Going into Tuesday’s crucial Pennsylvania primary, Hillary Clinton’s task looks not just difficult – as it has for weeks – but nigh on impossible. Overturning Barack Obama’s lead in the contest for the Democratic nomination requires, among other things, convincing victories in all the remaining primaries, of which Pennsylvania is the biggest. The polls offer little encouragement. Mrs Clinton’s once-commanding lead in Pennsylvania has narrowed in recent days, and the picture in Indiana and North Carolina is no better.

The striking thing is that her diminished prospects are not the consequence of a flawlessly conducted campaign by her opponent. Far from it. Mr Obama first had to weather the Jeremiah Wright affair, when video snippets of sermons by his pastor and one-time spiritual adviser revealed that gentleman (even if only in moments “taken out of context”) to be a ranting racist demagogue. No sooner had that subsided than Mr Obama, recorded in private conversation with (as he supposed) loyal supporters, talked about the limits to political sophistication in small-town America.

The remainder of this column can be read here. Please post comments below.

Tonight’s Democratic debate in Philadelphia was the worst I’ve watched, and that is saying something. The blogging consensus, not to mention the furious comments clogging up the ABC post-debate comment thread, has it right. The “moderators” were evidently bored by most of the policy issues at stake in this election—small matters such as comprehensive health care reform, the war in Iraq (eventually mentioned), the economy (mostly ignored). They preferred to dwell on American-flag lapel-pins, and on a variety of silly ambush questions intended, I don’t doubt, not to elicit information and discussion, but to wrong-foot the candidates and produce some “good television”. The whole thing was so phoney and dreary, even by the standards of these events, that I wonder how many people not being paid to watch managed to stay with it to the end.

As for the candidates, it was a night both would prefer to forget. They were not so much uninspiring as anti-inspiring. Hillary scored points but, as is her way, in a fashion that probably bumped up her disapproval rating as much as Obama’s. Having said that, Obama definitely had the worse of it. He looked tired, demoralised even, and was often as faltering and hesitant as in the first debates, way back when. Dealing with Wright (yes, that again), he squirmed, returning (to my astonishment) to his first, failed, and totally non-credible line of defence—namely, that he was not present when his pastor said those things, so it all came as something of a shock. He was that bad.

It couldn’t have gone better for the GOP if they had scripted and stage-managed the entire event.

The polls suggest that Obama weathered the Jeremiah Wright affair with little or no damage. This new flap–arising from remarks to supporters that most members of the liberal intelligentsia would regard as stating the obvious–may hurt him more.

You go into some of these small towns in Pennsylvania, and like a lot of small towns in the Midwest, the jobs have been gone now for 25 years and nothing’s replaced them. And they fell through the Clinton administration, and the Bush administration, and each successive administration has said that somehow these communities are gonna regenerate and they have not. And it’s not surprising then they get bitter, they cling to guns or religion or antipathy to people who aren’t like them or anti-immigrant sentiment or anti-trade sentiment as a way to explain their frustrations.

What a gift to Hillary. She piled on:

Clinton aides said they planned to make Obama’s comments central to their message on the campaign trail this weekend. The New York senator will campaign across Indiana Saturday, and will return to Pennsylvania on Sunday.

In a soft-spoken denunciation of her Democratic rival that lasted several minutes, Clinton played up her own faith and Midwestern roots before attacking point by point Obama’s claims that people who feel disenfranchised in small town America “cling to guns or religion or antipathy to people who aren’t like them or anti-immigrant sentiment or anti-trade sentiment as a way to explain their frustrations.”

“Americans who believe in God believe it’s a matter of personal faith,” she said, to periodic applause. “People of faith I know don’t cling to religion because they are bitter. People embrace faith not because they are materially poor but because they are spiritually rich.”

On the issue of guns, Clinton said: “People of all walks of life hunt, and they enjoy doing do because its an important part of their life, not because they are bitter.”

“I don’t think it helps to divide our country into one America that is enlightened and one that is not,” Clinton continued, finishing her remarks with a line she introduced on Friday in Philadelphia after the story broke: “People don’t need a president who looks down on them. They need a president who stands up for them, and that’s exactly what I will do.”

