ScaifeNet because we can't let Soros have all the fun...

A policy of low interest rates is a textbook response of monetary authorities to the economic weakness brought on by deficient aggregate demand. The policy is justified by pointing to various ways in which money can promote economic activity — including by stimulating investment, discouraging savings, encouraging consumption spending, and allowing individuals to lower their debt burdens by refinancing existing debt. While these effects are theoretically plausible, this textbook policy does not apply to our present situation.

First, our lingering crisis and economic weakness was brought on not by a Keynesian failure of effective demand, but by a Hayekian asset boom and bust. Second, the textbook case for low interest rates treats the policy as one of benefits without costs. No such policy exists.

The housing boom and bust was a classic asset bubble, such as occurred frequently in the 18th and 19th centuries. Easy money working through cheap credit made long-term investments appear more valuable than would otherwise have been the case.

In most cases, investment booms drive industries with sound fundamentals. When the cheap credit keeps flowing, however, fundamentals are forgotten and the process evolves into a mania (to use the old-fashioned term). What cannot be sustained will not be, so the boom ends in a crisis.

In these scenarios, the collapse of demand is a consequence — not the cause — of the bust. Policies to address crises must get cause and effect right.

When housing prices peaked and then turned down, there were repercussions throughout the financial system and then the broader economy. Mortgage-related securities soured, hitting the balance sheets of the institutions that had purchased them. As that became known, the prices of the securities of these institutions (mainly but not exclusively financial) fell. Credit dried up and the economy tanked. A general rout in the stock market ensued.

The financial panic and ensuing great recession was a classic balance-sheet recession. As balance sheets shrank in value, demand collapsed. There was a liquidity crisis as well, centered around Lehman's collapse, but the driving force was collapsing balance sheets, impaired capital values and, for many, insolvencies.

The declines in home values, investor portfolios and 401(k) plans, and the uncertainties surrounding retirement plans, have all had a big impact. The solution lies in restoring balance sheets. For financial firms, that means raising capital. For consumers and businesses alike, that means saving more of their reduced incomes.

Yet public policy has focused almost exclusively on stimulating spending without much regard to why spending, especially consumption, has flagged. Until balance sheets (corporate and household) are restored, increased spending cannot be sustained.

Temporary spending and tax breaks are always dubious, and especially so now when the rational motivation is to save more and consume less. One-off tax credits for homes, for example, merely borrowed sales from the future. These fiscal programs predictably depressed rather than augmented future consumption.

What is in short supply is not liquidity, but savings. The Fed can supply the former but not the latter. Both fiscal and monetary polices need to shift their focus. The Fed has done the heavy lifting and responded more than adequately to liquidity issues. Now there is little further it can do that is beneficial.

Its move toward Japan-style quantitative easing is a misstep. And historically low interest rates — about which the Bank of International Settlements, the bank for central banks, sounded a warning in its 2009/2010 annual report — will inevitably distort economic activity, as they did during the housing boom. Low interest rates slow the process of restoring balance sheets by keeping asset prices artificially inflated. They also penalize saving, thus prolonging the process of rebuilding balance sheets.

In the fiscal realm, policy must be reoriented from stimulating consumption to encouraging productive investment (not renewed financial speculation). That means no income-tax increases or costly new mandates. In particular, the Bush tax cuts should not be allowed to expire. No matter how the administration spins it, their expiration would entail a large increase in marginal tax rates in the midst of economic weakness. That would further impede savings and capital accumulation, discouraging firms from expanding and hiring workers. Treasury Secretary Tim Geithner is proposing to repeat the mistake of Herbert Hoover, who persuaded Congress to raise taxes in 1932.

Markets are resilient, but their recovery can be impeded by bad policies. At present, both monetary and fiscal policies are on the wrong track.

For those of us striving towards a free society, a basic tenet is a respect for mutual agreements between consenting adults. In the absence of fraud or actual physical harm to either persons or property, adults should have their contracts respected by the state and not rewritten upon political whim. So the question is: is the current system of executive compensation fraudulent or does it impose physical harm on others?

Let us start with the harm. An argument often heard for limiting executive compensation is that it drove the financial crisis, which clearly harmed all of us. The best that can be said is that the evidence is mixed. The most compelling evidence is probably that presented by Rüdiger Fahlenbrach and René Stulz, who conclude from their empirical investigation that "there is no evidence that banks with CEOs whose incentives were better aligned with the interests of their shareholders performed better during the crisis and some evidence that these banks actually performed worse". Professors Fahlenbrach and Stulz also go on to demonstrate that bank CEOs, particularly those of failing institutions, suffered extremely large wealth losses. Of course, the interests of shareholders may not coincide with those of the general public.

In the presence of a government guarantee (implicit or explicit), the interests of both shareholders and management may be to "bet the farm". Given the widespread government guarantees of risk-taking in the financial sector, perverse pay schemes are to be expected. Which, then, is the more important driver here? The moral hazard created by government guarantees or the perverse incentive schemes that result? Limiting compensation schemes in exchange for an explicit guarantee is one thing; limiting them when there is no guarantee is quite different. Eliminating these government guarantees should be the preferred approach, rather than creating intrusive regulatory schemes that seek to control moral hazard, especially when those regulatory schemes have at best a mixed record, if not one of outright failure.

One possibility is that executive compensation arrangements do represent harm to a company's shareholders, given that such arrangements are negotiated between management and the board of directors. The massive literature on the separation of ownership and control need not be repeated here. It is sufficient to say that this possibility has merit. In this case, however, excess compensation, if truly present, is a symptom rather than the disease — and it would be more effective to address the disease. For instance, considerably more could be done to improve the market for corporate control. Eliminating the many obstacles, often pushed by government at the urging of management, to contesting the control of a company would be more effective than just targeting compensation. Subjecting management to a greater possibility of hostile takeovers, for one, would do much to realign the incentives of management with shareholders.

While I do not believe that a price being viewed as "excess" constitutes legitimate grounds, on its own, for government intervention, it is worth asking if, in general, the executive compensation of American publicly traded companies is indeed "excess". Recent growth in pay could simply reflect the efficient outcome of market processes. Carola Frydman and Raven Saks, for example, compare compensation growth with the growth in the stockmarket, based upon S&P companies. Their results show that since the 1970s, growth in pay has closely followed that of the stockmarket. Growth in pay has also tracked growth in firm size. As companies have become larger, and thus more complex and difficult to run, pay has increased accordingly. Given that larger firms can have significant, if not systemic, impacts on the economy if they are mismanaged (think Fannie Mae or GM), then paying considerably more for qualified management would seem common sense.

