WHAT IS BEHIND THE INFLATION IN EMERGING MARKETS?

The President's Rotten Record on Trade

Why George W. Bush is the most protectionist president since Herbert Hoover

Bruce Bartlett

Herbert Hoover is rightly reviled for having the worst record on international trade of any president. The Smoot-Hawley Tariff, which Hoover signed into law in 1930 after a Republican Congress passed it, was a significant factor in deepening the Great Depression. Since then, every president has embraced at least the rhetoric of free trade. But actions and rhetoric are different things, and George W. Bush in particular has preached free trade while advancing the agenda of a petty protectionist.

In so doing, he’s returning his party to its roots. From Lincoln through Hoover, a high tariff on imported manufactured goods was the foundation of Republican trade policy. The Democrats, as the party of the workingman, backed free trade. They understood that tariffs raised the prices of goods, fattened the profits of politically connected businessmen, and acted like a tax on the poor.

After Smoot-Hawley led to a collapse of world trade and helped sow the seeds of World War II, a bipartisan anti-protectionist consensus emerged. Protection, it was understood, could lead to tit-for-tat retaliation by other countries that might explode into a trade war or even a shooting war. One of Franklin Roosevelt’s first acts in office was to reverse Smoot-Hawley. He later insisted that freer trade be a key element of postwar planning, which led to the creation of the General Agreement on Tariffs and Trade. Harry Truman required nations receiving Marshall Plan aid to adopt free trade policies, a decision that probably did more to revive Europe’s economies than the aid itself. Dwight Eisenhower supported creation of the Organization for Economic Cooperation and Development to help maintain free trade among major industrialized countries.

From then on every president had a hand in liberalizing world trade. John Kennedy initiated a round of multilateral trade negotiations, concluded under Lyndon Johnson, that eventually led to a reduction in world tariff levels by about a third. Under Richard Nixon, another round of trade negotiations began, known as the Tokyo Round, which Jimmy Carter finally pushed through an increasingly protectionist Democratic Congress in 1979.

Slowing Down Fast Track

By the 1980s, the parties had largely reversed their historical positions on trade. The Democrats, especially in Congress, had come to view protectionism as a way to protect jobs for working people rather than as a tax on them. And with American businesses becoming increasingly multinational, Republicans now saw free trade and access to foreign markets as central to their constituency. Ronald Reagan initiated talks with Canada and Mexico on establishing a North American free trade zone and inaugurated another multilateral trade negotiation known as the Uruguay Round. George H.W. Bush pushed forward negotiations on both the Uruguay Round and the North American Free Trade Agreement, known as NAFTA. Bill Clinton concluded the Uruguay Round and rammed NAFTA through Congress despite strong resistance from his own party.

George W. Bush came into office hoping to expand world trade by further breaking down barriers, which increasingly take the form of subsidies that distort prices and create an unlevel playing field. His first U.S. trade representative, Bob Zoellick, was widely known for his commitment to open markets and was anxious to start a new round of trade negotiations.

But before negotiations can begin, Congress has to give the president negotiating authority, sometimes called fast-track authority. The president could negotiate whatever he wants and then submit it to Congress for approval.

But without negotiating authority in advance, such an effort likely would succumb to the inevitable amendments and filibusters. Fast-track authority gets Congress to bind itself to granting an up-or-down vote on the package at the end of the process, with no further political games­manship.

In 2001 Congress was not in the mood to grant that authority. Democrats were against anything that would either expand trade (and thus, in their opinion, threaten American jobs) or help Bush, whose election many considered illegitimate. GOP control of Congress was very thin, and with the economy in recession many Republicans were skittish about voting to promote trade if it might be seen as threatening domestic jobs.

Republicans in the steel-producing districts of Pennsylvania, Ohio, and West Virginia were especially fearful of electoral retaliation. They demanded that Bush do something to help the steel industry as the price for their vote on trade-negotiating authority.

In June 2001, Bush initiated an investigation by the U.S. International Trade Commission into whether the steel industry was being injured by imports. It was virtually preordained that the commission would find such injury, because of the low legal threshold for such a determination. The commission did indeed find injury in December. Under the law, President Bush had until March to decide what actions he would take to protect the steel industry.

At the same time, Republicans from agricultural areas were complaining about low farm prices and demanding more subsidies, even though Bush had promised to move toward a more market-based agricultural system during the 2000 campaign. It was vital Bush do the right thing on the 2002 agriculture bill because the whole point of the trade negotiations, known as the Doha Round, was to remove subsidies for agriculture, which cost taxpayers in the industrialized countries dearly while making it impossible for farmers in the developing world to compete and better themselves.

In both cases, Bush made exactly the wrong decision.

George W. Bush, Man of Steel

Only one justification for trade protection has widespread support among economists: to preserve “infant” industries, those just getting started and competing against well-established rivals. So it is ironic that the American industry that has sought and received the most protection over the years is not a new one, such as electronics or software, but the quintessential old industry: steel. It is always just on the verge of being competitive, the industry swears, and only needs a little breathing space to invest and modernize. Then tariffs and quotas can be relaxed.

But that day never comes. Since 1969 the U.S. steel industry has received continuous protection in one form or another. These barriers have cost U.S. consumers between $104 billion and $175 billion more (in constant 2006 dollars) for products made with steel, such as automobiles and appliances.

Many academic studies have concluded that steel industry protection has done nothing to improve its competitiveness. The higher prices simply raise industry profits or reduce its losses—and reduce incentives to innovate. Despite that, many analysts who usually support free trade have made an exception for steel on national security grounds, arguing that we need adequate domestic manufacturing capability to build ships and tanks in the event of war. But today’s weaponry depends much more on high-tech composite materials than on ordinary steel. According to an October 2001 Commerce Department study, no weapons system is dependent on imported steel; there will be more than sufficient domestic capacity for all Defense Department needs for the foreseeable future; and there are far cheaper ways of ensuring the Pentagon’s needs than through trade protection.

In late 2001 the Doha Round officially started. But well into 2002, the U.S. could not meaningfully participate because Congress had yet to pass fast-track authority. Steel and agriculture were the hang-ups.

On March 5, 2002, Bush sought to assuage those concerned about steel by imposing a 30 percent tariff on steel imports. In an amazing example of doublespeak, Trade Representative Zoellick explained that this was a major step toward free trade. The tariffs, he said, would compensate for government subsidies often given to foreign steel producers. Most observers saw Bush’s action as nothing but buying a few votes in politically important swing states.

The Europeans and Japanese immediately drew up lists of American goods they’d subject to retaliatory tariffs. On a trip to Beijing in April, hoping to open the Chinese market to more U.S. exports, Zoellick found Chinese officials unresponsive. Why should they open their market, they asked, when the United States was in the process of closing its own?

The Wall Street Journal worried that Bush’s direction on steel was weakening his ability to influence other countries on a variety of issues. “The policy mattered less than the abandonment of principle,” it editorialized. “It signaled to the world that Mr. Bush was not the president he had seemed after September 11; his moral and strategic clarity could be compromised for a price.”

By summer, a wide variety of steel-using businesses in the U.S. were complaining about a cost squeeze. Their raw material cost had risen by 30 percent, but they were unable to raise their own prices to compensate. This was especially the case for businesses facing international competition, since finished goods made with steel were not subject to the tariffs. Hence the tariffs put U.S. manufacturers at a competitive disadvantage in both domestic and foreign markets.

Bush’s steel policy probably did get him the last couple of votes he needed in the House to get trade promotion authority, so that the U.S. could finally participate meaningfully in the ongoing Doha Round. On July 27, 2002, 215 House members voted for the conference report on the trade bill, while 212 voted against it.

By January 2003, the steel tariffs had cost far more jobs in steel-using businesses than could possibly have been saved among steel producers. According to the economists Joseph Francois and Laura Baughman, 200,000 jobs had been lost among steel users. There were only 187,500 total jobs in the steel industry itself. Substantial numbers of manufacturers had been forced to move their production outside the U.S. to escape the tariffs. It is unlikely these outsourced jobs will return.

In a September 2003 study, the International Trade Commission concluded that the steel protection policy had been a net loss for the country, calculating that, on balance, the nation was worse off to the tune of $42 million. Furthermore, in May 2003 the World Trade Organization had ruled that the steel tariffs were illegal under world trade law. After a U.S. appeal was rejected, the European Union prepared to impose retaliatory tariffs on U.S. goods.

