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May 21, 2009

Existential Crisis IV: the Agora, Civitas, Values and Futures

An existential crisis is one that threatens the existence of the entity in questions - the Hudson plane crash was that for the passengers, WW2 and the Cold War were such for the US and the world order as know and love it. By those standards the current multi-part crisii aren't quite existential but in each domain (Economic, Foreign Policy and Domestic) we are faced with disruptive threats to the structure of the system as it exists. In other words if/when/as we get thru all this the nature and structure of the US and World economies will be radically different than what's evolved over the last 3-5 decades, the world system is being re-architected as we watch and key domestic policy issues (Education, Healthcare, Energy) that have been allowed to metastasize into systemic, disruptive threats by willful neglect have all reached cusp points. As existential as we care to get. Yet, by and large, in a few weeks a lot has been done to address them. The prior three posts were wrap-up and summary assessments for each of the three and were preceded by series exploring each. With the release of the new Star Trek movie everybody and their siblings have been using it to re-visit history, the culture wars and current events. Newsweek for example gifted us with this Star Wars vs Trek poster, which is both amusing and rings true (or truish). Jon Meachem, the managing editor, was on Charlie Rose the other night and gave his impressions of Barry after the first 100 Days. [A conversation with Jon Meacham] Pretty inside baseball stuff and it misses some of the key points which are critically important. Not least of which is not just the speed, force, magnitude and scope/number of major policy initiatives being put into place, nor how well the process is being managed or even - so far - how decently they are being implemented. What Meachem and the rest of the beltway observers are missing is the processes that are being used to apply rigor, logic, experience, multiple points of view and consensus building to arrive at pragmatic, workable and implementable solutions.

Revisiting the Policy Blueprint

 This particular graphic evolved to try and compress and represent the fundamental themes we face as a nation. It's genesis begins back in 2004 and it was put together almost three years ago. The point was that these were and are the changes in philosophy, policy and values needed to meet the existential challenges we faced... and still face. If you skim back over the prior readings you'll find that each one is being tackled, being tackled with a strategic policy that meets the test of being the best thinking that has evolved over the last three decades and is, therefore, the "right" thing to do. The readings provide current updates coupled with structural graphics illustrating each area in all of the major policy areas, politics and value development. While each deserives it's own series consider two key examples - mileage standards and Healthcare. The US auto industry has fought standards for years because it's profit-dynamics favored large vehicles while it gave ground to the Japanese. What's been needed is a set of national standards that reduce consumption, decrease pollution and avoid the expense of a single company trying to invest in multiple standards from many states. This legislation was put together over several months and is a consensus among the stakeholders, especially including the manufacturers, on how to proceed collectively. Similarly the biggest momenturm for HC Reform since 1992 has been built up and, as shown by recent industry payors and other players, it too represents a coalescing consensus that's been carefully built up in the public square. As opposed to be crafted by a small team in a backroom and forced down the throats of the polity, of Congress and the stakeholders. On all these fronts we have the best chances we've had to do something reasonable and constructive we've had in two generations. If they fail it won't be because the best we can think isn't being put on the table. Nor will it be because the right steps to building political support and putting workable implementation are being put in place. It'll be because narrow interests can't help themselves or because we haven't yet come up with the right mechanisms for implementation.

Making It So: Policy From Vision to Selling It

To get a new idea from vision to implementation there are several components that have to be put in place. First is the overall Vision - what principles, values and directions are suited to the time, which direction do we need to head, how do we judge ? Next is Leadership - or character, integrity, explanations (Voice) and delivery (making it happen; approach). Finally there are the wonkish specifics - what, where, when, why and how ? Especially mechanism ! Over the course of the last two years Barry started out focused on the Vision Thing while John-boy had some old principles lying around but was mainly focused on specific policies. As the election evolved Barry got more and more into details and strategies (his acceptence speech, his victory speech, his inaugural and every subsequent major policy speech could almost be a single book as they are consistent from beginning to end). Meanwhile JB retreted more and more to vituperative specifics based on old philosophies and shibboleths that were and are out-dated. Though he redeemd himself with a noble and public-spirited concession speech, as fine as anyone could make. His party on the other hand is turning out to be a bunch of angry, old white mean, I mean men, who are getting angrier and angrier about narrower and narrower concerns. Concerns where they are not only losing on each issue but are proving to be wrong, which is more important.

The Agora and Civitas:

Tolerance, Civility, Open-Mindedness & Public Responsibility

Having a different point of view is all well and good but it should come with two critical characterisitcs. A willingness to dsiplay tolerance for alternative perspectives and to reason together in resolving disagreemetns. And a commitment to abiding by the decisions reached in the public square - the Agora. At the end of the day we all benefit from a functioning public square and it is healthy if and only if we all exhibit civility, manners, tolerance and a commitment to it's health. Each of the last two administrations, in their own ways, contributed to the disruption of the Agora. Clinton by chasing after the latest polls and swinging with the wind, looking not for the right thing to do but the thing that would win. Bush by trying to force what he and his people "knew" was right and govern not for the good of the majority but trying to find the 50 + .01% that would allow them to force a decision. If you actually listen to President Obama's Notre Dame speech he's not insisting that he's right. Rather he asks for open minds and a willingness to tackle collectively difficult and divisive issues. And live with the collective decision.

So, at the end of the day, the pundits are missing the two most important things that are happening.

1) Each major policy decision is being arrived at by open dispute among the involved parties until the issues and alternatives are clear when a decision is arrived at.

2) The Administration is treating the public and it's opponents as adults who are open to discussing complex issues with difficult answers. And who are also willing to govern themselves with Civitas - that is with a sense of public responsiblity. MUCH more importantly we can slowly see the tenor of the debates change and evolve more toward a sense of Civitas - tolerance, open-mindedness and a willingness to roll up our sleeves.


Economy and Policy

It’s No Time to Stop This Train CONTRARY to what you may have heard from some doomsayers, 2009 is not 1930 redux. What we must guard against, instead, is 2010 or 2011 becoming another 1936. Realistically, there is little danger that the economy is heading toward a repeat performance of the Great Depression — when real gross domestic product in the United States declined 27 percent and unemployment soared to 25 percent. What we have is bad enough: our worst recession since the 1930s. But unless our leaders behave unbelievably foolishly, we will not repeat the tragic slide into the abyss of 1930 to 1933 — for two main reasons. That’s the good news. But even if another depression is next to impossible, there is still the danger that next year, or the year after, might turn into 1936. Let me explain. From its bottom in 1933 to 1936, the G.D.P. climbed spectacularly (albeit from a very low base), averaging gains of almost 11 percent a year. But then, both the Fed and the administration of Franklin D. Roosevelt reversed course. In the summer of 1936, the Fed looked at the large volume of excess reserves piled up in the banking system, concluded that this mountain of liquidity could be fodder for future inflation, and began to withdraw it. This tightening of monetary policy continued into 1937, in a weak economy that was ill-prepared for it. About the same time, President Roosevelt looked at what seemed to be enormous federal budget deficits, concluded that it was time to put the nation’s fiscal house in order and started raising taxes and reducing spending. This tightening of fiscal policy transformed the federal budget from a deficit of 3.8 percent of G.D.P. in 1936 to a surplus of 0.2 percent of G.D.P. in 1937 — a swing of four percentage points in a single year. (Today, a swing that large would be almost $600 billion.) Thus, both monetary and fiscal policies did an abrupt about-face in 1936 and 1937, and the consequences were as predictable as they were tragic. The United States economy, which had been rapidly climbing out of the cellar from 1933 to 1936, was kicked rudely down the stairs again, and America experienced the so-called recession within the depression. Real G.D.P. contracted 3.4 percent from 1937 to 1938; the total G.D.P. decline during the recession, which lasted from mid-1937 to mid-1938, was even larger. The moral of the story should be clear: Prematurely changing fiscal and monetary policies — from stepping hard on the accelerator to slamming on the brake — can be hazardous to the economy’s health. Wow, we’ve learned a lot since the ’30s, right? Well, maybe not. For the echoes of 1936 are being heard right now, even before the current recession hits bottom.

Condemned to Repeat? Romer has a right to optimism. Managed adroitly, crashes need not take a catastrophic toll. A year or two after the 1929 panic on Wall Street, there was no inevitability about calamity, as Philip Zelikow of the University of Virginia recalled recently. There were signs of an economic rebound; Germany's democratic government was holding together; Japan remained a responsible player in the international system. It took the policy errors of the early 1930s to change all that. Those errors need not be repeated now. What errors? In 1930, the United States imposed the notorious Smoot-Hawley tariff, setting up a pattern of retaliation that exacerbated the downturn and splintered the world. This time, by contrast, there has been surprisingly little backlash against open trade. In 1931, the U.S. Federal Reserve hiked interest rates aggressively. This time the Fed, led by another scholarly expert on the 1930s, is forcing down interest rates by printing money. In 1932, the U.S. government tightened fiscal policy. Again, the lesson of that error has been absorbed aggressively -- witness the enormous fiscal stimulus. But there is one less comforting part of the 1930s comparison. The international tensions of the 1930s were not just about trade; they were also about exchange rates. If the United States, Germany, Japan and China all aim to boost exports, we are in for trouble. It is impossible for all the big economies to improve their trade positions simultaneously; a jockeying for advantage, through the manipulation of exchange rates or through other measures, is certainly conceivable. Just as in the Depression, we have no rules for governing the disputes that may arise out of such conflict. It is too early to congratulate the scholar-statesmen for banishing all whiff of 1930s-style tensions.

The Great Right North Reports last week that the recession is draining Social Security and Medicare funds were just one more reminder that the United States needs to fix its finances. For inspiration, why not look to Canada? Long derided by American conservatives as "socialist" and praised by the left for its generous government spending, Canada is casting off those stereotypes. Over the past few years, while U.S. politicians presided over huge increases in spending and debt, the Canadian government tightened its belt, slashed tax rates and balanced budgets. Consider these trends: Too often in the United States, Democrats reject cuts in taxes and spending because they consider them Republican causes. Yet in Canada, center-left governments implemented many of the reforms that made these impressive numbers possible. Perhaps we have something to learn from those "socialists" to the north.