It has no intellectual merit, but an exuberantly brainless rant by Jane Smiley in reply to Hillary (to think how I admired “A Thousand Acres”…) is worth noting:

So now, Barack Obama tells the truth about conditions as we know them–that the countryside and the small towns are dying in many places in our country, and that the corporatocracy doesn’t care enough to do a thing about it. He points out that immigrant-baiting, gay-baiting, gun-baiting, and religious pandering have helped to destroy those towns and that countryside, that those being destroyed have been cynically enlisted by their very own destroyers to provide the votes that help accomplish the destruction. And this is what Senator Hillary Clinton says about it: “Senator Obama’s remarks were elitist and out of touch. They are not reflective of the values and beliefs of Americans.”

From Senator Clinton’s remarks, I infer that to actually see what has gone on in the US in the last 20 years is unAmerican. It doesn’t matter who you are, where you were born, what you pay in taxes, what else you might have contributed to the culture, how you vote, who you support. If you don’t support fundamentalist religion, job outsourcing, and free access to guns, then you are not even American.

I cannot believe how angry this makes me. I cannot believe that after the last seven and a half years, I can even get this angry. Yes, I know she is pandering to her audience. Yes, I know she will do anything to get elected. Yes, I know that she and Bill Clinton are corrupt to the core, and that I should have never expected anything better of her. But, please, any of you angry white women who still support this craven shill, don’t mention it to me. Do me the following favor — apologize to your children for not stopping the war that HIllary voted for, the war that is going to impoverish them. Then apologize to them for the effects of global warming that are going to make their lives hell. Then apologize to them for the school shooting they may someday see, the one where the kid gets the guns out of his father’s gun case, or buys at a gunshow. Apologize to them for the meaningless wars they are going to fight and pay for. Then tell them that “American values” killed their hopes and maybe killed them. And ask them if they think it’s going to be worth it.

Back in the land of the non-raving, Mickey Kaus offers a characteristically painstaking dissection. He enumerates four principal flaws in Obama’s comments. He says the remarks combine “things that Obama wants us to think he thinks are good (religion) with things he undoubtedly thinks are bad (racism, anti-immigrant sentiment)”. They accuse Pennsylvanians of being racists. They contradict his own position (on trade, at least). And yes, Kaus says, they are plain condescending.

I think I would consolidate points one and three, but otherwise I agree. The reference to trade interested me especially. Up to now, Obama has indeed endorsed anti-trade sentiment. In last week’s comments he portrayed that view as an error induced by bitterness and frustration. Anti-trade sentiment is regrettable, he seemed to say (though Ms Smiley is stone-deaf to this implication). But it is understandable that ordinary people should be mistaken on this, and we more successful types, with less to be bitter or frustrated about, should make allowances. If that is not condescension, I don’t know what is.

Pandering is one thing. It is to be expected of politicians. But it is unwise, and it violates the etiquette of the profession, to say that you are pandering. Hillary panders to anti-trade sentiment, to the religious, and now (can this be correct?) to gun enthusiasts–all with apparently total conviction. Obama panders less well. I think it is a question of experience.

Competition for “most damaging legacy of the Bush administration” is lively. Iraq is the front-runner, of course, but bear in mind the wreckage of fiscal policy – although to use that term is to imply that the US even has a fiscal policy, when it does not. It would be more accurate to talk of fiscal consequences or fiscal footprint (an apt metaphor) than to imply anything as deliberate as “policy”.

All three presidential contenders criticise the administration on this, but none is offering much improvement. The Democrats remind the country that in the late 1990s the Clinton administration ran a budget surplus. With ill-designed tax cuts and reeling indiscipline on spending (partly, but not only, because of the war) the Bush administration turned this into a deficit. Barack Obama’s answer is the same as Hillary Clinton’s: undo the tax cuts and then raise spending by even more. John McCain, the Republican nominee and supposed fiscal conservative, is against raising taxes and promises to get spending down instead – but will not say how to do it.

