Sad Alan’s Lament

By PAUL KRUGMAN

Published: September 17, 2007

When President Bush first took office, it seemed unlikely that he would succeed in getting his proposed tax cuts enacted. The questionable nature of his installation in the White House seemed to leave him in a weak political position, while the Senate was evenly balanced between the parties. It was hard to see how a huge, controversial tax cut, which delivered most of its benefits to a wealthy elite, could get through Congress.

Then Alan Greenspan, the chairman of the Federal Reserve, testified before the Senate Budget Committee.

Until then Mr. Greenspan had presented himself as the voice of fiscal responsibility, warning the Clinton administration not to endanger its hard-won budget surpluses. But now Republicans held the White House, and the Greenspan who appeared before the Budget Committee was a very different man.

Suddenly, his greatest concern — the “emerging key fiscal policy need,” he told Congress — was to avert the threat that the federal government might actually pay off all its debt. To avoid this awful outcome, he advocated tax cuts. And the floodgates were opened.

As it turns out, Mr. Greenspan’s fears that the federal government would quickly pay off its debt were, shall we say, exaggerated. And Mr. Greenspan has just published a book in which he castigates the Bush administration for its fiscal irresponsibility.

Well, I’m sorry, but that criticism comes six years late and a trillion dollars short.

Mr. Greenspan now says that he didn’t mean to give the Bush tax cuts a green light, and that he was surprised at the political reaction to his remarks. There were, indeed, rumors at the time — which Mr. Greenspan now says were true — that the Fed chairman was upset about the response to his initial statement.

But the fact is that if Mr. Greenspan wasn’t intending to lend crucial support to the Bush tax cuts, he had ample opportunity to set the record straight when it could have made a difference.

His first big chance to clarify himself came a few weeks after that initial testimony, when he appeared before the Senate Committee on Banking, Housing and Urban Affairs.

Here’s what I wrote following that appearance: “Mr. Greenspan’s performance yesterday, in his first official testimony since he let the genie out of the bottle, was a profile in cowardice. Again and again he was offered the opportunity to say something that would help rein in runaway tax-cutting; each time he evaded the question, often replying by reading from his own previous testimony. He declared once again that he was speaking only for himself, thus granting himself leeway to pronounce on subjects far afield of his role as Federal Reserve chairman. But when pressed on the crucial question of whether the huge tax cuts that now seem inevitable are too large, he said it was inappropriate for him to comment on particular proposals.

“In short, Mr. Greenspan defined the rules of the game in a way that allows him to intervene as he likes in the political debate, but to retreat behind the veil of his office whenever anyone tries to hold him accountable for the results of those interventions.”

I received an irate phone call from Mr. Greenspan after that article, in which he demanded to know what he had said that was wrong. In his book, he claims that Robert Rubin, the former Treasury secretary, was stumped by that question. That’s hard to believe, because I certainly wasn’t: Mr. Greenspan’s argument for tax cuts was contorted and in places self-contradictory, not to mention based on budget projections that everyone knew, even then, were wildly overoptimistic.

If anyone had doubts about Mr. Greenspan’s determination not to inconvenience the Bush administration, those doubts were resolved two years later, when the administration proposed another round of tax cuts, even though the budget was now deep in deficit. And guess what? The former high priest of fiscal responsibility did not object.

And in 2004 he expressed support for making the Bush tax cuts permanent — remember, these are the tax cuts he now says he didn’t endorse — and argued that the budget should be balanced with cuts in entitlement spending, including Social Security benefits, instead. Of course, back in 2001 he specifically assured Congress that cutting taxes would not threaten Social Security.

In retrospect, Mr. Greenspan’s moral collapse in 2001 was a portent. It foreshadowed the way many people in the foreign policy community would put their critical faculties on hold and support the invasion of Iraq, despite ample evidence that it was a really bad idea.

And like enthusiastic war supporters who have started describing themselves as war critics now that the Iraq venture has gone wrong, Mr. Greenspan has started portraying himself as a critic of administration fiscal irresponsibility now that President Bush has become deeply unpopular and Democrats control Congress.

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A Surge, and Then a Stab

By PAUL KRUGMAN

Published: September 14, 2007

To understand what’s really happening in Iraq, follow the oil money, which already knows that the surge has failed.

Back in January, announcing his plan to send more troops to Iraq, President Bush declared that “America will hold the Iraqi government to the benchmarks it has announced.”

Near the top of his list was the promise that “to give every Iraqi citizen a stake in the country’s economy, Iraq will pass legislation to share oil revenues among all Iraqis.”

There was a reason he placed such importance on oil: oil is pretty much the only thing Iraq has going for it. Two-thirds of Iraq’s G.D.P. and almost all its government revenue come from the oil sector. Without an agreed system for sharing oil revenues, there is no Iraq, just a collection of armed gangs fighting for control of resources.

Well, the legislation Mr. Bush promised never materialized, and on Wednesday attempts to arrive at a compromise oil law collapsed.

What’s particularly revealing is the cause of the breakdown. Last month the provincial government in Kurdistan, defying the central government, passed its own oil law; last week a Kurdish Web site announced that the provincial government had signed a production-sharing deal with the Hunt Oil Company of Dallas, and that seems to have been the last straw.

Now here’s the thing: Ray L. Hunt, the chief executive and president of Hunt Oil, is a close political ally of Mr. Bush. More than that, Mr. Hunt is a member of the President’s Foreign Intelligence Advisory Board, a key oversight body.

Some commentators have expressed surprise at the fact that a businessman with very close ties to the White House is undermining U.S. policy. But that isn’t all that surprising, given this administration’s history. Remember, Halliburton was still signing business deals with Iran years after Mr. Bush declared Iran a member of the “axis of evil.”

No, what’s interesting about this deal is the fact that Mr. Hunt, thanks to his policy position, is presumably as well-informed about the actual state of affairs in Iraq as anyone in the business world can be. By putting his money into a deal with the Kurds, despite Baghdad’s disapproval, he’s essentially betting that the Iraqi government — which hasn’t met a single one of the major benchmarks Mr. Bush laid out in January — won’t get its act together. Indeed, he’s effectively betting against the survival of Iraq as a nation in any meaningful sense of the term.

The smart money, then, knows that the surge has failed, that the war is lost, and that Iraq is going the way of Yugoslavia. And I suspect that most people in the Bush administration — maybe even Mr. Bush himself — know this, too.

After all, if the administration had any real hope of retrieving the situation in Iraq, officials would be making an all-out effort to get the government of Prime Minister Nuri Kamal al-Maliki to start delivering on some of those benchmarks, perhaps using the threat that Congress would cut off funds otherwise. Instead, the Bushies are making excuses, minimizing Iraqi failures, moving goal posts and, in general, giving the Maliki government no incentive to do anything differently.

And for that matter, if the administration had any real intention of turning public opinion around, as opposed to merely shoring up the base enough to keep Republican members of Congress on board, it would have sent Gen. David Petraeus, the top military commander in Iraq, to as many news media outlets as possible — not granted an exclusive appearance to Fox News on Monday night.

All in all, Mr. Bush’s actions have not been those of a leader seriously trying to win a war. They have, however, been what you’d expect from a man whose plan is to keep up appearances for the next 16 months, never mind the cost in lives and money, then shift the blame for failure onto his successor.

In fact, that’s my interpretation of something that startled many people: Mr. Bush’s decision last month, after spending years denying that the Iraq war had anything in common with Vietnam, to suddenly embrace the parallel.

Here’s how I see it: At this point, Mr. Bush is looking forward to replaying the political aftermath of Vietnam, in which the right wing eventually achieved a rewriting of history that would have made George Orwell proud, convincing millions of Americans that our soldiers had victory in their grasp but were stabbed in the back by the peaceniks back home.

What all this means is that the next president, even as he or she tries to extricate us from Iraq — and prevent the country’s breakup from turning into a regional war — will have to deal with constant sniping from the people who lied us into an unnecessary war, then lost the war they started, but will never, ever, take responsibility for their failures.

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Where’s My Trickle?

By PAUL KRUGMAN

Published: September 10, 2007

Four years ago the Bush administration, exploiting the political bounce it got from the illusion of success in Iraq, pushed a cut in capital-gains and dividend taxes through Congress. It was an extremely elitist tax cut even by Bush-era standards: the nonpartisan Tax Policy Center says that more than half of the tax breaks went to Americans with incomes of more than $1 million a year.

Needless to say, administration economists produced various misleading statistics designed to convey the opposite impression, that the tax cut mainly went to ordinary, middle-class Americans. But they also insisted that the benefits of the tax cut would trickle down — that lower tax rates on the rich would do great things for the economy, helping everyone.

Well, Friday’s dismal jobs report showed that the Bush boom, such as it was, has run its course. And working Americans have a right to ask, “Where’s my trickle?”