In December 2003, Bush finally bowed to reality and lifted the tariffs. But he continued to pay a heavy price in the Doha talks, as other countries repeatedly rejected American entreaties to lower their barriers to U.S. goods. As The Wall Street Journal put it, “When the world’s main economic power indulges in protectionism, everyone else figures it’s safe to do the same.”

Dooming Doha

Congress traditionally produces a farm bill every five years. The 1996 law had eliminated a number of subsidies and regulations, but its 2001 successor was a return to the older, subsidy-heavy approach. The final bill, signed by Bush in May 2002, raised spending by almost $90 billion above the previous law; the Congressional Budget Office estimated that it cost $470 billion over five years.

The importance of the new agriculture subsidies went well beyond the burden on the budget or the impact on farmers. They basically doomed the Doha trade talks, which were primarily about reducing farm subsidies worldwide—especially in Europe, where farmers are even more politically powerful than they are here.

When pushing for the new trade round, the United States had enthusiastically endorsed farm subsidy reductions, believing they would increase U.S. exports. But the only hope of achieving meaningful cuts in agricultural subsidies lay in appealing to the basic principle that such payouts are wrong—that they are costly, inefficient, and a poorly targeted way to help farmers, with much of the money going to people who are already well-to-do. By working together with the few other countries that generally support free trade, such as Australia, it might have been possible to shame the Europeans into making some kind of deal. But when Bush signed a massive increase in U.S. subsidies right at the start of the trade talks, he lost all credibility.

It didn’t help that the Bush administration also alienated Canada, another of the small band of free traders, by slapping a 29 percent tariff on Canadian lumber in March 2002. Not only did this raise the cost of homebuilding in the U.S.; it also led Canada to retaliate with a 71 percent tariff on U.S. tomato exports.

Another sad consequence of failing to curb agricultural subsidies is the further impoverishment of farmers in the less developed countries. By forcing down prices for agricultural products, subsidies drive many poor farmers out of business, making them dependent on food aid from the West.

The Bush trade mavens were willing to pick fights with anyone in the name of protection, including the supposedly dangerous superpower-in-training China. On November 18, 2003, the Bush administration announced a decision to impose new trade restrictions on imports of Chinese textiles. A petition from four textile industry groups, led by South Carolina Republican textile magnate Roger Milliken, got that ball rolling. It claimed Chinese imports “threatened to impede the orderly development of trade and caused market disruption in the U.S.” No proof was offered to support this allegation.

To show just how absurd the situation was, one of the new restrictions applied to brassieres. Yet there is no domestic manufacturer of this product. Some components are produced in the United States, but all are exported to low-wage countries in Latin America for manufacture. This is done solely because of a law requiring a degree of domestic content to avoid trade barriers when the final product is imported. The reality is that 100 percent of brassieres are imported. There’s no domestic industry to protect.

The day after the U.S. textiles decision, China canceled a trade mission to the United States that probably would have led to billions of dollars in orders for American goods. In previous weeks China had signaled a desire to increase its imports of planes from Boeing, jet engines from General Electric, and a variety of agricultural products as well as chemical and telecommunications equipment. Such purchases likely would have been greater than the value of the goods that were now restricted, creating vastly more jobs—and better-paying ones—than those protected in the textiles industry.

The Problem With Bilateralism

After the de facto collapse of the Doha Round, the Bush administration turned toward free trade agreements (FTAs) with individual countries or small groups of countries. Economists are dubious about the value of such agreements, which were often less about free trade than about pursuing new avenues for U.S. protectionism.

Before 2001 the U.S. had free trade agreements only with Israel, and with Canada and Mexico through NAFTA. In 2001 Bush signed an agreement with Jordan. In 2002 he initiated talks with Australia, Chile, Singapore, and five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua). In 2003 his administration successfully concluded negotiations with Singapore and Chile and began new talks with Morocco, Bahrain, four Andean nations (Colombia, Peru, Ecuador, and Bolivia), and five Southern African ones (Botswana, Lesotho, Namibia, South Africa, and Swaziland). In 2004 the talks with the Central American countries (to which the Dominican Republic was added) and Australia were completed.

Although the amount of activity involved in pursuing FTAs was certainly impressive, economists had serious doubts about their value. “Nearly all scholars of international economics today are fiercely skeptical, even hostile, to such agreements,” the Columbia University economists Jagdish Bhagwati and Arvind Panagariya argue in the Financial Times.

Key reasons for this hostility are that bilateral agreements—and smaller multilateral agreements, such as the Central American pact—divert attention and resources from multilateral agreements, which are vastly preferable. FTAs may divert trade flows rather than increase them and may lead trade blocs to impose restrictions on trade with those outside the bloc, thus raising the overall level of protection. Supporters of FTAs mostly argue that they are better than nothing and may provide building blocks for broader trade agreements. No one believes that FTAs are optimal trade policy.

Nevertheless, FTAs have become almost the sole Bush administration effort to open trade. Even while doing so, it has often used such agreements to pursue protectionist objectives. An especially egregious example of this is when the administration nearly scuttled the free trade agreement with Australia in order to maintain protection for the sugar industry, despite universal condemnation of the sugar program, which adds some $2 billion per year to consumer costs, mainly to enrich a few Florida producers.

According to the Financial Times, George W. Bush personally made the decision to exclude Australian sugar from the FTA. This became the first such agreement ever negotiated to exclude an individual product from its provisions. The New York Times spoke for many. “The agreement sends a chilling message to the rest of the world,” it said. “Even when dealing with an allied nation with similar living standards, the administration…has opted to continue coddling the sugar lobby, rather than dropping the most indefensible form of protectionism. This will only embolden those around the world who argue that globalization is a rigged game.”

In early 2005, the Bush administration put enormous pressure on Congress to approve the Central American Free Trade Agreement (CAFTA). Although the economic benefits from this agreement were quite modest, the administration had little choice but to press hard for its passage in order to salvage some semblance of a trade agenda. But the price for passage was very high, with Republicans demanding restrictions on Chinese imports in exchange for their votes. Consequently there was very little likelihood that its passage would lead to a net reduction in trade barriers.

CAFTA also proved costly to taxpayers, because the administration was forced to agree to many new pork barrel projects in order to buy the last couple of votes to squeak it through; CAFTA passed the House by a razor-thin margin of 217 to 215 on July 28, 2005. Free traders worry this precedent will encourage members of Congress to demand even more payoffs for future votes.

The Dumping Delusion

Although Bush and his team have shown contempt for overarching free trade principles pretty much every step of the way, the administration excuses a lot of the new trade protection on its watch by saying it’s mandated by existing law, especially “anti-dumping” laws that require the imposition of tariffs and give the president no latitude. There is some truth to this defense. But in many cases the Bush administration has simply used anti-dumping statutes as backdoor protectionism that could have been resisted if it had chosen to do so.

The term dumping is commonly understood to mean selling foreign products at below cost, possibly because of subsidies from the producers’ governments. But legally speaking, dumping exists simply when a product is sold in the U.S. for less than it is sold for in other markets. No evidence is needed that the product is being sold below cost or that any subsidy is involved.

Although dumping is assumed to be unfair when it involves international trade, a business might sell products at seemingly unprofitable prices for many reasons commonly accepted as reasonable in the domestic market. For example, when introducing a new product against established competition, a company may need to sell at a loss in order to gain a foothold in the market. It may need to dispose of inadvertent overstocks, or it may hope to make a profit through ancillary sales—think of Barbie dolls that are sold cheaply because the real profit is in the clothes.

U.S. businesses often use anti-dumping petitions as a tool to prevent foreign competitors from reducing prices and undercutting the domestic companies’ profits and market share. Even when foreign firms are confident of winning a dumping case, they may not want to go through the effort and expense to defend themselves in what is rightly seen as a biased process. So they back off.

Though the idea that there is something inherently unfair or unjust about dumping has been entrenched in U.S. law for more than 100 years, the law was rarely enforced until the 1970s. At that time it was broadened to allow tariffs even in cases where no dumping was even alleged, as long as imports caused some injury to a domestic industry. Tariffs also could be imposed as retaliation for a foreign country’s restrictions on U.S. exports.

Despite the Bush administration’s claim that many of its tariff decisions are the result of obeying longstanding anti-dumping law, many of these investigations are instigated by the Commerce Department as a matter of policy and are rigged to guarantee that dumping will be found. Almost all of the tariffs imposed on Chinese furniture, Vietnamese shrimp, and other goods have taken place under the guise of anti-dumping enforcement when they are really policy actions. As a consequence, other countries increasingly are using their own anti-dumping laws against American goods. Like all protectionist moves, anti-dumping actions set in motion a domino effect of reactions and restrictions that clog up world markets and ultimately make us all poorer than we otherwise would be.