Obama's Auto Plan Is Capitalism at Work Contrary to what many pundits claim, the Obama administration's approach to the auto industry is not anticapitalist. Without a drastic restructuring neither Chrysler nor GM would have a chance for long-term success. Not only would thousands of workers lose their jobs, but the government would lose tens of billions of taxpayers' dollars. So rather than simply writing a check to the auto industry -- the policy of the previous administration -- the Obama team is focused on fundamentally restructuring these two businesses. So far, the auto task force has done an admirable job of refusing to rubber stamp the industry's proposals. It's used rigorous analysis to make tough decisions. These decisions include "right sizing" industry capacity by cutting many union and white-collar jobs and closing numerous manufacturing plants and dealerships; making the unions accept lower wages and benefits so that these companies can compete; and cutting the debt crushing these companies by forcing many of the stakeholders -- workers, retirees and creditors (including the government) -- to take equity rather than cash for their obligations. And yet the Obama administration has been strongly criticized for not adequately respecting the rights of creditors. That charge is false. Not a single creditor right has been altered during this process. The banks had the same choice they always face in similar situations: accept a modification in their loans or take over the struggling companies. A substantial majority of the banks initially accepted the government's offer as fair. They recognized that Chrysler could not survive without enormous additional funding and realized that the value they would receive in liquidation would likely be less than what the government offered. They understood that the billions of dollars Chrysler desperately needed wouldn't materialize without a dramatic restructuring. All debtholders have now agreed to the government's plan.The creditors are also reasonable and sophisticated capitalists who clearly recognized the risks they were taking when they purchased these Chrysler loans. Many probably bought these loans at prices below the 29 cents on the dollar that the government is offering since this debt often traded below that level. While these creditors were hopeful that the Obama administration might bless them with an enormous windfall -- a reasonable thought given the actions of the last administration -- they certainly knew that these loans were incredibly risky and that Chrysler survived only by the grace of taxpayer financing.

Foreign Affairs

Counterinsurgency Is King Counterinsurgency doctrine is on the verge of becoming an unquestioned orthodoxy, a far-reaching remedy for America's security challenges. But this would be a serious mistake. Not all future wars will involve insurgencies. Not even all internal conflicts in unstable states -- which can feature civil wars, resource battles or simple lawlessness -- include insurgencies. Yet COIN is the new coin of the realm, often considered the inevitable approach to fighting instability in foreign lands. Now the Pentagon is shifting its budget and seeking to "rebalance" U.S. military power in order to institutionalize counterinsurgency doctrine. Clearly some of these capabilities are needed, but like many useful concepts that gain currency in Washington, counterinsurgency risks being taken too far, distracting us from other threats, challenges and strategic debates.

The Best Guide for Gitmo In 2001, Singapore's authorities had no idea that they had a terrorist problem. But after the Sept. 11 attacks, the government was tipped off that a cell of Jemaah Islamiyah, the Southeast Asian militant group with links to al-Qaeda, was planning attacks across the city-state. In raids in late 2001 and 2002, more than 30 members of the terrorist outfit were arrested; more arrests followed. So, while the United States was filling its detention center at Guantanamo with foreign fighters, Singapore began to house its own population of Muslim extremists in its jails. Singapore's strict law-and-order government, which famously enforced a ban on chewing gum, may seem an unlikely candidate for believing terrorists could be reformed. But Singapore -- often referred to as "the little red dot" in Southeast Asia's Islamic sea -- is in a precarious position, and its government felt compelled to take action that would not only disrupt the terrorist group's operations, but also counter its ideological appeal. "We are what we are out of necessity," says Singapore's Foreign Minister George Yeo. "[Islamic extremism] is a long-term problem, and it's not going to go away in our lifetime. The only way you can combat it is to have an immune system." Singaporean officials said they decided to use Islamic clerics because they were convinced that only religious leaders could "de-program" the detainees. "Once you have taken an oath of God, it will take another man of God to undo it," a senior security official told me.

Governing Party in India Scores Victory The governing coalition led by the Indian National Congress sailed to a surprisingly decisive victory in India’s grueling parliamentary elections, vaulting Manmohan Singh, a soft-spoken economic reformer, to a second term as prime minister, and sweeping away the prospect of political instability in the world’s most populous democracy. Mr. Singh, 77, called the victory “a massive mandate” on Saturday afternoon, hours after the opposition Bharatiya Janata Party conceded defeat. The victory, in what is apparently a Congress landslide, signals the possibility of a stable and strong government in the face of stiff challenges: a sharp slowdown in economic growth, abiding poverty and instability in the region. It also sidelines a slew of small, regional party bosses whose influence had steadily grown in Indian national politics, and potentially cuts down the power of Communists who had blocked economic reforms for most of Mr. Singh’s first five-year term.  The Congress Party’s showing vindicates the prime minister’s efforts to deepen a strategic partnership with the United States at a time when the Obama administration is deeply concerned about security in the region, chiefly in Pakistan and Afghanistan. A stronger government will also be better able to tackle issues of crucial importance to Washington, from economic reforms to climate change, although there is not necessarily agreement with the Americans on how to proceed.

The Six Issues That Divide Bibi from Barack  President Barack Obama welcomes Prime Minister Benjamin Netanyahu to the White House on Monday, at a moment when the White House and the Israeli leadership are undeniably at odds over the path to Middle East peace. While the Obama Administration remains steadfastly committed to Israel's security, its ideas on how to achieve that security differ markedly from those of the hawkish Netanyahu government. As Obama moves to revive the stalled Middle East peace process, Monday's meeting has been widely predicted to be a tense affair, but that may be overstating the drama. Netanyahu, like any Israeli Prime Minister, has an overwhelming incentive to get along with Israel's single most important ally; Obama, for his part, needs to fashion a peace process that produces results, for which he requires Netanyahu's cooperation. So Monday's encounter won't be a showdown as much as the opening exchange of a difficult conversation that could continue for months. Herewith, a short guide to the issues that divide Obama and Netanyahu: A Two-State Solution? The idea of creating an independent Palestinian state alongside Israel on the territory it occupied in 1967 is the overwhelming international consensus, accepted even - according to opinion polls - by a majority of Israelis Iran First? Netanyahu will argue that Washington's goals are best achieved if it gives priority to curbing Iran's nuclear and geopolitical ambitions before separating Israel from the Palestinians.  What's the Hurry? Netanyahu will argue that whether the outcome is two states or something less, this is not the moment to try to conclude the peace process. Freeze the Settlements Obama will tell Netanyahu that stability is undermined, potentially fatally, by Israel's continued expansion of its settlements in the West Bank, and by its moves to extend control over East Jerusalem, captured by Israel in the 1967 war but claimed by the Palestinians as their future capital. Unfreeze Gaza The Gaza war earlier this year forced the Israeli-Palestinian issue to the top of the Obama Administration's agenda, and although the fighting has ended, no formal cease-fire has been agreed, and the Israeli blockade - and Palestinian political infighting - has prevented any of the $4.5 billion pledged for reconstruction by international donors from actually reaching the territory. How to Handle Iran While supporting Obama's diplomatic efforts, Israel wants to see time limits imposed to prevent Iran playing for time while increasing its nuclear capabilities.

Ready for a Fight: Russia's New Security Policy Diminishing supplies of oil and natural gas will push countries into violent competition, the Kremlin predicted in a long-awaited national security strategy paper released this week. The document foresees these struggles playing out in the Arctic as well as the Middle East, the Barents Sea, the Caspian Sea and Central Asia — and states that Russia is prepared to fight for its share of the world's resources. Although it vividly outlines the worsened relations between Russia and the West, the anti-Western rhetoric is tempered with acknowledgment of the beginning of rapprochement with the Obama Administration. But while the new paper maintains the belligerent stance displayed last summer and admits that Russia, one of the world's largest exporters of oil and gas, is willing to use military force to protect and even expand its reserve of resources, the tone has been softened. Although the paper focuses on foreign military policy, there is also a significant domestic socioeconomic element that was missing from the 2000 version. The document itself was supposed to be released in March, but was delayed possibly for this very reason. Media speculation abounds that the hold-up was due to the Obama Administration's less aggressive policy towards Russia, which forced a rethink on the tone of the document. However, observers believe that specific socioeconomic benchmarks such as poverty, food costs and education were removed from the document — which had been in draft form for over a year — as a result of the global financial crisis.

Domestic Policy

Credit-Card Fees Curbed consumers with more information on their debts. Starting in February 2010, a Senate bill passed Tuesday would ban practices such as charging consumers to pay by phone and sudden surges in interest rates. Payments above the minimum due would be applied to balances with the highest interest rates. Information once relegated to tiny print must be made clearer, and consumers will soon be told how long it would take to pay off a balance if they pay only the minimum due. The credit-card overhaul is set to become the first major legislative change to financial regulation outside housing since the emergency bank bailout enacted last fall, and it's not the last expected this year. Tuesday's 90-5 vote followed pressure from the White House on card issuers to improve fairness and transparency for the three-fourths of U.S. households that use credit cards. The measure is likely to pass the House in the coming days, and President Barack Obama is expected to sign it into law next week. For consumers, the legislation aims to change habits -- perhaps leading them to make fewer big-ticket purchases with credit cards -- by clarifying the cost of using card debt. Several provisions in the legislation are geared toward forcing consumers to recognize how much they're paying in interest. Card issuers would also have to provide information on consumer-counseling and debt-management services. Consumers also wouldn't face a retroactive interest-rate increase on existing balances unless payments are 60 days overdue. Even after that rate increase, a consumer could get the old rate reinstated by paying on time for six months. The legislation bans a practice known as double-cycle billing, in which a late-paying consumer is assessed interest on a prior month's balance that had been paid in full, in addition to the late balance. Issuers also will have to send bills 21 days before the due date and provide at least 45 days' notice before changing any significant terms on a card.