It’s true, as the Bushies never tire of reminding us, that the U.S. economy has added eight million jobs since that 2003 tax cut. That sounds impressive, unless you happen to know that a good part of that gain was simply a recovery from large job losses earlier in the administration’s tenure — and that the United States added no fewer than 21 million jobs after Bill Clinton raised taxes on the rich, a move that had conservative pundits predicting economic disaster.

What’s really remarkable, however, is that four years of economic growth have produced essentially no gains for ordinary American workers.

Wages, adjusted for inflation, have stagnated: the real hourly earnings of nonsupervisory workers, the most widely used measure of how typical workers are faring, were no higher in July 2007 than they were in July 2003.

Meanwhile, benefits have deteriorated: the percentage of Americans receiving health insurance through employers, which plunged along with employment during the early years of the Bush administration, continued to decline even as the economy finally began creating some jobs.

And one of the few seeming bright spots of the Bush-era economy, rising homeownership, is now revealed as the result of a bubble inflated in part by financial flim-flam, which deceived both borrowers and investors.

Now you know why 66 percent of Americans rate economic conditions in this country as only fair or poor, and why Americans disapprove of President Bush’s handling of the economy almost as strongly as they disapprove of the job he is doing in general.

Yet the overall economy has grown at a reasonable pace over the past four years. Where did the economic growth go? The answer is that it went to the same economic elite that received the lion’s share of those tax cuts. Corporate profits rose 72 percent from the second quarter of 2003 to the second quarter of 2007. The real income of the richest 0.1 percent of Americans surged by 51 percent between 2003 and 2005, and although we don’t yet have the data for 2006, everything we know suggests that the income of the rich took another upward leap.

The absence of any gains for workers in the years since the 2003 tax cut is a pretty convincing refutation of trickle-down theory. So is the fact that the economy had a much more convincing boom after Bill Clinton raised taxes on top brackets. It turns out that when you cut taxes on the rich, the rich pay less taxes; when you raise taxes on the rich, they pay more taxes — end of story.

But it’s not just trickle-down that has been refuted: the whole idea that a rising tide raises all boats, that growth in the economy necessarily translates into gains for the great majority of Americans, is belied by the Bush-era experience.

As far as I can tell, America has never before experienced a disconnect between overall economic performance and the fortunes of workers as complete as that of the last four years.

America was a highly unequal society during the Gilded Age, but workers’ living standards nonetheless improved as the economy grew. Inequality rose rapidly during the Reagan years, but “Morning in America” was nonetheless bright enough to make most people cheerful, at least temporarily. Inequality continued to increase during the Clinton years, but wages rose, as did the availability of health insurance — and the great majority of Americans felt prosperous.

What we’ve had since 2003, however, is an economic expansion that looks good if not great by the usual measures, but which has passed most Americans by.

Guaranteed health insurance, which all of the leading Democratic contenders (but none of the Republicans) are promising, would eliminate one of the reasons for this disconnect. But it should be only the start of a broader range of policies — a new New Deal — designed to turn economic growth into something more than a spectator sport.

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Time to Take a Stand

By PAUL KRUGMAN

Published: September 7, 2007

Here’s what will definitely happen when Gen. David Petraeus testifies before Congress next week: he’ll assert that the surge has reduced violence in Iraq — as long as you don’t count Sunnis killed by Sunnis, Shiites killed by Shiites, Iraqis killed by car bombs and people shot in the front of the head.

Here’s what I’m afraid will happen: Democrats will look at Gen. Petraeus’s uniform and medals and fall into their usual cringe. They won’t ask hard questions out of fear that someone might accuse them of attacking the military. After the testimony, they’ll desperately try to get Republicans to agree to a resolution that politely asks President Bush to maybe, possibly, withdraw some troops, if he feels like it.

There are five things I hope Democrats in Congress will remember.

First, no independent assessment has concluded that violence in Iraq is down. On the contrary, estimates based on morgue, hospital and police records suggest that the daily number of civilian deaths is almost twice its average pace from last year. And a recent assessment by the nonpartisan Government Accountability Office found no decline in the average number of daily attacks.

So how can the military be claiming otherwise? Apparently, the Pentagon has a double super secret formula that it uses to distinguish sectarian killings (bad) from other deaths (not important); according to press reports, all deaths from car bombs are excluded, and one intelligence analyst told The Washington Post that “if a bullet went through the back of the head, it’s sectarian. If it went through the front, it’s criminal.” So the number of dead is down, as long as you only count certain kinds of dead people.

Oh, and by the way: Baghdad is undergoing ethnic cleansing, with Shiite militias driving Sunnis out of much of the city. And guess what? When a Sunni enclave is eliminated and the death toll in that district falls because there’s nobody left to kill, that counts as progress by the Pentagon’s metric.

Second, Gen. Petraeus has a history of making wildly overoptimistic assessments of progress in Iraq that happen to be convenient for his political masters.

I’ve written before about the op-ed article Gen. Petraeus published six weeks before the 2004 election, claiming “tangible progress” in Iraq. Specifically, he declared that “Iraqi security elements are being rebuilt,” that “Iraqi leaders are stepping forward” and that “there has been progress in the effort to enable Iraqis to shoulder more of the load for their own security.” A year later, he declared that “there has been enormous progress with the Iraqi security forces.”

But now two more years have passed, and the independent commission of retired military officers appointed by Congress to assess Iraqi security forces has recommended that the national police force, which is riddled with corruption and sectarian influence, be disbanded, while Iraqi military forces “will be unable to fulfill their essential security responsibilities independently over the next 12-18 months.”

Third, any plan that depends on the White House recognizing reality is an idle fantasy. According to The Sydney Morning Herald, on Tuesday Mr. Bush told Australia’s deputy prime minister that “we’re kicking ass” in Iraq. Enough said.

Fourth, the lesson of the past six years is that Republicans will accuse Democrats of being unpatriotic no matter what the Democrats do. Democrats gave Mr. Bush everything he wanted in 2002; their reward was an ad attacking Max Cleland, who lost both legs and an arm in Vietnam, that featured images of Osama bin Laden and Saddam Hussein.

Finally, the public hates this war and wants to see it ended. Voters are exasperated with the Democrats, not because they think Congressional leaders are too liberal, but because they don’t see Congress doing anything to stop the war.

In light of all this, you have to wonder what Democrats, who according to The New York Times are considering a compromise that sets a “goal” for withdrawal rather than a timetable, are thinking. All such a compromise would accomplish would be to give Republicans who like to sound moderate — but who always vote with the Bush administration when it matters — political cover.

And six or seven months from now it will be the same thing all over again. Mr. Bush will stage another photo op at Camp Cupcake, the Marine nickname for the giant air base he never left on his recent visit to Iraq. The administration will move the goal posts again, and the military will come up with new ways to cook the books and claim success.

One thing is for sure: like 2004, 2008 will be a “khaki election” in which Republicans insist that a vote for the Democrats is a vote against the troops. The only question is whether they can also, once again, claim that the Democrats are flip-floppers who can’t make up their minds.

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Snow Job in the Desert

By PAUL KRUGMAN

Published: September 3, 2007

In February 2003, Secretary of State Colin Powell, addressing the United Nations Security Council, claimed to have proof that Saddam Hussein had weapons of mass destruction. He did not, in fact, present any actual evidence, just pictures of buildings with big arrows pointing at them saying things like “Chemical Munitions Bunker.” But many people in the political and media establishments swooned: they admired Mr. Powell, and because he said it, they believed it.

Mr. Powell’s masters got the war they wanted, and it soon became apparent that none of his assertions had been true.

Until recently I assumed that the failure to find W.M.D., followed by years of false claims of progress in Iraq, would make a repeat of the snow job that sold the war impossible. But I was wrong. The administration, this time relying on Gen. David Petraeus to play the Colin Powell role, has had remarkable success creating the perception that the “surge” is succeeding, even though there’s not a shred of verifiable evidence to suggest that it is.

Thus Kenneth Pollack of the Brookings Institution — the author of “The Threatening Storm: The Case for Invading Iraq” — and his colleague Michael O’Hanlon, another longtime war booster, returned from a Pentagon-guided tour of Iraq and declared that the surge was working. They received enormous media coverage; most of that coverage accepted their ludicrous self-description as critics of the war who have been convinced by new evidence.

A third participant in the same tour, Anthony Cordesman of the Center for Strategic and International Studies, reported that unlike his traveling companions, he saw little change in the Iraq situation and “did not see success for the strategy that President Bush announced in January.” But neither his dissent nor a courageous rebuttal of Mr. O’Hanlon and Mr. Pollack by seven soldiers actually serving in Iraq, published in The New York Times, received much media attention.

Meanwhile, many news organizations have come out with misleading reports suggesting a sharp drop in U.S. casualties. The reality is that this year, as in previous years, there have been month-to-month fluctuations that tell us little: for example, July 2006 was a low-casualty month, with only 43 U.S. military fatalities, but it was also a month in which the Iraqi situation continued to deteriorate. And so far, every month of 2007 has seen more U.S. military fatalities than the same month in 2006.