We should also be wary of the unintended consequences of government directing the executive compensation process. When Congress passed, and President Bill Clinton signed, a bill limiting the tax deductibility of compensation to $1m, except for performance-based pay, it helped shifted compensation towards options-based pay. Congress went so far, in the case of Fannie Mae and Freddie Mac, as to require, in statute, that their executive officers be paid a substantial portion of their pay based upon the "performance" of the companies. The track record of politicians in the area of executive compensation is hardly a good one. This should not be surprising, as the optimal compensation scheme is probably unknowable ex ante, and can be derived only by trial and error, a process generally unsuited for government.

A recurring reaction by politicians to the recent financial crisis has been to deflect attention away from the actual drivers of the crisis and instead focus on convenient targets. Executive compensation is just another example of that distraction. Given how badly politicians and bureaucrats have mismanaged our financial system — not to mention our fiscal situation — they are the last ones who should be tinkering with executive compensation.

Many Americans may not remember, if they ever knew, that toward the end of the Bush administration, FBI Director Robert Mueller and Attorney General Michael Muka sey so greatly expanded the "Guidelines for Domestic FBI Operations" that now, in Barack Obama's presidency, we have essentially returned to the reign of J. Edgar Hoover, who was convinced that a citizen's right to a private life and to his or her own thoughts could be ignored for national security.

The FBI, with no objection from President Obama, can conduct a "threat assessment" — an investigation — on any of us without a judicial warrant or any articulable suspicion of criminal activity. During J. Edgar Hoover's time, there was much public protest and reporting on his erasing of our Fourth Amendment's "right of the people to be secure ... against unreasonable searches and seizures."

Because of my reporting on Hoover's shelving of the Constitution, two FBI agents knocked on my door. Since they did not have a subpoena, I told them they would have to first see my lawyers at the ACLU, at the time a few blocks up the street from where I lived. They left and I never heard from them again, but later found I had an FBI file consisting mainly of newspaper clips of my reporting.

Now, however, even though these new FBI guidelines also permit its agents to take into account race and ethnicity in their "threat assessment," there is no commotion among the citizenry about being under increasingly pervasive surveillance since 9/11. And although Mueller, FBI director since September 2001, had little more than two years left in his 10-year tenure when Obama took office, Mueller is to remain securely in place.

Startlingly, although of very limited interest to the press, when Director Mueller was testifying on July 28 before the Senate Judiciary Committee, he actually told Illinois Democrat Sen. Dick Durbin that before any FBI surveillance can take place, there must be some suspicion of wrongdoing. Somebody in the FBI must have whispered a correction to him because later, he sent Durbin a note saying he had misspoken. He has also said wrongly that race never is a factor in a "threat assessment."

Well, he's so busy looking after our national security, this FBI director, like the much noisier J. Edgar Hoover, has never been a stickler about his agents' concern for the Bill of Rights.

For example, on July 28, the AP's Pete Yost reported that, the day before, the ACLU asked "FBI field offices in 29 states and Washington, D.C, to turn over records related to the bureau's collection of data on race and ethnicity." And, not at all surprisingly, "the FBI is still refusing to make public portions of the guide that deal with sending agents or informants into houses of worship and political gatherings."

If you go to political gatherings, are you going to be tracked just for being there, let alone for what you say? Like J. Edgar Hoover, Mueller isn't going to tell you which political gatherings are on his list — nor will Obama tell him to. And during his confirmation hearing, Obama's Attorney General Eric Holder said:

"The guidelines are necessary because the FBI is changing its mission, going from a pure investigative agency to one that deals with national security." That these limitless guidelines are kept from any judge's scrutiny didn't bother our attorney general or his boss.

But Holder did assure us that he would "see how these guidelines work in operation." I'm still waiting, Mr. Attorney General.

The year before he was nominated, I heard Holder, during a speech before the Constitution Project in Washington, as he condemned President George W. Bush, saying: "I never thought that I would see that a president would act in direct defiance of federal law by authorizing warrantless [National Security Agency] surveillance of American citizens."

Yet here is our chief law enforcement officer endorsing President Obama's approval of unbounded warrantless surveillance under "Guidelines for Domestic FBI Operations" — along with Obama's hearty support of the now much more expanded warrantless NSA surveillance of American citizens under the 2008 FISA Amendments Act, which then-Sen. Obama pledged he would filibuster, and then signed as president.

Moving into positions of power does indeed often corrupt previously cherished principles. Consider former congressman and Bill Clinton's White House chief of staff, Leon Panetta. Before becoming part of this current administration, Panetta wrote: "How did we transform from champions of human dignity and individual rights into a nation of armchair torturers? One word: fear. Then what's wrong with a little waterboarding? The simple answer is the rule of law."

And where is Panetta today? He is President Obama's director of the CIA. He has continued CIA "renditions" that used to send terrorism suspects to countries known for torture. Why is he continuing renditions? He won't say. That's classified. He does say that he rejects punishment of any CIA agents involved in what a then inspector general of the CIA found to be torture. They, Panetta emphasized, were following orders that lawfully, at the time, came from on high. Orders under our rule of law?

Next week: President Obama and Robert Mueller are insisting that the FBI get more warrantless surveillance powers to look into your electronic "communication transactional" Internet records in national security investigations. Like maybe all the websites you visit, or with whom you and your computer socialize on the web.

Why worry if you have nothing you want to hide? Don't you trust your government? It's not as if J. Edgar Hoover were still in the FBI's Washington headquarters named after him — but aren't his successors keeping faith with him? I doubt that many voters in the midterm elections will be asking that question. Many of us don't have the time to look into our history. We find out what's going on now through blogs and cable TV shows we agree with. Will the FBI eventually want to know which ones?

When last we heard from Senate Majority Leader Harry Reid, he was proclaiming that there was no need to reform Social Security because the program "is on solid ground for decades to come."

Well, apparently that's true — if by "decades" Reid, D-Nev., meant "five years."

Social Security's trustees this month finally released their long-delayed report on the system's finances. According to the trustees, who include President Barack Obama's secretaries of Labor and Treasury, Social Security is actually running a cash-flow deficit today, spending more money on benefits than it takes in through taxes. Most of that deficit has been caused by the recent economic downturn and, hopefully, will be only temporary.

But regardless of how the economy performs in the next few years, the trustees warn that by 2015, just five years from now, Social Security will again start to run deficits — and this time they will be permanent. That's a year sooner than predicted in last year's report.

While, in theory, the Social Security Trust Fund will be able to pay benefits until 2037, the same as in last year's report, that figure is misleading because the trust fund contains no actual assets. The government bonds it holds are simply a form of IOU, a measure of how much money the government owes the system, $2.6 trillion, according to the report.