The New Herbert Hoover

Bush’s overt protectionism may not be that great. But in overall policy, he’s the most protectionist president since Hoover. All of Hoover’s successors until Bush understood the fragility of free trade and the dangers of playing politics with it. They also understood that there is an inherent drift toward protectionism that needs to be vigorously resisted and offset by aggressive trade-opening measures. Bush has gone in the opposite direction, repeatedly using protectionism to buy short-term political support and sabotaging multilateral trade negotiations.

Bush also has treated the World Trade Organization with contempt. He has taken actions that he knew would be ruled illegal, such as the steel tariffs, and made little effort to redress illegaelements of U.S. law, such as the Foreign Sales Corporation tax break and the Byrd Amendment.

The former, which the WTO ruled to be a de facto subsidy, was finally repealed in 2004 with the White House and Treasury Department doing virtually nothing to aid the effort. The latter is a law enacted in 2000 that allows some anti-dumping duties to be paid directly to private businesses—making explicit what is already implicit in anti-dumping measures, which always help specific businesses at the nation’s expense. (According to the Government Accountability Office, half the benefits of this legislation went to just five companies.) The WTO ruled the Byrd Amendment illegal as well.

Under Bush, free trade is probably in its weakest position since the 1920s. The ultimate consequence of Bush’s abandonment of principle may not come on his watch. But thanks to him the dangers associated with protectionism are growing, and they will likely lead to future trade skirmishes and wars that will lower the standard of living of all Americans. Unfortunately, Bush seems comfortable with that legacy.

WHAT IS BEHIND THE INFLATION IN EMERGING MARKETS?

Gary Becker (link) and The Economist (link) recently discussed the surge in commodity prices and inflation that has driven inflation rates in emerging markets as well as in high-income economies to historic highs. For example, China's official rate of consumer price inflation is at 12-year high of 8,5 percent. Unofficial estimates have shown that Argentina's inflation rate has peaked 23 percent in 2008. Also, inflation rate in Russia has trimmed up to 14,5 percent, up from 8 percent annually. Central banks in emerging markets have repeatedly faced significant inflationary pressures. In world market, the price of oil barrel has climbed over $120 USD which gave speculators a boost in inflating the expectations that the world price of oil barrel will reach $200 percent and more.

Using the data and some basic tools of economic analysis, it is easily shown that the real price of oil per barrel in relative terms, cannot reach $200 USD unless terrorists attack or a sudden attack on oil fields in the Middle East impairs production abilities of oil producers in that part of the world. Commodity market analysts repeatedly analyze the spillover effects of the regulation of production in oil-exporting economies that generates upward changes in the world price of oil. One reason is that OPEC is a cartel of countries whose profit-making point rests on the real assumption that price elasticity of oil demand is very low which means that there's an inelastic demand for oil. In that case, producers choose to allocate relatively scarce resources by rationing the production of oil and thus increasing the price of oil which, in real conditions of imperfect competition, yields oil producers gains since inelastic consumer demand and quantity control of the production return higher profits when the price per unit of oil is increased. One of the classical solutions to avoid higher price increases and mark-ups is to shift towards the consumption of green energy that will make the demand for commodities, such as oil, more elastic and that would immediately eliminate the monopoly power of OPEC. But the shifts towards "greener energy" is a time-taking process that involves significant consumer expenditures as the price of products that are not linked to oil as production ingredient, is high. That is because, developing "green" products demands huge company expenditures in R&D, supply chains and knowledge-intensive services. Over time, the dependency on oil is expected to decline which implies that cartel stability of OPEC which controls the quantity and price of oil in the world market will decline gradually.

Among economic analysts, the surge in commodity prices is assumed as the engine of current inflationary pressures. But world supply and demand cannot solely explain the surge in commodity product prices. Impeding price controls and export subsidies have vastly contributed to a recent surge in commodity prices. Using price controls causes disparities in quantitiy demanded and supplied which leads to quantity shortages and price accomodation in underground markets. Also, various export bans, subsidies and price controls cause significant micro-inefficiencies that raise the rigidity and potentially reduce the elasticity of demand and supply.

Another important aspect of the surge in inflation in emerging markets is macroeconomic policy pursued by central banks and fiscal policymakers. For example, China responded to inflation surge by putting up more price controls and export bans. India has suspended futures trading in particular commodity markets. In the short run, such measures can cap the official inflation but in the long run, such measures do not lead to price adjustment after the endogenous and/or exogenous shocks tranquil. One of the reasons for an obviously higher inflation rate is that households in emerging markets have higher food expenditure from their budgets which places a heavy weight on food demand, making it more inelastic. Another reason is that central banks in emerging markets such as Russia, China, India and Brasil, pursued an expansionary monetary policy in recent years. Money supply, for example, has grown tremendously. In Russia, for instance, money supply has grown by a swelling 42 percent and central bank's target interest rate (6,5 percent) is far below the official inflation rate (15 percent).

On the offset, rigid labor markets and inflexible wage determination lead to price-wage spiral. An evidence has been observed in Russia where wages are growing 30 percent annually, more than 3 times more than the growth of productivity. A combination of rigid and inflexible market mechanism and expansionary macroeconomic policy as well as supply shocks contributed to the rise in the inflation rate. Even though sound growth forecast, predict a fairly stable output growth rate in the medium term, central banks in emerging markets will have to face the fact that expansionary fiscal policy must be neutralized by a rise in the interest rates and a decrease in the growth of money supply as a neccessary measure to bring the inflation under control. Continued rapid growth in emerging markets means that relative-price shock will be temporary and the food prices will remain high. Also, exchange rate flexibility is needed to avoid intended currency depreciation which sets an important pressure on inflation expectations. Thus, without tighter monetary policy and flexibile labor markets, central banks may soon repeat the mistakes which caused the great inflation in 1970s.

The Problem With the Corporate Tax

GREGORY MANKIEW
AT this point in the presidential campaign, Senator John McCain is the candidate of ideas on issues of tax policy. Too many ideas, in fact. While some of his ideas are great, others are almost laughable.

David G. Klein

The one that has received the most attention recently — a gas-tax holiday — falls in the second category. Many economists and policy wonks advocate raising the tax on gasoline to address problems ranging from global climate change to local traffic congestion. It is hard to find one who thinks that a temporary cut in the gas tax is a sensible response to the current spike in gas prices.

Lost in this hubbub, however, is a bigger idea that Mr. McCain and his economic team have put forward: a cut in the corporate tax rate, to 25 percent from 35 percent. It is perhaps the best simple recipe for promoting long-run growth in American living standards.

Cutting corporate taxes is not the kind of idea that normally pops up in presidential campaigns. After all, voters aren’t corporations. Why promise goodies for those who can’t put you in office?

In fact, a corporate rate cut would help a lot of voters, though they might not know it. The most basic lesson about corporate taxes is this: A corporation is not really a taxpayer at all. It is more like a tax collector.

The ultimate payers of the corporate tax are those individuals who have some stake in the company on which the tax is levied. If you own corporate equities, if you work for a corporation or if you buy goods and services from a corporation, you pay part of the corporate income tax. The corporate tax leads to lower returns on capital, lower wages or higher prices — and, most likely, a combination of all three.

A cut in the corporate tax as Mr. McCain proposes would initially give a boost to after-tax profits and stock prices, but the results would not end there. A stronger stock market would lead to more capital investment. More investment would lead to greater productivity. Greater productivity would lead to higher wages for workers and lower prices for customers.

Populist critics deride this train of logic as “trickle-down economics.” But it is more accurate to call it textbook economics. Students in introductory economics courses learn that the burden of a tax does not necessarily stay where the Congress chooses to put it. That lesson is especially relevant when thinking about the corporate tax.

In a 2006 study, the economist William C. Randolph of the Congressional Budget Office estimated who wins and who loses from this tax. He concluded that “domestic labor bears slightly more than 70 percent of the burden.”

Mr. Randolph’s analysis stresses the role of international capital mobility. With savings sloshing around the world in search of the highest returns, he says, “the domestic owners of capital can escape most of the corporate income tax burden when capital is reallocated abroad in response to the tax.” When capital leaves a country, the workers left behind suffer. (According to Mr. Randolph, however, some workers do benefit from the American corporate tax: those abroad who earn higher wages from the inflow of capital.)

A similar result was found in a recent Oxford University study by Wiji Arulampalam, Michael P. Devereux and Giorgia Maffini. After examining data on more than 50,000 companies in nine European countries, they concluded that “a substantial part of the corporation income tax is passed on to the labor force in the form of lower wages,” adding that “in the long-run a $1 increase in the tax bill tends to reduce real wages at the median by 92 cents.”