Game-Changer for Health Costs? The announcement that health-care industry groups plan to voluntarily shave $2 trillion off the rate of increase in health spending over the next 10 years reminded me of the voluntary effort launched with similar fanfare in the Carter administration. Then, industry groups fended off Jimmy Carter's efforts to aggressively control the costs of hospital care by offering to do it themselves. Their efforts helped slow the rate of increase in health spending for a few years -- and helped defeat Carter's plan -- but then the rate of increase in costs spiked again. Historically, efforts to control growth in health costs have sometimes achieved successes, but higher rates of increases have always returned. Meanwhile, health costs continue to consume a bigger and bigger share of our economy. Ever since the Carter presidency the voluntary effort has been viewed in health policy circles as something of a farce -- a president diverted by an industry trying to fend off cost-containment actions it views as more harmful to its bottom line. Today, though, the industry is at the table in an unprecedented way, and its efforts are not an attempt to block action on health reform legislation. But this private effort -- which President Obama has been clear is compatible with, but not a replacement for, Congress's challenge of designing and paying for health reform legislation -- underscores how the prospect of broader action by a president and Congress, including specific ideas industry groups don't like, such as a public plan option, can motivate industry to do more than it otherwise would. The good news is that the health-care industry has publicly recognized that the rate of growth in health spending is unsustainable and needs to be reduced (even if the announced goals do not prove fully achievable, either because national associations cannot deliver their members or expected savings do not materialize). Such recognition will provide cover for other efforts to reduce health spending. And it's possible that some of the ideas the industry groups propose, or similar ones, will emerge in health reform legislation on Capitol Hill. The bigger test will come once health reform legislation is written and details about how it will be financed become clear. Will the industry remain supportive or will it revert to form and protect its bottom line? At that point, the debate will enter a critical phase -- and if the industry is still at the table then, health care's legendary interest groups will really have changed their ways, and prospects for reform will be vastly improved.

Automakers, Obama announce mileage, pollution plan President Barack Obama wants drivers to go farther on a gallon of gas and cause less damage to the environment — and be willing to pick up the tab. Obama on Tuesday planned to announce the first-ever national emissions limits for cars and trucks, as well as require a 35.5 miles per gallon standard. Consumers should expect to pay an extra $1,300 per vehicle by the time the plan is complete in 2016. Carol Browner, the White House energy and climate director, publicly confirmed the new initiative in appearances on morning network news shows Tuesday, calling it a "truly historic" occasion and saying that such tougher environmental standards have been "long overdue." The plan also would effectively end a feud between automakers and statehouses over emission standards — with the states coming out on top but the automakers getting the single national standard they've been seeking and more time to make the changes. Obama's plan couples for the first time pollution reduction from vehicle tailpipes with increased efficiency on the road. It would save 1.8 billion barrels of oil through 2016 and would be the environmental equivalent to taking 177 million cars off the road, senior administration officials said Monday night. New vehicles would be 30 percent cleaner and more fuel-efficient by the end of the program, according to officials familiar with the administration's discussions. The officials also spoke on condition of anonymity because the formal announcement had not been made. The plan still must clear regulatory hurdles at the Environmental Protection Agency and the Transportation Department. Automakers appear to be in support.Administration officials said consumers were going to pay an extra $700 for mileage standards that had already been approved. The comprehensive Obama plan would add another $600 to the price of a vehicle, a senior administration official said. The extra miles would come at roughly a 5 percent increase each year. By the time the plan takes full effect, at the end of 2016, new vehicles would cost an extra $1,300. That official said the cost would be recovered through savings at the pump for consumers who choose a standard 60-month car loan and if gas prices follow government projections. "We worked very, very closely with all the car companies, with California, with the environmental groups," Browner said Tuesday. "This is truly historic. It is long overdue. ... Congress stood in the way of tougher fuel standards." "Historically, the program was a fleet average," said Browner, who headed the EPA during the Clinton administration. "What we're doing here is proposing standards for every category of car." Browner said the administration worked closely with the industry on this issue. "What they told us over and over again," she said, "was they wanted to make more fuel-efficient, they wanted to make cleaner cars and what they needed was the government to give them predictability and certainty so that they could make the investments toward cleaner cars."

Preventing Another Camp Liberty How has the military's focus on mental health changed since your time in Iraq? There's such an increased awareness, not just in the medical communities of the military but in the line -- in the warriors themselves. The leadership is really behind the idea that what we're talking about here is an injury, not an illness. That these are normal people in an extraordinary circumstance, under extreme pressure and possibly exposed to trauma, and that those people can be injured. Just like those same normal, healthy people could have turned their ankle. Those injuries require both rest and proper treatment. But they can and will heal and actually have the potential to be better, more resilient. How so? Just like if you were to go through [physical therapy] for a badly sprained ankle -- your ankle might get stronger. And by taking away the idea of mental illness, we're trying to reduce the stigma. There's a huge, huge stigma in the military culture about seeking mental health care and treatment, and that's a culture that's longstanding, so it's quite a battle against it.

Politics, Partisans and Civitas

Obama makes quiet play for GOP aid President Barack Obama’s first date with House Republicans didn’t end so well: He made a high-profile trip to the Capitol to ask for their help with his economic stimulus plan, and they said no — unanimously, twice. Now Obama is trying again — more quietly and with a smaller group of moderate Republicans who might be more willing to say yes. The goal: Try to get at least some Republicans to back big-ticket items such as Obama’s health care plan, but avoid the public spectacle of being rejected a second time around. Rather than have the president, his motorcade and his press pool trek to Capitol Hill, White House chief of staff Rahm Emanuel last week invited about a dozen or so moderate House Republicans to meet with him in a small outdoor courtyard just off the West Wing. According to members who attended, Emanuel acknowledged that even moderate Republicans might not support Obama’s health care plan in the end, but he said that the White House wanted to maintain an open dialogue throughout the process — and that some of their ideas might be included. The president stopped by for about 15 minutes. He listened to the Republicans’ ideas for overhauling the health care system and agreed to review an energy bill authored, in part, by Rep. Tim Murphy (R-Pa.). At least one Republican walked away impressed. “I believe they’re making an honest and overt effort to deal with Republicans,” said Delaware Rep. Mike Castle. “The White House is genuinely interested in resolvable issues.” Administration officials, including Emanuel, thought their efforts at bipartisanship during the stimulus debate at times got in the way of promoting the substance of the bill. Receiving such little Republican support on the stimulus was something of a wake-up call, and Obama’s advisers have since made clear that they’d prefer to move their priorities on health care and energy than win praise from process-obsessed Beltway types for being inclusive of the minority.

At Notre Dame, Obama Calls for Civil Tone in Abortion Debate President Obama directly confronted America’s deep divide over abortion on Sunday as he appealed to partisans on each side to find ways to respect one another’s basic decency and even work together to reduce the number of unwanted pregnancies. As anti-abortion demonstrators protested outside and a few hecklers shouted inside, Mr. Obama used a commencement address at the University of Notre Dame to call for more “open hearts, open minds, fair-minded words” in a debate that has polarized the country for decades. The audience at this Roman Catholic institution cheered his message and drowned out protesters, some of whom called him a “baby killer.” “Maybe we won’t agree on abortion,” Mr. Obama told graduating students, relatives and professors, “but we can still agree that this heart-wrenching decision for any woman is not made casually. It has both moral and spiritual dimension. “So let us work together to reduce the number of women seeking abortions. Let’s reduce unintended pregnancies. Let’s make adoption more available. Let’s provide care and support for women who do carry their children to term.” The encounter was a rare foray into one of the most volatile areas of public life for Mr. Obama, who supports abortion rights but has sought to avoid becoming enmeshed in the issue. As recently as last week, aides said he would mention the controversy in his speech without dwelling on it. But ultimately, he decided to devote most of his address to bridging the chasm over abortion and other moral issues.

Obama at Notre Dame For his part, Obama gave what may have been both the most radical and the most conservative speech of his presidency. Acknowledging the Roman Catholic Church's role in supporting his early community organizing work, the president drew on the resources of Catholic social thought. It combines opposition to abortion with a sharp critique of economic injustice and thus doesn't squeeze into the round holes of contemporary ideology. "Too many of us view life only through the lens of immediate self-interest and crass materialism," Obama declared. "The strong too often dominate the weak, and too many of those with wealth and with power find all manner of justification for their own privilege in the face of poverty and injustice." Yet his argument drew on very old ideas, notably original sin and the common good. Obama was as explicit in talking about his faith as George W. Bush ever was about his own but with distinctly different inflections and conclusions. The former president often emphasized the comfort and certainty he drew from his religious beliefs. Obama said that "the ultimate irony of faith is that it necessarily admits doubt." "This doubt should not push away our faith," Obama preached. "But it should humble us. It should temper our passions, cause us to be wary of too much self-righteousness." It was a quietly pointed response to his critics.

Values and Behaviors

Kentucky Healthy Chicken? But fast food executives have also found ways to exploit consumer anxieties over nutrition, by introducing allegedly "healthy" menu options. These items serve two crucial functions. First, they attract a segment of the population that otherwise might never set foot in a fast food restaurant. My friend Billy, for instance, is able to convince his vegetarian wife to visit McDonald's because salads and yogurt parfaits are on the menu. Second, these "healthy" options wind up allowing consumers to feel okay about frequenting what amount to dietary houses of sin. After all, the barrier to purchase when it comes to fast food isn't cost, convenience or taste. It's guilt. And fast food executives are well aware of this psychological dynamic. It's their job, basically, to draw customers who want to gorge themselves but know that they shouldn't. I myself have played this game plenty of times. If I get the Diet Coke and the side salad, I'll have "earned" the large fries. What's more remarkable is that the very presence of healthy items on a fast food menu can induce consumers to feel better about ordering a high-fat alternative. A recent study of fast food eating habits revealed an effect known as "vicarious goal fulfillment." This means that the simple act of considering a healthy item makes people feel justified in ordering the high-fat option. Even more astonishing is the fact that the pattern is more pronounced among eaters who normally exhibit high levels of self-control. This may come as a revelation to academics, but I'd be willing to bet my last Whopper that the fast food brass has known about it for years. After all, their profit margins depend on an acute psychological understanding of their paying customers. McDonald's most recent quarterly earnings statement tells the whole story. In these difficult times, they've seen profits climb due to increased sales of their core products, such as the 410-calorie Quarter Pounder, not their Garden Salads.