What about civilian casualties? The Pentagon says they’re down, but it has neither released its numbers nor explained how they’re calculated. According to a draft report from the Government Accountability Office, which was leaked to the press because officials were afraid the office would be pressured into changing the report’s conclusions, U.S. government agencies “differ” on whether sectarian violence has been reduced. And independent attempts by news agencies to estimate civilian deaths from news reports, hospital records and other sources have not found any significant decline.

Now, there are parts of Baghdad where civilian deaths probably have fallen — but that’s not necessarily good news. “Some military officers,” reports Leila Fadel of McClatchy, “believe that it may be an indication that ethnic cleansing has been completed in many neighborhoods and that there aren’t as many people to kill.”

Above all, we should remember that the whole point of the surge was to create space for political progress in Iraq. And neither that leaked G.A.O. report nor the recent National Intelligence Estimate found any political progress worth mentioning. There has been no hint of sectarian reconciliation, and the Iraqi government, according to yet another leaked U.S. government report, is completely riddled with corruption.

But, say the usual suspects, General Petraeus is a fine, upstanding officer who wouldn’t participate in a campaign of deception — apparently forgetting that they said the same thing about Mr. Powell.

First of all, General Petraeus is now identified with the surge; if it fails, he fails. He has every incentive to find a way to keep it going, in the hope that somehow he can pull off something he can call success.

And General Petraeus’s history also suggests that he is much more of a political, and indeed partisan, animal than his press would have you believe. In particular, six weeks before the 2004 presidential election, General Petraeus published an op-ed article in The Washington Post in which he claimed — wrongly, of course — that there had been “tangible progress” in Iraq, and that “momentum has gathered in recent months.”

Is it normal for serving military officers to publish articles just before an election that clearly help an incumbent’s campaign? I don’t think so.

So here we go again. It appears that many influential people in this country have learned nothing from the last five years. And those who cannot learn from history are, indeed, doomed to repeat it.

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Katrina All the Time

By PAUL KRUGMAN

Published: August 31, 2007

Two years ago today, Americans watched in horror as a great city drowned, and wondered what had happened to their country. Where was FEMA? Where was the National Guard? Why wasn’t the government of the world’s richest, most powerful nation coming to the aid of its own citizens?

What we mostly saw on TV was the nightmarish scene at the Superdome, but things were even worse at the New Orleans convention center, where thousands were stranded without food or water. The levees were breached Monday morning — but as late as Thursday evening, The Washington Post reported, the convention center “still had no visible government presence,” while “corpses lay out in the open among wailing babies and other refugees.”

Meanwhile, federal officials were oblivious. “We are extremely pleased with the response that every element of the federal government, all of our federal partners, have made to this terrible tragedy,” declared Michael Chertoff, the secretary for Homeland Security, on Wednesday. When asked the next day about the situation at the convention center, he dismissed the reports as “a rumor” or “someone’s anecdotal version.”

Today, much of the Gulf Coast remains in ruins. Less than half the federal money set aside for rebuilding, as opposed to emergency relief, has actually been spent, in part because the Bush administration refused to waive the requirement that local governments put up matching funds for recovery projects — an impossible burden for communities whose tax bases have literally been washed away.

On the other hand, generous investment tax breaks, supposedly designed to spur recovery in the disaster area, have been used to build luxury condominiums near the University of Alabama’s football stadium in Tuscaloosa, 200 miles inland.

But why should we be surprised by any of this? The Bush administration’s response to Hurricane Katrina — the mixture of neglect of those in need, obliviousness to their plight, and self-congratulation in the face of abject failure — has become standard operating procedure. These days, it’s Katrina all the time.

Consider the White House reaction to new Census data on income, poverty and health insurance. By any normal standard, this week’s report was a devastating indictment of the administration’s policies. After all, last year the administration insisted that the economy was booming — and whined that it wasn’t getting enough credit. What the data show, however, is that 2006, while a good year for the wealthy, brought only a slight decline in the poverty rate and a modest rise in median income, with most Americans still considerably worse off than they were before President Bush took office.

Most disturbing of all, the number of Americans without health insurance jumped. At this point, there are 47 million uninsured people in this country, 8.5 million more than there were in 2000. Mr. Bush may think that being uninsured is no big deal — “you just go to an emergency room” — but the reality is that if you’re uninsured every illness is a catastrophe, your own private Katrina.

Yet the White House press release on the report declared that President Bush was “pleased” with the new numbers. Heckuva job, economy!

Mr. Bush’s only concession that something might be amiss was to say that “challenges remain in reducing the number of uninsured Americans” — a statement reminiscent of Emperor Hirohito’s famous admission, in his surrender broadcast, that “the war situation has developed not necessarily to Japan’s advantage.” And Mr. Bush’s solution — more tax cuts, of course — has about as much relevance to the real needs of the uninsured as subsidies for luxury condos in Tuscaloosa have to the needs of New Orleans’s Ninth Ward.

The question is whether any of this will change when Mr. Bush leaves office.

There’s a powerful political faction in this country that’s determined to draw exactly the wrong lesson from the Katrina debacle — namely, that the government always fails when it attempts to help people in need, so it shouldn’t even try. “I don’t want the people who ran the Katrina cleanup to manage our health care system,” says Mitt Romney, as if the Bush administration’s practice of appointing incompetent cronies to key positions and refusing to hold them accountable no matter how badly they perform — did I mention that Mr. Chertoff still has his job? — were the way government always works.

And I’m not sure that faction is losing the argument. The thing about conservative governance is that it can succeed by failing: when conservative politicians mess up, they foster a cynicism about government that may actually help their cause.

Future historians will, without doubt, see Katrina as a turning point. The question is whether it will be seen as the moment when America remembered the importance of good government, or the moment when neglect and obliviousness to the needs of others became the new American way.

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A Socialist Plot

By PAUL KRUGMAN

Published: August 27, 2007

Suppose, for a moment, that the Heritage Foundation were to put out a press release attacking the liberal view that even children whose parents could afford to send them to private school should be entitled to free government-run education.

They’d have a point: many American families with middle-class incomes do send their kids to school at public expense, so taxpayers without school-age children subsidize families that do. And the effect is to displace the private sector: if public schools weren’t available, many families would pay for private schools instead.

So let’s end this un-American system and make education what it should be — a matter of individual responsibility and private enterprise. Oh, and we shouldn’t have any government mandates that force children to get educated, either. As a Republican presidential candidate might say, the future of America’s education system lies in free-market solutions, not socialist models.

O.K., in case you’re wondering, I haven’t lost my mind, I’m drawing an analogy. The real Heritage press release, titled “The Middle-Class Welfare Kid Next Door,” is an attack on proposals to expand the State Children’s Health Insurance Program. Such an expansion, says Heritage, will “displace private insurance with government-sponsored health care coverage.”

And Rudy Giuliani’s call for “free-market solutions, not socialist models” was about health care, not education.

But thinking about how we’d react if they said the same things about education helps dispel the fog of obfuscation right-wingers use to obscure the true nature of their position on children’s health.

The truth is that there’s no difference in principle between saying that every American child is entitled to an education and saying that every American child is entitled to adequate health care. It’s just a matter of historical accident that we think of access to free K-12 education as a basic right, but consider having the government pay children’s medical bills “welfare,“ with all the negative connotations that go with that term.

And conservative opposition to giving every child in this country access to health care is, in a fundamental sense, un-American.

Here’s what I mean: The great majority of Americans believe that everyone is entitled to a chance to make the most of his or her life. Even conservatives usually claim to believe that. For example, N. Gregory Mankiw, the former chairman of the Bush Council of Economic Advisers, contrasts the position of liberals, who he says believe in equality of outcomes, with that of conservatives, who he says believe that the goal of policy should be “to give everyone the same shot and not be surprised or concerned when outcomes differ wildly.”

But a child who doesn’t receive adequate health care, like a child who doesn’t receive an adequate education, doesn’t have the same shot — he or she doesn’t have the same chances in life as children who get both these things.

And insurance is crucial to receiving adequate health care. President Bush may think that lacking insurance is no problem — “I mean, people have access to health care in America. After all, you just go to an emergency room” — but the reality is that the nine million children in America who don’t have health insurance often have unmet medical or dental needs, don’t have a regular place for medical care, and frequently have to delay care because of cost.

Now, the public understands the importance of health insurance, even if Mr. Bush doesn’t. According to a recent New York Times/CBS News poll, an amazing 94 percent of the public regards the fact that many children in America lack health insurance as either a “serious” or a “very serious” problem.

So how can conservatives defend the indefensible, and oppose giving children the health care they need? By trying the old welfare queen in her Cadillac strategy (albeit without the racial innuendo that made it so effective when Reagan used it). That is, to divert public sympathy from people who really need help, they’re trying to change the subject to the supposedly undeserving recipients of government aid. Hence the emphasis on the evils of “middle-class welfare.”

