David Stockman redux.

He chose him for his conservative zeal and youthful energy. His reputation as a fiscal whiz. He has intensely opposed Government intervention in the economy--whether by regulation or subsidy. He will be no mere budget trimmer, but rather a pivotal figure in the effort to restrain the Federal budget, upon which all else depends.

It was in these words that New York Times described not the political ascendency of Paul Ryan, but rather of his political doppelganger, David Stockman, thirty years ago.

David Stockman was the Paul Ryan of the Reagan era, and the similarities are uncanny. A rising conservative star whose southwestern Michigan district was just across the lake from Ryan's, David Stockman was a 34-year-old Congressman who was famous for his mastery of the arcane details of the Federal budget. When Ronald Reagan selected him to be the Director of the Office of Management and Budget, it was a pivotal appointment, as the central question facing the Reagan Revolution--from old line Republicans as well as Democrats--was whether Reagan could cut taxes, increase defense spending and balance the budget, all at once.

Stockman believed that it could be done, or as he said at the time, "The whole thing is premised on faith. On a belief in how the world works."

And the rest is history. The Reagan administration transformed Washington.

Stockman did not succeed in balancing the budget. But unlike revisionist defenders of the Reagan era, he did not blame it on the duplicity of Tip O'Neill and the Democrats, but rather on the perfidy of fellow Republicans. What was birthed in that era was--in the words of fellow Republican apostate Pete Peterson--the unholy alliance of tax cutting Republicans and big spending Republicans. Together, they untethered the Grand Old Party from its roots as the party of frugality and prudence, and embraced the singular legacy of the Reagan era--the realization that balanced budgets were no longer either a political or economic imperative.

And this perfidy lies at the core of Paul Ryan's much vaunted Roadmap for America's Future. For all the claims to being a document of budget wizardry, the Roadmap offers little policy insight beyond its fundamental, and unarguable, stipulation: We cannot continue to borrow forever. Beyond that, the Roadmap offers little more than an assertion of the author's own political imperative--in this case capping spending at 19% of GDP--and assuming that Congress in future years will agree to curb spending in excess of that cap.

I published the graph below several months ago in a post about the Obama-Boehner negotiations. The graph incidentally makes the same simple point as the Roadmap: "If Federal spending were to be capped at its pre-financial crisis average since the mid-1970s of 20.8% of GDP, five categories of spending--Social Security, Medicare, Medicaid, Defense and Net Interest--will steadily squeeze out all other areas of entitlement and discretionary spending. By 2022, Everything Else is reduced 57% from its historical average of 6.4% of GDP to 2.7% of GDP."

This is not a great insight. It is simply a product of understanding budget numbers at the most rudimentary level and having some facility with Excel. And yet this is the basic insight of Paul Ryan's plan. Ryan does not say what he proposes to cut--beyond proposed cost shifting of healthcare costs to beneficiaries--indeed he barely discusses non-entitlement, non-defense spending. Instead, he simply asserts that if there were a hard spending cap, that would force drastic--but undefined--reductions to stay within aggregate spending limits.

But to say what is squeezed out is not a question of budgetary wisdom, but pure politics. Why does Ryan's plan preserve Medicare untouched for those 55 years and older? The answer is not because they paid for it and therefore are entitled to it--because they didn't pay for it. Medicare is in large measure paid for by general tax revenues just like everything else. It is simply because they vote, and they vote with a greater sense of determination and focus than those who are 35 years old and younger.

Imagine what a roadmap might look like if those aged 18 to 35 had the political clout that their numbers might demand? One could imagine that Pell Grants would be the third rail of politics. Military action as a tool of foreign policy might be viewed with greater skepticism if political power hinged on the votes of those whose lives were to be put in harms way. And Social Security and Medicare would more likely be means tested and subject to spending limits. Perhaps if the young electorate whose wallets were to be raided to pay for it all down the road voted their self-interest with the same ferocity of older voters, we might have less willingness to borrow today to pay for a broad-based welfare state for the elderly. It is all about who shows up on election day.

While conservatives heap adulation upon the Ryan as a thinker, David Stockman is not fooled. He understands that Ryan's document demonstrates neither budgetary insight nor political courage. Writing on the op-ed page of the New York Times last week, Stockman assaulted Ryan's plan:

Thirty years of Republican apostasy--a once grand party's embrace of the welfare state, the warfare state and the Wall Street-coddling bailout state--have crippled the engines of capitalism and buried us in debt. Mr. Ryan's sonorous campaign rhetoric about shrinking Big Government and giving tax cuts to 'job creators' (read: the top 2 percent) will do nothing to reverse the nation's economic decline and arrest its fiscal collapse...

But the greater hypocrisy is his phony "plan" to solve the entitlements mess by deferring changes to social insurance by at least a decade.

A true agenda to reform the welfare state would require a sweeping, income-based eligibility test, which would reduce or eliminate social insurance benefits for millions of affluent retirees. Without it, there is no math that can avoid giant tax increases or vast new borrowing. Yet the supposedly courageous Ryan plan would not cut one dime over the next decade from the $1.3 trillion-per-year cost of Social Security and Medicare.

The sophistry of the plan rests in the simplistic assumptions it makes about the ability of Congress to designate cuts now for future years, as well as the assumption Republicans are not in fact big supporters of large swaths of the discretionary budget the Ryan presumes to simply assume that Congress will eliminate in future years. Indeed, Ryan's plan does not address how the fundamental question of how the budget would be balanced until the last few pages of his opus, this despite the presumptions that the existential threat to the nation is presumed to be the Roadmap's raison d'etre.

But that is the crux of the budgetary challenge, not a sideshow. What Ryan ultimately offers is nothing more than a repeat of the now decades-old idea of legislating hard spending caps. This is the same approach that failed with the brief experiment with the 1985 Gramm-Rudman-Hollings law. It failed in a different incarnation as Paygo rules. And it has failed again in the form of the 10-year scoring rules that are the reason the Bush tax cuts were supposed to have expired several years ago.

The problem, in its essence, is that Congress does not actually have power to impose cuts on the future, as any rule one Congress makes to control spending, the next Congress can undo. This is the essential dilemma that has underscored our budgetary politics since the political and economic imperative of balanced budgets was overturned in the wake of the Reagan revolution--only Congress can restrain itself, and if it doesn't want to, it won't.

What Stockman and Peterson understand is that for all of the hubris of conservatives in Congress, they are no different than their political brethren across the political spectrum. In fact, they have proved to be worse. They hold forth on the immorality of deficits and the path to ruin that lies ahead, but it is all just words--words that mask a deep hypocrisy and cynicism. And when David Stockman looks at the Ryan plan, and the fawning support of the conservative establishment in Washington, he cannot conceal his contempt.

It's rank demagoguery. We should call it for what it is. If these people were all put into a room on penalty of death to come up with how much they could cut, they couldn't come up with $50 billion, when the problem is $1.3 trillion. So, to stand before the public and rub raw this anti-tax sentiment, the Republican Party, as much as it pains me to say this, should be ashamed of themselves.

That about sums it up.

Born to Empire. All gone. All taken away.

In truth, it has been Albion’s summer to forget. Even as London basked in a successful Olympic Games, the City of London—their Wall Street—has suffered global attention of an altogether different sort.

Beginning in June, with the news that the British bank Barclays had agreed to pay a half-billion dollar fine for manipulating the LIBOR benchmark interest rate, the news has only gotten worse from one week to the next.

LIBOR—the London Interbank Offered Rate—actually refers to a number of interest rates along a yield curve calculated daily by the British Bankers Association (BBA). Each morning, a panel of up to 18 banks each submit interest rates at which they believe they could borrow a substantial amount of money from other banks for differing time periods—a thirty-day rate, a sixty-day rate, a one-year rate, and so forth. Much like a panel of Olympic gymnastics judges in years gone by, the BBA tosses out the highest and lowest rates, and takes an average of those in the middle that become that day’s LIBOR rates.