'A-Rod' And now when she reveals that Rodriguez is a vulgar cad who wipes his mouth with $100 bills, signals to opposing hitters what pitch is coming for the return favor that swells his personal statistics, and requires clubhouse attendants to have a toothbrush squirted with toothpaste waiting for him, presumably so that after games he can more efficiently resume his practice of listening to the tapes of broadcasters praising his play, you’ll be inclined to believe him capable of just about anything — including Ms. Roberts’s contention that Rodriguez began using the drugs as a gangly and mediocre high school shortstop. You may also suspect him of more recent transgressions. You cannot read a book like Ms. Roberts’s, or “American Icon,” the just-published investigation of the Faustian fall of the great pitcher Roger Clemens, without outrage at how shamefully complicit baseball’s leadership has been in the contamination of the game. Ms. Roberts’s depiction of Rodriguez’s agent, Scott Boras, as a greedy, vengeful manipulator in league with the feckless Players’ Association and a pliant commissioner’s office, to help ballplayers inflate their statistics, and so their attendance figures, and so their salaries, is the most devastating part of her book. It is a dismaying reminder that baseball continues to enable the tawdry likes of Rodriguez at deliberate cost to those who play it straight. Even today the game resists the Olympic standard of drug testing that would screen players for the freely abused human growth hormone. Ms. Roberts’s subtext — how glibly baseball’s power brokers have compromised their game and the long-term health of young athletes — makes you forgive all her breathless piling on.

  • Gilded Era Is Going, Going, Gone Fire-sale auctions of mansions, yachts, sports cars and other trappings of wealth have become increasingly common as the rich become less rich.

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May 16, 2009

Existential Crisis OF the Agora III: Fixing Things Around Home

The last two posts were, in some senses, wrap-ups on the economic and international situations; they were couched in terms of the Agora - the public square and how it functions. A major purpose of the Agora is free exchange, that is trade and the economy, and the public square exists within the context of the relationships among states, hence the international part. Now we want to shift our attention to the third major aspect of the Agora - the behavior and rest of the lives of the citizens. In other words what goes on in the Agora besides "just" being a marketplace, or what is going on with Domestic Policy. Now that's a topic we've covered, in some depth before for it's own sake, as well as in the context of the role of key policies for the health of the economy (changing the game with regard to Education, Healthcare and Energy are sine qua nons of reaching a new plateau of healthy economic growth that's sustainable for example). But we have serious problems with these policies that will take serious people to solve them.

Why You Care: Long-running Structural Problems

Necessarily we all focus on our own day to day concerns and affairs, hopefully with a weather eye to how the winds and currents are blowing. Letting today's emergencies swamp all concern for the weather leaves us extremely vulnerable to boiled frog syndrome. Ignoring them entirely and taking a comfortable state of affairs for granted (that's not a lukewarm bath it the soup water warming up slowly) guarantees it. As we've hopefully made clear in the prior two posts we are crossing major cusp points in the economy and in the world that will shape the next decades as much as anything that's happened in the last six. One way or another they cannot be ignored - our only choice is cope or drift. Let's descend into wonkishness for a minute and consider another of the major structural trends, and remember this is just one of several major structural challenges we face. The top part shows the cumulative growth in the economy, consumption, investment and saving since 1948. The key thing to note is that when credit-driven consumption led to the relative demise of savings; in other words when immediate gratification became the dominant driver of our socionomic health. At the end of the day growth is jobs, income, prosperity and the well-being of our descendants. You can see the debt vs consumption link more clearly in the second sub-chart while the third comes full-circle back to growth, investment and savings. Growth has been gradually slowing down for many years until it went cliff-diving recently (NB: as badly as it's done in those six decades !). If we want to create a prosperous new future we need to return to being a nation of ants, not of grasshoppers.

Domestic Policy and Future Prosperities

Our first post on the health of the Agora took a fairly deep dive on long-term economic prospects, what it'll take from an economic policy point of view and what it'll take for those policies to work in terms of re-factoring crucial domestic policies in Education, Energy and Healthcare. In other words our future prosperity is utterly dependent on getting them right and making them work. There's a giant meme that's set into our politico-cultural DNA that government should keep hands off on everything, which is something of a natural reaction to the failed social engineering policies of the '60s. It also is neither realistic nor reflects the vital roles that are mandatory for government to play if we are to have a healthy society; it's also appallingly ignorant of history. Each of these topics require not just a post but books to properly dissect and, unfortunately we're still feeling our way thru on some key ones. Nonetheless government has a traditional role to play in defense and public safety as well as the creation and maintenance of civil society - which we've known about since the First Cities and continue to work on. A lot of folks think free markets came down from on high thru the immaculate conception but in fact they are a recent invention in human history and require their own institutional infrastructure. Government has also played a role in public investment that's vital to the health of any society from roads and bridges to China's Great Canal. For example modern capital markets were created by the Dutch and adopted and grown by the English. The entire notion of reliable financial markets (ahem) and public finance owes a great deal to England, Issac Newton, David Hume and others. The US government has played a vital historical role in jump-shifting US economic growth in investing in all our modes of transportation. And did you know that the entirety of our post-WW2 prosperity, over which we're now haggling, was based on federal investment in pre-war inventions that turned then into major new products, industries and jobs ? Markets don't work well for these sorts of good and are also prone to other systemic (that is self-caused) breakdowns as well as market failures. The classic example is pollution where no one company can afford to clean itself up if everyone doesn't. On a macro-scale modern economies are vulnerable to Black Swan breakdowns where the entire system implodes. We experienced one during the Great Depression and are in the middle of another, who's worst potential consequences appear to have been avoided. Another example is the role of publicly funded education - without the widespread adoption of free public high-schools the industrialization of our economy wouldn't have worked very well. And without extensive public health programs the urbanization that drove it was also infeasible. At the end of the day government is indeed vital - the question is finding the proper balances between public, private and civic policies and the mechanisms to implement them.

Getting It Right: Policy Mechanism

Many of the public initiatives listed in our shopping list are things that we've been working away at for centuries, even millenia and we've gotten to the point where we understand what needs to be done and how to do it pretty well. The area where we thought government could do everything led to a rather hubristic set of social engineering policies in the sixties that didn't go at all well however. And led to the Reagan Backlash as the limits of government intervention were reached and tested beyond workability. Now we've gone to far in the other direction, with obvious penalties. Friedrich Hayek arrived at the telling criticism of socialism and communism - if you attempted to determine policy across a large and complex society the efforts at data collection, decision-making, implementation, monitoring, control and enforcement quickly swamp your coordination capabilities and led to a rigid and ossified public policy. That's also what, IOHO at least, made the social engineering projects of the '60s unworkable. Yet the painful burns we've acquired by refusing to do what we've known needs to be done in Education, Healthcare and Energy, where we've literally been talking about fixes for three decades or more, makes clear that the ARE NOT SELF-CORRECTING problems. Which gets us to the fundamental challenge of implementation. In other words we need to set national policy congruent with our long-term goals and find the appropriate mechanisms to get people moving in the right direction voluntarily. Creating such incentives for individual decision-making is how markets work, when they work. Here we know they do not. What may be required - remember we're still feeling our way thru these new challenges - is national standards and funding combined with localized implementation and customization. If you look at the Big Three programs rolling out in D.C. you'll find that this is indeed the path they are taking. We'll be picking up on that thesis in the future with detailed dives into each. In the meantime we suggest you put to bed the "socialism" meme that partisan politics attempted to exploit to win points.

It's Time For Every Person

Horatio Lord Nelson's final general signal to his fleet at Trafalgar, which saved England and the modern world as we know it by their victory, was that "England expects every man to do his duty". Since we started with an Aaron Sorkin allusion we'll end with one as well. Here Ainsley Hayes, newly appointed to the White House Office of the Counsel is challenged on her motives.

"Is it so hard to believe in this day and age that some one would roll up their sleeves, set aside partisanship and ask, what can I do ?

What's your answer ? Whatever it might be let's hope the people in D.C., or at least the White House, agree with Miss Ainsley. Clearly many do not and put partisan victory ahead of duty to country. And duty to country is NOT blind - it doesn't require blind acquisence. It requires coming up with the best answers of which one is capable and makng one's best efforts to shape public policy. It then requires doing one's best to make the decisions reached  effective and successful - not continuing a constant search for advantage at the expense of the country.

Domestic Policy and Politics

Scoring Obama's First 100 Days   Obama's much-maligned $787 billion stimulus, which passed, is actually several bills in one: the biggest tax cut in American history, the biggest infrastructure investment since the interstate highway in the 1950s, the biggest investment in education in a generation and lots more. His budget, which was approved with no Republican votes, shifts a whole range of priorities in a progressive direction and sets in motion a process that will likely lead to major health-care reform this year. Add the other bills and executive orders that seem to get signed practically every week, and the One is moving into Roosevelt's range. Because no one ever marches for stimulus or a budget, maybe it's easier to assess Obama's achievements by thinking of the people on the receiving end. If you're a woman seeking pay equity, a child in need of health insurance, a nurse trying to avoid a layoff, a $25,000-a-year worker hoping for a tax credit, a passenger who would rather take the train, a group of parents trying to start a charter school, a homeowner facing foreclosure, a cancer researcher strapped for funding, a hiker looking for more wilderness, a small business tired of exorbitant federal loan fees, a historian trying to see some long-secret documents, a young person eager to take part in national service, a prisoner praying to avoid torture, then you got something tangible out of the president's debut. For all the hoopla, Obama came to the job with unfavorable odds for success. He had no major management experience except his nearly flawless campaign, the success of which has in the past been an unreliable predictor (see Jimmy Carter). But despite a nightmarish effort to get his subcabinet vetted and confirmed, Obama quickly mastered the art of picking the right senior management team and selling successfully to his customers in Congress, the media and the public. His ease with himself and his audiences makes it all go down easier, even when he makes mistakes. Crisis leadership is, above all, about restoring confidence. Just as FDR got the country believing again in capitalism and democracy, Obama is so far making good on his pledge to navigate in a new direction. The people are responding. From January to April, the percentage of Americans saying the country is on the "right track" went up 23 points under Obama. The figure was flat or down for the previous three presidents. Polls are ephemeral. Stuff happens, especially abroad, to cripple presidents. Remember LBJ and Vietnam? And at home I'm still worried he'll compromise too much on health care or other priorities. But the president heads into the middle of a rough year with something substantial to build on.