Despite these findings, a corporate tax cut as a way to help workers may strike some people as needlessly indirect. Why not just pass an income tax cut aimed squarely at working families, as Senator Barack Obama proposes?

The answer is that while most taxes distort incentives and shrink the economic pie, they do not do so equally. Compared with other ways of funding the government, the corporate tax is particularly hard on economic growth. A C.B.O. report in 2005 concluded that the “distortions that the corporate income tax induces are large compared with the revenues that the tax generates.” Reducing these distortions would lead to better-paying jobs.

Of course, a corporate tax cut would affect the federal budget. And any change in tax policy has to be made against a background of a looming fiscal crisis, which threatens to unfold as baby boomers retire and start collecting Social Security and Medicare. In 2007, corporate taxes brought in $370 billion, representing 14 percent of federal revenue. Cutting the rate to 25 percent would seem to cost the Treasury about $100 billion a year.

Part of that revenue loss, however, would be recouped through other taxes. To the extent that shareholders would benefit, they would pay higher taxes on dividends, capital gains and withdrawals from their retirement accounts. To the extent that workers would benefit, they would pay higher payroll and income taxes. Increased economic growth would tend to raise tax revenue from all sources.

SOME economists think that these effects are strong enough to make a corporate rate cut self-financing. A recent study by Alex Brill and Kevin A. Hassett of the American Enterprise Institute, looking at countries in the Organization for Economic Cooperation and Development, supports exactly that conclusion. But even if that turns out to be too optimistic, both theory and evidence make it reasonable to expect a significant discount from the sticker price. In the end, the net budgetary cost of the tax cut might be, say, $50 billion a year.

Senator McCain wants to fill that hole in the budget by restraining spending. If he can stop bloated legislation like the recent $300 billion farm bill from becoming law, more power to him.

But in case that quest proves quixotic, I have a back-up plan for him: increase the gasoline tax. With Americans consuming about 140 billion gallons of gasoline a year, a gas-tax increase of about 40 cents a gallon could fund a corporate rate cut, fostering economic growth and reducing a variety of driving-related problems.

Indeed, if we increased the tax on gasoline to the level that many experts consider optimal, we could raise enough revenue to eliminate the corporate income tax. And the price at the pump would still be far lower in the United States than in much of Europe.

Don’t laugh. I’m serious.

N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser to President Bush and advised Mitt Romney in his campaign for the Republican presidential nomination.

CHILE ECONOMIC MIRACLE

G-8 Seeks to Aid Growth as Oil Focuses Central Banks on Prices

June 13 (Bloomberg) -- The world's most powerful governments are looking for ways to boost economic growth to compensate for record oil prices, just as central bankers gird for an inflation fight.

French President Nicolas Sarkozy wants to cap value-added taxes on fuel, the U.K. is cutting taxes for energy producers and Japan is helping truckers. Italy is threatening a levy on oil companies, while in the U.S., Democratic presidential candidate Barack Obama is calling for a second economic stimulus package.

Finance ministers from Group of Eight countries gather in Osaka today and tomorrow after the price of crude oil doubled in the past year to reach a record $139.12 on June 6. While they try to stave off a global recession, central bankers are turning their attention to quashing price increases after 10 months of defending the expansion from a credit squeeze.

``Inflation means central banks aren't in a position to provide great relief to growth,'' said David Hensley, director of global economic coordination at JPMorgan Chase & Co. in New York. ``There's going to be mounting pressure on governments to respond decisively.''

The International Monetary Fund in April predicted advanced economies this year will suffer their fastest price gains since 1995 and their weakest expansion in seven years. The World Bank said June 10 that global growth will slow a percentage point to 2.7 percent in 2008.

Bernanke Signal

Federal Reserve Chairman Ben S. Bernanke on June 9 delivered his clearest message yet that the central bank is done lowering interest rates after 3.25 percentage points of cuts since September, saying officials will ``strongly resist'' any surge in inflation expectations. European Central Bank President Jean-Claude Trichet said June 5 he may raise rates in July.

``What was a threat about half a year ago now appears to have become a reality -- stagflation,'' said Joachim Fels, co- chief economist at Morgan Stanley in London.

That leaves it to politicians to defend growth, and their own political standing, as U.K. motorcyclists and French taxi drivers protest rising fuel bills and consumers bemoan falling purchasing power.

`Very Worried'

``Governments are very worried about the impact of inflation economically and politically,'' said Klaus Baader, chief European economist at Merrill Lynch & Co. in London. ``They're going to take more and more compensatory action.''

Ed Gillespie, President George W. Bush's counselor, said June 6 the U.S. is ``constantly looking at options and proposals'' even after it began mailing more than $100 billion in tax-rebate checks. Four days later, Keith Hennessey, director of the White House National Economic Council, said the Bush administration is opposed to another stimulus package.

U.K. Prime Minister Gordon Brown last month relaxed taxes on some North Sea oil production sites in an effort to lift output and is facing calls to delay an increase in fuel duties and reverse a doubling of taxes for some cars.

Sarkozy is renewing energy-tax rebates for farmers and has proposed cutting the VAT on fuel, ignoring opposition from neighbors in the European Union.

Italian Prime Minister Silvio Berlusconi plans ``targeted'' tax cuts on fuels while Finance Minister Giulio Tremonti last week suggested oil companies be forced to pay a ``Robin Hood'' tax with the revenues being passed to households.

Temporary Relief

Meantime, the Japanese government is spending 215 billion yen ($1.9 billion) through March on easing the burden of higher oil costs on small and midsized enterprises. For trucking businesses, the discount for overnight highway tolls was raised to 40 percent from 30 percent.

While such measures may provide temporary relief, they might also exacerbate the inflation threat by reinforcing energy demand. A windfall tax could also deter companies from investing in exploration.

``Tax policies are not an appropriate means to counter commodity-price increases,'' Trichet said June 5. ``This would send the wrong signals to producers and consumers alike.''

Some G-8 politicians agree. German Finance Minister Peer Steinbrueck, who is not traveling to Osaka, said June 2 that governments shouldn't ``react politically and try to intervene'' to tame oil prices.

Past Failures

That means that as a group, the G-8 may shy away from backing coordinated fiscal responses, instead resorting to repeating past demands that petroleum producers pump more oil and consuming countries become more efficient.

That approach has so far proved unsuccessful. When it was adopted at a May 2004 meeting in New York, oil cost about $40 a barrel. Saudi Arabian Oil Minister Ali al-Naimi on June 9 rejected demands for higher output.

Geoffrey Yu, a currency strategist at UBS AG in Zurich, said the G-8 may also express concern that the falling dollar is fanning inflation. The G-8 ministers have refrained from making a joint comment on exchange rates for two decades as central bankers aren't present at the talks. A Canadian official said June 9 that currencies would not be a major topic.

``It's hard to talk about commodity prices and not the dollar,'' Yu said. Paulson told Bloomberg Television on June 10 that he would tell his counterparts that ``strong'' economic fundamentals will be reflected in the dollar.

The G-8 is composed of the U.S., Japan, Germany, Russia, U.K., Italy, Canada and France.

Sex and the Sissy
PEEGY NOONAN

She was born in Russia, fled the pogroms with her family, was raised in Milwaukee, and worked the counter at her father's general store when she was 8. In early adulthood she made aliyah to Palestine, where she worked on a kibbutz, picking almonds and chasing chickens. She rose in politics, was the first woman in the first Israeli cabinet, soldiered on through war and rumors of war, became the first and so far only woman to be prime minister of Israel. And she knew what it is to be a woman in the world. "At work, you think of the children you've left at home. At home you think of the work you've left unfinished. . . . Your heart is rent." This of course was Golda Meir.

AP

Golda Meir never cried 'sexism.'

Another: She was born in a family at war with itself and the reigning power outside. As a child she carried word from her important father to his fellow revolutionaries, smuggling the papers in her school bag. War and rumors of war, arrests, eight months in jail. A rise in politics -- administering refugee camps, government minister. When war came, she refused to flee an insecure border area; her stubbornness helped rally a nation. Her rivals sometimes called her "Dumb Doll," and an American president is said to have referred to her in private as "the old witch." But the prime minister of India preferred grounding her foes to dust to complaining about gender bias. In the end, and in the way of things, she was ground up too. Proud woman, Indira Gandhi.