Barclays confessed to British bank regulators that over a period of years beginning in 2007, its traders had not submitted rates in good faith, but rather—like the East German judges of Olympics past—they had deliberately sought to skew the results, to manipulate LIBOR in directions that would benefit their trading positions. While at first it was unclear how much damage Barclays could have inflicted—after all Barclays was but one participant on the LIBOR panel—in the ensuing weeks other global bank members of the panel have come forward to admit that their traders conspired with Barclays to tilt the playing field in their favor.

To date, the list of banks who have stepped forward includes names that have become all too familiar for their participation in financial misdeeds over the course of the last half-decade: UBS, Deutsche Bank, Royal Bank of Scotland, Citigroup, JPMorgan, Credit Suisse and Bank of America. And the list goes on.

And then it got worse.

As July rolled into August, two of the most venerable British banks, Hong Kong Shanghai Bank (HSBC) and Standard Chartered, were accused by U.S. investigators and bank regulators of aiding and abetting global money laundering schemes. HSBC and Standard Chartered are particularly important institutions in British history. Each were created under charters granted by Queen Victoria, to create institutions to finance the growth and development of the Empire. HSBC was founded to fund growing British trade and investment in China, while Standard Chartered's mission focused on British colonies from East Asia to South Africa.

The first shoe to drop was HSBC, which was accused of complicity in $15 billion of money laundering and illicit transactions for Mexican drug cartels, as well as Russian and other international criminal groups. Then, before the HSBC story could fully sink in, Standard Chartered was accused by New York bank regulators of complicity in laundering a quarter of a trillion dollars of Iranian assets, and indirectly abetting terrorist activity.

For Americans, it is difficult to understand the depth of betrayal represented by the malfeasance at HSBC and Standard Chartered. America has always been suspicious of its banks, and our tradition is one of fear—if not conspiracy theories—of the power of our banks over our government, rather than the other way around.

In Britain, the anger at Barclays CEO Bob Diamond and before him Royal Bank of Scotland CEO Fred Goodwin reflected outrage at their failed stewardship of important national institution. Back here in the colonies, both the outrage and the treatment of Bank CEOs have been notably different. Regulators and the Justice Department have treated our top banks—now comprising JPMorgan, Citi, BofA, Wells Fargo, Morgan Stanley and Goldman—with kid gloves. Just this week, federal judge William Pauley grudgingly signed off on a $4.8 million fine for Morgan Stanley, for its part in an electricity price fixing scheme that cost New York consumers $300 million. Morgan Stanley earned on the deal was $21.6 million, and they admitted no wrongdoing in the plea agreement.

The Morgan Stanley settlement—representing less than 25% of their take—simply illustrated the profitability of behaving badly, and came the same week that the U.S. Justice Department decision not to prosecute Goldman Sachs for its conduct in shorting the housing market during the 2008 housing market collapse.

It should be conventional wisdom by now that regulators do not have the capacity to effectively counter the power of our dominant banks. This weeks news recalled the observation of one Wall Street trader that he and his brethren would not be deterred by fines—which are few and far between—only arrests would do the trick, as every trader’s greatest fear was that their mother would see them frog-marched off to jail on television.

In the post-2008 world, much discussion of banking in the U.S. has focused on the reintroduction of the Glass-Steagall restrictions that separated tradition commercial banking services—taking deposits and lending money—from investment banking and proprietary trading. Sandy Weill—the Godfather of the modern mega-banks who orchestrated the financial reforms that ended the Glass-Steagall restrictions—made waves in July when he recanted his views and called for the reimposition of Glass-Steagall.  Weill’s view reflects that of many on the right and the left who share the view of Paul Ryan, who stated succinctly at a town hall meeting in May, “If you’re a bank and you want to operate like some non-bank entity like a hedge fund, then don’t be a bank. Don’t let banks use their customers money to do anything other than traditional banking.” 

Writing in the New York Times, Obama Car Tsar and former Lazard Frere head Steven Rattner joined the finance industry swift reply to Weill’s treachery, arguing essentially that such banking activities should not be restricted, just regulated better, and that Glass-Steagall restrictions would put American banking out of synch with the rest of the world, where such restrictions do not exist. But in the rest of the world, international banks have traditionally been national banks, with governance and management closely aligned with national leadership.

American banking is unique, and is a reflection of the freer world of American capitalism. As the old saying goes, in Germany, what isn’t legal is illegal, while in America what isn’t illegal is legal. Glass-Steagall was important in America specifically because of the lack of essential trust and interconnection between the banks and the political sector, and the apparently reasonable concern that American banks could not be trusted as conservative stewards of public deposits.

Unlike European and Asian banks—whose roles and function in the world have traditionally been closely linked to the nations whose interest they serve—American banks are private organization that pursue their own interests and make no pretense of advancing nationalist interests—other than in acknowledging the essential role of banking to the functioning of the private economy. Accordingly, America has far more banks and resolution systems that presume that banks will fail as a matter of course. Or as Paul Ryan noted as his preamble to the comment above, “We should make sure you can’t get too big where you’re going to become too big to fail and trigger a bailout, and if you take risky behavior then you go into bankruptcy and we open up the bankruptcy laws to allow them to go into bankruptcy.”

As bad as the LIBOR scandal has been, the HSBC and Standard Chartered revelations are in their way deeper indictments of the state of international banking. HSBC and Standard Chartered are culturally rooted in the British Empire. As created by Queen Victoria, they were not simply institutions regulated by the state, but were arms of the state, chartered as essential tools of state policy.

Over the past decades, the dominance of the U.S. Federal Reserve Bank—combined with the failures of the European Union to develop effective, unified bank regulation—have led to a creeping Americanization of global finance. International banks, like Barclays, have found themselves run by American or American-trained chief executives, and their cultures have migrated toward the those of their large American counterparts, where trading and investment banking—and the higher compensation that those activities can generate—have undermined the traditional banking values focused on credit and long-term relationships.

Internal emails at Standard Chartered published in the New York Times, provide a hint at the awareness of bank managers of their own activities and the reputational risks that they were taking. According to one email, the Standard Chartered chief executive for American activities warned London that the Iranian activities had “the potential to cause very serious or even catastrophic reputational damage to the group.” The response was telling, “Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians."

Back in the day, such a response might well have reflected directives from Whitehall that Britain was supportive of Iranian relations, and Standard Chartered need not curtail its activities in deference to the political priorities of their American cousins. But those days are long past. Like Barclays and the list of other LIBOR manipulators, Standard Chartered had no such defense. In today’s world, each bank is acting only on their own account, with traders focused on their own bonuses, and with little regard for the impact of their activities on the world around them.

The devolution of the venerable Victorian banks from instruments of the British state to instruments of individual self-interest is unfortunate, if not tragic. Those banks have lost their mission, their purpose and the tether to the national government that they were created to serve. Queen Victoria would not be pleased

But the problems are not Britain’s alone. It appears that we may be migrating toward the worst of both worlds. Even as global banks are loosening their traditional ties to their political masters, and migrating into trading activities delinked from their traditional banking focus in pursuit of greater compensation, our banks are increasingly tied to the political system. But here, it is not the political system that guides the banks toward areas of strategic national interest, but rather the other way around.  Through our open system of political funding, political influence increasingly appears to flow from the banks to the politicians, and from there up the latter of the political and regulatory apparatus.

Bold move.

Four months ago, a colleague high up in the Romney camp suggested in a conversation that Mitt Romney would run on a bold economic agenda to “inspire the middle to vote their disappointment.” “2010,” he noted, “was an anger-fueled wave turnout election. Unlikely that [this fall] R's will be as angry or D's as dispirited. The center is the way to win but he has to occupy that center with a bold agenda—a Bowles/Simpson level of boldness.”

Through the summer, no such boldness was apparent, and it has been unclear what kind of campaign Romney would actually run. Even as the Obama campaign launched a blitz of negative ads in swing states, the Romney campaign remained relatively quiet, clinging to benign themes, along with their own stable of negative ads. Now, as the conventions approach and the real start looms, Romney has finally shown his cards.