The Slippery Side of 60 Since Election Day, Democrats have dreamed of reaching the sunny uplands of a filibuster-proof Senate majority. Now that Sen. Arlen Specter has switched parties, and Al Franken seems likely to win his vote-count court case, they are approaching the commanding heights. But they ought to be careful what they wish for. The history of fat congressional majorities is mixed. They can stoke unrealistic expectations among interest groups and magnify the role of outliers and egos. There is a risk of philosophical overkill, internal civil war and the kind of political myopia that eventually empowers the opposition party (yes, even one as lost as this GOP). The country's philosophical fault lines don't disappear when one party is in power; they just appear as internecine battles. If and when the Democrats get to 60, the party's core liberal-progressive interests are likely to demand prompt action on a host of topics. But if every action requires 60—and that's becoming the norm in the Senate—the ironic result will be to empower the party's centrist wing. "We're going to spend all of our time dealing with those guys, I'm afraid," said a Senate leadership aide, who declined to be identified because he didn't want to antagonize them.

After the Great Recession FINANCE: Well, first of all, I think that we should distinguish between finance as the lifeblood of our economy and finance as a significant industry where we have a comparative advantage — right? So in terms of just growing our economy, we’ve got to have enough credit out there to fund businesses, large and small, to allow consumers the flexibility to make long-term purchases like cars or homes. So that’s not going to change. And I would be concerned if our credit market shrunk in ways that did not allow for the financing of long-term growth. What that means is not only do we have to have a healthy banking sector, but we’re going to have to figure out what we do with the nonbanking sector that was providing almost half of our credit out there. What I think will change, what I think was an aberration, was a situation where corporate profits in the financial sector were such a heavy part of our overall profitability over the last decade. That I think will change. And so part of that has to do with the effects of regulation that will inhibit some of the massive leveraging and the massive risk-taking that had become so common. EDUCATION: We set out a goal in my speech to the joint session that said everybody should have at least one year of post-high-school training. And I think it would be too rigid to say everybody needs a four-year-college degree. I think everybody needs enough post-high-school training that they are competent in fields that require technical expertise, because it’s very hard to imagine getting a job that pays a living wage without that — or it’s very hard at least to envision a steady job in the absence of that. And so to the extent that we can upgrade not only our high schools but also our community colleges to provide a sound technical basis for being able to perform complicated tasks in a 21st-century economy, then I think that not only is that good for the individuals, but that’s going to be critical for the economy as a whole. CHANGE: Do you think this recession is a big-enough event to make us as a country willing to make some of the sorts of hard choices that we need to make on health care, on taxes in the long term — which will not cover the cost of government — on energy? Traditionally those choices get made in times of depression or war, and I’m not sure whether this rises to that level. THE PRESIDENT: Well, part of it will depend on leadership. So I’ve got to make some good arguments out there. And that’s what I’ve been trying to do since I came in, is to say now is the time for us to make some tough, big decisions. The critics have said, you’re doing too much, you can’t do all this at once, Congress can’t digest everything. I just reject that. There’s nothing inherent in our political process that should prevent us from making these difficult decisions now, as opposed to 10 years from now or 20 years from now. It is true that as tough an economic time as it is right now, we haven’t had 42 months of 20, 30 percent unemployment. And so the degree of desperation and the shock to the system may not be as great. And that means that there’s going to be more resistance to any of these steps: reforming the financial system or reforming our health care system or doing something about energy. On each of these things — you know, things aren’t so bad in the eyes of a lot of Americans that they say, We’re willing to completely try something new. But part of my job I think is to bridge that gap between the status quo and what we know we have to do for our future.

SoundsGreat, But What Does He Really Mean?' After all, everything Obama does is pragmatic. His adviser David Axelrod let it be known just after the election that Obama was a "pragmatist and a problem solver," which was a good thing, because, as Axelrod had said shortly before the election, "people are in a pragmatic mood, not an ideological mood." When Obama introduced his national security team, he declared that "they share my pragmatism about the use of power." And as he recently told the New York Times, the same goes for his economic policy, where "what I've been constantly searching for is a ruthless pragmatism."  Ruthless pragmatism! It sends shivers up the spine. But what does it mean, really, to have a "pragmatic" president? Pragmatism has distinguished roots. William James and John Dewey promoted it as a philosophy that elevated knowledge gained through action over theory and concepts. Obama has been pragmatic in this sense when it comes to, say, the financial crisis, embracing trial and error and resisting the more systemic solution of nationalizing banks. But pragmatism fails as a political definition, says Robert Reich, who served as President Clinton's labor secretary, because it describes how a politician moves toward a goal, not the goal itself. "It's possible to be ruthlessly pragmatic in terms of how you get to an objective," Reich said, "but the phrase is nonsensical in terms of picking an objective." That leaves us searching for the intent and belief beneath each "pragmatic" approach so far.

At a Glitzy Washington Gala, Hailing the Stand-Up in Chief  The annual dinner of the White House Correspondents' Association took on an edgier quality last night: it could have been held on the edge of the Hollywood Hills. A once-cachet Washington tradition, the annual dinner may have completed its final transformation this year into a crushing gathering of several thousand, increasingly less a celebration of journalism than a parade of Hollywood and television celebrity. The President, who by tradition attends and delivers comical remarks at the dinner each year, won the crowd over early. "Most of you covered me." After a beat, he added, "All of you voted for me." Noting that Sunday is Mother's Day, Obama reported that it was a tough holiday for his sometimes profane chief of Staff, Rahm Emanuel. "He's not used to saying the word 'day' after 'mother.'" Obama also made fun of RNC chairman Michael Steele for seeking a bailout for the GOP and noted that former vice president Dick Cheney was not in attendance, busying writing his memoirs which Obama said would be titled, "How to Shoot Friends and Interrogate People." He mocked the reporters' recent obsession with his first 100 days by announcing that he was immediately building a presidential library in honor his first 100 days. "My next 100 days will be so successful, I will complete them in 72 days. And on the 73rd day, I will rest." Obama said that in his next 100 days he will learn to give a speech without a teleprompter — something he has been criticized by some for relying too heavily on — while his vice president Joe Biden, who has made a string of ill-advised comments lately — will learn to use one.

Obama is Spock: It's quite logical Spock has been on many minds lately, and not entirely because of the new film. Big thinkers in both print media and the blogosphere -- from New York Times columnist Maureen Dowd  to MIT media moguls -- have referenced the Enterprise's science officer in recent months, drawing parallels between the dependably logical half-Vulcan and another mixed-race icon: Barack Obama. They're not just talking about the ears. For those of us who watched the show in the 1960s (or during the countless reruns since), Nimoy's alter ego was the harbinger of a future in which logic would reign over emotion, and rational thought triumph over blind faith. He was a digital being in an analog world; the Pied Piper who led our generation into the Silicon Age. Anyone who followed the early "Star Trek" with regularity knows how charismatic Spock was. If there were two characters I wanted to be as a young man, they were Spock -- and James Bond. Both displayed total self-confidence, and amazing problem-solving skills. Both traveled to exotic destinations, and were irresistible to women. And both shared a quality that my generation lacked completely: composure. While Bond had his weaknesses (anything in a bikini), Spock was virtually unflappable. During the months that I researched "Future Perfect," people all over the world admitted a longing for the zeitgeist of "Star Trek." "The Enterprise crew was a professional team of people solving problems together," agreed Nimoy. "It was always a very humanistic show, one that celebrated the potential strengths of mankind, of our civilization, with great respect for all kinds of life, and a great hope that there be communication between civilizations and cultures." The problem with smart, thoughtful people is that you have to pay attention. Even with "Star Trek," some viewers complained that the stories were too complicated, requiring too much focus for the average TV viewer. Nimoy sympathized. "'Star Trek,'" he reflected, "was a language show. A lot of the ideas were expressed verbally. It has been said -- and I think it's true -- that if you didn't listen to 'Star Trek,' you couldn't follow the stories." The same could be said of today's White House: It's a language show. "Issues are never simple," Obama has said. "Very rarely will you hear me simplify the issues." The stakes are high, the narrative is complex, and no one's talking down to us. Obama, like Spock, rewards close listening. His cool logic is a real departure from what we've grown used to. Often presidential speechmaking is an emotive art, where oratory trumps reason.

http://www.newsweek.com/id/195414

Playing 'D' Against Obama The Republican Party's navel is a pretty unattractive thing. So maybe Republicans should stop obsessively gazing at it. Instead, the GOP might focus on taking on the Obama administration, whose policies are surprisingly vulnerable to political and substantive attack. Battling Barack Obama is an enterprise that offers better grounds for Republican hope than indulging in spasms of introspection or bouts of petty recrimination. No, the payoff from a policy confrontation with Obama won't be immediate. The economy appears to be set for a short-term uptick. Obama remains popular. Many of his proposals look superficially attractive. But we haven't yet had a thorough airing of their implications, to say nothing of their real-world consequences if they are enacted. So one should assume Obama will stay strong through the summer and perhaps even the fall. But 2009-10 could be the winter of Obama's discontent. Republicans should be making the case against Obama's policies now so that citizens know whom to blame next year. To make things simple for busy and easily distracted GOP pols, I'll organize the Republican anti-Obama agenda into five categories, all beginning with the letter "D" (as in Democrat). Bill Bennett likes to quote the adage that no one ever became a saint through someone else's sins. But Republicans don't need to qualify for sainthood. They need to get back in the game. If Republicans begin to highlight the problems in Obama's five-D agenda now, they should be ready to compete, with a real shot at success, in 2010.

The GOP's Shameless New Attack How desperate are Republicans? If their political anxiety correlates with their shamelessness, very. Last week, the House GOP released a web video that flashed images of President Obama associating with the King of Saudi Arabia and, yes, members of the Congressional Hispanic Caucus -- spliced between scenes of angry-looking foreigners burning American flags and a balaclava-clad insurgent firing a rocket propelled grenade. Yesterday, the Senate’s Republicans took their turn at alarmist political aspersioneering, releasing this web video on Obama’s plan to close the prison facility at Guantanamo Bay. After showing the names and scary looking pictures of some of Gitmo’s most unsavory prisoners, the video cuts to a CNN anchor asking, “where are they going to go?” -- and then it flashes shots of detention facilities in military bases in the Lower 48. On screen, road signs tell us who’s really going to get creamed: Colorado, Pennsylvania, Virginia -- even Kansas! (What, did Lamar Alexander, who produced the ad, run out of swing states to scare?) “Terrorists,” the video warns in bold letters, “Coming Soon to a Neighborhood Near You.”