Of course, no one is saying that the government will default on its obligations, but one might ask where the government will get the money to pay back that $2.6 trillion. It's not as though the government has it laying around. To say that Social Security is fine because the Treasury will find a way to pay its debts is like saying you have plenty of money for your mortgage — as long as you don't eat.

Even if Congress can find a way to redeem the bonds, the trust fund surplus will be completely exhausted by 2037. At that point, Social Security will have to rely solely on revenue from the payroll tax — and that won't be sufficient to pay all promised benefits. Overall, the amount the system has promised beyond what it can actually pay now totals $18.7 trillion.

Not surprisingly, Reid and others have suggested that all of this could be fixed with a simple tax increase. They have suggested, for instance, taking the cap off the amount of income subject to the Social Security payroll tax. This would be the largest tax increase in U.S. history, and would give this country a higher marginal tax rate than, say, Sweden. And it wouldn't come close to fixing Social security's financial shortfall.

In fact, even if you took the cap off completely, without giving anyone additional benefits in exchange for the higher taxes, you would extend the date at which Social Security begins to run a deficit by seven years — to 2022. That's not much gain for all that pain.

To actually "save" Social Security would require a 50 percent hike in the payroll tax, from 12.4 percent to at least 18 percent, or the equivalent in other taxes. That's a big tax hike.

And all this says nothing about Social Security's other problems. Social Security taxes are already so high, relative to benefits, that Social Security has simply become a bad deal for younger workers, providing a low, below-market rate of return. Many young workers will end up paying more in taxes than they receive in benefits. They will actually lose money under the program.

And, most importantly, under the current system, workers do not actually own their Social Security benefits. They are left totally dependent on the goodwill of the 535 politicians in Congress to determine what they'll receive in retirement. Benefits are not inheritable, and the program is a barrier to wealth accumulation.

Politicians like Reid can no longer be allowed to duck this vital issue. The trustees' report makes it clear that Social Security is not "on solid ground." Social Security must be reformed, sooner rather than later.

Government officials and apologists for America's wars are furious at Bradley Manning. The ruddy-cheeked Army private, now in solitary confinement in Quantico, Virigina, allegedly released classified army documents to WikiLeaks, the controversial whistleblower protection website. Manning appears to be the source of the video WikiLeaks released under the name "Collateral Murder," which shows a U.S. Army helicopter crew killing more than a dozen civilians with a mounted machine gun. Manning is also suspected to be a source of WikiLeaks' "Afghan War Diaries," the massive trove of classified files detailing routine military operations in Afghanistan. The series of New York Times stories based on the files paints a grim picture of a mission hampered by endemic disorganization, double-dealing allies, and frequently deadly error.

Rep. Mike Rogers, a Republican from Michigan, has called for Manning's execution on grounds of treason. Washington Post columnist Marc Thiessen, the former Bush speech writer who rose to prominence through his aggressive defense of state-sanctioned torture, has called WikiLeaks a "criminal syndicate" — stopping just short of demanding the invasion of Iceland for the robust legal protections it affords organizations like WikiLeaks and its founder Julian Assange. Admiral Mike Mullen, the chairman of the Joint Chiefs of Staff, said that Assange might already have on his hands "the blood of some young soldier or that of an Afghan family."

This idea — that Manning and WikiLeaks have imperiled Afghani informants or American troops — is now the leading charge against them. "We know for a fact that people will likely be killed because of this information being disclosed," Rep. Rogers said.

Rogers did not provide evidence for his "fact," but one fact beyond dispute in our wars in Iraq and Afghanistan is this: they have killed people by the thousands. In fact, the two wars combined have produced well more than 100,000 corpses. If putting people in harm's way is a damning criticism of Manning, then what are we to make of those who have cheered on, voted for, and managed America's wars? Is all this killing justified or not? Is there a legitimate aim that will somehow redeem all this death? These questions are the backdrop against which we judge the deeds of Bradley Manning and the efforts of WikiLeaks.

The bloody events portrayed in the WikiLeaks' "Collateral Murder" video seem gratuitously malign. It is no consolation to know that the victims were riddled with bullets in accordance with military protocol. (Again, for what?) Consequently, it takes no great empathy to understand Manning's desire to expose such savage, pointless destruction of human life, or his desire to distance himself from it.

"I don't believe in good guys versus bad guys anymore," Private Manning confessed in an instant message chat with Adrian Lamo, the ex-hacker who turned him in. "I mean, we're better in some respects," he clarified. "[W]e're much more subtle... use a lot more words and legal techniques to legitimize everything. It's better than disappearing in the middle of the night. But just because something is more subtle, doesn't make it right."

Manning's disillusionment may strike unfaltering patriots as the germ of his betrayal. But lazy love of country blinds us to the possibility of our country's wrongdoing. What's more, it blinds us to the possibility that Manning's softening of partiality, his recoil from slaughter, is the morally right response to what he had seen. It is hard to sense our own complicity in injustice, especially when the victims of injustice appear remote. But Manning saw that he was an adjunct to injustice and senseless death, and was moved to risk his freedom, possibly his life, to do something about it. After telling the duplicitous Lamo that he had forwarded 260,000 State Department cables to WikiLeaks, Manning explained his aim: "Hopefully worldwide discussion, debates, and reforms," he wrote. "[I] want people to see the truth, regardless of who they are, because without information, you cannot make informed decisions as a public." Though he has soured on the state, Manning evidently remains an idealist animated by the possibly naïve hope that a democratic public that has seen what he has seen will feel moved, as he was moved, to do something about it.

Glenn Greenwald argues that WikiLeaks has generated so much animosity because "they breached the Absolute Wall of Secrecy behind which our Government, and its private National Security and Surveillance State partners, operate."

This is a big part of the story, but not the only part. Private Manning and WikiLeaks have also created the possibility that millions of Americans will now come face to face with the same ugly truths that led Manning to conclude that he had obligations to humanity weightier than an oath to the state. The wars in Iraq and Afghanistan have left Americans with blood on our hands, and on our wallets — a truth most of us prefer to avoid. Unfiltered facts and uncensored video about what has been done on our behalf, on our dime, are "dangerous" precisely because they lead to mortifying moral clarity when it is face-saving obfuscation that we crave. Secrets sold by a grasping turncoat would not threaten America's wars. It is Manning's idealistic exercise of conscience, and the faint possibility that we are as good as he thinks we are, that has agitated the lords of war.

Eating with the Enemy: How I Waged Peace With North Korea from My BBQ Shack in Hackensack
By Robert Egan with Kurt Pitzer
St. Martin's Press, $25.99 386 pages

Dealing with North Korea is one of Washington's most disagreeable tasks. The country is isolated; its political system is opaque; its government is truculent. The United States does not maintain diplomatic relations with the so-called Democratic People's Republic of Korea. Because of Pyongyang, Northeast Asia is one of the world's most dangerous regions.