With the selection of Paul Ryan, Mitt Romney has made a definitive statement. Gone are the accusations that Romney would be afraid of a bold choice, afraid of being over-shadowed. Gone as well are the suggestions that his would be a tactical choice, driven by a narrow objective of winning 50%-plus-one electoral votes. Paul Ryan is a political star in his own right, and has proven his willingness to take on the toughest issues. By picking him, Romney is suggesting that the fall campaign will go beyond negative attacks and focus on real and substantive choices.

The instant response to the pick from the Democrat side has been to attack Ryan’s Medicare plan. That plan essentially proposes to keep the existing system intact for those over 55 and then migrate to a private insurance/voucher plan, ultimately ending Medicare as we know it. Opposition to that plan, interestingly, has focused on the costs that would be absorbed by future retirees under the voucher plan, rather than on the inequity of a plan that places no burden on current recipients and older workers in its effort to control the share of overall healthcare costs funded by government revenues.

Medicare is the fundamental challenge facing the U.S. budget, as it has steadily increased as a share of GDP. As federal income tax receipts declined in the wake of the 2008 fiscal collapse, healthcare costs increased dramatically as a share of the taxes individuals pay, growing from just over one-third of federal personal income tax payments before 2008 to well over one-half in recent years.

One might not like Ryan's solutions, but he has been willing to grapple with issues and offer detailed proposals where others have no not. His proposals have winners and losers, as any solution will. His Medicare plan shifts costs onto future beneficiaries, while effectively holding current retirees and older workers harmless, as it places the burden of paying for both current retirees and future retirees on those Americans now under 55.

Making younger workers pay a heavy price to support the retirement years of boomers has become a public policy theme of late. Across the country, state and local governments are reforming their pension plans in ways that reflect the Ryan formula. Retirees pay little or nothing, older workers pay some, but the real bailout comes from new employees. These solutions do little to tackle current costs, but instead promise changes down the road. They tend to alienate elderly voters less, while younger voters seem not to be paying attention. In a country where voter turnout is roughly correlated with age, this is a formula that combines fiscal and political viability.

The data on Medicare costs and benefits reinforces the fact that the problem is not simply one of overall cost. Research published by Eugene Steuerle and Stephanie Rennane of the Urban Institute suggests that while Social Security has been the more frequent target of reform efforts, that system is relatively sound. Most cohorts of households Steuerle and Rennane studied pay into the system as much or more than they ultimately receive in benefits. In contrast, Medicare taxes across all income groups pay only a fraction of the benefits people receive. The rest falls on the working population who essentially support retiree health costs, reinforcing generational inequity as costs rise.

The broader problem that America faces is a cultural problem. Cornell professor Suzanne Mettler has published useful data on this issue in her work on what she refers to as the “Submerged State.” Her data, presented here, suggests that a large number of Americans who benefit from public programs deny that they are indeed recipients of governmental largess. For example, 40% of Medicare recipients state that they have not used a government program, only slightly less than 44% for social security recipients who actually pay much of their own costs.

Mettler’s data suggests that the deep distrust of government that has long been a hallmark of the American psyche now rests at the center of our political and budget debates. It offers insight into how a man at a Sarah Palin rally in 2008 famously cried out “Don’t let the government get its hands on my Medicare.” Apparently Americans are able to reconcile their dislike or distrust of government by convincing themselves that those programs from which they themselves benefit are “not government.” Based on Mettler's data, it is apparent that the disconnect between what we receive and what we are willing to pay for runs deep.

And this is deep-seated problem. In the era of the Tea Party, the question of what government people want to have and what they are willing to pay for is a central one. Last year, the $1.4 trillion cost of Medicare, Social Security and defense expenditures alone—those that would appear to be sacred even to Tea Party acolytes—exceeded federal personal income tax payments by over $300 billion. This suggests that even if all other areas of government—the entire discretionary budget as well as Medicaid and other entitlements—were cut, the taxes we pay as individuals would not support those three areas of expenditure.

In coming months Paul Ryan will be decried for his Medicare plan and the burdens it will place on future retirees. Yet his plan is not alone in the intergenerational inequity on which it is constructed. None of the tax or budget proposals embraced by the Obama administration bridge the gap between what people appear to want and what they are willing to pay for either. The conventional wisdom remains that people will support tax increases on the other guy. But taxing the other guy—even all those rich people whose effective tax rates are far below those of middleclass workers—would not be sufficient to bridge the difference between what we appear to want, and what we appear to be willing to pay.

At some point, we will have to come to grips with the imbalance between what we appear to want and what we appear to be willing to pay. The interesting question now that Romney has selected Paul Ryan as his running mate is whether Romney is really proposing to engage in that debate, or whether the selection is merely a political calculus. Paul Ryan's entire political brand is premised on being the person who is prepared to engage those issues. Yet, there is no evidence to date that Ryan's Tea Party supporters have seriously considered what his proposed changes would mean for “their Medicare.” 

Mitt Romney and his campaign believe that the pivotal voters in the independent center—who have not yet made up their minds—will reward him for his choice of Ryan as his running mate, and the signal it sends that Romney is prepared to make hard choices to address the nation's economic and fiscal challenges. What remains to be seen is whether voters will recoil once they understand the details of Ryan's plan, or whether they are prepared to support candidates that offer solutions to problems that the electorate claims to want to see solved, however painful those solutions might be.  

Before the gun sounds.

Watching the presidential contest has been like watching the beginning of an America’s Cup race. The gun does not sound for the beginning of the race until Labor Day, after the parties hold their conventions and Americans fully engage in the contest. The summer months are a time of pre-race maneuvering, as Team Obama and Team Romney are jockeying for position, seeking to define the terms of the race to come.

Despite Democrat euphoria during Republican primaries that seemed to turn back the clock on such settled matters as contraception—and pushed Obama’s reelection odds above 60% on Intrade—Mitt Romney emerged largely unscathed. This week, Real Clear Politics shows the race at 47-45, with Obama up by just 1-3 points in the critical states of Ohio, Florida, Virginia, and the new swing state, Michigan. In rough terms, Obama needs two of these states to win, Romney three, but by any measure, this is now a race.

The two sides largely view the race in the same terms. Each side has to motivate its own base, and each is fighting for the still-undecided center. And each side has chosen to make the appeal to the center largely a referendum on the Other Guy. The Republican argument is that Obama has made a hash of the economy. The Democrat counter argument is that it was hash when he got there and he is doing as much as he can with a stridently negative Republican House blocking him at every turn. The Democrat argument is that Romney is a plutocrat who cares not a whit for the large swath of the American electorate. It is the Republican counter argument that seems passive and unfocused.

There is nothing new in attacking Mitt Romney for his years at Bain or his uncaring mien. Mike Huckabee’s famous quip that voters would ultimately disdain Romney because he “looks like the guy that fired you” has become the essence of the Obama strategy to define Romney before the fall race begins.

Making the opponent unacceptable is a time-honored strategy, and sometimes it works and sometimes it doesn’t. In 1964, Democrats succeeded in defining Barry Goldwater as unstable—if not an outright lunatic—in a campaign that culminated with the classic "Daisy" campaign ad. On the other hand, in 1980, Jimmy Carter sought to define Ronald Ronald Reagan as a dangerous alternative—in the vein of Goldwater—and led in the polls through the summer, only to see the strategy ultimately fail as Reagan was humanized through the fall, and ultimately won handily following the debates. For their part, Republicans used the strategy to great effect in 2004, when the Swift Boat attacks on John Kerry through the summer left his campaign sorely damaged once the fall campaign arrived.