And there is Margaret Hilda Roberts. A childhood in the besieged Britain of World War II -- she told me once of listening to the wireless and being roused by Churchill. "Westward look, the land is bright," she quoted him; she knew every stanza of the old poem. Her father, too, was a shopkeeper, and she grew up in the apartment above the store near the tracks. She went to Oxford on scholarship, worked as a chemist, entered politics, rose, became another first and only, succeeding not only in a man's world but in a class system in which they knew how to take care of ambitious little grocer's daughters from Grantham. She was to a degree an outsider within her own party, so she remade it. She lived for ideas as her colleagues lived for comfort and complaint. The Tories those days managed loss. She wanted to stop it; she wanted gain. Just before she became prime minister, the Soviets, thinking they were deftly stigmatizing an upstart, labeled her the Iron Lady. She seized the insult and wore it like a hat. This was Thatcher, stupendous Thatcher, now the baroness.

Great women, all different, but great in terms of size, of impact on the world and of struggles overcome. Struggle was not something they read about in a book. They did not use guilt to win election -- it comes up zero if you Google "Thatcher" and "You're just picking on me because I'm a woman." Instead they used the appeals men used: stronger leadership, better ideas, a superior philosophy.

* * *

You know where I'm going, for you know where she went. Hillary Clinton complained again this week that sexism has been a major dynamic in her unsuccessful bid for political dominance. She is quoted by the Washington Post's Lois Romano decrying the "sexist" treatment she received during the campaign, and the "incredible vitriol that has been engendered" by those who are "nothing but misogynists." The New York Times reported she told sympathetic bloggers in a conference call that she is saddened by the "mean-spiritedness and terrible insults" that have been thrown "at you, for supporting me, and at women in general."

Where to begin? One wants to be sympathetic to Mrs. Clinton at this point, if for no other reason than to show one's range. But her last weeks have been, and her next weeks will likely be, one long exercise in summoning further denunciations. It is something new in politics, the How Else Can I Offend You Tour. And I suppose it is aimed not at voters -- you don't persuade anyone by complaining in this way, you only reinforce what your supporters already think -- but at history, at the way history will tell the story of the reasons for her loss.

So, to address the charge that sexism did her in:

It is insulting, because it asserts that those who supported someone else this year were driven by low prejudice and mindless bias.

It is manipulative, because it asserts that if you want to be understood, both within the community and in the larger brotherhood of man, to be wholly without bias and prejudice, you must support Mrs. Clinton.

It is not true. Tough hill-country men voted for her, men so backward they'd give the lady a chair in the union hall. Tough Catholic men in the outer suburbs voted for her, men so backward they'd call a woman a lady. And all of them so naturally courteous that they'd realize, in offering the chair or addressing the lady, that they might have given offense, and awkwardly joke at themselves to take away the sting. These are great men. And Hillary got her share, more than her share, of their votes. She should be a guy and say thanks.

It is prissy. Mrs. Clinton's supporters are now complaining about the Hillary nutcrackers sold at every airport shop. Boo hoo. If Golda Meir, a woman of not only proclaimed but actual toughness, heard about Golda nutcrackers, she would have bought them by the case and given them away as party favors.

It is sissy. It is blame-gaming, whining, a way of not taking responsibility, of not seeing your flaws and addressing them. You want to say "Girl, butch up, you are playing in the leagues, they get bruised in the leagues, they break each other's bones, they like to hit you low and hear the crack, it's like that for the boys and for the girls."

And because the charge of sexism is all of the above, it is, ultimately, undermining of the position of women. Or rather it would be if its source were not someone broadly understood by friend and foe alike to be willing to say anything to gain advantage.

* * *

It is probably truer that being a woman helped Mrs. Clinton. She was the front-runner anyway and had all the money, power, Beltway backers. But the fact that she was a woman helped give her supporters the special oomph to be gotten from making history. They were by definition involved in something historic. And they were on the right side, connected to the one making the breakthrough, shattering the glass. They were going to be part of breaking it into a million little pieces that could rain down softly during the balloon drop at the historic convention, each of them catching the glow of the lights. Some network reporter was going to say, "They look like pieces of the glass ceiling that has finally been shattered."

I know: Barf. But also: Fine. Politics should be fun.

Meir and Gandhi and Mrs. Thatcher suffered through the political downside of their sex and made the most of the upside. Fair enough. As for this week's Clinton complaints, I imagine Mrs. Thatcher would bop her on the head with her purse. Mrs. Gandhi would say "That is no way to play it." Mrs. Meir? "They said I was the only woman in the cabinet and the only one with -- well, you know. I loved it."

The Obama Learning Curve

Senate Foreign Relations Committee Chairman Joe Biden took to the airwaves this week to "help" the rookie Barack Obama out of a foreign-policy jam. Oh sure, admitted Mr. Biden, the presumptive Democratic nominee had given the "wrong" answer when he said he'd meet unconditionally with leaders of rogue states. But on the upside, the guy "has learned a hell of a lot."

Somewhere Mr. Obama was muttering an expletive. But give Mr. Biden marks for honesty. As Mr. Obama finishes a week of brutal questioning over his foreign-policy judgments, it's become clear he has learned a lot – and is learning still.

AP

Right now, for instance, he's learning how tough it can be to pivot to a general-election stance on the crucial issue of foreign policy. He's also learning Democrats won't be able to sail through a national-security debate by simply painting John McCain as the second coming of George Bush.

Remember how Mr. Obama got here. In a July debate, the Illinois senator was asked if he'd meet, "without preconditions," the "leaders of Iran, Syria, Venezuela, Cuba and North Korea." It was an unexpected question, and Mr. Obama rolled with his gut: "I would," he said, riffing that the Bush administration's policy of not negotiating with terror-sponsoring states was "ridiculous."

Hillary Clinton, who still had the aura of inevitability, and who was already thinking ahead to a general election, wouldn't bite. At that point, any initial misgivings the Obama campaign had about the boss's answer disappeared. Mr. Obama hadn't got much traction differentiating himself from Mrs. Clinton over Iraq, but this was a chance to get to her left, to cast her to liberal primary voters as a warmonger. Which he did, often, committing himself ever more to a policy of unfettered engagement.

Today's Obama, all-but-nominee, is pitching to a broad American audience less keen to legitimize Iranian President Mahmoud Ahmadinejad, who provides weapons that kill American soldiers. The senator clumsily invited this debate when he took great umbrage to President Bush's recent criticism of appeasers (which, in a wonderfully revealing moment, Democrats instantly assumed meant them). Mr. Obama has since been scrambling to neutralize his former statement.

A week ago, in Oregon, he adopted the "no-big-deal" approach, telling listeners Iran was just a "tiny" country that, unlike the Soviet Union, did not "pose a serious threat to us." But this suggested he'd missed that whole asymmetrical warfare debate – not to mention 9/11 – so by the next day, he'd switched to the "blame-Republicans" line. Iran was in fact "the greatest threat to the United States and Israel and the Middle East for a generation" – but all because of President Bush's Iraq war.

This, however, revived questions of why he'd meet with said greatest-threat leader, so his advisers jumped in, this time to float the "misunderstood" balloon. Obama senior foreign policy adviser Susan Rice, channeling Bill Clinton, said it all depended on what the definition of a "leader" is. "Well, first of all, he said he'd meet with the appropriate Iranian leaders. He hasn't named who that leader will be." (Turns out, Mr. Obama has said he will meet with . . . Mr. Ahmadinejad.)

Former Sen. Tom Daschle, channeling Ms. Rice, explained it also depended on what the definition of a precondition is: "It's important to emphasize again when we talk about preconditions, we're just saying everything needs to be on the table. I would not say that we would meet unconditionally." This is called being against preconditions before you were for them.

And so it goes, as Mr. Obama shifts and shambles, all the while telling audiences that when voting for president they should look beyond "experience" to "judgment." In this case, whatever his particular judgment on Iran is on any particular day.

It wasn't supposed to be this way. Democrats entered this race confident national security wouldn't be the drag on the party it has in the past. With an unpopular war and a rival who supports that war, they planned to wrap Mr. McCain around the unpopular Mr. Bush and be done with it. Mr. Obama is still manfully marching down this road, today spending as much time warning about a "third Bush term" as he does reassuring voters about a first Obama one.

Then again, 9/11 and five years of Iraq debate have educated voters. Mr. McCain is certainly betting they can separate the war from the urgent threat of an Iranian dictator who could possess nukes, and whose legitimization would encourage other rogues in their belligerence. This is a debate the Arizonan has been preparing for all his life and, note, Iranian diplomacy is simply the topic du jour.