The whole debate rings hollow anyway, because most Americans think it has nothing to do with them. The Democrats are promising to raise taxes only on the rich: the country’s vast middle class expects to be unaffected. And as long as Mr McCain declines to explain exactly how he will curb spending (aside from attacking earmarks, the special interest spending projects which in the larger scheme of things are trivial), voters will be equally blithe about that side of the calculation too. Everyone can deplore the fiscal incontinence of the Bush administration and hardly anyone need worry about what restoring fiscal control might require. In this, as in other areas, the thinking boils down to: “After George W. Bush, everything will be fine.”

The remainder of this column can be read here. Please post comments below.

Here is a subject that preoccupies me at the moment. Europe continues, slowly and reluctantly, to deregulate its economies. In this it is following the US example. The American economy has some problems at the moment, but the EU’s governments are ever mindful of, and oppressed by, the long-term success of the American model. What is interesting is that the United States has been moving the other way. If the Democrats control both the White House and Congress next year, which seems very likely, America’s hitherto-gentle drift in Europe’s general direction will accelerate. One day, might the lines actually cross?

This piece for The Atlantic takes a first stab at the question. I offer it as an introduction to the topic. I intend to return to it.

That the United States stands apart is something Americans and Europeans have agreed on for a long time. It goes back to Tocqueville, like most things. Many of the differences of character and culture he noted in the first half of the 19th century are still there, no doubt, but some more recent contrasts are looking questionable. Since 1945, American exceptionalism has been asserted with particular confidence—but gradually diminishing validity—in economic affairs. America is to Europe as private enterprise is to the public good, as selfish individualism is to social partnership, as “compensation” is to work-life balance. Modern America has limited government, weak unions, high-powered incentives, capitalism red in tooth and claw. Post-war Europe has tax-and-spend, transport strikes, six-week vacations, and the welfare state. Or so, on both sides of the Atlantic, we fondly imagine.

Living in the U.S. for several years after decades as a restless Brit, I continue to be struck by two things. First, this idea of rival economic paradigms appeals to both audiences: Neither would have it any other way. This may be why the notion persists so tenaciously, despite not being true. That is the second thing. Caricatures are well and good, but this one is just too much. In economic matters, America is far more like Europe, and Europe more like America, than either cares to admit. Moreover, the differences continue to shrink, and the pace of convergence seems about to accelerate. We will see whether the idea of America as the land of uncushioned capitalism—the timid and work-shy need not apply—will outlast a faster approach to the European norm.

The Democrats’ promise of comprehensive health reform—something the country finally seems to want—is what prompts this line of thought. Over the past ten years, it seems, many Americans have come to think it wrong that a country as rich as theirs fails to guarantee access to health care. For much longer, almost all Europeans have thought it both incomprehensible and shameful. This is America’s biggest social-policy exception (unless you count capital punishment as social policy). And it is marked for abolition.

Universal health care, if it happens, will be an enormous change in its own right, of course, but also one with further implications. It is going to push taxes up—in the end, possibly way up. The plans lately under discussion have not been properly costed, but figures of $50 billion to $75 billion a year in extra spending—the sorts of numbers bruited for the Democrats’ proposals—are optimistic. Beyond the initial outlay, whatever that proves to be, is the likelihood that people will gradually migrate (at their own initiative, or more likely at their employers’) from private insurance schemes to the new (and presumably subsidized) public alternatives. Everything depends on how the system is managed, but it is easy to foresee, in the fullness of time, a far bigger increase in the cost to taxpayers than the current plans envisage. And if American health care coverage and financing get more European, American taxes will have to as well.

The rest of the article is here.

Ken Rogoff asks, “Has the moment come to replace the dollar?” His answer is: “Maybe not quite yet….but soon.” (His article, which I came across on Real Clear Markets, is for Project Syndicate, but it seems to have been posted in the The Daily Star of Lebanon, of all places, before it is available there.)