Proponents of an expansion of children’s health care have, as they should, responded to this strategy with facts and figures. Congressional Budget Office estimates show that S-chip expansion would, in fact, primarily benefit those who need it most: the great majority of children receiving coverage under an expanded program would otherwise have been uninsured.

But the more fundamental response should be, so what?

We offer free education, and don’t worry about middle-class families getting benefits they don’t need, because that’s the only way to ensure that every child gets an education — and giving every child a fair chance is the American way. And we should guarantee health care to every child, for the same reason.

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Seeking Willie Horton

By PAUL KRUGMAN

Published: August 24, 2007

So now Mitt Romney is trying to Willie Hortonize Rudy Giuliani. And thereby hangs a tale — the tale, in fact, of American politics past and future, and the ultimate reason Karl Rove’s vision of a permanent Republican majority was a foolish fantasy.

Willie Horton, for those who don’t remember the 1988 election, was a convict from Massachusetts who committed armed robbery and rape after being released from prison on a weekend furlough program. He was made famous by an attack ad, featuring a menacing mugshot, that played into racial fears. Many believe that the ad played an important role in George H.W. Bush’s victory over Michael Dukakis.

Now some Republicans are trying to make similar use of the recent murder of three college students in Newark, a crime in which two of the suspects are Hispanic illegal immigrants. Tom Tancredo flew into Newark to accuse the city’s leaders of inviting the crime by failing to enforce immigration laws, while Newt Gingrich declared that the “war here at home” against illegal immigrants is “even more deadly than the war in Iraq and Afghanistan.”

And Mr. Romney, who pretends to be whatever he thinks the G.O.P. base wants him to be, is running a radio ad denouncing New York as a “sanctuary city” for illegal immigrants, an implicit attack on Mr. Giuliani.

Strangely, nobody seems to be trying to make a national political issue out of other horrifying crimes, like the Connecticut home invasion in which two paroled convicts, both white, are accused of killing a mother and her two daughters. Oh, and by the way: over all, Hispanic immigrants appear to commit relatively few crimes — in fact, their incarceration rate is actually lower than that of native-born non-Hispanic whites.

To appreciate what’s going on here you need to understand the difference between the goals of the modern Republican Party and the strategy it uses to win elections.

The people who run the G.O.P. are concerned, above all, with making America safe for the rich. Their ultimate goal, as Grover Norquist once put it, is to get America back to the way it was “up until Teddy Roosevelt, when the socialists took over,” getting rid of “the income tax, the death tax, regulation, all that.”

But right-wing economic ideology has never been a vote-winner. Instead, the party’s electoral strategy has depended largely on exploiting racial fear and animosity.

Ronald Reagan didn’t become governor of California by preaching the wonders of free enterprise; he did it by attacking the state’s fair housing law, denouncing welfare cheats and associating liberals with urban riots. Reagan didn’t begin his 1980 campaign with a speech on supply-side economics, he began it — at the urging of a young Trent Lott — with a speech supporting states’ rights delivered just outside Philadelphia, Miss., where three civil rights workers were murdered in 1964.

And if you look at the political successes of the G.O.P. since it was taken over by movement conservatives, they had very little to do with public opposition to taxes, moral values, perceived strength on national security, or any of the other explanations usually offered. To an almost embarrassing extent, they all come down to just five words: southern whites starting voting Republican.

In fact, I suspect that the underlying importance of race to the Republican base is the reason Rudy Giuliani remains the front-runner for the G.O.P. nomination, despite his serial adultery and his past record as a social liberal. Never mind moral values: what really matters to the base is that Mr. Giuliani comes across as an authoritarian, willing in particular to crack down on you-know-who.

But Republicans have a problem: demographic changes are making their race-based electoral strategy decreasingly effective. Quite simply, America is becoming less white, mainly because of immigration. Hispanic and Asian voters were only 4 percent of the electorate in 1980, but they were 11 percent of voters in 2004 — and that number will keep rising for the foreseeable future.

Those numbers are the reason Karl Rove was so eager to reach out to Hispanic voters. But the whites the G.O.P. has counted on to vote their color, not their economic interests, are having none of it. From their point of view, it’s us versus them — and everyone who looks different is one of them.

So now we have the spectacle of Republicans competing over who can be most convincingly anti-Hispanic. I know, officially they’re not hostile to Hispanics in general, only to illegal immigrants, but that’s a distinction neither the G.O.P. base nor Hispanic voters takes seriously.

Today’s G.O.P., in short, is trapped by its history of cynicism. For decades it has exploited racial animosity to win over white voters — and now, when Republican politicians need to reach out to an increasingly diverse country, the base won’t let them.

David Brooks is off today.

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It’s a Miserable Life

By PAUL KRUGMAN

Published: August 20, 2007

Last week the scene at branches of Countrywide Bank, with crowds of agitated depositors trying to withdraw their money, looked a bit like the bank run in the classic holiday movie “It’s a Wonderful Life.”

As it happens, Countrywide’s customers were overreacting. True, the bank is owned by Countrywide Financial, the nation’s largest mortgage lender — and mortgage lenders are in big trouble these days. But bank deposits up to $100,000 are protected by the Federal Deposit Insurance Corporation. Old-fashioned bank runs just don’t make sense these days.

New-fashioned bank runs, on the other hand, do make sense — and they’re at the heart of the current financial crisis.

The key to understanding what’s happening is taking a broad view of what constitutes a bank. From an economic perspective, a bank is any institution that offers people liquidity — the ability to convert their assets into cash on short notice — while still using their money to make long-term investments.

Traditional banks promise depositors the right to withdraw their funds at any time. Yet banks lend out most of the money depositors place in their care, keeping only a fraction in cash. The reason this works is that normally a bank’s depositors want to withdraw only a small proportion of their money on any given day.

Banks get in trouble, however, when some event, like a rumor that major loans have gone bad, leads many depositors to demand their money at the same time.

The scary thing about bank runs is that doubts about a bank’s soundness can be a self-fulfilling prophecy: a bank that should be safely in the black can nonetheless fail if it’s forced to sell assets in a hurry. And bank failures can have devastating economic effects. Many economists believe that the banking panic of the early 1930s, not the stock market crash of 1929, was the principal cause of the Great Depression.

That’s why bank deposits are now protected by a combination of guarantees and regulation. On one side, deposits are federally insured, and the Federal Reserve stands ready to rush cash to troubled banks if necessary. On the other side, banks are required to keep adequate reserves, have adequate capital and make conservative loans.

But these guarantees and regulations apply only to traditional banks. Meanwhile, a growing number of unregulated bank-like institutions have become vulnerable to the 21st-century version of bank runs.

Consider the case of KKR Financial Holdings, an affiliate of Kohlberg Kravis Roberts, a powerhouse Wall Street operator. KKR Financial raises money by issuing asset-backed commercial paper — a claim that’s sort of like a short-term C.D., used by large investors to temporarily park funds — and invests most of this money in longer-term assets. So the company is acting as a kind of bank, one that offers a higher interest rate than ordinary banks pay their clients.

It sounds like a great deal — except that last week KKR Financial announced that it was seeking to delay $5 billion in repayments. That’s the equivalent of a bank closing its doors because it’s running out of cash.

The problems at KKR Financial are part of a broader picture in which many investors, spooked by the problems in the mortgage market, have been pulling their money out of institutions that use short-term borrowing to finance long-term investments. These institutions aren’t called banks, but in economic terms what’s been happening amounts to a burgeoning banking panic.

On Friday, the Federal Reserve tried to quell this panic by announcing a surprise cut in the discount rate, the rate at which it lends money to banks. It remains to be seen whether the move will do the trick.

The problem, as many observers have noticed, is that the Fed’s move is largely symbolic. It makes more funds available to depository institutions, a k a old-fashioned banks — but old-fashioned banks aren’t where the crisis is centered. And the Fed doesn’t have any clear way to deal with bank runs on institutions that aren’t called banks.

Now, sometimes symbolic gestures are enough. The Fed’s surprise quarter-point interest rate cut in October 1998, at the height of the crisis caused by the implosion of the hedge fund Long-Term Capital Management, was similarly a case of providing money where it wasn’t needed. Yet it helped restore calm to the markets, by conveying the sense that policy makers were on top of the situation.

Friday’s cut might do the same thing. But if it doesn’t, it’s not clear what comes next.

Whatever happens now, it’s hard to avoid the sense that the growing complexity of our financial system is making it increasingly prone to crises — crises that are beyond the ability of traditional policies to handle. Maybe we’ll make it through this crisis unscathed. But what about the next one, or the one after that?

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Workouts, Not Bailouts

By PAUL KRUGMAN

Published: August 17, 2007

In April, Henry Paulson, the Treasury secretary, declared that all the signs he saw indicated that the housing market was “at or near the bottom.” Earlier this month he was still insisting that problems caused by the meltdown in the market for subprime mortgages were “largely contained.”

But the time for denial is past.