Mr. McCain has every intention of running his opponent through the complete foreign-policy gamut. Explain again in what circumstances you'd use nuclear weapons? What was that about invading Pakistan? How does a policy of engaging the world include Mr. Ahmadinejad, but not our ally Colombia and its trade pact?

It explains too the strong desire among the McCain camp to get Mr. Obama on stage for debates soon. There's a feeling Mr. Obama is still climbing the foreign-policy learning curve. And they see mileage in his issuing a few more gut reactions.

'Nothing but Misogynists'

By DONALD J. BOUDREAUX

Hillary Clinton is now complaining that her candidacy has been harmed by sexism. Interviewed earlier this week by the Washington Post, Sen. Clinton said the polls show that "more people would be reluctant to vote for a woman [than] to vote for an African American." This gender bias, she grumbled, "rarely gets reported on."

So a woman who holds degrees from Wellesley and Yale – who has earned millions in the private sector, won two terms in the U.S. Senate, and gathered many more votes than John Edwards, Bill Richardson and several other middle-aged white guys in their respective bids for the 2008 Democratic nomination – feels cheated because she's a woman.

Seems doubtful. But hey, I'm a guy and perhaps hopelessly insensitive. So let's give her the benefit of the doubt and assume that her campaign has indeed suffered because of sexism.

This fact (if it be a fact) reveals a hitherto unknown, ugly truth about the Democratic Party. The alleged bastion of modern liberalism, toleration and diversity is full of (to use Mrs. Clinton's own phrase) "people who are nothing but misogynists." Large numbers of Democratic voters are sexists. Who knew?

But here's another revelation. If Mrs. Clinton is correct that she is more likely than Barack Obama to defeat John McCain in November, that implies Republicans and independents are less sexist than Democrats.

It must be so. If American voters of all parties are as sexist as the Democrats, Mr. Obama would have a better chance than Mrs. Clinton of defeating Mr. McCain. The same misogyny that thwarted her in the Democratic primaries would thwart her in the general election. Only if registered Republicans and independents are more open-minded than registered Democrats – only if people who lean GOP or who have no party affiliation are more willing than Democrats to overlook a candidate's sex and vote on the issues – could Mrs. Clinton be a stronger candidate.

I am neither a Democrat nor a Republican. But if I ever become convinced that Mrs. Clinton is correct that sexism played a role in her disappointing showing in the Democratic primaries – and that she truly is her party's strongest candidate to take on John McCain – I might finally join a party: the GOP. At least it's not infested with sexists.

Mr. Boudreaux is chairman of the economics department at George Mason University.

John Boehner
Minority Leader in a Storm

By KIMBERLEY A. STRASSEL

"Awful. Awful." That's John Boehner's candid answer when I ask what life is like for House Republicans these days. The question the 58-year-old minority leader is pondering is how long that awfulness will last.

The GOP is in a panic after a string of special election defeats that suggest voters haven't forgiven Republicans for straying from small-government principles. Rival wings of the party are fighting over where to go next. About the only thing everyone agrees on: If the GOP doesn't redefine itself soon, it's facing a rout this fall.

Ismael Roldan

Elected two years ago because of his reputation as a reformer, Mr. Boehner and his team recently unrolled its election-year agenda, entitled "Change You Deserve." It will attempt to show voters that the GOP is again ready to lead on everything from health care to energy to taxes.

Yet Mr. Boehner knows he's pushing a big rock up a steep hill. Asked how he might "win" back a majority, he cuts me off: "Earn. Earn back the majority. . . . we have to show the American people that we learned our lesson from the '06 election. That we hear what they are saying. And that means things like getting earmarks under control . . . balancing the budget, being willing to take on the tough job of entitlement reform, or the really tough job of a health-care system that insures all Americans and allows them control over who their doctor is."

Says Mr. Boehner: "My job is to lead the 200 of us on the Republican side into being real agents of change." He adds, "Some are more open to that than others."

That might be the minority leader's greatest challenge. His predecessor, Tom "the Hammer" DeLay from Texas, rankled many with his dictatorial style. Mr. Boehner, from Ohio, has tried to rule more by consensus, pushing members to voluntarily unite. When it works, it works brilliantly, as when Mr. Boehner rallied nearly every Republican to stand against House Democratic attempts to defund the Iraq war.

Getting members to abandon the bad habits that have lost them respect among voters is harder. Mr. Boehner stands as a role model, having never requested nor received an earmark, and having fought for reform legislation like the 2006 pension overhaul. Yet his example alone hasn't moved some Republicans to shape up. Consider his unsuccessful attempt to get House GOP members to agree to a unilateral earmark moratorium.

"The team's not ready to go there," he says, consternation in his big bass voice. Why do so many Republicans refuse to swear off pork? "I'm sure with some it's maybe about elections . . . And another group believes that the Constitution says that all spending rests with Congress; they believe that directing some of the spending to their district is part of their job."

Mr. Boehner is not in that group. "I just happened to tell my constituents when I wanted to come here that if they thought my job was to come and rob the federal Treasury on their behalf they were voting for the wrong guy. I said it, I meant it. It might have been the best decision I ever made."

The recent farm bill was a $300 billion, subsidy-laden grab bag of handouts to special interests. Mr. Boehner railed against the legislation on the House floor, urging GOP members to vote against it. The bill passed by a huge margin with the help of 100 Republicans. President Bush vetoed it, and the House promptly overrode the veto. "I wouldn't describe the farm bill we're voting on as change," he told me in something of an understatement. "As I said on the floor, we can do better."

Perhaps that's why Mr. Boehner has recently switched from cajoling to trying to use the GOP's recent misfortunes to scare Republicans out of their torpor. Some in his party are already marking down the special election losses in conservative districts in Illinois, Louisiana and Mississippi to lack of money, bad candidates and a poor message. Mr. Boehner is painting the defeats as "real wake-up calls" and warning members to think hard: "Every race is different, and there are a lot of reasons why those three races were lost. But it is clear that the American people are anxious for change. . . . and Republicans have to show we can be ready to deliver it."

As for what message Republicans should adopt to prove they've changed, Mr. Boehner is not hurting for suggestions. I ask what he thinks of a 20-page memo recently delivered to the Republican leadership by Virginia Rep. Tom Davis. This analysis declared the environment for Republicans as "toxic," outlined their financial and perception problems, and suggested the House GOP proactively embrace an emergency housing package and jump on board an energy bill that includes global-warming provisions.

"I read it, I thought it was insightful," Mr. Boehner replies. "I thought it was honest. Members all ought to read it and learn from it, in terms of helping them understand that we've got to be serious about delivering change." But he adds a caveat: "We're talking about the right kind of change, not change for change's sake. We want change rooted in freedom."

And how about Mr. Davis's suggestions the party needs quickly to distance itself from President Bush and his subterranean poll numbers? The minority leader suggests that if the party chooses simply to focus on the problems of President Bush rather than its own, it won't do itself any favors. "The president is the president of the United States and will be until January 20 next year. . . . elections are about the future and not about the past, and we've got to show people that if they were to honor us with the majority, this is what we'll do. When people go to the polls in November, they are going to be voting for Barack Obama or John McCain (or maybe Hillary Clinton). Our members are on the ballot, they've got opponents. George Bush isn't on the ballot."

The first part of Mr. Boehner's "Change You Deserve" agenda started last week, with an attempt to pitch the party's free-market ideals at the needs of modern working families with "flex time" laws and better tax policies for small business owners. This week's focus was energy, with promises to boost all energy supplies here at home to help lower prices and create jobs. In subsequent weeks they will tackle health care, taxes and security. This week, however, another blast of advice arrived on Mr. Boehner's doorstep from the conservative Republican Study Committee, many members of which feel the House leadership's new agenda is too diffuse.

Mr. Boehner's view? "As I told the members, our agenda was put together by listening to our members, and as we move forward we are going to continue listening to our members. A lot of what they offered is already in our product. I'm going to announce a meeting later this week to talk about our economic package, and we're going to bring members in who want to bring more to the package."

One message Mr. Boehner is interested in adopting is that of John McCain. The minority leader clearly realizes that at a time when the public is angry with the same-old, same-old, the Arizona senator's reformist line has resonance. He's also no doubt realized it might be in Mr. McCain's interest to run against Congressional Republicans. "I want [the Republican members] to understand, it's a presidential election year, he's our nominee. He has his own Republican brand, and part of my goal, I've told them, is to work with the McCain campaign and our folks so that our agendas are identical, our themes are the same."