At current market exchange rates, the European Union is now larger economically than the US. New central and eastern European members are bringing enormous dynamism and flexibility. At the same time, the European Central Bank has gained considerable credibility from its handling of the global credit crisis. Indeed, if the euro zone can persuade Great Britain to become a full-fledged member, thereby acquiring one of the world’s two premier financial centers (London), the euro might start to look like a viable alternative to the dollar.

In 1971, as the dollar collapsed towards the end of the post-World War II fixed exchange-rate system, US Treasury Secretary John Connally famously told his foreign counterparts that “the dollar is our currency, but your problem.” And the dollar’s exalted global status has survived ever since, despite many episodes of neglect and abuse.

World currency standards have enormous inertia. The British pound only forfeited its role to the US dollar after more than 50 years of industrial decline and two world wars. But it could happen a lot faster this time. As central bankers and finance ministers ponder how to intervene to prop up the dollar, they should also start thinking about what to do when the time comes to pull the plug.

I did a piece on the same subject for The Atlantic last May. The article goes into some of the advantages that the US has derived from the dollar’s reserve-currency status, and what is at stake if that should change.

The dollar’s status as the global currency confers more advantages on the United States and its citizens than you might think—advantages far beyond convenience for international travelers (though let us not underestimate that). The dollar’s popularity has moved real resources from the rest of the world to the United States. And on a much larger scale, through an economic sleight of hand in global financial markets, it has allowed the country to sustain an otherwise impossible standard of living. These wonderful tricks, unfortunately, may not work much longer. When they start to fail, as they eventually must, the dollar’s peculiar global role will suddenly become a focus of attention. You don’t know what you’ve got till it’s gone.

When the crisis in US and global financial markets started to unfold, so began the incantation of two default opinions. One: regulation is the answer and we must have more. Two: regulation is the problem and more would be worse. With all that chanting to be getting on with, neither choir has time to look at what has happened. Which is as well: the details might call for some thought.

I am a pro-market type, whose stock-in-trade is to warn of the unintended consequences of hasty or excessive regulation. In the present case, however, we are badly served by our usual catechism. This time, elements of large-scale regulatory failure are indisputably at the centre of what has happened. If, for the sake of leaving our prejudices in peace, we deny the obvious, we bring our regard for markets into disrepute and have nothing to offer by way of an intelligent policy response.

The remainder of this column can be read here. Please post comments below.

Struck by the near unanimity of the view that the Paulson blueprint is beside the point–something that Paul Krugman and the Wall Street Journal, for heaven’s sake, have been able to agree on–I attempt a limited defence in this column for National Journal (the link expires in a week). The document is not a waste of time, and I do not see it as a cynical political manoeuvre. Most of what the Treasury proposes actually makes sense, and it would be good to see the plan acted on. The problem is that the blueprint fails to ask the most pressing and important questions. As I noted two posts ago, it is more about form than content.

In 2005, my friend Moises Naim, the editor of Foreign Policy, published “Illicit: How Smugglers, Traffickers, and Copycats are Hijacking the Global Economy“–a unique and fascinating study of illicit trade in the new age of globalisation. National Geographic has made a TV documentary based on the book, and on Tuesday night it showed a preview in Washington. The film has some gripping footage. It is well done and I recommend you watch it. But television has a limited attention span and not much taste for complications, and I have to say I did not find the movie as stimulating as the book.

It does successfully dramatise some of the key ideas. The scale of illicit trade–which encompasses, to name a few, counterfeiting, money-laundering, illegal drugs, fake medicines, loose nukes, and illegal immigrants–is huge. The pattern of trade is complex, organised and extended. Traders large and small have been much faster and more adept at developing their networks than governments have been in interrupting them: borders empower the criminals, and disempower the authorities. Also, this is a story about disturbing synergies. Once you have a supply chain for counterfeit handbags, or bogus pharmaceuticals, you can use it for other things too. In that sense, at least, illicit globalisation is akin to a single multinational industry.

But there, I think, is where the film goes wrong. You can push that insight too far, and elide the differences between different kinds of illicit activity. The book is careful not to do that. The film, in contrast, develops this idea as its principal theme. It wants you to think that protecting intellectual property is almost a national security issue–that buying a fake Ralph Lauren shirt is only one step removed from facilitating nuclear terrorism. This is a view that the US Chamber of Commerce (which supported the production) doubtless finds to its liking, but it is not the right way to think about the issue.