The Romney campaign response to Democrat attacks seems to reflect either a lack of preparedness or a view that what happens now will not materially matter once the real race starts. It is simply inconceivable that the Romney camp did not anticipate the Bain attacks—after all, Romney has faced them before. Nor does it seem possible—despite Abby Huntsman's suggestion that Romney would resign the campaign before releasing more tax returns—that the campaign does not ultimately plan to release all of Romney’s financial information. Therefore, one has to believe that we are watching a rope-a-dope strategy of letting the summer weeks go by, content to let Team Obama punch itself out. And to date, Team Romney may be right. After all, the national numbers have remained in the range of 47-45 for some time, and the salient point of this is that as long as the President cannot sustain his numbers above 50%, the race is very much in play.

If this is the plan, the moment that seemed discordant was Romney’s demand for an apology. Apologies, and specifically demands for apologies, are just not part of the game. Or as Mitt Romney himself lecturedMike Huckabee in 2008, rule number one in politics: No whining.

Romney’s demand for an apology evinces weakness—particularly to a President who is now famously picking individuals to be targeted by cruise missiles. This is not a normal stance for a Republican facing a Democrat. But more than just violating his own political rule, by whining about attacks on Bain and outsourcing Romney is missing an opportunity to take on the central issue that has been missing from this presidential race.

Both candidates have given lip service to this race being about the middle class, yet there has been little substantive discussion of what that means. This is a real area of weakness for President Obama, whose understanding of the economy appears shallow and whose selection of advisors has been poor. On the other hand, Romney’s work at Bain should provide a window into the real forces that have affected the U.S. economy over the past thirty years. Specifically, outsourcing is a symptom, not a cause, of the problems affecting the middle class. The potential of bringing manufacturing jobs back to America is a good thing, but even that discussion has avoided the larger question of what it would take for America to regain a sustained competitive advantage in the global economy. As long as we don’t discuss our history and the causes of decline, it is difficult to make meaningful policy decisions going forward.

Richard Nixon remains a cloudy and widely reviled figure in our politics, who lived out his years in disgrace, yet his presidency marked the turning point in our modern economic history. He ended a war in Vietnam that was escalated by two Democrat presidents. And more importantly, he began the process of normalizing political relationships with our two greatest political adversaries, the Soviet Union and China. In the economic realm, he ended the Gold Standard and birthed OPEC as an economic force, both of which contributed to the emergence of the U.S. dollar as the global reserve currency.

The ensuing end of the Cold War brought hundreds of millions of workers out from behind the Iron Curtain and from formerly insular economies such as India into the world labor market. During the years of the Cold War, Democrats and Republicans alike envisioned a free trade world that would replace military hostilities and the threat of nuclear war with economic competition involving our former adversaries. And so it has.

The decline of the American middle class in the face of new, global competition should have come as a surprise to no one. Over the past three decades, nations across the world have build their own economies through labor competition tied to pegged currencies that allowed them to deliver low-cost goods to the U.S. consumer market. The fact that real incomes in the U.S. have largely been flat over the past several decades could be seen as a triumph, given the circumstances. Plunged into competition with nearly free labor, one can imagine that the devastation of our economy might have been far greater.

Unlike the President, Mitt Romney had a front seat during this era of massive economic change. He sat in corporate boardrooms where decisions were made to reduce costs or otherwise seek strategic advantage. Reducing costs and seeking competitive advantage are part and parcel of corporate strategy in competitive markets. Companies do this, or they die. And seeing such companies survive rather than die was the work that Bain Capital specialized in. If Bain Capital advised its portfolio companies to outsource manufacturing or services—and it is inconceivable that it did not—this was not out of animus to workers, but just part of the job. That is the way it is in the real world.

And the way it is in the real world is what Mitt Romney and Barack Obama should be talking about. The American worker has been lied to for decades. Election year after election year, politicians pronounce the American worker the best in the world, as if this was meaningful. Rarely does a politician speak the truth: for decades now, American workers have been thrown to the wolves, first in the interest of Cold War foreign policy, and more recently in the interests of a political and corporate elites that profit mightily from globalization.

Along with outsourcing, political contributions have become a critical tool for seeking competitive advantage. The impacts of free trade and political cronyism have been the focus of political campaigns on the right and left. Pat Robertson, Ralph Nader, Ron Paul and Dennis Kucinich each spoke to these issues, in nearly identical terms. Each have pointed out in great specificity how our economic, budgetary and military policies have undermined the middle class and served corporate interests, yet each were marginalized and ultimately ridiculed by the aligned interests of the major political parties.

Today, the plight of the middle class is debated in terms of inequality. Yet this debate has focused on who pays how much in taxes—epitomized by the Occupy movement “single, clear demand” for a Robin Hood tax—which again is a symptom of the problem, not the cause, rather than on global labor and currency markets.

Mitt Romney maintains that his campaign is about the plight of the middle class, yet so far, he has had little to say beyond the normal prattle about knowing how to create jobs. He has failed to show how his inside experience in the corporate world combined with his experience as a governor of an industrial state give him a unique insights into the nature of global economic competition, and the ability to craft solutions that might aid the plight of working Americans. There is a case to be made for changes that would be directly enhance our competitive advantage as a nation—such as ending pegged currency relationships, building low cost energy as a national competitive advantage, addressing structural deficits—but Romney has not made that case. 

This is the response that Romney has failed to make as the onslaught continues from the Obama campaign. No apology will be forthcoming, and none should be. Bain did—during Romney’s tenure or otherwise—what Bain was supposed to do, what the rules of the competitive marketplace dictates that companies must do. If there is an apology to be made, it should be from Romney for his failure to make good on the central argument of his campaign: that he understands how the economy works, and can translate that knowledge in to a positive vision for renewal of the American economy.

For the next six weeks, the respective presidential campaigns will seek to define the terms of the race to come. The Obama campaign is an open book. As the incumbent, he has no choice but to run on his record. Its challenge will be to motivate its base to replicate the turnout it achieved four years ago—knowing that the moment of inspiration is past—keep the focus on Romney's character and Republican recalcitrance, and convince independent voters that the President remains their best option.

The Romney campaign is far more opaque, as even its summer strategy seems to lack focus. Unlike the President, the Romney campaign has all of the tools in place to assure a motivated base, from John Roberts’ treachery, to the stewing resentments around contraception funding, to the ultimate motivation: the thought of four more years of Barack Obama occupying the Oval Office. Ironically—given Romney's bona fides as a moderate, blue state governor—Romney’s challenge will be the independent vote. That vote disdains the passions of the Republican base and is looking for more than a negative motivation. Perhaps the Romney campaign summer strategy is playing rope-a-dope, dumbing down expectations before a campaign of shock and awe to win the center. Endorse Simpson-Bowles, break up the banks and tackle campaign finance excesses.

Or perhaps what we see is what we get, and Mitt Romney doesn’t really have anything to say. Or as one Massachusetts pol commented to me a while back, "you'll see, there really is no there there."

Unrighteous mammon.

As I write this, Bruno Iksil is still riding the Bongo Board. We have all done it, at least those of us of a certain age. We got up on the Bongo Board and we thought we could stay up forever.

One can only imagine the endorphins pumping across the world’s trading desks. The king of the hill, JPMorgan, has seen its killer trade—reputed to entail multiple hundreds of billions of credit default swap notional amount—go the wrong way, and now they need to reverse out of their position before the stink gets worse. The loss of two billion dollars announced a week ago grew by a billion in a week, and clearly the fire sale is not over.

Faced with a public relations fiasco, Jamie Dimon let his long-time, trusted lieutenant, Ina Drew, take the fall. Meanwhile, Iksil—the trader that amassed the positions that have been a topic online since early April—cannot be let go because he is the one that understands the billions and billions of complex derivative contracts that now need to be unwound. It must be quite a spectacle on derivatives trading desks around the world. It is get-back time, and in that world no one takes any prisoners.

As the hedge funds continue to circle in the water, feeding off of JPMorgan's exposed balance sheet, Dimon’s friends on Capitol Hill have been quick to come to his defense. House Financial Services Committee Chairman Spencer Bachus (R-Alabama) was quick to minimize the importance of one loss, whatever its size, while across the aisle President Obama lauded Dimon's bona fides and JPMorgan as “one of the best-managed banks there is.”

