rescue, credit enhancement, loan modification, illegal property flipping, seller assistance, bust-out, debt elimination, mortgage backed securities, real estate investment, multiple loan, assignment fee, air loan, asset rental, backwards application, reverse mortgage fraud, and equity skimming. Many of these tactics use various strategies like the use of a straw buyer, identity theft, silent seconds, quit claims, land trusts, shell companies, fraudulent loan documents (to include forged applications, settlement statements, and verification of employment, rental, occupancy, income, and deposit), double sold loans to secondary investors, leasebacks, and inflated appraisals.

The net result? According to the IMF, about $2.7 trillion in expected US mortgage writedowns and more than $4 trillion globally. Those writedowns affect bank stakeholders, many left with pennies on each dollar of investment if, in fact, the bank doesn't fail, and obviously the government, where the bank has federally-insured accounts and which backs implicitly or explicitly a large percentage mortgages or mortgage-backed securities.

Does Michael Moore consistently condemn well-documented failures of the "generous" federal bureaucrats to prevent fraud, e.g., Medicare/Medicaid, tax, welfare, defense industry, etc.? I don't think so.

Credit Default Swaps

Hannity did, of course, raise up the topic of Fannie Mae and Freddie Mac (which has become a bumper sticker issue, given the high-ranking contributions of the GSE's to Obama's campaigns); Michael Moore sidestepped that in favor of discussing the progressive economic theory it was the fault of unregulated "new" financial products, like credit default swaps, run amuck.

Let me briefly address the latter point; this is not an economics/finance blog. There's no doubt that AIG's incompetent writing of certain derivatives (credit default swaps) threatened its viability as a going concern; there was systemic risk from the nature and extent of its dealings in multiple markets, across the world; they wrote contracts worth around 44% of assets (vs. Berkshire Hathaway's recent transactions under 2%). Merton Miller of the Chicago School wrote an interesting paper a few years ago, entitled "Do We Really Need More Regulation of Financial Derivatives?"; among other things, he points out: progressives often describe derivatives in misleading and irrelevant terms; bank regulators already have access to relevant transactions; the issue isn't intrinsically with derivatives but their incompetent use by management; there are vested interests/hidden agendas behind calls to regulate (e.g., lawsuits for parties whom lose money in transactions); regulating the derivatives business is like squeezing a balloon; and additional regulations and reporting beg the difficult questions of competent regulation and regulators and of what exactly to report. As Rancière and Tornell note, "[Excess] financial repression and government intervention ...would drastically reduce risk-taking and growth. Our research shows that over the last five decades countries that have liberalized financially are the ones that have grown faster, even though they have experienced rare crises."

Which is greater hubris: corporate managers speculating they know more than Wall Street specialists on the direction and extent of future general economic metrics, or the Obama Administration thinking heavy-handed regulation and stifling financial innovation will eliminate economic crises (instead of unilaterally handicapping future American business and job growth)? If there is something which could bring more order in the recent chaos, it's greater transparency, the kind that arises through an exchange. Lenzner points out that the new Intercontinental Exchange is serving as a national clearinghouse for CDS contracts, including the related books of almost all relevant major banks and dealers, made available to regulators (and, one would hope one day, the general financial marketplace).

Public Policy Played a Big Role in the Housing Bubble

The fact is, both parties got political benefit from a robust housing market and a historically high relative percentage of American homeowners. The private sector, quasi-public sector (GSE's) and the government (e.g., the FHA) have approved bad loans.

We had fundamental supply/demand issues; there was too much money in the market chasing a limited number of houses. Accommodative monetary policy by the Fed Reserve; high demand by foreign investors for mortgage-backed securities implicitly backed by the government, and Democratic politician pressure to open the market for lower-income/high-risk applicants without conventional down payments or other creditworthiness factors (including stable income and other assets, limited coexisting debts, credit history, etc.) played roles. A number of mortgage-backed securities were not properly diversified by geographic risk, being disproportionately weighted toward clearly frothy markets in California, Nevada, Florida and elsewhere.

Government-Run Mortgage Lending: A Role Model of Lending Prudence?

Michael Moore, no doubt, wants us to aspire to the generous government-run example of the FHA versus the greedy private-sector. Consider this excerpt I've reorganized from The New York Times:

Skittish lenders are asking for 20 percent down, which few prospective borrowers have to spare. As a result, private lending has dwindled. The government has stepped into the breach, facilitating loans with down payments as low as 3.5 percent and offering other incentives to stabilize the market. The F.H.A. is insuring about 6,000 loans a day, four times the amount in 2006...As the number of loans has soared, random quality control checks have decreased sharply, F.H.A. staff members say. Mr. Donohue, the inspector general, cited numerous examples of organized fraud in testimony to Congress earlier this year.

The number of F.H.A. mortgage holders in default is 410,916, up 76 percent from a year ago, when 232,864 were in default, according to agency data...7.77 percent of the portfolio is in default, up from 5.6 percent a year ago...The troubled loans are nevertheless weighing on the agency’s capital reserve fund, which has fallen to below its Congressionally mandated minimum of 2 percent.

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” Edward Pinto, a former Fannie Mae executive, said in testimony, [predicting] that F.H.A. losses would more than wipe out the agency’s $30 billion of cash reserves.

Don't you just love the way the FHA is stepping up to build up market share (just like GSE's Fannie Mae and Freddie Mac once did) at the expense of the private sector, while a properly chastened private sector is clamping down on credit risk? Where is Michael Moore's indignation at the FHA furiously writing new mortgages in the middle of a severe recession with already inadequate reserves to service ill-performing loans?

The Times provides 2 cases of FHA-mortgage homeowners for our consideration:

[Take] Bernadine Shimon. She lost a house to foreclosure, declared bankruptcy, got divorced and is now a single mother, teaching high school [in Denver]. She wanted a house but no lender would touch her. The Federal Housing Administration was more obliging. With the F.H.A. insuring her mortgage, Ms. Shimon was able to buy a $134,000 fixer-upper in August.

Chaz Fullenkamp, an automotive technician in Columbus, Ohio, got an F.H.A. loan even though he was living on the financial edge. “If I got unemployed, I’d be wiped out in a month or two,” he says. Mr. Fullenkamp used F.H.A. insurance to buy a house this spring for $179,000. The eager seller paid the closing costs and also gave Mr. Fullenkamp $2,500 in cash. He immediately applied for the $8,000 tax rebate. Even taking his down payment into account, he came out ahead. “I knew in my heart I could not really afford the house, but they gave it to me anyway,” said Mr. Fullenkamp, 22. “I thought, ‘Wow, I’m surprised I pulled that off.’ ”

People might wonder how well-paying and secure a high school teaching job is (given government budget constraints in a deep recession), not to mention household expenses for a single-parent home and out-of-pocket expenses to renovate the home. Yes, Mr. Fullenkamp, we American taxpayers can't believe you pulled that off, too. You have to admire his inventive double-dipping, using the Obama tax rebate to cover the FHA-required down payment (money is fungible). Two months away from not covering his mortgage payment? He's not sure he can afford to own a home, but Barack Obama is there to say, "Yes, you can!"

In Maryland, there is a local car dealer group (Antwerpen) with a distinctive tagline for a prospect's offer for a car: "Jack says, "Yes!"" I'm waiting for the White House Propaganda New Media office to come up with new Obama FHA spots: "Past credit issues? No problem. Not enough savings for a real down payment? No problem. Don't have a secure federal job in the middle of a severe recession? No problem... Obama says, "Yes! We can... get you into that house!""