Establishing normal relations with North Korea might not bring regional peace. However, such contacts would yield some insights into an otherwise closed society. With American diplomats unwilling to engage in diplomacy, a working-class restaurateur in New Jersey stepped into the void.

Bobby Egan (with the assistance of writer Kurt Pitzer) tells the curiously engaging tale of how he became friends with members of the North Korean U.N. delegation and ended up visiting North Korea. Mr. Egan is an unlikely international ambassador. A high school dropout who abused drugs and committed petty crimes, he eventually righted his life and established a BBQ joint called Cubby's. He met some Vietnamese diplomats and got involved in the issue of left-behind POWs.

The relationship between Mr. Egan and the North Koreans zigged and zagged. The latter apparently believed that Mr. Egan was an intelligence officer. The DPRK mission staff used him to help with practical issues, such as buying gifts for North Korean dignitaries. But Mr. Egan also had his own agenda. For instance, he decided that the North needed public exposure, so he cadged free tickets to take his newfound friends to New Jersey Nets and New York Giants games.

No surprise, the FBI took an interest in his activities. He worked with them as a quasi-informant, even helping collect DNA samples for some bizarre purpose. Nevertheless, his relationship with the feds always was difficult. For instance, they were horrified at the thought that he would take a North Korean hunting, as if an armed DPRK diplomat would wreak havoc upon a helpless America.

Over time, he developed a close friendship with Han Song-ryol, counselor and then U.N. ambassador. It's an improbably madcap story. After Mr. Egan hires a limousine for game night, his wife reasonably points out:"Why can't they pay for it themselves? If they can afford a nuclear program, they can afford a limo."

The North Koreans invited him to Pyongyang in 1994. He stayed at the same hotel and visited many of the same spots that I did when I went two years before. But he was given a Kim Il-sung button, a major honor denied me (the North Koreans were upset at my evident disdain for the ubiquitous "icons" of the Kims).They also stuck him with sodium pentothal, or "truth serum," in an attempt to find out who he really worked for. (Thankfully, I avoided this process).

Mr. Egan's most interesting activities were his attempts to play informal ambassador, resolving disputes between the DPRK and United States. He seems shocked that "the Clinton Administration didn't want me to be part of the conversation about North Korea." He appears befuddled that U.S. officials were unimpressed by Pyongyang's offer to help hunt down Osama bin Laden. Unfortunately, Mr. Egan's abundant moral fervor was not matched by geopolitical understanding.

There's a good policy argument for opening diplomatic relations with and eliminating economic sanctions against North Korea. But it is a case that must take into account the nature of the DPRK regime.

There may be none worse on earth. A half-million or more people perished in a famine in the late 1990s. The regime remains a Stalinist police state. None of its neighbors, including China, favors a North Korea with an abundant nuclear arsenal and continent-spanning missiles.

Mr. Egan ignores the reality of the regime with which he is dealing, even though he acknowledges that his North Korean friend, Ambassador Han, went through some form of re-education after returning home for the first time. Mr. Egan's individual relationships with North Korean officials cannot overcome the larger political issues with North Korea.

Nevertheless, Mr. Egan thinks he played a major role in the release of a U.S. helicopter pilot shot down over North Korea, the participation of North Korea in the 1996 Olympics and the provision of private food aid to the North. He even worries that by toasting the DPRK's nuclear test with North Korean diplomats that he was "responsible for encouraging [Ambassador] Han to move forward" with nuclear weapons. The idea that "Dear Leader" Kim Jong-il made decisions in Pyongyang about his nation's nuclear program based on the opinion of a New Jersey restaurateur is rather charming, but it is easy to mistake causation for correlation.

Perhaps Mr. Egan's craziest adventure was his trip to the DPRK with a Pennsylvania state senator to bring home the U.S.S. Pueblo, the intelligence ship seized by North Korea in 1968. The crew was eventually released, but the ship remains a tourist attraction highlighting the evils of American imperialism.

A decision to return the ship could only come from the Dear Leader, and the North would do so only in return for a substantial concession. After all, the Pueblo is Pyongyang's most important symbol of American humiliation. Mr. Egan's belief that the North Korean regime would hand the ship over to a couple of American unknowns exhibits blinding naivete.

After Mr. Egan and his companion showed up in Pyongyang, they only got to visit the Pueblo as tourists — after paying the normal admission fee! "I fumed all the way back to New York," he writes, and for a time he refused to talk to Mr. Han, who, he decided, "was just like any other commie. They were all alike — a one-way street." Mr. Egan eventually got over his disappointment, and the book ends with Mr. Han returning to Pyongyang.

Mr. Egan feels good about his accomplishments, as well he should. The most important message of Eating with the Enemy is not that average citizens can easily surmount international political barriers. They cannot. But private people can reach beyond international politics to form enduring human relationships. As did Bobby Egan.

The gay marriage debate gained renewed intensity last week when a federal judge struck down California's Proposition 8 ban on gay marriage. Supporters of gay marriage hailed the decision as a crucial blow for civil rights; opponents assailed it as an assault on fundamental moral and religious values.

Oddly, both sides agreed on one thing: that government should define and "supply" marriage.

But it is the government's role in marriage that's at the heart of the problem.

Marriage means two things in modern society.

Religious marriage is a custom, ceremony or rite that some couples wish to pursue. Religious marriage is not the subject of the legal controversy; no one is proposing that governments bar religions from supplying religious marriage to same-sex couples.

Civil marriage is a legal institution created by governments. It is, in essence, just a bundle of contracts involving the marrying couple, their children and others. A marrying couple gets legal rights and responsibilities about division of property, inheritance, guardianship of children and other issues. The government enforces this bundle of rights and responsibilities.

The question is, does the government need to specify a particular bundle of contracts, enforce this bundle and call it "marriage"?

The answer is no.

If government exits the marriage business, both same-sex and opposite-sex couples would be free to enter private contracts, picking and choosing which ones to sign. Do they plan to have kids? Sign the guardianship contract. Do they need to protect inheritances? Add in that contract. Do they want the whole bundle? No problem.

The result would be that opposite-sex couples and same-sex couples would have the same opportunity to live together, write wills, have biological or adopted children, and so on. Nothing in the law would make any distinction based on the gender or sexual preferences.

The government could still accomplish its legitimate aims in this area by defining default rules for each component. It could, for example, specify that the biological mother is a child's only legal parent unless the mother voluntarily gives up that status. This rule might also impose that the biological father is responsible for some percentage of child support. (Governments already have such rules because many children are born outside of wedlock.)

Of course, couples who wished to be married could still head off to the church or synagogue. This wouldn't have any legal implications, it would simply be a private arrangement between the couples and the religious institution performing the ceremony.