Mr. Boehner's hope is that his members can project enough "change" of their own to benefit from McCain voters. "We've got 29 retirements, though 22 or 23 of those are in solid Republican seats with good candidates. But we're going to have a handful of tough open seats to defend. Still, when you begin to look at the 61 Democrat districts that George Bush won in the '04 election, I'd argue John McCain will win more than 61 currently held Democrat seats. . . . The goal is, if they're going to go vote for McCain, we just need them to vote for our candidate at the same time. But it means we need to have a credible candidate on the ballot, we need to have issues."

Another part of the Boehner strategy is hammering Democrats, an approach that has at least some in his conference worried Republicans should be spending more time promoting their own "change" message. But Mr. Boehner thinks part of the approach has to be reminding voters that "all the American people have gotten from the Democrat majority in Congress are long lists of broken promises."

The minority has spent its tenure pushing votes that forced freshman Democrats in particular to choose between their more liberal leadership and their more conservative districts. Mr. Boehner is hoping those votes will play in some of the tougher House races this year.

"These are things like voting for the largest tax increase in American history. They voted for a budget last year that had a $450 billion hole in it; this year a $685 billion hole in it, and at some point they are going to have to say if they are for the 15% capital gains rate expiring, or the death tax expiration expiring, or the 15% rate on dividends expiring, or marriage penalty relief, or the $1,000 per child tax credit. Somebody is going to have to answer. That's going to be a big issue." Republicans are also angling to use what's left of this legislative calendar to pigeonhole Democrats into a few more uncomfortable spots, on Iraq war spending, or the debate over reauthorizing the wiretap law.

And Barack Obama? How does he play into this? What are his weaknesses? "Well," he says dramatically, rolling his eyes. "He has been a member of the United States Senate for three years and four months. And has done exactly one thing for exactly three years and four months: Run for president. He hasn't done anything. Who ever heard of a subcommittee chairman never having had a hearing?" (Mr. Obama chairs a Senate subcommittee on European affairs, which has not held a policy hearing since he took over as chairman in January 2007).

Will this prove enough to get Mr. Boehner out of this "awful" minority purgatory? "You know, I didn't like the cards that were dealt 16 months ago, but . . . my job is to play the hand as best I can. So it is what it is. And my job is to lead an effort for our team to earn back the majority. And I keep pushing them and pushing them and pushing them and pushing them. Because the only way we're gonna win it back is to earn it.

"Oh, we could get lucky and [voters] could get madder at the Democrats than they were at us but what kind of majority is that? I want us to earn our way back. And we're getting there. It's just a long, slow process."

Sudan

The south on the brink

Clashes in the middle of Sudan threaten the entire north-south peace accord

NOBODY seems to know how or why the fighting in Abyei, on Sudan's north-south fault line, began. But everyone knows that if it gets out of hand, the entire peace accord that has kept an edgy calm between north and south for the past three years could dissolve in a bloodbath.

In mid-May, rumours started to spread that a local militiaman in the pay of the northern government in Khartoum had been arrested by the police run by the main southern movement. A government soldier from the north was shot. Within hours, the town of Abyei was reverberating with the clatter of machinegun fire and the crashing of mortars and rocket-propelled grenades. Tens of thousands of the town's residents fled into the bush. UN helicopters were sent to evacuate terrified aid workers under heavy fire. At least 50 people were killed in several days of fighting.

The mood in Abyei, an oil-rich area straddling Sudan's north-south border, had been darkening for months. The ruling parties of north and south—the National Congress Party (NCP), headquartered in Khartoum, and the Sudan People's Liberation Movement (SPLM), with its nerve-centre in Juba—each claim the area as theirs. There had been sporadic incidents between proxies. But the clashes that erupted on May 14th were the first sustained bout of armed conflict between the northern-based national army and former guerrillas from the south.

Abyei is at the nub of the problems that have strained relations between north and south since the Comprehensive Peace Agreement (CPA)was signed in 2005, ending two decades of war in Africa's largest country. But an argument still festers over sharing oil revenue and demarcating the border between north and south. Trust between the two sides is patently lacking.

A particular row over drawing the border through the Abyei area was a big reason why, last year, the SPLM suspended its participation in various aspects of the peace deal. It complained that the government in the north was refusing to accept the findings of an international boundary commission, which put Abyei in the south. Though the SPLM later rejoined the Sudanese unity government based in Khartoum, it unilaterally sent one of its top men, Edward Lino, to run the Abyei area, which had had no proper administration for three years. But the northerners rejected him and sent several hundred heavily armed soldiers into Abyei town. “We don't want to fight,” says Mr Lino. “But we're not going to surrender just like that. They can't just come and take over our land and people.”

The mood in Abyei has long been twitchy because of historic animosity between the Misseriya nomads, some of whom are armed by northerners in the government in Khartoum, and the southern Ngok Dinka, who look to the SPLM for protection. Since time immemorial they have clashed over land and water. Such issues can usually be resolved locally but the groups have become pawns in a bigger game. If fighting between them gets bloodier, the north-south partnership in Khartoum could collapse.

In any event, the northerners, who are mainly Arabs, have been dragging their feet over the accord of 2005, not just over Abyei, but also over other border disputes. They have been slow to withdraw troops from the south, as agreed. Some observers think they want to provoke a crisis, so that a general election due next year cannot be held. The northerners are even more loth to contemplate a referendum, due in 2011, that is part of the agreement; the southerners are entitled to opt for secession and full independence. If that happened, the south would draw the benefits of Sudan's 500,000 barrels of oil a day, much of it pumped out of Abyei. Hence the tension over the border. The Abyei area alone is said to have produced oil worth $1.8 billion since the accord was signed. The south says it has seen none of the cash at all.

The SPLM's ability to negotiate and implement a border settlement is weakened by its own disunity. Some of its top men believe in a federal Sudan, with the south getting wide autonomy. Others believe passionately that the Muslim-dominated, Arab north will never co-operate with the Christian and animist south, and that independence is the only way.

Such differences are sharpened by fierce rivalries between the southern tribes. The Dinka, among them both the SPLM's leader, Salva Kiir, and his predecessor, the late John Garang, have long held the upper hand. Several of their top people, known as “the Garang boys”, are amenable, as was Mr Garang, to the idea of a federal Sudan with an autonomous south. Mr Kiir leans towards independence. The autonomy-versus-independence debate bubbles on, sometimes angrily.

The SPLM is holding its first party convention since 1994, when it was meant to heal divisions between Mr Garang and a group led by Riek Machar, now the south's vice-president, whose Nuer people are the Dinka's chief rivals. “Most of us want separation [ie, independence] but we are worried about the problems between the tribes,” says Hassan Kuku, a trader in Juba market. “We don't want more war over this.” Moreover, corruption has worsened, making everyone edgier about the future.

Meanwhile, a fear of lawlessness has returned. Though the southern guerrillas are supposed to have disarmed under the agreement, hundreds of civilians in the past week darted into their huts to grab their hidden AK-47s to join the present fray. The accord provided for joint units of northerners and southerners to act as a neutral force; but they never materialised.

The UN Mission in Sudan, known as UNMIS, is feeble. Its diplomats call for calm, but their ability to do good on the ground is impeded by the government in Khartoum, which never wanted the mission there in the first place and limits its ability even to move around freely. The 10,000-strong mission, including some 7,000 soldiers and police, has a weak mandate; its mainly Zambian units did little more than protect a nearby UN base when the hostilities in Abyei broke out.

Since then, some 50,000 civilians have fled into the bush, leaving Abyei town virtually deserted, a stark reminder that some 2m were killed and 4m displaced during the long conflict that ended in 2005. Hectic talks between politicians of north and south are going on in Khartoum.

Yet the continuing horrors of Darfur, in western Sudan, attract more of the world's attention. Many foreign government agencies and charities have switched their focus to Darfur. For the UN, tackling southern Sudan still seems a challenge too far.

Mexican banks

Riding high

Mexico's fast-growing banks appear unusually unaffected by the financial crisis north of the border

AFTER the 1994 peso crash, the risk of Mexico's difficulties spilling over into America was considered so great that the Clinton administration helped bail out its southern neighbour. In the first quarter of 2008, the boot was on the other foot, though the scale was entirely different. Now it was the turn of Banamex, one of Mexico's two largest banks, to help out Citigroup, its crisis-stricken parent. Banamex provided $453m of the $1.1 billion Citi earned in net income from its overseas operations between January and March (Citi lost $5.1 billion overall). You could almost hear Vikram Pandit, Citi's new chief, mutter “Gracias, compadre.”