Politicians jumping to Jamie Dimon’s defense are missing the point. This is not about a single trade or one loss. Iksil, whose nicknames “Voldemort” and the “White Whale” (think Ahab’s nemesis, not a fat Frenchman) should give a hint as to his industry reputation, and now that the hedge funds have tasted blood JP cannot get out until the counterparties are good and ready. That the loss is still growing simply means that they are not ready to let go.

But if JP’s counterparties have Bruno by the balls, so too does Dimon have a firm grip on the nation’s political leadership. Last week on Meet the Press, Jamie Dimon described himself as still a Democrat, but just barely. Once a prominent Obama supporter, Dimon is one of many across the finance community who feel that they have been unfairly tarred for cratering the global economy.

To put a finer point on it, despite the media feeding frenzy surrounding Voldemort’s personal Black Swan event (Nicholas Taleeb’s now-famous phrase for things that can’t go wrong, until they do) comments from our nation's capitol remain measured, almost fawning. Democrats and Republicans have fallen over each other to praise Dimon as America’s Greatest Risk Manager notwithstanding JPMorgan's contretemps. Dimon's reputation grew out of the ease with which JPMorgan navigated the financial crisis, though some have suggested that Dimon's predecessor as CEO, Bill Harrison, deserves a fair share of the credit. Harrison, apparently, minimized the bank's exposure to exotic mortgage derivatives and handed Dimon a pretty clean balance sheet when Dimon arrived on the scene as CEO in 2006.

While some of the adulation garnered by Dimon may well be warranted, it is likely that most of the politicians uttering the hosannas have no idea what risk management is. It may be that what we are actually watching is a not very subtle food fight between our two political parties for campaign cash. Simply stated, this is not about Dimon's management skills, rather it is about his wallet.


Over the past two decades, the financial services sector has been the most generous source of political money, and that money has been up for grabs. For decades, the Republican Party was the party of Wall Street. That singular identity ended during the Clinton administration, which was determined to lure Wall Street's lucre across the aisle. While Clinton and the Democrats grabbed the golden ring, the price for the nation was steep: the Financial Services Modernization Act of 1999 and the ensuing Commodity Futures Modernization Act of 2000 that together laid the groundwork for the financial services world as we know it, and as the world came to experience it in the global financial meltdown of 2008. During the last presidential cycle, according to OpenSecrets.org, the financial sector remained far and away the largest source of political contributions, with 54% going to Democrats, while this time around—in the wake of industry anger over Dodd-Frank reforms—the tide has turned and 77% of that money is gracing Republican coffers.

Could it be that Chairman Bachus was quick to rise to the defense of JPMorgan because that bank has been the leading source of contributions to his campaigns over the course of his career? Could it be that President Obama is treading lightly on the issue because to date he appears to have lost his edge with two of his largest financial supporters from 2008—Goldman Sachs and JPMorgan—who according to OpenSecrets.org are the two largest sources of contributions to the Romney campaign?

It is getting boring reading about how the events of the past week—to say nothing of the past decade—suggest why our banks should be smaller or risk trading functions separated from traditional commercial banking. Democrats that continue to believe that we can regulate our way out of this either don’t want to give up their share of the money or simply lack imagination. Banks should be smaller so they can fail with the regularity with which small banks do fail. JP’s oft-repeated argument that their nearly one hundred trillion dollars derivatives book is book-matched and therefore does not constitute a systemic risk to the financial system is disingenuous at best and simply dishonest at worst. 

Lost in the endless—and endlessly self-serving—arguments is the fact that commercial banking is essential to the economy—and thus is supported by numerous institutions including the FDIC and the Fed—and that the integration of investment banking and commercial banking—a brainchild of Dimon’s mentor Sandy Weill—has brought little to no demonstrable value to commercial banking’s core societal function, while bringing much to the investment banking world—massive bonuses, a bottomless supply of free capital and the socialization of trading risk.

Both Jamie Dimon and our nation’s political leaders face the same fundamental problem: as risky as the status quo might be, no one can afford to give it up. For Jamie Dimon, derivatives trading is a gravy train that has underpinned JPMorgan's profitability, regardless of the larger threat it may entail, while for our political leaders major contributors are an irreplaceable constituency always for sale to the highest bidder. 

But don’t worry about Bruno Iksil. Whether Jamie Dimon finds he has to let him go, or figures out a way to keep him, he will be fine. There will always be a market for a proven derivatives trader, particularly one with the moniker of the true master of the universe. He will not be tainted by this trade, no matter what the final damage turns out to be, or at least not for long. After all, take a look at his new boss who took over from Ina Drew. He was formerly a trader at Long-term Capital Management.

Same story, just a few crises ago.

Not the way it was supposed to be.

Last month, the Territory of the Northern Mariana Islands became the first U.S. public pension fund to declare bankruptcy. Like many public pension plans across the country, the financial condition of the Northern Mariana's pension fund deteriorated significantly over the past five years. With $256 million of pension fund assets available to fund $1 billion of pension fund liabilities—a "funded ratio" of just 25%—the trustees of the Northern Mariana's pension fund have suggested that they may be able to pay out just 50% of the retirement benefits promised to public employees under the defined benefit pension plan.

There may be those who hope that because this tiny U.S. territory is way, way offshore—situated as it is somewhere between Japan and Papua New Guinea—events there cannot be a harbinger of things to come here on the mainland. But just two weeks later, much closer to home, Mayor Angel Taveras of Providence, Rhode Island, approved a plan to sharply curtail pension benefits to current workers and retirees in an effort to keep that city out of bankruptcy. Faced with a pension fund that is 32% funded, Taveras' pension reforms ended cost of living increases for retiree benefits until the City pension system’s funded ratio increases to 70% and capped the annual pension payable to any one individual at 150% of the median state household income.

Problems with public employee pension plans have been brewing for some time. These plans promise retirees a “defined benefit” that is generally calculated as a percentage of an employee’s average compensation over the last few years on the job. The cost of the future benefits are supposed to be budgeted and funded each year by a combination of employer and employee contributions in an amount calculated by the system actuary to be sufficient to fund—together with projected earnings rate on those contributions—the future benefits earned in that year. That way, as long as these “normal costs” are budgeted and paid over to the pension trust fund each year, and the assumed earnings rate on the pension fund deposits are achieved, the pension system will be fully funded and future taxpayers will not be required to fund benefits earned by employees in prior years.

As recently as a decade ago, in the wake of the stock market boom of the late 1980s and 1990s, municipal pension plans were in good shape, with many boasting funded ratios in excess of 100%. But over the past decade, equity markets have not fared well and pension fund investment returns have fallen short of actuarial targets, averaging less than 6.00% over the course of the decade and 1.00% over the last year.

By 2010, according to a study by Barclays, state pension funds on average were just over 60% funded, and underperformance relative to actuarial earnings targets has led to new "unfunded actuarial pension liabilities" that are now the responsibility of the sponsoring governments in the same manner as a communities general obligation bonds. The Barclay's study began by noting that the unfunded pension liabilities of the states are estimated to be as much as $3 trillion, or six times the amount of bonds outstanding. The impact of pension problems at the local level has been dramatic, as pension system actuaries have required significant, long-term increases in pension contributions to fund theses new, unfunded pension liabilities.

For example, based on data from the California State Controller, in my city of Berkeley, the employer contribution rate for police—the largest area of municipal spending—has grown from 3.6% of salaries ten years ago to 40.4%, usurping much needed funds from other purposes to meet these new pension costs. The same issue is affecting funding for government services across the County, according to data from the Stanford Institute for Economic Policy Research.  The following graphic illustrates dramatic impact of the growing cost of these new pension liabilities, which will soon consume 10% of the entire County operating budget. This translates into a diversion of approximately $200 million that would otherwise be available for spending on public safety, public assistance, healthcare and other critical public programs.