According to data released yesterday, both housing starts and applications for building permits have fallen to their lowest levels in a decade, showing that home construction is still in free fall. And if historical relationships are any guide, home prices are still way too high. The housing slump will probably be with us for years, not months.

Meanwhile, it’s becoming clear that the mortgage problem is anything but contained. For one thing, it’s not confined to subprime mortgages, which are loans to people who don’t satisfy the standard financial criteria. There are also growing problems in so-called Alt-A mortgages (don’t ask), which are another 20 percent of the mortgage market. Problems are starting to appear in prime loans, too — all of which is what you would expect given the depth of the housing slump.

Many on Wall Street are clamoring for a bailout — for Fannie Mae or the Federal Reserve or someone to step in and buy mortgage-backed securities from troubled hedge funds. But that would be like having the taxpayers bail out Enron or WorldCom when they went bust — it would be saving bad actors from the consequences of their misdeeds.

For it is becoming increasingly clear that the real-estate bubble of recent years, like the stock bubble of the late 1990s, both caused and was fed by widespread malfeasance. Rating agencies like Moody’s Investors Service, which get paid a lot of money for rating mortgage-backed securities, seem to have played a similar role to that played by complaisant accountants in the corporate scandals of a few years ago. In the ’90s, accountants certified dubious earning statements; in this decade, rating agencies declared dubious mortgage-backed securities to be highest-quality, AAA assets.

Yet our desire to avoid letting bad actors off the hook shouldn’t prevent us from doing the right thing, both morally and in economic terms, for borrowers who were victims of the bubble.

Most of the proposals I’ve seen for dealing with the problems of subprime borrowers are of the locking-the-barn-door-after-the-horse-is-gone variety: they would curb abusive lending practices — which would have been very useful three years ago — but they wouldn’t help much now. What we need at this point is a policy to deal with the consequences of the housing bust.

Consider a borrower who can’t meet his or her mortgage payments and is facing foreclosure. In the past, as Gretchen Morgenson recently pointed out in The Times, the bank that made the loan would often have been willing to offer a workout, modifying the loan’s terms to make it affordable, because what the borrower was able to pay would be worth more to the bank than its incurring the costs of foreclosure and trying to resell the home. That would have been especially likely in the face of a depressed housing market.

Today, however, the mortgage broker who made the loan is usually, as Ms. Morgenson says, “the first link in a financial merry-go-round.” The mortgage was bundled with others and sold to investment banks, who in turn sliced and diced the claims to produce artificial assets that Moody’s or Standard & Poor’s were willing to classify as AAA. And the result is that there’s nobody to deal with.

This looks to me like a clear case for government intervention: there’s a serious market failure, and fixing that failure could greatly help thousands, maybe hundreds of thousands, of Americans. The federal government shouldn’t be providing bailouts, but it should be helping to arrange workouts.

And we’ve done this sort of thing before — for third-world countries, not for U.S. citizens. The Latin American debt crisis of the 1980s was brought to an end by so-called Brady deals, in which creditors were corralled into reducing the countries’ debt burdens to manageable levels. Both the debtors, who escaped the shadow of default, and the creditors, who got most of their money, benefited.

The mechanics of a domestic version would need a lot of work, from lawyers as well as financial experts. My guess is that it would involve federal agencies buying mortgages — not the securities conjured up from these mortgages, but the original loans — at a steep discount, then renegotiating the terms. But I’m happy to listen to better ideas.

The point, however, is that doing nothing isn’t the only alternative to letting the parties who got us into this mess off the hook. Say no to bailouts — but let’s help borrowers work things out.

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It’s All About Them

By PAUL KRUGMAN

Published: August 13, 2007

Ask not what your country can do for you — ask what you can do for your father’s political campaign.

Last week, at one of Mitt Romney’s “Ask Mitt” forums, a woman in the audience asked Mr. Romney whether any of his five sons are serving in the military and, if not, when they plan to enlist.

The candidate replied with a rambling attempt to change the subject, but near the end he let his real feelings slip. “It’s remarkable how we can show our support for our nation,” he said, “and one of the ways my sons are showing support for our nation is helping to get me elected, because they think I’d be a great president.”

Wow. The important point isn’t the fact that Mr. Romney’s sons aren’t in uniform — although it is striking just how few of those who claim to believe that we’re engaged in a struggle for our very existence think that they themselves should be called on to make any sacrifices. The point is, instead, that Mr. Romney apparently considers helping him get elected an act of service comparable to putting your life on the line in Iraq.

Yet the week’s prize for most self-centered remark by a serious presidential contender goes not to Mr. Romney, but to his principal rival for the G.O.P. nomination.

Rudy Giuliani has lately been getting some long-overdue criticism for his missteps both before and after 9/11. For example, The Village Voice reports that he insisted that the city’s emergency command center — which included a personal suite with its own elevator that he visited “often, even on weekends, bringing his girlfriend Judi Nathan there long before the relationship surfaced” — be within walking distance of City Hall. This led to the disastrous decision to locate the center in the World Trade Center, an obvious potential terrorist target.

At the same time, Mr. Giuliani is being attacked for his failure to take adequate precautions to protect those who worked on the cleanup at ground zero from the hazards at the site. Many workers have since been sickened by the dust and toxic materials.

For a politician whose entire campaign is based on the myth of his leadership that fateful day — as The Onion put it, Mr. Giuliani is running for “president of 9/11” — anything that challenges his personal legend is a big problem. So here’s what Mr. Giuliani said last week in response: “I was at ground zero as often, if not more, than most of the workers. ... I was exposed to exactly the same things they were exposed to. So in that sense, I’m one of them.”

Real ground zero workers, who were digging through the toxic rubble while Mr. Giuliani held photo ops, were understandably outraged. So the next day Mr. Giuliani tried to recover, claiming that “what I was trying to say yesterday is that I empathize with them because I feel like I have that same risk.” But thanks to the wonders of YouTube, we can all watch Mr. Giuliani’s actual demeanor as he delivered the original remarks. Empathy had nothing to do with it.

What’s striking about these unintentional moments of self-revelation is how much Mr. Romney and Mr. Giuliani sound like the current occupant of the White House.

It has long been clear that President Bush doesn’t feel other people’s pain. His self-centeredness shines through whenever he makes off-the-cuff, unscripted remarks, from his jocular obliviousness in the aftermath of Hurricane Katrina to the joke he made last year in San Antonio when visiting the Brooke Army Medical Center, which treats the severely wounded: “As you can possibly see, I have an injury myself — not here at the hospital, but in combat with a cedar. I eventually won. The cedar gave me a little scratch.”

What’s now clear is that the two men most likely to end up as the G.O.P. presidential nominee are cut from the same cloth.

This probably isn’t a coincidence. Arguably, the current state of the Republican Party is such that only extreme narcissists have a chance of getting nominated.

To be a serious presidential contender, after all, you have to be a fairly smart guy — and nobody has accused either Mr. Romney or Mr. Giuliani of being stupid. To appeal to the G.O.P. base, however, you have to say very stupid things, like Mr. Romney’s declaration that we should “double Guantánamo,” or Mr. Giuliani’s dismissal of the idea that raising taxes is sometimes necessary to pay for things like repairing bridges as a “Democratic, liberal assumption.”

So the G.O.P. field is dominated by smart men willing to play dumb to further their personal ambitions. We shouldn’t be surprised, then, to learn that these men are monstrously self-centered.

All of which leaves us with a political question. Most voters are thoroughly fed up with the current narcissist in chief. Are they really ready to elect another?

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Very Scary Things

By PAUL KRUGMAN

Published: August 10, 2007

In September 1998, the collapse of Long Term Capital Management, a giant hedge fund, led to a meltdown in the financial markets similar, in some ways, to what’s happening now. During the crisis in ’98, I attended a closed-door briefing given by a senior Federal Reserve official, who laid out the grim state of the markets. “What can we do about it?” asked one participant. “Pray,” replied the Fed official.

Our prayers were answered. The Fed coordinated a rescue for L.T.C.M., while Robert Rubin, the Treasury secretary at the time, and Alan Greenspan, who was the Fed chairman, assured investors that everything would be all right. And the panic subsided.

Yesterday, President Bush, showing off his M.B.A. vocabulary, similarly tried to reassure the markets. But Mr. Bush is, let’s say, a bit lacking in credibility. On the other hand, it’s not clear that anyone could do the trick: right now we’re suffering from a serious shortage of saviors. And that’s too bad, because we might need one.

What’s been happening in financial markets over the past few days is something that truly scares monetary economists: liquidity has dried up. That is, markets in stuff that is normally traded all the time — in particular, financial instruments backed by home mortgages — have shut down because there are no buyers.

This could turn out to be nothing more than a brief scare. At worst, however, it could cause a chain reaction of debt defaults.

The origins of the current crunch lie in the financial follies of the last few years, which in retrospect were as irrational as the dot-com mania. The housing bubble was only part of it; across the board, people began acting as if risk had disappeared.