Neither supporters nor opponents of gay marriage are likely to endorse the privatization of marriage. That's because both sides want government policy to validate their own views of what constitutes a "legitimate" family.

But the best path for achieving equal treatment of same-sex and opposite-sex marriage — the goal of those who support gay marriage — is to remove government provision of opposite-sex marriage, rather than extending it to same-sex marriage.

In this arena, as in many others, the way to fix bad policies is by getting rid of them, not by expanding them.

Now onto actually addressing one of the causes of the financial crisis: our deeply flawed housing finance system.

For a White House conference set for next week on housing finance to be truly effective, we must ask ourselves some basic questions about what our mortgage system should do and how it should operate. We must also ensure that the rescue of Fannie Mae and Freddie Mac — one that will likely exceed the cost to the taxpayer of every bank failure in American history combined — will never be repeated.

The central flaw in our current system is that the gains from risk-taking are divorced from losses. All too often, lenders, homeowners and the real estate industry reap the rewards, while the taxpayer is left holding the bag. This needs to end.

We should also recognize that homeowners and taxpayers are often the same people. Policies that take a dollar out of your left pocket just to put it back in your right pocket do not provide a real benefit. Of course homeowners would be lucky, as taxpayers, to actually get a dollar back for every dollar they put in. A more accurate description would be paying a dollar to gain maybe 50 cents.

In addition to aligning the costs and benefits within our mortgage finance system, those costs and benefits should be both transparent and credible. Implicit subsidies and contingent liabilities should be a thing of the past.

The era of politicians winking and nodding about the "private" status of Fannie Mae and Freddie Mac should be no more. Any subsidies should be on-budget, as well as accurately and fairly estimated. This means no more assuming that house prices only go up or that the business cycle is dead.

Despite the frequent recurrence of housing booms and busts, our mortgage finance system is not built to withstand the busts. After the losses of the savings and loan crisis and now the historic losses of Fannie Mae and Freddie Mac, any regulatory system for housing finance should assume there will be another housing bust in the future.

In making our system more resistant to crises, we should avoid policies that concentrate either credit or interest rate risk into a small number of entities. As bad as the savings and loan crisis was, there was no one company whose failure threatened our economy. The same cannot be said for Fannie Mae and Freddie Mac.

Firms will, and should, sometimes fail. Our mortgage finance system should be able to withstand the failure of any one firm. The best way to accomplish this is to not concentrate all the risk in one place.

Our current mortgage policies encourage an excess degree of leverage, both on the part of homeowners and financial institutions. Ownership and debt are not synonymous. Absent the many subsidies for mortgage debt, families would have more equity in their homes, allowing them a greater cushion when house prices fall.

To the extent that we subsidize homeownership — something that in itself should be debated — those subsidies should be designed so that their benefits go largely to the homeowner, and exclusively to families who would not be homeowners otherwise. Too much of the current subsidies simply end up in the pockets of the real estate and mortgage industries.

Much of the current subsidies also do little more than run up house prices, without actually improving affordability. Any policy that increases the price of one of life's basic necessities — shelter — is a policy we should question if not outright reject.

Perhaps most importantly, our mortgage finance system must be better insulated from politics. Booms are always popular when they occur, and the natural instinct of politicians is to reinforce the popular. The less politics pervades mortgage finance, the less likely government is to add fuel to the fire during the next housing boom.

On a narrower level, the mortgage finance system has been repeatedly used by government over the last few decades as an avenue for redistributing wealth. To the extent that government should redistribute income, it should be carried out directly and transparently via the welfare system. The sole purpose of mortgage finance should be to finance mortgages, not to solve every social problem under the sun.

We have a rare opportunity in public policy: correcting a major flaw in our economy. While there is widespread agreement that our mortgage finance system is broken, we risk simply applying a few Band-Aids if we do not begin a serious and thoughtful conversation about what that system should achieve. Before we worry about the politics, we should decide upon the principles.

China's large stimulus package and rapid credit expansion have kept the growth engine running, but at the expense of the non-state sector. Credit allocation via state-owned banks has favoured state-owned enterprises and local governments. Although the large banks are in no immediate danger, there are warning signs that the banking sector is more fragile than commonly understood.

Local politicians, under strong pressure to develop infrastructure, have used investment platforms to circumvent restrictions on direct borrowing from banks. If too many subprime projects are undertaken, bank loans may go sour and non-performing loans could mushroom Investment decisions are still heavily politicised and risk assessment is weak. Trying to serve two masters — the market and the state — is a tricky business. Lending to local governments accounts for about 20 per cent of total bank credit, and 20 per cent of those loans are now considered non-performing.

Credit expanded by 34 per cent last year. Although new bank loans have slowed to about 18 per cent this year, the use of off-balance sheet lending is spreading. In a recent report, Fitch noted that the use of informal securitisation is leading to a "pervasive understatement of credit growth and credit exposure". As such, actual loan growth may have been understated by 28 per cent in the first half of this year.

State-owned banks now work closely with trust companies to package loans and resell them as "wealth management products", which pay a higher rate of interest than bank deposits. Those products come with a guarantee so the demand for them is high, and supply is meeting demand. In May, banks in conjunction with trust companies issued about 615 billion yuan (HK$704 billion) of these products, nearly matching the amount of new bank loans.

Without transparent private ownership of banks and other financial institutions, China could face mounting non-performing loans as loans are made to local governments and state-owned firms for projects that wouldn't float in the sea of private enterprise. Distortions will increase.

If the People's Bank of China does not adequately slow the printing press, today's inflation of 3 per cent could easily increase, resulting in wage and price controls, the loss of economic freedom, and a rise in unemployment and poverty.

"The ongoing clean-up of local government investment vehicles is critical to contain fiscal and banking sector risks over the medium term," says UBS economist Tao Wang. China needs more capital freedom and less government intervention. Grafting securitisation onto a socialist market economy is a recipe for disaster: leverage is increased and risk is socialised.

China needs to take steps to allow real capital markets to develop and for funds to flow to the private sector on a commercial basis. Interest rates need to be further liberalised, and the capital account needs to be further opened. The recent lifting of restrictions on the free flow of yuan in Hong Kong is a step in the right direction, as is the announcement that the exchange rate will be more flexible.

Hu Xiaolian, the outspoken POBC deputy governor, has acknowledged the inflation risk inherent in the current system of financial repression. In her recent statement, posted on the bank's website, she cited Milton Friedman's market-liberal treatise Free to Choose, to emphasise that "inflation is a disease that if not checked in time can destroy society".

Beijing needs to look at ideas that have worked and speed up the transition to a free capital market. The moral hazard problem arises when government is too big and the market too small.