Obama hails efforts on clean energy, health care President Barack Obama says agreement on an energy bill and a promise by interest groups to squeeze trillions of dollars in savings from the health care system show that change has come to Washington. Some of those most opposed to past attempts at health care overhaul pledged this week to reduce the annual rate of growth in such spending by 1.5 percentage points, for a promised savings of $2 trillion in the next decade.Weeks of negotiations have led to the introduction in the House of an energy proposal that, for the first time, would mandate reductions in the heat-trapping gases blamed for global warming and shift the country toward cleaner sources of energy.Obama campaigned for president on a promise to change the way Washington works.He said Saturday in his weekly radio and Internet address that he was heartened by the "willingness of those with different points of view and disparate interests to come together around common goals, to embrace a shared sense of responsibility and make historic progress."Obama singled out utility companies and health insurers, doctors and hospitals for coming to the table.

Do you get the Millennial Generation?  MTV premièred in August 1981, seven months after Ronald Reagan was inaugurated as America's 40th president. It revolutionized TV and the music industry as much as Reagan changed the country's politics.And now, just as the election of Barack Obama to the presidency signaled the end of that political era and the beginning of another, MTV is belatedly shifting gears as well.The network, long known for cynical and vapid content, has suddenly understood the importance of being earnest. Booze and bikinis are out. Do-good singers and hard-working art students are in. MTV's mistake was to assume that the members of particular demographic groups, in this instance young people in their mid-teens through their mid-20s, behave the same and hold the same attitudes at all times. If only MTV's executives had gone to the movies more often, they might have recognized these generational changes much sooner. Everyone in politics and pop culture should learn the lesson MTV belatedly has. To really understand the preferences of young people, take a look at their generation and not simply their age. That will tell you everything you need to know.

'A Failure of Capitalism' The current crisis, Posner maintains, is a depression. True, it is not (we hope) a great depression. But the typical postwar recession is a partly self-correcting disinflationary contraction that soon subsides, often leaving the economy healthier. The present downturn is a self-sustaining deflationary contraction whose costly aftereffects will linger for years. The Great Depression led to World War II. Today’s depression presumably won’t be that bad, but it may cause a huge loss of output, an immense increase in the national debt, a swing to excessive regulation, a nasty bout of inflation, a decline in America’s economic and geopolitical power, and increased political instability abroad.A typical recession is a market correction, usually of inflation or other economic imbalances; a depression is a market failure. And it is a failure (here is grenade No. 2) that the market is powerless to prevent. “An interrelated system of financial intermediaries” — a banking system, broadly defined — “is inherently unstable,” Posner writes. Think of it as “a kind of epileptic, subject to unpredictable, strange seizures.”And so — here is the part libertarians will hate — markets, entirely of their own accord, will sometimes capsize and be unable to right themselves completely for years at a stretch. (See: Japan, “lost decade” of.) Nor can monetary policy be counted on to counteract markets’ tippy tendencies, as so many economists had come to believe.Alas, economists and policy makers got cocksure. They thought they had consigned depressions to history. As a result, they missed warning signs and failed to prepare for the worst. “We are learning,” Posner writes, “that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails.”

Posted by dblwyo at 02:24 PM | | Comments (0)

May 09, 2009

Existential Crisis Around the Agora II: New World Stories

The point we implied in the last post (Existential Crisis in the Agora I: Economy, Policy and US Strategic Outlook (Addons)) was that we're facing major, multi-part crisis and challenges which must address key questions that are at cusp points that will define our futures. Last post we focused on the strategic economic situation and pointed back to almost the entire collection of related postings. But more than the US faces these challenges on a shared basis - it's a world wide phenomenon. Key questions include: 1) how will we organize our economies and the socio-political structures that support them, 2) what institutional and governance frameworks will each country build to sustain itself and become a member of the international community and 3) how will we re-structure the architecture of the international system by evolving the old to something more inclusive, adaptive and connected ? Last time the primary focus was on the first question, now we're going to focus on the next two by looking at selected individual country stories and some shared challenges. The last post on International Affairs (Brave New World: the Emerging Balance, Pluralities, & Non-zero Sums) summarized a series and inventoried all the prior analysis and surveys as well as wrapped up the most recent series with a checklist that blueprints the things that are happening, and need to happen, for a satisfactory resolution.

The central question we're wrestling with is whether or not a plurality of the world's nations realize that this is a non-zero sum world where they are each better off with a stable and prosperous world order and act to support it's continued emergence. Or whether they pursue the zero-sum, opportunistic strategies that are the historical norm. Fortunately more seem inclined to be collaborative than not, despite some opportunism - which is natural and inescapable. But on balance the early signs are encouraging. And make no mistake, these changes are well underway, having already brought more people farther out of poverty than at any time in history. Contemplate the accompanying graphic which traces out population and income/capita over the last 200 years and notice how key players are crossing the knee of the development curve. The chart was built using Hans Rosling's Gapminder World tool to look at the US,Russia, China and India. But besides just looking watch these two videos from Hans that take a quick dive into these changes: 200 Years That Changed the World and Yes they can! - which'll give you a perspective on bit the changes are and how fast they're happening.

Refreshing the Framework: Governance and the International Architecture

Back in the 1830's a Frenchman named Alexis de Tocqueville visited the US and wrote one of the most astute assessments of American character, institutions and outlooks every concieved. One of the point he made was that in a 100 years or less the two dominant world powers would be the US and Russia. And in a way he got it dead on. Why ? Because he was extrapolating potentials based on resources, trends, character and outlook. This was at a time when the US had a population of 13 million people and a vast, unpopulated continent that was a wilderness to deal with. Prescient indeed. The population, resources, wealth, power and economic influence of the other three "powers" were all out of proportion. So what happened ? Our explanation in the prior Foreign Affairs post was R X P X H X C X I = Power. Or in words the power and wealth of a country is determined not just by raw resources but by Resources, Population to develop them, Human Capital, Economic Capital and Institutions. Tiny little Holland defeated the world's mightiest empire in the 150-1600's because it was more efficient and effective than Spain. In other words because of it's institutions and governance. As societies become more complex and sophisticated the need for inclusive institutions that act for the betterment of the whole society, not just the priveleged powerholders. There is a tradeoff between complexity, form of government and the amount of resources that is effective and legitimate for government to collect. When a government is exploitative, that is it extracts more than it gives back, and/or the form is mis-aligned with the history and culture it will collapse.

The second major institutional challenge we must deal with is getting each of these governments to be a proactive, constructive and relatively non-opportunisitic stakeholder in the world system. One can never expect any nation to act against it's own strategic interests but you can reasonably expect them to trade-off intelligently between national advantage and world effectiveness from which they benefit in a non-zero world. To the extent that more and more governments see it as in their interests to support the emergence of a constructive international institutional framework the world will establish the kind of foundation needed to keep things on an even keel. And meet the major challenges of today as well the bigger ones we know are coming tomorrow. Right now the early evidence is that we are collectively opting to move toward and onto the green path toward a more stable and prosperous world. Certainly measured by post-WW2 norms a lot of progress is being made. And measured by prior historical experience there is literally no comparison - we are living thru a fundemantal re-think unique in human history. The emergence of a new, pluralistic international framework evolved from the old and adapting to the new. Interesting times indeed !

Stories From Around the World

In the readings after the break you'll find sections updating you on current US responses, selected country stories from key players, a list of some key emerging issues and a final section of the future of Capitalism. The graphic is the 10-point checklist we developed to summarize what we think is going on at the end of the last series of foreign affairs postings. As we go thru the readings we'd like to keep it in mind as measuring indicator along with the two concepts of the "brave new world" framework.

A. US Update -

... starts with a really fascinating CSpan video of David Kilcullen discussing his conclusions about what we learned in Iraq (Kilcullen was one of the principal architects), how it applies in Afghanistan and Pakistan and broader lessons. Key ones include the fact that military force is a small part of it and the real requirement is for nation-building. There are three other CSpan clips of Clinton or Obama. They're included because a) the enthusiastic reception of the State, CIA and military for them is indicative of the kind of relationship they've already got, as well as for details on our approaches. But, in a few short days, we've already under-taken major new initiatives and established a level of interest and cooperation on a worldwide basis we haven't seen in two decades.

B. Country Stories

  1. Japan is struggline mightily to start addressing the re-factoring of it's economy. Something it's put off for two decades but with the most severe downturn in a long time can no longer avoid.
  2. Europe - as the result of the crisis blind free-market capitalism is loosing a lot of credibility in Europe and the European countries are re-thinking their approaches. At the same time there's been a distinct shift rightward in politics.
  3. Eastern Europe was a major beneficiary of globalization, the EU and the eastward march of NATO but a lot of that is coming under threat.
  4. Russia is beginning to face the fact that in twenty years it's gone nowhere, the recent commodity and energy boom helped but the necessary investments in futures wasn't made and malfeasant government and corruption are disrupting attempts to adapt.
  5. India on the other hand is doing reasonably well while...
  6. China has had a severe drop but relative to the rest of the world is doing very well, has responded quickly and forcefully and is in a position to become the US's major partner in crafting this new world.
  7. Islamic World - is large, complex and convoluted. But nonetheless it's becoming clearer that major steps are underway to start dealing with and adapting to the modern world. This won't be easy but it's both encouraging and in all our best interests.

C. Key Future Challenges

  1. The mainstream media has finally noticed that CyberWar is a rapidly escalating challenge though folks like StrategPage have been covering it for years (as have you - just check your spam)
  2. The US coasted thru the '90s and let it's foreign affairs, defense and security and international development capabilities wither away with the result that we got caught flat-footed. There's been a major re-direction and re-development of Security and obviously of Defense capabilities. Now it's beginning to happen on civilian side of the house.
  3. Nonetheless America, as we've pointed out before, is not in terminal decline. In fact it'll reamin the major military, economic and political power for decades. As a result it must continue to develop and provide leadership. At the same it must also encourage (hence the section above) the growing roles and responsibilities of serious stakeholders.

 D. Future of Capitalism

We spent untold millions of lives and billions of $ testing the question of what was the best way to organize the economic and socio-political structure of our societies in the 20thC. In a way the modern version of the European Wars of Religion - literally. The result was pretty clear - there is no more effective organizing principle than market-supporting economies. The problem was in that in settling that issue we went to far and forget that markets themselves must live in institutional frameworks to function. Now the worldwide debate, which will determine the worldwide fate, is on just what form the future of Capitalism will take and how best to govern it. IOHO this is one of the 4/5 most critical questions facing us.