In the Q&A after the showing, Moises said (as he emphasises in the book) that governments need to prioritise if they are to get a grip on the problem. For instance, he favours, as I do, drug legalisation. The film does not go there. It never really gets beyond the idea that illegal drugs equals counterfeit handbags equals loose nukes equals poisons in medicine bottles.

As I watched the movie I found myself thinking along these lines: suppose, just for the sake of argument, that the world had liberal trade, an enlightened policy of decriminalisation of illicit drugs, and an equitable dispensation on global intellectual property rights. What kind of inroads against illicit trade would you make, merely by doing the right things in those areas? And think of the resources those changes would free up to address the issues–loose nukes, among them–that remained.

The new Treasury blueprint for reforming financial regulation is not really a blueprint at all. (The full document is here; or see a Treasury summary of it here.) It says some sensible things and has some good ideas, but for the most part it is an agenda for discussion rather than a detailed plan. Given that the Treasury has been working on this thing at least since March 2007, it is surprisingly thin.

Moreover, it is concerned exclusively with the structure of the regulatory system. I think that getting this right is more important than Paul Krugman does—he calls this the Dilbert strategy—but Paul is surely right to complain that a better structure will get you only so far. It is a question of form and content. What the rules say matters more than which regulators are responsible for enforcing them, and the so-called blueprint does not go into that.

For instance, the document calls in the short term for the Federal Reserve to “continue to write regulations implementing national mortgage lending laws”. It also “recommends clarification and enhancement of the enforcement authority over these laws”. Fine. But what should these laws actually say? We are told only that they “should ensure adequate consumer protections”. No doubt; so far as I am aware, nobody is calling for inadequate protections. The question is, what does “adequate” demand. Up to now, the Fed has presumably judged the existing standards—embodied mainly in the Truth in Lending Act—to be all right. (When he was Fed chairman, Alan Greenspan applauded the explosion of subprime mortgage lending, saying it let people buy a home who would otherwise have been unable to.)

In the long term, the report envisages a structure based on what it calls an objective-based approach. This means dividing up the regulatory workload by broad tasks, rather by types of institutions covered. Today’s approach segregates banking, insurance, securities and futures under different (overlapping and cross-cutting) systems of regulation—an idea that last made sense decades ago. The Treasury urges instead a three-part division of responsibilities. There would be a “market stability regulator”—the Fed—whose job would be to gather information and monitor risks across the whole financial system. There would also be a single “prudential regulator”, concerned with capital adequacy, investment limits, and risk management—with a remit confined to firms with explicit federal guarantees. Finally there would be a “business conduct regulator”, operating across all types of financial firms (and absorbing the SEC), to protect consumers and investors.

This basic structure makes much more sense than the present chaotic array of industry-focused regulators. But one big gap—even at this level of generality—is obvious. On my reading of this document, the Fed is seen mainly as a system-wide information gatherer, not a rule writer or rule enforcer. True, it would have “the responsibility and authority to…take corrective actions when necessary”. But what does that mean? I think it means, provide liquidity at times of stress—which it does already. The document does not explicitly entertain the idea that the Fed would write and enforce new rules to make stability easier to achieve. The prudential regulator would do that, you might argue–but only for firms with federal guarantees. That narrow remit would have excluded Bear Stearns, for instance. Investment banks and hedge funds will not be covered. And the business conduct regulator does not fill this gap either: it is concerned with consumer and investor protection, not financial safety and soundness.

It seems to me obvious that prudential regulation ought to extend beyond firms with “explicit government guarantees”. At the very least, delete “explicit”. We are witnessing right now how the collapse of firms without explicit guarantees may nonetheless pose a threat to the integrity of the whole financial system. Evidently, it is a threat that the Fed and the Treasury have recognized—and that is why the umbrella of implicit guarantees continues to expand. There must be a regulatory quid pro quo for that, just as for the explicit kind.