This is not the way it was meant to be. Beginning around the 1840s—in the wake of defaults by a number of states in the nascent United States—new state constitutions were established across the country that placed severe restrictions on the ability of states to take on debts or other liabilities that would place a burden on subsequent generations. For example, the California constitution that provides that "The Legislature shall not, in any manner create any debt or debts, liability or liabilities" without a two-thirds vote of the legislature and subsequent approval by popular referendum. However, at the same time, that constitution and the federal constitution prohibit the impairment of contracts, which has been presumed to protect public employee pensions.

The moral dilemma presented by the pension issue is embodied in the apparent conflict between two first principles of governance: Limitations on the creation of debt and the sanctity of contracts. On the one hand, the constitutional framework established in the 1840s placed severe hurdles on the ability of elected officials of one generation to place burdens on future generations. On the other hand, sanctity of contract provisions of both state and federal constitutions provides both the moral and legal basis for non-impairment of vested pension rights.

As defined benefit pension plans have evolved—by taking on greater investment risk as they increased benefit payouts—the effect has been to shift 100% of that investment risk to the taxpayers. When pension fund investment returns fell short of the actuarial earnings target, new liabilities were created. Essentially, the labor agreements that embodied the pension commitments became a source of new public liabilities, bypassing what in many states are long-standing rules constraining the creation of new liabilities.

Moral indignation lies at the heart of the pension crisis. For their part, workers have for decades paid into their pension plans based upon contractual commitments. Pensioners reasonably believe that they are entitled to what the rules say they are entitled to, that they obtained their benefits openly and legally and properly, and that the benefits are owed to them as a matter of rights.

On the other side are communities that are being forced to cut essential services as the cost of unfunded pension liabilities—liabilities that appeared as out of thin air—grab an increasing share of current budgets. Public support for public pensions has been further eroded by stories about abuses of pension rules—pension "spiking" schemes and double dipping—that game the system to increase individual payouts.

Although early on the pension crisis seemed destined to play out as a one more Democrat vs. Republican spat, it has migrated beyond party boundaries. It was a Democrat mayor in Providence that approved new, draconian pension reforms, and a Democrat Governor in California that is proposing pension reforms that so far have only received Republican endorsement. And last year, San Francisco's elected Public Defender Jeff Adachi—an unabashed progressive—ran for mayor specifically to confront the pension question and the huge diversion of funds from core social services that is undermining that city's social service infrastructure. 

The pension issue is not going to go away. The financial impacts of pension deficits are going to be felt at the state and local level for years, and will continue to influence the political landscape as politicians are forced to confront that which is manifestly broken. And lying in the background will be the experience of the Northern Mariana Islands, a harbinger of things to come if communities and public workers fail to confront, and ultimately fix, the problem.

Published on The Huffington Post on May 24, 2012.

Aung San Suu Kyi and the prospects for a new grand bargain.

The election of Aung San Suu Kyi is a useful reminder that change and progress is possible even in the most apparently sclerotic societies. Whatever the combination of external pressure and internal dynamics, the notion that there is a parliament in the country formerly known as Burma, that there are elections that matter, and that long-time pro-democracy dissident Aung San Suu Kyi won a seat, is a reminder to a casual observer that the status quo can evolve. Perhaps if change is possible in Myanmar, it is possible here as well.

After a week of watching the partisan hostilities surrounding the Supreme Court’s oral arguments on Obamacare, Matt Bai’s article in the New York Times revisiting the failed “grand bargain” that might have ameliorated our continuing budget crisis suggests both how close the sides came to a viable agreement. Notwithstanding lingering questions about whether the President Obama changed the terms of the deal at the last moment and whether Speaker John Boehner could have delivered the votes of his restive caucus, it seems clear that Obama and Boehner fundamentally understand the urgency of addressing our long-term budget challenges before market forces make such a resolution far more difficult.

The intractability of our budget problems are illustrated in this dynamic graphic that illustrates the changes over time in the population distribution by age of the United States from 1950 to 2050. As shown here in the snapshots of the beginning and end of that century long period, the age distribution by 2050 has a far greater share of the population in the post-65 retirement years, compared to the beginning of the century when the population distribution reflected a larger working age population supporting their retired parents and grandparents.

These demographic trends tell much of our budget story. The steady aging of the population and the declining share of the population that are in their economically active years demands that difficult choices be confronted. With an aging population and with increasing longevity, and a declining share of the population in their economically productive years, the costs per retiree are growing steadily and demanding a steadily increasing share of national resources.

When the Social Security system was created in the 1930s, average longevity was less than the retirement age of 65. That is to say that the average American at the time died before they were eligible to receive benefits. In 1950, there were sixteen workers paying into the system—which remains in large measure a pay-as-you-go system where current payroll taxes pay for current retiree benefits—compared to 2.8 workers by 2010. Today, with longevity approaching 80s and the retirement age still at 65 for most Americans, simply to cap retiree and health spending at a constant percentage of GDP would require some combination of extending the age of eligibility, means testing and/or changes to the benefits formula.

The graph below illustrates the pattern of federal spending over the past several decades, and projected for the next decade by the Congressional Budget Office. As illustrated here, over the past decades, the cost of core entitlements has grown steadily to usurp a growing share of federal spending. As this graph suggests, if federal spending were to be capped at its pre-financial crisis average since the mid-1970s of 20.8% of GDP, five categories of spending—Social Security, Medicare, Medicaid, Defense and Net Interest—will steadily squeeze out all other areas of entitlement and discretionary spending. By 2022, Everything Else is reduced 57% from its historical average of 6.4% of GDP to 2.7% of GDP.

The Obama-Boehner negotiations illustrate the challenge to the two political parties—and particularly to the ability of the party leadership to bring along their rank and file—in navigating their way to a long-term budget solution. The urgency of controlling our destiny sooner rather than later is illustrated in the growing Net Interest share of the federal budget over the coming decade. The growth in Net Interest shown here reflects optimistic assumptions by the Congressional Budget Office of only gradual increases in federal borrowing costs, with the 10-year treasury barely reaching 5% over the coming decade.

It is notable that Net Interest, currently 1.5% of our national GDP, peaked in 1991 at 3.3% of GDP in 1991 in the wake of Reagan-era deficit. However, our public debt currently stands at four times the amount in 1991, while current net interest costs reflect today's absurdly low interest rates that are around one-fourth of what they were back then. We do not have to face a Greece-like scenario threatening loss of market access, skyrocketing interest rates and default for our failure to control our financial destiny to wreck havoc on our national budget and politics. All it would take is for economic activity to rebound and investors regain comfort with global debt and equity markets, and we can reasonably expect to face a scenario with substantially higher federal borrowing costs. For example, should interest rates return to 1991 levels, the interest costs of our current level of public debt would rise from the current 1.5% to closer to 7% of GDP, well more than the share of national income consumed today by Medicare, Social Security or defense.

The problem, of course, is that everyone in Washington wants to solve the nation's fiscal imbalances by placing the burden on the back of someone else’s constituency. Democrats, as New York Mayor Michael Bloomberg pointed out in an op-ed this week, are living an illusion in their suggestion that tax hikes on the rich alone can do anything meaningful to solve our fiscal problems. For their part, Republicans have demonstrated no appetite for compromise on budget solutions. W. counsel John Yoo argued in an op-ed this week that regardless of the outcome of this week's Supreme Court arguments, salvation can only come through complete dominance of both branches of Congress as well as the executive branch.

House Budget Committee Chairman Paul Ryan is one of few in Washington who has proven himself willing to grapple with the entitlement nettle, however vague his budget proposals might be. Democrats only undermine their own credibility as they attack Ryan's budget proposals with accusations that Republicans are throwing the elderly under the bus. The fact is that one way or the other, the future will be different from the past, the question is when our political leaders will face up to the challenges. And the longer they wait, the more painful the required changes will be.

Congressman Ryan, like President Obama, rejected the Simpson-Bowles Commission recommendations. The failure of the President to provide leadership on the issue was particularly puzzling as the Commission report came in the wake of the off-year 2010 elections in which Democrats—and the President in particular—were soundly rebuked. One does not need the benefit of hindsight to wonder how the President’s political advisors at the time could have believed that he could negotiate a better deal with Republicans than what the Simpson-Bowles Commission put on the table.