US Foreign Policy Adaptations

The Accidental Guerrilla: Fighting Small Wars in the Midst of a Big One David Kilcullen, former senior counterinsurgency adviser to General Petraeus in Iraq, talks about the relationship between the war on terror and smaller guerrilla wars being fought around the world.  He also discusses President Obama's plans for Afghanistan.  Mr. Kilcullen is interviewed by the Washington Post's David Ignatius at an event hosted by the Center for a New American Security.   David Kilcullen, former Australian infantry officer, is a senior fellow at the Center for a New American Security and a partner at the Crumpton Group, a Washington, D.C.-based strategic advisory firm. Prior to joining CNAS, he served as Special Advisor for Counterinsurgency to Secretary of State Condoleezza Rice. For more, visit cnas.org and search his name.

  • Clinton Foreign Affairs Day Town Hall Meeting Secretary of State Hillary Clinton conducted a Foreign Affairs Day town hall to discuss foreign policy issues at the State Department.
  • Obama Meets the CIA President Obama met with CIA personnel and delivered a public message to the workforce about the importance of CIA's mission to our national security.
  • Pres. Obama Remarks on Lincoln Painting President Obama delivered remarks at the dedication of Abraham Lincoln Hall at the National Defense University

National Security Adviser Tries Quieter Approach On a foreign policy team of supersize egos, Gen. James L. Jones, President Obama’s national security adviser, is flying below the radar. Compared with his immediate predecessors, Condoleezza Rice and Stephen J. Hadley, General Jones is rarely seen at the president’s side. Neither does he serve as a gateway to the president, in the way that Samuel R. Berger was viewed because of his close friendship with President Bill Clinton. By his own account, General Jones favors more of a “bottom-up approach,” one very different from what has usually been practiced from the national security adviser’s corner office in the West Wing. During a National Security Council meeting in March on Mr. Obama’s new Afghanistan strategy, General Jones, although seated next to the president, seldom voiced his own opinions, according to officials in the room. Instead, he preferred to go around the table collecting the views of others. But Richard C. Holbrooke, Mr. Obama’s special representative to Afghanistan and Pakistan, said that General Jones was “a Marine, and he believes in team-building,” an approach that Mr. Holbrooke said had produced “a sophisticated, multilayer decision structure at the N.S.C. that did not exist before.” It has been General Jones, Mr. Holbrooke said, who has served as an important filter between the president and the military, particularly in advising Mr. Obama during the debate over when military requests for more troops were warranted for Afghanistan.

The Mellow Doctrine Amazing what happens when you cast aside the testosterone. I know bristling Dick Cheney believes America’s enemies now perceive “a weak president,” as do sundry Republican senators, but the truth is that foes of the United States have been disarmed by Barack Obama’s no-drama diplomacy. Call it the mellow doctrine. Neither idealistic nor classic realpolitik, it involves finding strength through unconventional means: acknowledgment of the limits of American power; frankness about U.S. failings; careful listening; fear reduction; adroit deployment of the wide appeal of brand Barack Hussein Obama; and jujitsu engagement. Already the mellow doctrine has brought some remarkable shifts, even if more time is needed to see its results. The Castro brothers in Cuba are squabbling over the meaning of Obama’s overtures. Venezuela’s Hugo Chávez has gone gooey-eyed over the Yanqui president. Turkey relented on a major NATO dispute, persuaded of the importance of Obama’s conciliatory message to Muslims. From Damascus to Tehran, new debate rages over possible rapprochement with Washington. In Israel, I understand Prime Minister Benjamin Netanyahu is about to drag his Likud party kicking and screaming to acceptance of the idea of a two-state solution because he knows the cost of an early confrontation with Obama. Not bad for 105 days. The fact is the United States spent most of the eight years before last January making things easy for its enemies. It was in the ammunition-supply business. Deprived of an easy enemy, several countries are trying to calibrate how to become America’s friend, or at least normalize relations. They are uneasy about being left in the cold. On a recent visit to Damascus, Martin Indyk, a former U.S. ambassador to Israel, was intrigued to find Walid Muallem, the Syrian foreign minister, asking him with concern whether there was “some sort of understanding” between the United States and Iran. There isn’t yet, but Syria, like many Arab states, is already worried about losing out to any American-Iranian détente. Conversely, Iran worries that it might lose its Syrian ally (and conduit to Hezbollah and Hamas) as a result of Obama’s Middle East peace effort. The fact is Syria’s interests in Iraq after a U.S. withdrawal will diverge from Iran’s: Syria’s priority is an Iraq in the Arab sphere.

Country Response Stories

Japan Seeks to Fashion a New Economy For Japan, Nippon Chemi-Con's move realizes an inevitable shift: Its cherished tradition of manufacturing may finally move away from its high-cost market to lower-cost neighbors, leaving hundreds of thousands of Japanese workers jobless as the country struggles to reinvent its economy. In the 1990s, as China took on more manufacturing work once done in Japan, many Japanese feared their industries would be "hollowed out," with executive offices remaining at home while jobs moved abroad. But the past six years sparked a manufacturing renaissance, helped by cheap temporary labor, surging demand for Japanese products and a weak yen -- which made the price of exports competitive. Exports soared, reaching a record 16.5% of the overall economy in July-September 2008, after ranging between 8% and 10% during the 1980s and 1990s. Companies rushed to open factories at home, saying complex products, evolving technologies and the danger of manufacturing secrets leaking out made it important to keep factories close to headquarters. Now, Japan's manufacturing bubble has burst. Exports for February dropped by 49%, the fifth month of decline. The higher yen is pummeling companies' overseas earnings. The dollar, which was at 123 yen in July 2007, tumbled to 87 yen in December 2008, before recovering to the current level of about 100 yen. Japan's economy contracted at an annualized 12.1% during the October-December quarter. The Organization for Economic Cooperation and Development forecasts Japan's economy will contract 6.6% in 2009. How Japan fares in transitioning from its manufacturing-dependent growth model could determine how the world's second-largest economy emerges from the recession.

A new pecking order FOR years leaders in continental Europe have been told by the Americans, the British and even this newspaper that their economies are sclerotic, overregulated and too state-dominated, and that to prosper in true Anglo-Saxon style they need a dose of free-market reform. But the global economic meltdown has given them the satisfying triple whammy of exposing the risks in deregulation, giving the state a more important role and (best of all) laying low les Anglo-Saxons. At the April G20 summit in London, France’s Nicolas Sarkozy and Germany’s Angela Merkel stood shoulder-to-shoulder to insist pointedly that this recession was not of their making. Ms Merkel has never been a particular fan of Wall Street. But the rhetorical lead has been grabbed by Mr Sarkozy. The man who once wanted to make Paris more like London now declares laissez-faire a broken system. Jean-Baptiste Colbert once again reigns in Paris. Rather than challenge dirigisme, the British and Americans are busy following it: Gordon Brown is ushering in new financial rules and higher taxes, and Barack Obama is suggesting that America could copy some things from France, to the consternation of his more conservative countrymen. Indeed, a new European pecking order has emerged, with statist France on top, corporatist Germany in the middle and poor old liberal Britain floored.

Heirs to Fortuyn?  When the New Left emerged in the 1960s, something else was born that would mark American elites for decades thereafter: the notion that social-democratic Western Europe was far superior to the capitalist United States. Pity the poor American professor whose every junket to a European academic conference was marred by his continental colleagues' sneering over cocktails about his nation's shame du jour—Vietnam, Watergate, Iraq—or about American racism, capital punishment or health. This rosy view was never accurate, of course. Europe's socialized health care was blighted by outrageous (and sometimes deadly) waiting lists and rationing, to name just one example. To name another: Timbro, a Swedish think tank, found in 2004 that Sweden was poorer than all but five U.S. states and Denmark poorer than all but nine. But in recent years, something has happened to complicate the left's fanciful picture even further: Western European voters' widespread reaction against social democracy. The shift has two principal, and related, causes. The more significant one is that over the past three decades, social-democratic Europe's political, cultural, academic and media elites have presided over, and vigorously defended, a vast wave of immigration from the Muslim world—the largest such influx in human history. Yet instead of encouraging these immigrants to integrate and become part of their new societies, Western Europe's governments have allowed them to form self-segregating parallel societies run more or less according to Shariah. Many of the residents of these patriarchal enclaves subsist on government benefits, speak the language of their adopted country poorly or not at all, despise pluralistic democracy, look forward to Europe's incorporation into the House of Islam, and support—at least in spirit—terrorism against the West. The other major reason for the turn against the left is economic. Western Europeans have long paid sky-high taxes for a social safety net that seems increasingly not worth the price. These taxes have slowed economic growth. Timbro's Johnny Munkhammar noted in 2005 that Sweden, for instance, which in the first half of the 20th century had the world's second-highest growth rate, had since fallen to No. 14, owing to enormous tax hikes. Government revenues in Western Europe go largely to support the unemployed, thus discouraging work. Over the last decade or so, the overall unemployment rate in the EU 15—that is, Western Europe—has hovered at about 2.5 to 3 points higher than in the United States. In France and Germany, it has ascended into the double digits (and that was before the global financial crisis that began in 2008). Western Europe's rate of long-term unemployment has consistently been several times higher than America's, denoting the presence of a sizable minority.