China's reform process since the late 1970s has transformed society and widened the range of choices open to people. Yet financial repression still constrains the choice of investments and favours state-owned firms and banks. The "too big to fail" problem and moral hazard are not limited to the West.

Amid growing debate about whether the United States should stay in Afghanistan, one issue of agreement is that Afghanistan's president, Hamid Karzai, is both the central figure in the war and its weakest link.

Recent embarrassing controversies between Karzai and Washington — including a move this month by the Afghan leader to hinder U.S.-backed anti-corruption investigations in Kabul — reveal a troubling pattern in U.S. foreign policy. U.S. leaders have a tendency to hail flawed foreign leaders as the saviors of their countries, only to publicly disparage them later for not meeting America's lofty expectations.

In dealing with the erratic and unreliable Karzai, Washington is replicating the pattern of exaltation and subsequent blame-shifting it followed five decades ago with South Vietnamese leader Ngo Dinh Diem. That episode produced famously disastrous results.

In October 1954, President Eisenhower wrote a letter to Diem stressing the goal of "developing and maintaining a strong, viable state, capable of resisting attempted subversion or aggression." To leaders in Washington, backing South Vietnam was deemed critical to preventing the expansion of communism. And in Diem, they thought they had the man to do the job.

Assistant Secretary of State for Far Eastern Affairs Walter Robertson proclaimed in a 1956 speech: "Asia has given us in President Diem another great figure, and the entire free world has become richer for his example of determination and moral fortitude." Sen. Jacob Javits (R-N.Y.) hailed Diem as "one of the real heroes of the free world."

By the end of the 1950s, however, U.S. officials were growing concerned about Diem's autocratic political style and nepotism. Worse, support for Diem's government among the Vietnamese people was eroding.

President Kennedy inherited that dilemma. Pledging in his inaugural address to "support any friend, oppose any foe" to ensure the success of liberty, the new president was determined to take a strong stand in Vietnam. But Diem's mounting unpopularity and ineffectiveness posed a major problem for U.S. policy.

Fast-forward five decades, and Washington encounters an eerily similar situation in Afghanistan. Just as success in South Vietnam was deemed essential to blunt the communist threat, success in Afghanistan is deemed crucial to the war against terrorism. And once again America is linked to a deeply flawed leader with whom U.S. officials have become disillusioned.

As in the case of Diem, U.S. policymakers initially lavished praise on Karzai. In 2002, the newly installed Afghan leader was an honored guest at the State of the Union address, and in 2004, President George W. Bush spoke of Karzai as a man of "honor, courage and skill" and pledged America's "ironclad commitment" to help his country succeed.

But also as in the case of Diem, allegations of corruption and Karzai's apparent contempt for democratic norms — and his growing domestic unpopularity — have reached the point that U.S. officials are reacting with anger. In November 2009, Karl W. Eikenberry, U.S. ambassador to Kabul, bluntly warned his superiors that Karzai "is not an adequate strategic partner."

There is little doubt that if Washington could find a more credible replacement, it would dump Karzai. But perhaps the lesson of the Diem experience has induced caution. In 1963, the Kennedy administration gave a wink and a nod to the South Vietnamese military to stage a coup against Diem. But Diem's ouster (and killing) merely caused the already shaky U.S. mission in Vietnam to become even more untenable. U.S. leaders probably fear a similar result in Afghanistan if they encourage Karzai's opponents to remove him.

American policymakers need to overcome some deeply ingrained counterproductive habits. Not only do policymakers tend to overestimate the strategic importance of small Third World countries to U.S. national security, they also see foreign political clients through the prism of American ideals. Ngo Dinh Diem was never a genuine democrat, much less a "hero" of the free world. He was a garden-variety, corrupt autocrat.

The same appears to be true of Hamid Karzai. Policymakers are frustrated because he has not fulfilled Western expectations, but those expectations were always completely detached from the realities of Afghanistan. American leaders need to learn that if they don't want to get down in the muck with highly imperfect foreign clients, the U.S. needs to be far more selective about the places — and the reasons — it intervenes.

There's a revolution happening, and you probably don't even know it. While you've been worrying about wars, spills and bailouts, Washington has been taking over your schools.

Already, more than 30 states, including Michigan, have capitulated to national mathematics and language arts standards, and several more are likely to do so. And amazingly, almost no one's heard about it. But that's exactly what standardizers, who know national standards' fatal flaws, want.

The immediate impetus for this has been the "Race to the Top," a federal competition for $4.35 billion in federal funds. Adopting standards created by something called the Common Core State Standards Initiative is crucial for states to compete.

Much more credit, though, goes to the No Child Left Behind Act, the reviled 2002 law that requires states to implement standards and tests, and progress toward full math and reading "proficiency" by 2014.

NCLB made seemingly tough "accountability" demands so that politicians could look uncompromising on bad schools. So the same politicians could appear to pay homage to local control, however, it left states to write their own standards, tests, and definitions of proficiency. The result predictably, has been low, but highly variable, state definitions of proficiency. It's much easier to set low bars than push kids over high ones.

To remedy this, standardizers want to force states to use uniform, high standards. In the context of NCLB it makes some sense, and has likely muted criticism of the standards drive.

Unfortunately, there is another, much more disturbing reason that national standards have been flying under the radar: Stealth is essential for its proponents to succeed.

The last national standards push was in the 1990s, and it disintegrated almost the moment proposed federal standards were released. Everyone, it seemed, was paying attention, and every diverse American found something in the very detailed standards to hate.

Avoiding a similar fate explains why the CCSSI furnished only mathematics and language arts standards, and why the latter identify almost no specific works students must read. Math is relatively uncontroversial, as is English — if you don't prescribe any actual readings.

The big problems are that focusing on just two subjects threatens to narrow the curriculum, while dodging essential reading threatens to hollow it out. Do more, though, and Americans might have something of substance to grab onto.

The second key to keeping things hush-hush has been to deceive the public about what — and who — is driving the standards. Contrary to proponents' incessant refrain, standardization has been neither "state led" nor "voluntary," and it's the heavy hand of the super-unpopular federal government that's shoving everything along.

While creation of the Common Core was spearheaded by associations of governors and state education chiefs, those groups do not represent individual states. Meanwhile, the National Conference of State Legislatures opposes national standards.

Of course, many state school boards have adopted the standards, but they might just be happily passing the standards buck. Much more importantly, thanks to Race to the Top and Obama administration plans to connect national standards to even bigger piles of money, adoption is no more "voluntary" than adhering to NCLB or the minimum drinking age. If states want federal dollars, which were taken from their citizens to begin with, they must do as they're told.