Looking back, one has to imagine that either the President underestimated the severity of the budget challenge or overestimated his ability to persuade his Republican opposites. Neither conclusion is comforting. However, the portrait painted by Matt Bai in the President's negotiation with the Speaker suggest the latter, that the President is prone to overestimate his negotiating ability, as Bai's account suggests that the President had a deal within reach, but changed the terms at the last minute.

For his part, Paul Ryan’s rejection of the Simpson-Bowles Commission recommendations as a member of the Commission led directly to the Commission’s failure. Had Ryan supported that balanced plan, he likely would have brought with him the two more votes necessary to force an up-or-down vote in Congress, and the entire history of the fiscal debate and the debt ceiling travesty might well have been different.

For Tea Party fellow travelers—who in Matt Bai's account were an unmovable obstacle to a budget deal even as the President won the acquiescence of Congressional Democrats—the budget question is fairly straightforward: What is the greater evil, debt or taxes? Both parties would prefer to imagine a world where they dictate the outcome and do not have to compromise on their principles. But we don't have a parliamentary system; the two sides ultimately have no choice but to work together and no one is going to get the outcome that they prefer.

Aung San Suu Kyi’s victory should give us hope that if change can happen in Myanmar, we should set aside our cynicism and insist that the dysfunction and gridlock in our nation's capital not allow our country to risk meandering further down the tracks toward a fiscal and—societal—train wreck. President Obama and Speaker Boehner understood the parameters of a solution—as did the Simpson-Bowles Commission—and came remarkably close to a deal. The solutions are not difficult to imagine, just the willingness of our leaders to embrace them, and their followers to follow.

Hubris stands before the court.

I believe that the Supreme Court will uphold the individual mandate that is at the core of Obamacare by a vote of 6-3. Based on no legal theory whatsoever, I expect Chief Justice Roberts and perennial swing vote Justice Kennedy to vote with the Liberal wing to uphold the act of Congress.

OK, maybe expect is a strong word. Hope would be better. But it's not about the law, it's about the Court itself.

Spending last week in our nation’s capital, I listened to the astonishing vitriol of members of Congress and other publicly spirited Americans expressing their outrage at a law that would, to summarize their argument, bring the full weight of tyranny to our shores and mark the end of freedom in America. In the view of the assembled masses, should the Supreme Court fail to act—or the people in some other form fail to rise up—ours will be the generation who will have to explain to our grandchildren why we let freedom and liberty, our most hallowed values, die on our watch.

Lost in the arguments of conservatives and right wing activists was the fact that the individual mandate—the essential element that would bring tyranny to our homes—was initially raised as the preferred strategy for healthcare reform by the right. Dating back to 1989, the Heritage Foundation articulated the view that an individual mandate to purchase health insurance—rather than government provided healthcare or an employer mandate proposed by Democrats—should be a central element of healthcare reform:

“Society does feel a moral obligation to insure that its citizens do not suffer from the unavailability of health care. But on the other hand, each household has the obligation, to the extent it is able, to avoid placing demands on society by protecting itself... A mandate on households certainly would force those with adequate means to obtain insurance protection."

Three years later, the Heritage Consumer Choice Health Plan went further:

“Require all households to purchase at least a basic package of insurance, unless they are covered by Medicaid, Medicare, or other government health programs.

"All Heads of households would be required by law to obtain at least a basic health plan specified by Congress...

"The private insurance market would be reformed to make a standard basic package available to all at an acceptable price."

The moral rationale for the individual mandate was stated succinctly at the time by Heritage Foundation Senior Fellow Robert E. Moffitt:

"Absent a specific mandate for at least catastrophic health insurance coverage, some persons, even with the availability of tax credits to offset their costs, will deliberately take advantage of their fellow citizens by not protecting themselves or their families, with the full knowledge that if they do incur a catastrophic illness that financially devastates them, we will, after all is said and done, take care of them and pay all of the bills. They will be correct in this assessment...

"An individual mandate for insurance, then, is not simply to assure other people protection from the ravages of a serious illness, however socially desirable that may be; it is also to protect ourselves. Such self-protection is justified within the context of individual freedom; the precedent for this view can be traced to none other than John Stuart Mill."

What has changed, of course, is not the logic of the Heritage Foundation's argument, but the politics. The individual mandate—a public policy that was central to Republican healthcare reform alternatives to Hillarycare—became anathema to the right by the time it was finally embraced by Democrats as an alternative to the left’s preferred single-payer or employer mandate approaches. A Cato Institute attack in 1994 on the Republican embrace of the individual mandate foreshadowed the current attacks on Obamacare, and illustrates the drift to the right in Republican policymaking in the Tea Party era:

“The most troubling aspect of the Nickles-Stearns [Republican healthcare reform] legislation, as introduced on November 20 [1993], is the mandate that it imposes on all Americans to purchase a standard package of health insurance benefits. By endorsing the concept of compulsory universal insurance coverage, Nickles-Stearns undermines the traditional principles of personal liberty and individual responsibility that provide essential bulwarks against allintrusive governmental control of health care."

In the late 1970s, Duncan Kennedy and the crits created turmoil within the hallowed halls of Harvard Law School by offering the horrific—if self-evident to many—observation that law and the courts are a tool of social power. This month, conservative jurist J. Harvie Wilkinson published Cosmic Constitutional Theory. Wilkinson, a federal appeals court judge often mentioned as a Republican Supreme Court nominee, mirrored Kennedy and the crits in his March 11, 2012 op-ed arguing in his opening paragraph that liberals and conservatives alike have conspired to undermine the role of law and the courts in our society.

“Both liberals and conservatives have the American Constitution in the cross hairs. They assault the Constitution in their different ways, each with damaging effects on our nation. Conservatives attack the courts on one hand and seek to have them advance their activist agenda on the other. Liberals, when it suits them, embrace rights that have not been enumerated in the Constitution and cry for restraint only when their pet bills come under fire. The result is a national jurisprudence whetted by political appetite, with our democratic values as the victims.”

Wilkinson essentially argues for leaving political decisions to those elected to make political decisions, and suggests that the grand legal theories—from the jurisprudence of original intent on the right to living constitutionalism on the left—are simply covers for justifying the use of the judicial branch as a tool to achieve political goals.

For many, the swift and party-line action of the Supreme Court in Bush v. Gore deeply damaged faith in the Court as a reasoned arbiter of our political system. But that was a unique circumstance. This week’s argument, as Judge Wilkinson makes clear, is specifically about whether a politically motivated majority on the court will act to directly overturn an act of Congress simply because they want to, and because they can.

During the second day of arguments, Justice Antonin Scalia suggested to Solicitor General Donald Verrilli that allowing the individual mandate would lead to a world where Congress could compel Americans to buy broccoli. Scalia's question would have been more insightful had it not simply mimicked conservative talking points circulating the prior the weekend making the argument that to let the individual mandate stand would lead to a world where the government would make us buy broccoli and GM cars. Hearing Justice Scalia use an argument from conservative talking points illustrated Wilkinson's argument that the high court may have reduced itself to just another player in our ongoing political wars, and placed at risk its cherished role as the last refuge of integrity.

The history of the individual mandate is what makes this circumstance so defining. The individual mandate began as a conservative doctrine, embraced early on by conservative Senators who today attack the same policy with no sense of shame or irony. Far from being the hallmark of tyranny, the individual mandate under Obamacare marks the success of the Republican Party in pushing Democrats to the right, to the embrace of market solutions over the employer mandates or single payer options.

This case is not about tyranny. It is not about broccoli. In a sense it is not even about the Commerce Clause. At the end of the day, it is about whether those on the Court are prepared to step back from the abyss that Wilkinson describes, and leave the making of laws—and our political debates—to Congress and the President. By the third day, the arguments went beyond the constitutionality of the individual mandate to overturning the entire act of Congress, as specifically argued by former Solicitor General Paul Clement, representing the 26 states challenging the law.