Yet Banamex was not even the best-performing of the Mexican banks. Of Mexico's five largest financial institutions (which control three-quarters of the market and also include Bancomer, Santander, HSBC and Banorte), it was the only one that did not show a big rise in year-on-year profits in the first quarter. The performance of the banks was impressive for two reasons. Firstly, Mexico has one of the most open banking systems in the world; two of its top five banks are Spanish-owned, one is American, one British, and only one is Mexican. Yet the crisis in global banking has barely ruffled it. Also, Mexico's economy is usually more exposed than almost any other to a slowdown in America. As Alejandro Valenzuela, boss of Banorte, delicately puts it: “Decoupling is the wrong word, but there is now a certain shield.”

That shield, however brittle, has been forged both from financial reform in recent years and from macroeconomic stability. On the financial front, lending has ballooned. According to the central bank, credit to the private sector has nearly tripled since 2001, while consumer credit has increased by around seven times. The banks have also feathered their nests with relatively high consumer-banking fees.

Meanwhile, the market has grown more sophisticated, thanks to some shrewd moves by regulators. Chief among these, according to an IMF working paper released this week, were reforms to bank-secrecy laws which allowed the creation of a successful credit-reporting system, as well as reforms to bankruptcy laws. These have given birth to a thriving mortgage-backed securities industry. If that sets off alarm bells, Alejandro Werner, the deputy finance minister, notes that over the past seven years, the accumulated increase in house prices in Mexico has been less than inflation: there is no bubble yet.

There are also economic reforms to thank. Marcos Martínez, the head of Santander in Mexico, says that infrastructure investment as well as a huge public-sector mortgage programme have boosted demand. It helps that Mexican GDP closely correlates with America's industrial production, rather than its overall economy. The brunt of the slowdown in America has been borne by the services sector.

Although Mexican economic growth is likely to remain sluggish, at something under 3%, the health of the banking industry is a salutary sign. For once, Mexicans can look northward with a sense of sympathy rather than envy.

Colombia and Venezuela

The FARC files

Just how much help has Hugo Chávez given to Colombia's guerrillas?

THEY represent only one side of a story, and most of their claims have yet to be independently corroborated. But Interpol has now concluded that the huge cache of e-mails and other documents recovered from the computers of Raúl Reyes, a senior leader of the FARC guerrillas killed in a Colombian bombing raid on his camp in Ecuador on March 1st, are authentic and undoctored. The documents throw new light on the inner workings of the FARC. And they raise some very pointed questions about the ties between Venezuela's leftist president, Hugo Chávez, and a group considered to be terrorists by the United States and the European Union (EU).

Batches of the documents have been seen by The Economist and several other publications. They appear to show that Mr Chávez offered the FARC up to $300m, and talked of allocating the guerrillas an oil ration which they could sell for profit. They also suggest that Venezuelan army officers helped the FARC to obtain small arms, such as rocket-propelled grenades, and to set up meetings with arms dealers.

Venezuelan officials have dismissed the documents as fabrications. That was contradicted by Ronald Noble, Interpol's secretary-general, who announced in Bogotá on May 15th, after two months of study by a team of 64 foreign experts, that the computer files came from the FARC camp and had not been modified in any way. Mr Chávez called this “ridiculous”, questioning the impartiality of Mr Noble, who is American, and labelling him a “gringo policeman”. However, in one indication of their accuracy, the documents provided information that in March guided police in Costa Rica to a house where they found $480,000 in cash, as an e-mail suggested.

The FARC are in some ways a throwback to a past era in Latin America. In other ways they are part of the new face of organised crime in the region. Old-fashioned Marxists unmoved by the collapse of the Soviet Union, they have flourished since then by drug-trafficking and kidnapping. Their war against Colombia's elected government has almost no public support, especially since they showed no interest in making peace during three years of talks with the government from 1999 to 2002. Since then, a determined security build-up by Álvaro Uribe, Colombia's popular president, has put the FARC on the defensive, driving it into remote jungles and savannahs—and towards the country's borders.

Mr Chávez has long expressed sympathy for the FARC. But Colombian officials, backed by detailed testimony from guerrilla deserters, accuse Venezuela and Ecuador of more than rhetoric, saying they have turned a blind eye to guerrilla camps on their territory. The killing of Mr Reyes, a member of the FARC's seven-man secretariat, underlined the point. The captured documents seem to confirm that FARC commanders have co-ordinated closely with Venezuelan army and intelligence officers on the border for several years, according to a Colombian official.

The documents also cast light on the FARC's strategic thinking. Its overriding objective seems to be to obtain international recognition as a “belligerent force” and to persuade the EU to stop labelling it a terrorist group. The guerrillas are desperate to establish a “strategic alliance” with Mr Chávez. But that was still just an aspiration in early 2007, the documents suggest. “We don't know if we enjoy their trust,” writes Jorge Briceño (alias “Mono Jojoy”), the FARC's military leader, to other members of the secretariat.

Contacts intensified last September after Mr Uribe asked Mr Chávez to mediate with the FARC to release the guerrillas' hostages, including Ingrid Betancourt, a politician with French and Colombian nationality. The secretariat agreed to send one of its members, Iván Márquez, to meet Mr Chávez in Caracas to talk about swapping the hostages for jailed guerrillas—but also, wrote Mr Briceño, “to lay the foundations for mutual political relations...even though this might be in the long term.”

At their meeting, Mr Chávez “approved totally and without batting an eyelid” a FARC request for $300m, Mr Márquez reported to his colleagues in a message published by Spain's El País and Colombia's Semana. In a long e-mail 12 days later, Mr Briceño notes that it was not clear whether the money was “a loan or for solidarity” but that the FARC should offer Mr Chávez help in return. According to a document obtained by the Wall Street Journal, Mr Chávez's interior minister, Ramón Rodríguez Chacín, asked the FARC to train Venezuelan soldiers in guerrilla tactics for use if the United States were to invade.

In an e-mail dated February 8th, Mr Márquez and a colleague report that Mr Chávez (whom they identify with the pseudonym “Ángel”) had told them that the first $50m was “available”, with another $200m over the course of the year. However, there is no corroboration as to whether any money was actually paid. Colombian officials have long said that the FARC was wealthy through drug money. So why were they so jubilant about the loan? Perhaps because army pressure against the guerrillas has disrupted their drug business. The government has evidence that some FARC fronts are short of cash and have trouble paying farmers for coca paste, says Sergio Jaramillo, the deputy defence minister.

The secretariat's e-mail correspondence sheds light on several other matters. It confirms that Manuel Marulanda, the FARC's veteran leader, is still alive and apparently in overall command. It also shows the FARC's cynicism about the plight of its hostages. Mr Briceño says repeatedly that he does not expect to achieve the hostage-for-prisoners swap while Mr Uribe is in power but that the FARC will keep pushing it to create problems for the president. When Mr Chávez asked for Ms Betancourt's release “we told him that if we did that we would be without cards,” Mr Márquez writes.

The e-mails show the extent to which the army has the FARC on the run: the secretariat members often complain of their difficulties in communicating with each other. Days after Mr Reyes was killed another member of the secretariat, Iván Ríos, was murdered by his own bodyguard. This week Mr Ríos's deputy, Nelly Ávila Moreno (aka “Karina”), surrendered. But the FARC is far from defeated. In an e-mail last August Mr Briceño notes that guerrilla landmines are undermining army morale. Their impact is “very good and we are going to increase them,” he writes.

The e-mails released so far represent only a fraction of the almost 40,000 written documents and 610 gigabytes of data on the computers. For all his bravado, Mr Chávez is clearly discomfited by all this. At a get-together of European and Latin American leaders in Lima on May 16th he was unusually conciliatory. Some Republicans in the United States have seized upon the computer cache as grounds for declaring Venezuela to be a state sponsor of terrorism. This could require the United States to impose trade sanctions on a country from which it buys some 10% of its imported oil—and so is unlikely to happen. And the e-mails are not a smoking gun implicating Mr Chávez unequivocally. It was Mr Márquez and other FARC commanders, not Mr Reyes, who handled relations with Venezuela. So there are no e-mails from Venezuelan officials on his computer.

Even so, the documents should trouble Venezuela's South American neighbours. None of them echoed Mr Chávez's call in January for the FARC to be recognised as legitimate belligerents. The centre-left governments in many countries are wary of Colombia's close alliance with the United States, which supplies it with military aid. But all have signed the Organisation of American States' democratic charter, requiring them to support, not undermine, each other's democracies. Last month José Miguel Insulza, the OAS's secretary-general, said that “no evidence” linked Venezuela to the FARC. But the evidence from the laptops suggests that there is certainly a case to be answered—by something more than a blustering denial.