Everyone knows now about the explosion in subprime loans, which allowed people without the usual financial qualifications to buy houses, and the eagerness with which investors bought securities backed by these loans. But investors also snapped up high-yield corporate debt, a k a junk bonds, driving the spread between junk bond yields and U.S. Treasuries down to record lows.

Then reality hit — not all at once, but in a series of blows. First, the housing bubble popped. Then subprime melted down. Then there was a surge in investor nervousness about junk bonds: two months ago the yield on corporate bonds rated B was only 2.45 percent higher than that on government bonds; now the spread is well over 4 percent.

Investors were rattled recently when the subprime meltdown caused the collapse of two hedge funds operated by Bear Stearns, the investment bank. Since then, markets have been manic-depressive, with triple-digit gains or losses in the Dow Jones industrial average — the rule rather than the exception for the past two weeks.

But yesterday’s announcement by BNP Paribas, a large French bank, that it was suspending the operations of three of its own funds was, if anything, the most ominous news yet. The suspension was necessary, the bank said, because of “the complete evaporation of liquidity in certain market segments” — that is, there are no buyers.

When liquidity dries up, as I said, it can produce a chain reaction of defaults. Financial institution A can’t sell its mortgage-backed securities, so it can’t raise enough cash to make the payment it owes to institution B, which then doesn’t have the cash to pay institution C — and those who do have cash sit on it, because they don’t trust anyone else to repay a loan, which makes things even worse.

And here’s the truly scary thing about liquidity crises: it’s very hard for policy makers to do anything about them.

The Fed normally responds to economic problems by cutting interest rates — and as of yesterday morning the futures markets put the probability of a rate cut by the Fed before the end of next month at almost 100 percent. It can also lend money to banks that are short of cash: yesterday the European Central Bank, the Fed’s trans-Atlantic counterpart, lent banks $130 billion, saying that it would provide unlimited cash if necessary, and the Fed pumped in $24 billion.

But when liquidity dries up, the normal tools of policy lose much of their effectiveness. Reducing the cost of money doesn’t do much for borrowers if nobody is willing to make loans. Ensuring that banks have plenty of cash doesn’t do much if the cash stays in the banks’ vaults.

There are other, more exotic things the Fed and, more important, the executive branch of the U.S. government could do to contain the crisis if the standard policies don’t work. But for a variety of reasons, not least the current administration’s record of incompetence, we’d really rather not go there.

Let’s hope, then, that this crisis blows over as quickly as that of 1998. But I wouldn’t count on it.

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The Substance Thing

By PAUL KRUGMAN

Published: August 6, 2007

Two presidential elections ago, the conventional wisdom said that George W. Bush was a likable, honest fellow. But those of us who actually analyzed what he was saying about policy came to a different conclusion — namely, that he was irresponsible and deeply dishonest. His numbers didn’t add up, and in his speeches he simply lied about the content of his own proposals.

In the fifth year of the disastrous war Mr. Bush started on false pretenses, it’s clear who was right. What a candidate says about policy, not the supposedly revealing personal anecdotes political reporters love to dwell on, is the best way to judge his or her character.

So what are the current presidential candidates saying about policy, and what does it tell us about them?

Well, none of the leading Republican candidates have said anything substantive about policy. Go through their speeches and campaign materials and you’ll see a lot of posturing, especially about how tough they are on terrorists — but nothing at all about what they actually plan to do.

In fact, I suspect that the real reason most of the Republicans are ducking a YouTube debate is that they’re afraid they would be asked questions about policy, rather than being invited to compare themselves to Ronald Reagan.

But didn’t Rudy Giuliani just announce a health care plan? No, he vaguely described a tax cut proposal that he says would do something good for health care. (Most experts disagree.) But he offered no specifics about how the plan would work, how much it would cost or how he would pay for it.

As Ezra Klein of The American Prospect has pointed out, in the speech announcing his “plan” — and since no policy document has been released, the speech is all we have to go on — Mr. Giuliani never uttered the word “uninsured.” He did, however, repeatedly denounce “socialized medicine” or some variant thereof.

The entire G.O.P. field, then, fails the substance test.

There is, by contrast, a lot of substance on the Democratic side, with John Edwards forcing the pace. Most notably, in February, Mr. Edwards transformed the whole health care debate with a plan that offers a politically and fiscally plausible path to universal health insurance.

Whatever the fate of the Edwards candidacy, Mr. Edwards will deserve a lot of the credit if and when we do get universal care in this country.

Mr. Edwards has also offered a detailed, sensible plan for tax reform, and some serious antipoverty initiatives.

Four months after the Edwards health care plan was announced, Barack Obama followed with a broadly similar but somewhat less comprehensive plan. Like Mr. Edwards, Mr. Obama has also announced a serious plan to fight poverty.

Hillary Clinton, however, has been evasive. She conveys the impression that there’s not much difference between her policy positions and those of the other candidates — but she’s offered few specifics. In particular, unlike Mr. Edwards or Mr. Obama, she hasn’t announced a specific universal care plan, or explicitly committed herself to paying for health reform by letting some of the Bush tax cuts expire.

For those who believe that the time for universal care has come, this lack of specifics is disturbing. In fact, what Mrs. Clinton said about health care in February’s Democratic debate suggested a notable lack of urgency: “Well, I want to have universal health care coverage by the end of my second term.”

On Saturday, at the YearlyKos Convention in Chicago, she sounded more forceful: “Universal health care will be my highest domestic priority as president.” But does this represent a real change in position? It’s hard to know, since she has said nothing about how she would cover the uninsured.

And even if you believe Mrs. Clinton’s contention that her positions could never be influenced by lobbyists’ money — a remark that drew boos and hisses from the Chicago crowd — there’s reason to worry about the big contributions she receives from the insurance and drug industries. Are they simply betting on the front-runner, or are they also backing the Democratic candidate least likely to hurt their profits?

All of the leading Democratic candidates are articulate and impressive. It’s easy to imagine any of them as president. But after what happened in 2000, it worries me that Mrs. Clinton is showing an almost Republican aversion to talking about substance.

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A Test for Democrats

By PAUL KRUGMAN

Published: August 3, 2007

It’s been a good Democrats, bad Democrats kind of week. The bill expanding children’s health insurance that just passed in the House makes you want to stand up and cheer. Reports that Senator Charles Schumer opposes plans to close the hedge fund tax loophole make you want to sit down and cry.

Let’s start with the good news: The House bill, which the Congressional Budget Office says would provide coverage to five million children who would otherwise be uninsured.

The bill is so good that it has Republicans spluttering. “The bill uses children as pawns,” declared Representative Pete Sessions of Texas. Yes, the Democrats are exploiting children — by providing them with health care.

The horror, the horror!

What’s especially encouraging is the way House Democrats were willing to take on the insurance companies. The bill pays for children’s health care in part by cutting subsidies to Medicare Advantage, a privatization scheme that yields big profits for insurers, but that the budget office estimates would cost taxpayers $54 billion in excess payments over the next five years.

Earlier this year I worried that many Democrats would be taken in by the insurance industry’s disinformation campaign in support of its subsidies, which included the pretense that Medicare Advantage offers big benefits to minority groups. In the end, however, House Democrats refused to be rolled.

All in all, the bill is both a fine piece of legislation and a demonstration that Democrats can stand up to special interests. Happy days are here again.

Or maybe not.

The hedge fund tax loophole is a crystal-clear example of unjustified privilege. Because of a quirk in the law, the people who run these funds don’t pay taxes like ordinary mortals.

For example, the salaries that pension fund employees receive for managing other peoples’ money are taxed as ordinary income, at rates up to 35 percent. But if that money is invested with a hedge fund — and 40 percent of the money in hedge funds comes from public, corporate and union pension plans — the fees the hedge fund manager receives for his services are mainly taxed as capital gains, with a maximum rate of 15 percent.

The arguments usually made on behalf of this unique privilege make no sense. We’re told that the tax rate on hedge fund managers has to be kept low to encourage risk-taking. But the managers aren’t risking their own money. The only risk they face is the uncertainty of their fees — and as any waitress who depends on tips or salesman who depends on commissions can tell you, most people with uncertain incomes don’t get any special tax breaks.

We’re also told that management fees would rise, reducing returns to investors, if the privileged status of fund managers is eliminated — as if someone with a $100-million-a-year hedge fund job would walk away if his take-home pay fell from $85 million to $65 million.

And we’re talking about a lot of lost revenue here. The Economic Policy Institute estimates that the hedge fund loophole costs the government $6.3 billion a year — the cost of providing health care to three million children. Of that total, almost $2 billion a year in unjustified tax breaks goes to just 25 individuals.

If being a Democrat means anything, it means opposing this kind of exorbitant privilege. Yet according to a report in The Times earlier this week, Mr. Schumer says that he opposes any increase in hedge fund taxes unless tax breaks for the energy and real estate industries are also eliminated, and pigs start flying. Seriously, his claim that he really would support closing the hedge fund loophole if other, deeply entrenched tax privileges were eliminated at the same time is a fig leaf that hides nothing.