Finally, to keep the public from grasping what's happening, standardizers have rushed adoption of the Common Core standards. They were released on June 2, and Race to the Top required adoption just two months later.

The truth about national standards explains the need to evade serious scrutiny. Despite claims about needing national standards to compete in the world economy, or all countries that outperform us having national standards, the research reveals that, all else equal, countries with national standards do no better than those without. It also reveals that the freer the education system, the better.

It's not hard to understand why. Government schooling is almost always controlled by the people it employs because they are the most motivated to be involved in education politics. And like most people, they would prefer as little outside accountability as possible. Conversely, more freedom means more competition, and that means real accountability — answering to customers — as well as constant innovation.

So why are national curriculum standards the biggest federal takeover you've never heard of? Because they need silence to survive. And here's another big secret: Unless we do something now, national tests are coming next.

The Federal National Mortgage Association — known as Fannie Mae — and the Federal Home Loan Mortgage Corporation — Freddie Mac — were poorly structured from the time, 40 years ago, when they were set up as so-called government-sponsored enterprises. Both of these technically private companies, designed to foster the issuance of home mortgages, enjoyed implicit federal backing in the event they got into financial trouble but only weak regulation to prevent such trouble. Essentially, the federal government insured the companies' liabilities but never charged a premium.

Fannie and Freddie had a license to print money. They could borrow at an interest rate only a bit over the Treasury rate and then accumulate large portfolios of mortgages and mortgage-backed securities earning the market rate. What a deal — borrow at the low rate, invest at a higher one, hold little capital and let the federal government bear the risk! Investors enjoyed high returns, and management enjoyed high salaries. Incidentally, politicians also got a steady flow of campaign contributions from the companies' executives.

Fannie and Freddie's risky policies led to their near collapse; in September 2008, the federal government brought them under federal conservatorship. Fannie and Freddie have cost taxpayers about $150 billion so far.

On Tuesday, the Obama administration plans to hold a conference to address the question of what to do with the two companies. Clearly, it would be an inexcusable mistake to reconstitute them as private companies in anything close to their prior form. Some people have suggested recasting them as a single new "Fan-Fred agency" that would continue to securitize and guarantee home mortgages. It's true that Fannie and Freddie played an important role in developing the market for mortgage-backed securities. But they have completed that work, and they should not be preserved in any form. They should be thanked for their successes and gracefully retired.

Can the home mortgage market stand on its own, without support from federally sponsored mortgage companies? Experience tells us that the answer is an unambiguous yes. When Fannie and Freddie curtailed their operations after the disclosure of accounting irregularities in 2003, there was no effect on mortgage rates. We have seen how the jumbo mortgage market, for loans too large to be eligible for Fannie and Freddie purchases, has long operated efficiently, with rates only slightly above the rates on smaller mortgages. And many other asset markets, like the one for securitized auto loans, have functioned well without federal intermediaries.

If Fannie and Freddie were to continue to operate with the government absorbing all their risk, they would keep a large share of the market. But that system has been terribly expensive for taxpayers. The evidence shows that the private market can originate, securitize and distribute home mortgages efficiently on its own. While it's true that the private market brought on the financial crisis by creating so many subprime mortgages, Fannie and Freddie did not block that parade; they joined it — indeed, in some respects led it.

In principle, it ought to be possible for government financial agencies to be self-supporting. But decades of observation have convinced me that there is no practical way to prevent the government from inserting hidden subsidies and special interest mandates into the agencies' operations. If there are to be more federal housing subsidies — and I hope there are not — they should be legislated transparently.

The danger in having any new mortgage agency is that its guarantees would subsidize mortgage risk, eventually leading to further taxpayer losses. The only sure way to prevent that outcome is to phase out Fannie and Freddie. If the home finance market were fully private, then it would bear the losses from its own mistakes in pricing and insurance. The proper government role is regulatory oversight and not direct operation of financial firms.

Fannie and Freddie could not be shuttered immediately; they are too large. A sensible transition plan would have them stop buying new mortgages, and their portfolios would decline as the mortgages they own are paid down. Within 10 years, the portfolios would shrink to insignificance.

Their securitization business, whereby they purchase mortgages and issue securities against them, should likewise be wound down. A practical approach would be to set a gradually rising schedule of fees, motivating private companies to enter the securitization business.

In 10 or 15 years, the companies would be gone, closing a chapter in American financial history that enjoyed considerable success but ended very badly and at great taxpayer cost.

No less than 93% of Chinese businessmen say the main reason for their spectacular success is network connections (guangxi), especially with government officials. Indian businessmen, however, have succeeded despite the government: 81% say the main reason for their success is jugaad, the ability to find innovative way round prohibitive rules and institutions.

This is the key finding of a survey of 4,000 businessmen in the two countries by YouGov, a top online survey organisation, and the Legatum Institute, an independent think tank. The survey represents the subjective view of Indian and Chinese entrepreneurs, but has a ring of truth.

China is in many ways a government-led success. Chinese businessmen add that the government's regulations remain major hurdles, but see a much more positive side to officialdom than in India. Only 11% of Indians view the government as 'very good' against 30% in China.

Most Indian business owners view the government as corrupt, wasteful and ineffective. They acknowledge major gains from liberalisation but see corruption as a terrible problem that merits top priority in the future.

India's main successes are in the private sector, while its main failures are in the government sector. That is surely a major reason why India has lagged behind China for three decades. It may yet overtake China in the next decade because of its demographic dividend. In 2011-20, India's workforce will increase by 110 million, but China's by less than 20 million, according to a Goldman Sachs study. This advantage may translate into faster GDP growth.

But even India's workforce surge is surely a private sector success. You could call it private initiative in the bedroom. Cynics will disagree: they will say our demographic dividend is due to the utter failure of the state in family planning in Uttar Pradesh, Bihar and Rajasthan! These states have by far the highest fertility rate: four children per woman. The fertility rate is half that in progressive states.

The YouGov-Legatum survey provides many other fascinating insights. It says 62% of entrepreneurs in China and 48 % in India think their own country will be the biggest global economic power in 20 years.

One-fifth in India and just over onethird in China believe the global financial crisis has made starting and running a business more difficult.

This suggests that China has been less resilient than India in facing the financial crisis. This probably flows from China's greater dependence on exports.

Large majorities — 81% in China and 65% in India — believe they are more naturally entrepreneurial than other societies. Indians think they have more jugaad. Now, Europeans beat the pants off Chinese and Indian businessmen after the industrial revolution.

But the confidence now exuded by Indian and Chinese entrepreneurs shows that feelings of inferiority induced by the colonial era are almost entirely gone.

Chinese entrepreneurs say the main reason for starting businesses is to make money. Indians give money a lower priority, and say their main motivation is independence, being one's own boss.