There were no cries of tyranny from the right when the Heritage Foundation first proposed the individual mandate, and those cries today are nothing more than one more manifestation of our political wars—wars in which those on the Supreme Court engage at their—and our—peril. Paul Clement's argument that they entire law should be shunted aside by the Court demonstrated how far the Court has drifted toward becoming just one more tool of the political combattants.

Chief Justice Roberts and Justice Kennedy—the most likely swing votes—hold in their hands the question of public faith and confidence in the Supreme Court. I believe that they will each ultimately choose to validate that faith. And I hope they will validate that faith, because even more than healthcare, our society needs a Supreme Court that we can all have faith in.

Moving on.

It is now over, perhaps someone will tell Rick and Calista.

This week, Jeb Bush quietly endorsed Mitt Romney—silencing the quiet yearning of Republicans who for months have hoped that Bush might yet emerge through a brokered convention—and Tea Party leader Jim DeMint urged Republicans to embrace him. For all the sturm und drang, the Republican Party’s imitation of a Democrat nominating fight seems to finally be over.

Further evidence of this emerging political reality could be seen in Santorum’s increasingly shrill rhetoric. First, standing in the ashes of his Illinois primary defeat, Santorum sought to raise the stakes—and the hyperbole—when he suggested that this presidential race was “the most important election since the election of 1860.”

Santorum seemed to lack any sense of irony in his comments. The notion that we are at a sesquicentennial moment—that our liberty and freedom, our status as a unitary nation, are at a moment of transcendent risk—might make one wonder why Santorum is the best his party could offer in such a moment. Such moments might call for yet another Bush, but despite his admirable passion for the cause, Santorum has failed to make the case beyond a narrow spectrum of the national electorate.

There has been a lot of gloating on MSNBC over the past few weeks, as the Republican kerfuffle seemed to push the Republican Party and its presumptive nominee out to the political fringes of the national polity. Just one week after the Republican trans-vaginal episode in Virginia, they seemed intent on getting decked out in full genitalia, as Santorum and Limbaugh insisted on adding contraception to the public debate.

This week it was Romney political strategist Eric Fehrnstrom’s suggestion that his candidate would not be hurt by a primary campaign that focused on issues that would not play well in a general election, when he observed that “I think you hit a reset button for the fall campaign. Everything changes. It’s almost like an Etch A Sketch. You can kind of shake it up and restart all of over again.”

But while Santorum and Newt eagerly displayed their Etch A Sketch props, and Democrats eagerly piled on, few seemed to acknowledge that despite all the fun of the moment, Fehnstrom is largely correct in his observation. If there was enduring damage in the Etch A Sketch comment, it is in the apt metaphor it has offered for Fehnstrom’s candidate, not for his campaign.

Come the fall, there will indeed be a new starting line, and the President will be hard pressed—much as his advisors might love the thought—to keep contraception on the front burner. While Obama’s re-election team moved quickly to seize the high ground in the wake of the Republican genitalia offensive and launch its Women strategy, the irony could not have been lost on any who have read Ron Suskind’s Confidence Men, a rather thorough smear of the President as manager and team leader of a misogynist horde—led by since-dismissed Larry Summers and Rahm Emanuel.

The Women strategy will matter, because for all the premature victory cries on MSNBC when the whistle blows starting the fall race, Obama and Romney will be somewhere around 45-45 and the fight will be over the remaining 10%. Just like Hillary’s supporters who came around to vote for Obama, the Republican right will be sufficiently motivated to show up on November 6th by visions of Barak Obama’s second term that they will get past the fact that they have no idea what Mitt Romney actually believes.

Romney will have the opportunity to start again and run the campaign he wanted to run all along. Even today, in the midst of the Santorum onslaught, Romney’s campaign’s website says nothing about social issues. The issues are jobs and growth, foreign policy, and managing the government. The only reference to social or cultural issues is the masthead statement “We have a moral responsibility not to spend more than we take in.”

And he will get to run that campaign in a limited number of states. Looking back at 2008, Obama soundly defeated McCain 365 to 173, for a 192-vote electoral college margin. Obama won the electorate in order of age, with the strongest margins among 18 to 24 year old voters, and the highest share of the youth (66%) vote going back to 1972, as well as the highest share of women voters (56%) over the same timeframe.

The other group where Obama outperformed compared to recent electoral history was his winning of the moderate vote, with 60%, the highest share for either party over this same timeframe. And this is where Romney has intended to take the fight.

A moderate governor from a blue state, this was going to be Romney’s battle plan and battleground. And it still will be.

His focus will be on a handful of states, with few surprises, that could comprise a path to the 96 votes that Romney needs to win. He has to win back traditionally red states Indiana and North Carolina, as well as Virginia. Then he has to add Colorado and Nevada or New Mexico. Each of these states has sizable Mormon populations, a significant Tea Party presence, and were strongly contested in statewide races in 2010. And then there are Florida and Ohio, notorious battleground states that were each won by Obama by 200,000 votes four years ago.

The VP selection generally does not have much impact beyond one state, but in this equation, one state matters. Romney will not pick Santorum, just because it is his choice and he has to have more self-respect than to pick a guy who has savaged him so brutally. That leaves Florida Senator Marco Rubio, Virginia Governor Bob McDonnell and Ohio Senator Rob Portman as likely candidates to buttress his chances. But despite his Tea Party cred, Rubio is simply too young. McDonnell has to have been soiled by the transvaginal ultrasound affair, and certainly Romney wants to stay away from the word vagina. That leaves Rob Portman.

That would be a reasonable strategy looking at the electoral path to winning those 96 votes. Romney can lose Florida as long as he wins Pennsylvania. And he should win Pennsylvania if he wins Ohio. Hard to imagine he wins Ohio and Pennsylvania and loses Virginia. And he simply cannot count on Florida, even though Obama's margin was thinner in Florida than Ohio or Virginia, both because of Republican punting of Latino voters, and just because it is... Florida.

The election results in 2008 and 2010 point to a central question about 2012: Who will show up. The 2010 electoral rebuke of the President was not so much about a change in the national mood as much as a change in who showed up—a notably older and whiter slice of America than in 2008.

Obama will be well-served to focus on women, as the Republican gender gap—already wide—has only been exacerbated. While Rush Limbaugh has long set the direction of Republican national strategy, his is a rhetoric best kept to true believers.

The challenge for Romney will be to craft a positive message that charts and alternative direction for the country. His stump speeches lack either philosophical or policy vision. Instead, he is defining himself purely against the President—a political vesion of Professor Quincy Adams Wagstaff, Groucho Marx’ eloquent character in Horsefeathers: Whatever the President say, whatever the President does, Romney is against it.

The fall campaign will not be about anything that Mitt Romney and Rick Santorum are arguing about. And the national media has even caught up with the fact that arguments about the price of gas have long been the staple of political campaigns and ignore the reality of commodity pricing and markets.

Eric Fehrnstrom is correct. The slate will be wiped clean in the fall. The challenge for the Romney campaign will be to articulate an alternative, more conservative vision of the nation, and in the fall campaign Whatever he says, whatever he did, I’m against it is unlikely to suffice. There are many compelling and traditional Republican themes that one might embrace—perhaps smaller banks, ending government-by-lobbyist, curtailed foreign entanglements, and of course fiscal responsibility. However, while Romney's website asserts the moral responsibility not to overspend, in his stump speech he pledges not to touch Medicare, which raises the question of how Romney balances his sense of moral obligation in the face of political exigencies. This is his Etch A Sketch problem.

For his part, the President’s reelection may yet rest on factors beyond his control. He has doubled down on claims that we are out of the economic woods, yet that remains a tenuous claim. And then there is Iran. Supreme Leader Ali Khamenei may yet meddle in our elections, and for all the debates over Obamacare, the President’s reelection may yet be influenced as much by issues of war and peace as by individual mandates and the commerce clause.