Mr. Schumer, who heads the Democratic Senatorial Campaign Committee, insists that the large financial contributions that hedge funds make to his party aren’t influencing him. Well, I can’t read his mind, but from the outside his position looks remarkably like money-driven politics as usual. And that’s not acceptable.

Look, the worst thing that could happen to Democrats is for voters to conclude that there’s no real difference between the parties, that when you replace Republicans with Democrats, all you do is replace sweet deals for Halliburton with sweet deals for hedge funds. The hedge fund loophole is a test — and it’s one that Mr. Schumer is failing.

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An Immoral Philosophy

By PAUL KRUGMAN

Published: July 30, 2007

When a child is enrolled in the State Children’s Health Insurance Program (Schip), the positive results can be dramatic. For example, after asthmatic children are enrolled in Schip, the frequency of their attacks declines on average by 60 percent, and their likelihood of being hospitalized for the condition declines more than 70 percent.

Regular care, in other words, makes a big difference. That’s why Congressional Democrats, with support from many Republicans, are trying to expand Schip, which already provides essential medical care to millions of children, to cover millions of additional children who would otherwise lack health insurance.

But President Bush says that access to care is no problem — “After all, you just go to an emergency room” — and, with the support of the Republican Congressional leadership, he’s declared that he’ll veto any Schip expansion on “philosophical” grounds.

It must be about philosophy, because it surely isn’t about cost. One of the plans Mr. Bush opposes, the one approved by an overwhelming bipartisan majority in the Senate Finance Committee, would cost less over the next five years than we’ll spend in Iraq in the next four months. And it would be fully paid for by an increase in tobacco taxes.

The House plan, which would cover more children, is more expensive, but it offsets Schip costs by reducing subsidies to Medicare Advantage — a privatization scheme that pays insurance companies to provide coverage, and costs taxpayers 12 percent more per beneficiary than traditional Medicare.

Strange to say, however, the administration, although determined to prevent any expansion of children’s health care, is also dead set against any cut in Medicare Advantage payments.

So what kind of philosophy says that it’s O.K. to subsidize insurance companies, but not to provide health care to children?

Well, here’s what Mr. Bush said after explaining that emergency rooms provide all the health care you need: “They’re going to increase the number of folks eligible through Schip; some want to lower the age for Medicare. And then all of a sudden, you begin to see a — I wouldn’t call it a plot, just a strategy — to get more people to be a part of a federalization of health care.”

Now, why should Mr. Bush fear that insuring uninsured children would lead to a further “federalization” of health care, even though nothing like that is actually in either the Senate plan or the House plan? It’s not because he thinks the plans wouldn’t work. It’s because he’s afraid that they would. That is, he fears that voters, having seen how the government can help children, would ask why it can’t do the same for adults.

And there you have the core of Mr. Bush’s philosophy. He wants the public to believe that government is always the problem, never the solution. But it’s hard to convince people that government is always bad when they see it doing good things. So his philosophy says that the government must be prevented from solving problems, even if it can. In fact, the more good a proposed government program would do, the more fiercely it must be opposed.

This sounds like a caricature, but it isn’t. The truth is that this good-is-bad philosophy has always been at the core of Republican opposition to health care reform. Thus back in 1994, William Kristol warned against passage of the Clinton health care plan “in any form,” because “its success would signal the rebirth of centralized welfare-state policy at the very moment that such policy is being perceived as a failure in other areas.”

But it has taken the fight over children’s health insurance to bring the perversity of this philosophy fully into view.

There are arguments you can make against programs, like Social Security, that provide a safety net for adults. I can respect those arguments, even though I disagree. But denying basic health care to children whose parents lack the means to pay for it, simply because you’re afraid that success in insuring children might put big government in a good light, is just morally wrong.

And the public understands that. According to a recent Georgetown University poll, 9 in 10 Americans — including 83 percent of self-identified Republicans — support an expansion of the children’s health insurance program.

There is, it seems, more basic decency in the hearts of Americans than is dreamt of in Mr. Bush’s philosophy.

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The French Connections

By PAUL KRUGMAN

Published: July 23, 2007

There was a time when everyone thought that the Europeans and the Japanese were better at business than we were. In the early 1990s airport bookstores were full of volumes with samurai warriors on their covers, promising to teach you the secrets of Japanese business success. Lester Thurow’s 1992 book, “Head to Head: The Coming Economic Battle Among Japan, Europe and America,” which spent more than six months on the Times best-seller list, predicted that Europe would win.

Then it all changed, and American despondency turned into triumphalism. Partly this was because the Clinton boom contrasted so sharply with Europe’s slow growth and Japan’s decade-long slump. Above all, however, our new confidence reflected the rise of the Internet. Jacques Chirac complained that the Internet was an “Anglo-Saxon network,” and he had a point — France, like most of Europe except Scandinavia, lagged far behind the U.S. when it came to getting online.

What most Americans probably don’t know is that over the last few years the situation has totally reversed. As the Internet has evolved — in particular, as dial-up has given way to broadband connections using DSL, cable and other high-speed links — it’s the United States that has fallen behind.

The numbers are startling. As recently as 2001, the percentage of the population with high-speed access in Japan and Germany was only half that in the United States. In France it was less than a quarter. By the end of 2006, however, all three countries had more broadband subscribers per 100 people than we did.

Even more striking is the fact that our “high speed” connections are painfully slow by other countries’ standards. According to the Information Technology and Innovation Foundation, French broadband connections are, on average, more than three times as fast as ours. Japanese connections are a dozen times faster. Oh, and access is much cheaper in both countries than it is here.

As a result, we’re lagging in new applications of the Internet that depend on high speed. France leads the world in the number of subscribers to Internet TV; the United States isn’t even in the top 10.

What happened to America’s Internet lead? Bad policy. Specifically, the United States made the same mistake in Internet policy that California made in energy policy: it forgot — or was persuaded by special interests to ignore — the reality that sometimes you can’t have effective market competition without effective regulation.

You see, the world may look flat once you’re in cyberspace — but to get there you need to go through a narrow passageway, down your phone line or down your TV cable. And if the companies controlling these passageways can behave like the robber barons of yore, levying whatever tolls they like on those who pass by, commerce suffers.

America’s Internet flourished in the dial-up era because federal regulators didn’t let that happen — they forced local phone companies to act as common carriers, allowing competing service providers to use their lines. Clinton administration officials, including Al Gore and Reed Hundt, the chairman of the Federal Communications Commission, tried to ensure that this open competition would continue — but the telecommunications giants sabotaged their efforts, while The Wall Street Journal’s editorial page ridiculed them as people with the minds of French bureaucrats.

And when the Bush administration put Michael Powell in charge of the F.C.C., the digital robber barons were basically set free to do whatever they liked. As a result, there’s little competition in U.S. broadband — if you’re lucky, you have a choice between the services offered by the local cable monopoly and the local phone monopoly. The price is high and the service is poor, but there’s nowhere else to go.

Meanwhile, as a recent article in Business Week explains, the real French bureaucrats used judicious regulation to promote competition. As a result, French consumers get to choose from a variety of service providers who offer reasonably priced Internet access that’s much faster than anything I can get, and comes with free voice calls, TV and Wi-Fi.

It’s too early to say how much harm the broadband lag will do to the U.S. economy as a whole. But it’s interesting to learn that health care isn’t the only area in which the French, who can take a pragmatic approach because they aren’t prisoners of free-market ideology, simply do things better.

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The Waiting Game

By PAUL KRUGMAN

Published: July 16, 2007
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Being without health insurance is no big deal. Just ask President Bush. “I mean, people have access to health care in America,” he said last week. “After all, you just go to an emergency room.”

This is what you might call callousness with consequences. The White House has announced that Mr. Bush will veto a bipartisan plan that would extend health insurance, and with it such essentials as regular checkups and preventive medical care, to an estimated 4.1 million currently uninsured children. After all, it’s not as if those kids really need insurance — they can just go to emergency rooms, right?

O.K., it’s not news that Mr. Bush has no empathy for people less fortunate than himself. But his willful ignorance here is part of a larger picture: by and large, opponents of universal health care paint a glowing portrait of the American system that bears as little resemblance to reality as the scare stories they tell about health care in France, Britain, and Canada.

The claim that the uninsured can get all the care they need in emergency rooms is just the beginning. Beyond that is the myth that Americans who are lucky enough to have insurance never face long waits for medical care.

Actually, the persistence of that myth puzzles me. I can understand how people like Mr. Bush or Fred Thompson, who declared recently that “the poorest Americans are getting far better service” than Canadians or the British, can wave away the desperation of uninsured Americans, who are often poor and voiceless. But how can they get away with pretending that insured Americans always get prompt care, when most of us can testify otherwise?

A recent article in Business Week put it bluntly: “In reality, both data and anecdotes show that the American people are already waiting as long or longer than patients living with universal health-care systems.”