In both countries, businessmen seek not just money but community improvement. Nearly two-thirds of business owners in both countries say that improving the quality of life in their communities is 'very important, a main motivation for what I do'. Cynics will scoff. But entrepreneurs see business as aiding, not coming in the way of, social development.

Only a small fraction — 6% in China and 2% in India — sees philanthropy or volunteerism as the primary means for creating social impact.

In India, the immediate family is most important for a business. In China, with its emphasis on networks, the extended family matters more. Indian entrepreneurs get money for startups mainly from their immediate family, while Chinese businessmen depend more on conventional debt and investors. In China, 37% of business owners use loan as the primary source of financing for their startup, against 19% in India. And in India, 39% start with family resources, against 19% in China. Clearly, access to finance is more difficult in India, and 'priority sector' obligations on banks do not translate into actual loans to startups.

Ironically, the Chinese are so used to easy finance that they cite lack of it as the greatest reason for business failure, while Indians say it is the bureaucracy.

In India, the biggest immediate motivation to start a business is another entrepreneur (27% of those surveyed). In China, the biggest motivation (23%) is what was taught in school or college. Clearly, Chinese schools and colleges do a better job in this respect.

Chinese respondents cite pro-business efforts by universities, government communications and the media as key factors in their decision to start a business. However, most Indian entrepreneurs are motivated by the family, finance availability and friends.

The most common source of business advice among Indian entrepreneurs is family or friends. But Chinese entrepreneurs seek out other businessmen, and hire consultants at twice the Indian rate.

No single survey can capture all dimensions and problems of entrepreneurship. Yet, the YouGov-Legatum survey provides some useful lessons for public policy.

First, economic liberalisation needs to proceed much faster. The bureaucracy continues to be a major problem, so we need get rid of many pointless rules and regulations. The quality of governance is poor, so we need administrative and legal reforms to reduce corruption and improve access to common justice. Access to finance is a major problem in India, and so the Reserve Bank of India must abandon its ultra-conservative policy in licensing more banks and branches.

Finally, jugaad is a vital ingredient of success. India may not have ample natural resources like oil or copper, but it has jugaad, which is more valuable. Natural resources like oil are often a curse: they can lead to government kleptocracy and authoritarianism. But jugaad helps foil government kleptocracy and authoritarian regulations. It enabled Indian business to survive the licence-permit raj, and to blossom after the 1991 reforms.

Jugaad cannot be measured, and so cannot be incorporated in economic models. That is why most economic analyses of India are incomplete.

Riding a record of unprecedented government spending, rising debt, a government takeover of the health-care system, high unemployment, and proposals to tax everything they stumble across, Democrats have put themselves in position for an epic electoral defeat that will rival the Republican debacles of 2006 and 2008.

Given this record of Democratic ineptitude and the voters' reaction to it, one would think that Republicans would be talking about these issues every day. Instead, Republicans and conservatives have spent recent weeks talking about such distracting side-issues as immigration, the 14th amendment, gay marriage, and when and where mosques should be built.

No doubt these are important issues to various constituencies. But, the merits of the issues aside, if Republicans believe that the key to victory this year is to refight the culture wars, they are mistaken.

Today, the Republican base is fired up, and Democrats are dispirited. To see how important that is, look no further back than 2008, when overall Republican voter turnout was down by 1.5 percent. Putting this in perspective, in the crucial swing state of Ohio, Barack Obama received 40,000 fewer votes in 2008 than did John Kerry in 2004. Yet, Obama carried the state while Kerry lost it.

Despite their repeated threats to stay home if Republicans deviated from a commitment to conservative social issues, it wasn't the Religious Right that deserted Republicans in 2008 (or 2006, for that matter). Turnout among self-described members of the Religious Right remained steady from 2004 to 2008, and these voters remained loyally Republican. Roughly 70 percent of white evangelicals and born-again Christians voted Republican in 2006, and 74 percent in 2008, essentially in line with how they have been voting for the past two or three decades.

It was suburbanites, independents, and others who were fed up with the Republican drift toward big government who stayed home — or, worse, voted Democratic in 2008. Republicans carried the suburbs in both 2000 (49 to 47) and 2004 (52 to 47), but in 2008, suburban voters — notably wealthy, college-educated professionals, many of whom consider themselves moderate on social issues but economically conservative — voted for Barack Obama by a margin of 50 to 48. The switch among voters in the suburbs of Columbus, Charlotte, and Indianapolis, for instance, was largely responsible for moving Ohio, North Carolina, and Indiana into the Democratic column. Democrats also continued their gains in the more independent, libertarian West.

These independent and suburban voters are now regretting their Democratic flirtation. They didn't vote for record deficits, the health-care bill, bailouts to banks and auto companies, or cap-and-trade. Having rejected big-government conservatism, they never realized they were going to get even-bigger-government liberalism.

But these voters are not culture warriors. Polls show that while they are fiscally conservative, and very upset by excessive government spending and rising deficits, they are socially moderate, tending toward indifference or even support on issues like gay marriage.

It is true that many vulnerable House Democrats this year represent culturally conservative districts. But those Democrats are likely to share the same positions on social issues as their Republican opponents. One is not likely to get to the right of, say, Tom Perriello (D., Va.) on social issues. But if cultural issues come to dominate the fall campaign, it could hurt Republican candidates in more moderate suburban districts — candidates like, say, Keith Fimian, who is challenging Gerry Connolly in northern Virginia. On the other hand, both Connolly and Perriello voted for the stimulus, the health-care bill, and cap-and-trade.

If one needs a template for victory, Republicans need look no further than last year's gubernatorial elections in Virginia and New Jersey. Bob McDonnell and Chris Christie did not run as culture warriors. Instead they won their upset victories on issues like jobs, the economy, and a commitment to limited government.

The polls are overwhelming. Those are the issues that voters care about, not whether two men in California get married. Republicans should focus on creating jobs, reducing spending, repealing Obamacare, and cutting the size of government — and leave the culture wars for another day.

The Bureau of Economic Analysis has released its annual data on compensation levels by industry. The data show that the pay advantage enjoyed by federal civilian workers over private-sector workers continues to expand. Cato scholar Chris Edwards has long studied the growing gap, and argues, "It's time to put a stop to this. Federal wages should be frozen for a period of years, at least until the private-sector economy has recovered and average workers start seeing some wage gains of their own."

• "Federal vs. Private Pay: A Response to OPM Director John Berry," by Tad DeHaven
• "Federal Employees Continue to Prosper," by Tad DeHaven
• "Federal Government Is a Lucrative 'Industry'," by Tad DeHaven
• "Federal workers earning double their private counterparts," by Dennis Cauchon, USA Today
• DownsizingGovernment.org