A cross-national survey conducted by the Commonwealth Fund found that America ranks near the bottom among advanced countries in terms of how hard it is to get medical attention on short notice (although Canada was slightly worse), and that America is the worst place in the advanced world if you need care after hours or on a weekend.

We look better when it comes to seeing a specialist or receiving elective surgery. But Germany outperforms us even on those measures — and I suspect that France, which wasn’t included in the study, matches Germany’s performance.

Besides, not all medical delays are created equal. In Canada and Britain, delays are caused by doctors trying to devote limited medical resources to the most urgent cases. In the United States, they’re often caused by insurance companies trying to save money.

This can lead to ordeals like the one recently described by Mark Kleiman, a professor at U.C.L.A., who nearly died of cancer because his insurer kept delaying approval for a necessary biopsy. “It was only later,” writes Mr. Kleiman on his blog, “that I discovered why the insurance company was stalling; I had an option, which I didn’t know I had, to avoid all the approvals by going to ‘Tier II,’ which would have meant higher co-payments.”

He adds, “I don’t know how many people my insurance company waited to death that year, but I’m certain the number wasn’t zero.”

To be fair, Mr. Kleiman is only surmising that his insurance company risked his life in an attempt to get him to pay more of his treatment costs. But there’s no question that some Americans who seemingly have good insurance nonetheless die because insurers are trying to hold down their “medical losses” — the industry term for actually having to pay for care.

On the other hand, it’s true that Americans get hip replacements faster than Canadians. But there’s a funny thing about that example, which is used constantly as an argument for the superiority of private health insurance over a government-run system: the large majority of hip replacements in the United States are paid for by, um, Medicare.

That’s right: the hip-replacement gap is actually a comparison of two government health insurance systems. American Medicare has shorter waits than Canadian Medicare (yes, that’s what they call their system) because it has more lavish funding — end of story. The alleged virtues of private insurance have nothing to do with it.

The bottom line is that the opponents of universal health care appear to have run out of honest arguments. All they have left are fantasies: horror fiction about health care in other countries, and fairy tales about health care here in America.

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An Unjustified Privilege

By PAUL KRUGMAN

Published: July 13, 2007
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During the 2000 presidential campaign, Ralph Nader mocked politicians of both parties as “Republicrats,” equally subservient to corporations and the wealthy. It was nonsense, of course: the modern G.O.P. is so devoted to the cause of making the rich richer that it makes even the most business-friendly Democrats look like F.D.R.

But right now, as I watch Senate Democrats waffle over what should be a clear issue of justice and sound tax policy — namely, whether managers of private equity funds and hedge funds should be subject to the same taxes as ordinary working Americans — I’m starting to feel that Mr. Nader wasn’t all wrong.

What’s at stake here is a proposal by House Democrats to tax “carried interest” as regular income. This would close a tax loophole that is complicated in detail, but basically lets fund managers take a large part of the fees they earn for handling other peoples’ money and redefine those fees, for tax purposes, as capital gains.

The effect of this redefinition is that income that should be considered by normal standards to be ordinary income taxed at a 35 percent rate is treated as capital gains, taxed at only 15 percent instead. So fund managers get to pay a low tax rate that is supposed to provide incentives to risk-taking investors, even though they aren’t investors and they aren’t taking risks.

For example, the typical hedge-fund manager has a 2-and-20 contract — that is, he gets a fee equal to 2 percent of the funds under management, plus 20 percent of whatever his fund earns. It’s not exactly straight salary, but none of this income comes from putting his own wealth at risk. Except for the fact that he might make a billion dollars a year, he resembles a waitress whose income depends on a mix of wages and tips, or a salesman who lives on a mix of salary and commissions, more than he resembles an entrepreneur who sinks his life savings into a new business.

So why does he get the same tax breaks as that entrepreneur? Not to put too fine a point on it, why does Henry Kravis pay a lower tax rate on his management fees than I pay on my book royalties?

There’s a larger question one could ask: should we even be giving preferential tax treatment to true capital gains? I’d say no, because there’s very little evidence that taxing capital gains as ordinary income would actually hurt the economy. Meanwhile, the low tax rate on capital gains is one main reason the truly rich often pay lower tax rates than the middle class.

A couple of weeks ago, Warren Buffett pointed out that he pays an average federal income tax rate of 17.7 percent, while his receptionist pays about 30 percent.

But even those who disagree with me on the larger point, who think the special treatment of capital gains is justified, should be able to agree that treating the income of fund managers differently from the way we treat the income of everyone else who works for a living makes no sense. And that’s why it’s very disheartening to read that prominent Democratic senators are taking seriously the claims of fund managers that making them pay taxes like regular people would discourage risk-taking.

The immediate response should be: what risk-taking? To repeat: the fund managers aren’t entrepreneurs; they aren’t putting their own assets on the line.

Look, this isn’t about envy, about punishing success. No doubt many fund managers earn their pay. Some of them also give generously to worthy causes.

But closing the carried interest loophole should be a simple question of fairness: other Americans also earn their pay, but they don’t get special tax breaks. Plus, we’re talking about a lot of lost revenue due to that loophole — revenue that could, for example, be paying for the health care of tens if not hundreds of thousands of children.

And since we’re living in the real world of politics, there’s also the Republicrat issue: the hesitation of the Senate Democrats is terrible for the party’s image. It conveys the impression that they’re as beholden to hedge funds, one of the few types of businesses whose campaign contributions strongly favor Democrats, as Republicans are to the oil and drug industries.

So here’s a plea to Democratic senators on the fence: do the right thing and close this unjustified tax loophole.

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Health Care Terror

By PAUL KRUGMAN

Published: July 9, 2007
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These days terrorism is the first refuge of scoundrels. So when British authorities announced that a ring of Muslim doctors working for the National Health Service was behind the recent failed bomb plot, we should have known what was coming.

“National healthcare: Breeding ground for terror?” read the on-screen headline, as the Fox News host Neil Cavuto and the commentator Jerry Bowyer solemnly discussed how universal health care promotes terrorism.

While this was crass even by the standards of Bush-era political discourse, Fox was following in a long tradition. For more than 60 years, the medical-industrial complex and its political allies have used scare tactics to prevent America from following its conscience and making access to health care a right for all its citizens.

I say conscience, because the health care issue is, most of all, about morality.

That’s what we learn from the overwhelming response to Michael Moore’s “Sicko.” Health care reformers should, by all means, address the anxieties of middle-class Americans, their growing and justified fear of finding themselves uninsured or having their insurers deny coverage when they need it most. But reformers shouldn’t focus only on self-interest. They should also appeal to Americans’ sense of decency and humanity.

What outrages people who see “Sicko” is the sheer cruelty and injustice of the American health care system — sick people who can’t pay their hospital bills literally dumped on the sidewalk, a child who dies because an emergency room that isn’t a participant in her mother’s health plan won’t treat her, hard-working Americans driven into humiliating poverty by medical bills.

“Sicko” is a powerful call to action — but don’t count the defenders of the status quo out. History shows that they’re very good at fending off reform by finding new ways to scare us.

These scare tactics have often included over-the-top claims about the dangers of government insurance. “Sicko” plays part of a recording Ronald Reagan once made for the American Medical Association, warning that a proposed program of health insurance for the elderly — the program now known as Medicare — would lead to totalitarianism.

Right now, by the way, Medicare — which did enormous good, without leading to a dictatorship — is being undermined by privatization.

Mainly, though, the big-money interests with a stake in the present system want you to believe that universal health care would lead to a crushing tax burden and lousy medical care.

Now, every wealthy country except the United States already has some form of universal care. Citizens of these countries pay extra taxes as a result — but they make up for that through savings on insurance premiums and out-of-pocket medical costs. The overall cost of health care in countries with universal coverage is much lower than it is here.

Meanwhile, every available indicator says that in terms of quality, access to needed care and health outcomes, the U.S. health care system does worse, not better, than other advanced countries — even Britain, which spends only about 40 percent as much per person as we do.

Yes, Canadians wait longer than insured Americans for elective surgery. But over all, the average Canadian’s access to health care is as good as that of the average insured American — and much better than that of uninsured Americans, many of whom never receive needed care at all.

And the French manage to provide arguably the best health care in the world, without significant waiting lists of any kind. There’s a scene in “Sicko” in which expatriate Americans in Paris praise the French system. According to the hard data they’re not romanticizing. It really is that good.

All of which raises the question Mr. Moore asks at the beginning of “Sicko”: who are we?

“We have always known that heedless self-interest was bad morals; we know now that it is bad economics.” So declared F.D.R. in 1937, in words that apply perfectly to health care today. This isn’t one of those cases where we face painful tradeoffs — here, doing the right thing is also cost-efficient. Universal health care would save thousands of American lives each year, while actually saving money.

So this is a test. The only things standing in the way of universal health care are the fear-mongering and influence-buying of interest groups. If we can’t overcome those forces here, there’s not much hope for America’s future.

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