In Budapest, a Snapshot of a World Now at Risk The decline of the world economy is usually chronicled in numbers — 8.5 percent unemployment in the United States; 15 percent unemployment in Spain; Chinese exports dropping 25 percent; Japan’s dropping 49 percent; global trade expected to fall for the first time in 80 years, by more than 13 percent. But the numbers, cold and stark, do not convey the real cost this downturn may yet extract, if it isn’t turned around. Budapest does that. When I first visited, as an exchange student in January 1989, Budapest was the capital of Communist Hungary. And despite the moroseness that hung over the city like a cloud, it held a certain charm beneath layers of dirt and gloom. When I returned last month, a journalist on vacation, Budapest was Europe, as European as Paris or Barcelona, and as dazzling. Twenty years ago, Hungary was a Soviet satellite, one of the less hard-line regimes of Eastern Europe but Communist all the same. As a student of the Soviet Union’s domestic and foreign policy, I figured I knew the country intellectually. I had no idea. My first memory of Budapest was riding a subway from the train station to Moszkva ter, Moscow Square. When I emerged onto the square atop one of the many hills on the Buda side of the Danube, I was stunned. Across the steel-gray river, in Pest, stood Hungary’s Parliament, a collection of a dozen delicate Gothic spires surrounding a majestic dome. The dome was off-white with terra cotta-color tiles, its luster dimmed by the caked-on pollution. Still, it was audacious. I spent the next days discovering that Budapest, like the Parliament, was regal. But the grandeur seemed out of place amid the unmistakable sadness that hung over it and other Eastern European capitals of the time. When I returned to Budapest last month, I was once again amazed. After two decades of economic and political liberalization, the city’s potential was no longer hidden, glimpsed like a shadow disappearing around a corner. Budapest had become a dream realized, full of world-class hotels, ubiquitous construction cranes, mansions and museums scrubbed clean. Stylish women and men filled the subways and sidewalks. The stores were full to bursting, with local products as well as global brands. Hungary, it struck me, was part of Europe again. That is what is at stake in the current meltdown — a truly globalized world, increasingly connected and increasingly familiar, and, as the contagion of economic weakness has shown, more fragile because of its interdependence. In the years since China, then Russia and its satellites, joined the world economy, confidence has become the currency of this globalized world. One of our era’s dominant features had been a swaggering self-assurance, a sometimes smug pride in our modernity. Until it all started to come apart last year, a sense of optimism and possibility infected a border-hopping elite and, to some extent, the middle and working classes from Budapest to Bangalore.

20 Years of Going Nowhere The recent annual meeting of the Council for Foreign and Defense Policy, a Moscow-based think tank, underscored the confusion and distress among leading Russian politicians, analysts and policymakers. The meeting was dedicated to discussing the results of these last two decades. If in recent years they were all caught up in a frenzy of patriotism, muscle-flexing and shouts of "Russia is rising from its knees!" this spring has marked a clear shift in mood. Now they are much more sober and reflective. The economic crisis and Russia's continuing foreign policy failures have hit them like one big cold shower.This year marks the 20th anniversary of the fall of the Berlin Wall. It is interesting to compare how far the West has advanced since 1989 and how Russia has fallen behind. First, NATO membership grew in three successive waves over the last 20 years, adding 12 new countries, including former Warsaw Pact countries and three former Soviet republics. In addition, the European Union similarly added 15 new countries in three waves of expansion, reaching a current total of 27 member states. But this expansion is by no means completed; a number of countries are standing in line to join NATO and the EU. Twenty years ago, Russia lagged behind the development of the Western world, and it has yet to close that gap. Since 1989, Russia has steadily lost its influence on the global arena and soured its relations with most of its neighbors. For example, relations with Georgia and Ukraine are now hopelessly ruined. Among the few friends that remain, relations are not nearly as strong as Russia would like. One vivid example: None of its allies, except Nicaragua, has recognized the independence of Abkhazia and South Ossetia. From 1989 to 2009, the number of Russia's friends has diminished while its ill-wishers have grown. In fact, the Kremlin suffered a double defeat: It lost its status as a global superpower and simultaneously failed to modernize its economy and institutions. In stark contrast to China and India, over the last two decades Russia has not managed to modernize its economy. Instead, its economy became even more reliant on raw material exports than during the Soviet era, and the country failed to create functional government institutions. The country has still not been able to develop independent courts or parliament, nor has it been able to build a modern army. Moreover, there is no effective control over the bureaucracy, little protection of private property and corruption continues to be a debilitating, systemic problem. In short, Russia remains a colossus on clay feet with a bad reputation in the world -- a fact well understood not only by the West and China, but also by our closest neighbors. A country run by a clan of siloviki with an economy so heavily dependent on oil and gas exports cannot become a center of influence or a respected global power, particularly when it must compete with advanced and influential industrial power centers such as the European Union, the United States and China. If Russia does not modernize its political and economic institutions, its decline will only get worse.

  • The Oligarchs in the Government Corruption has become Russia's most profitable business. According to experts, the corruption market is worth $300 billion annually. Medvedev understands that corruption has reached unacceptable and dangerous levels and something must be done at the top echelons of government to control the situation.

India Defies Slump, Powered by Growth in Poor Rural States Growth has slowed in the new India of technology outsourcing, property development and securities trade. But old India -- the rural sector that is home to 700 million of the country's billion-plus people -- shows signs it can pick up the slack. The rural awakening helps explain why India continues to grow even as the U.S. recession drags on the world economy. The change is largely political. In years past, many state leaders rode to power with vows to give voice to lower-caste voters. But after failing for the most part to lift living standards, these officials have been replaced in many cases by leaders who have. In poor and largely rural states from Orissa in the east to Rajasthan in the west, many new leaders have invested in health, education and infrastructure. That has set the stage for the creation of industry and consumer markets and enabled upward mobility. It's unclear whether development spending in rural India will spark longer-term expansion. The countryside's strength comes in part from a trade policy that free-market economists say may hurt India in the long run. Tariffs on agricultural imports are among the world's highest and may have deterred investment in rural India. But these tariffs have also sheltered swaths of the country. An estimated 88% of India's rural incomes are tied to activities inside those markets, according to IIFL. Even slight improvements here are significant, economists say, because they build on a base of practically zero. India's economy has held up better than most, in spite of slowing tech sales and falling real-estate and stock markets. The International Monetary Fund projects India will grow 5.1% in 2009, faster than Brazil (1.8%) and Russia (-0.7%). India is also closing the gap on China, whose 6.7% projected growth for 2009 marks a sharp decline from recent double-digit gains.

Distant horizons WITH an unprecedented display of its rapidly growing naval armory, China has flaunted its ambitions as a global power. To mark the 60th anniversary of the founding of the People’s Liberation Army Navy (PLAN), Chinese leaders on April 23rd reviewed a maritime parade of hardware ranging from nuclear submarines to amphibious assault-craft and fighter bombers. The only missing ingredient of naval might was an aircraft-carrier. Officials hint it will not be long before China has some of these too. Ten years ago, the PLAN’s 50th anniversary slipped by with little more than a few commemorative stamps and plenty of bunting. But the last decade has seen the fruits of a huge military modernisation and expansion programme, launched after tensions mounted in the Taiwan Strait in 1995 and 1996. This has included the purchase of billions of dollars worth of Russian naval hardware, and the deployment of homemade ships, submarines and missiles. The build-up has sent ripples of unease across China’s neighbourhood. China was anxious lest the parade, in the port city of Qingdao, sent too scary a message. It invited foreign navies to take part too, including America’s 7th Fleet, which sent a guided-missile destroyer, the USS Fitzgerald. The official theme of the show was “harmonious ocean”. China’s neighbours wish it were so. Some of the new weaponry on display in Qingdao suggested that projecting power is becoming a bigger priority for China. Among the vessels inspected by President Hu Jintao from on board a Chinese-made destroyer were two nuclear-powered submarines. China’s official press identified them as a Xia-class ballistic-missile submarine and a Han-class attack submarine. These are not China’s very latest models, but showing them at all was rare.

The World Depends on U.S.-China Cooperation Recent events confirm that we're living in a new world of disorder. North Korea tested a missile that could reach the U.S., and is threatening to resume its nuclear-weapons program; the Taliban is using drug money to destabilize Afghanistan and turn that country back into a terrorist safe haven; the financial crisis has sparked a global recession; and unchecked greenhouse gas emissions are transforming the global climate. These disparate challenges share one thing in common: They cannot be addressed successfully without cooperation between the U.S. and China. The most immediate opportunity for cooperation is in confronting the international financial crisis. China currently holds $2 trillion worth of largely U.S. dollar-denominated foreign exchange reserves, and it is by far the world's largest holder of U.S. government debt. As the Obama administration increases that debt to finance its economic stimulus plan, China will almost certainly be called upon to purchase the lion's share of new U.S. debt instruments. China also has an interest in working with the U.S. to ensure those efforts succeed, because it depends on economic growth in the U.S. (still its largest single trading partner) to ensure stability at home. There is a compelling need to create a new dialogue on finance and economics. This conversation began with President Barack Obama and Chinese President Hu Jintao's discussions at the G-20 summit this month in London. Meetings between U.S. and Chinese leaders have been dubbed the "G-2" by some to reflect the crucial role of economic negotiations between our two countries. To be sure, there remain a number of areas of serious divergence between Washington and Beijing. But with so many challenges facing our nations, the stakes are too high to allow old hostilities to impede constructive cooperation. Virtually no global challenge can be met without China-U.S. cooperation. By finding new ways to promote our common interests, the Obama administration can transform our relations with China and promote the global good.

Islamic World

Nicholas D. Kristof: Islam, Virgins and Grapes Muslim fundamentalists damage Islam far more than any number of Danish cartoonists ever could, for it’s inevitably the extremists who capture the world’s attention. But there is the beginning of an intellectual reform movement in the Islamic world, and one window into this awakening was an international conference this week at the University of Notre Dame on the latest scholarship about the Koran. “We’re experiencing right now in Koranic studies a rise of interest analogous to the rise of critical Bible studies in the 19th century,” said Gabriel Said Reynolds, a Notre Dame professor and organizer of the conference. The Notre Dame conference probably could not have occurred in a Muslim country, for the rigorous application of historical analysis to the Koran is as controversial today in the Muslim world as its application to the Bible was in the 1800s. For some literal-minded Christians, it was traumatic to discover that the ending of the Gospel of Mark, describing encounters with the resurrected Jesus, is stylistically different from the rest of Mark and is widely regarded by scholars as a later addition. One of the scholars at the Notre Dame conference whom I particularly admire is Nasr Hamid Abu Zayd, an Egyptian Muslim who argues eloquently that if the Koran is interpreted sensibly in context then it carries a strong message of social justice and women’s rights. If the Islamic world is going to enjoy a revival, if fundamentalists are to be tamed, if women are to be employed more productively, then moderate interpretations of the Koran will have to gain ascendancy. There are signs of that, including a brand of “feminist Islam” that cites verses and traditions suggesting that the Prophet Muhammad favored women’s rights. Professor Reynolds says that Muslim scholars have asked that conference papers be translated into Arabic so that they can get a broader hearing. If the great intellectual fires are reawakening within Islam, after centuries of torpor, then that will be the best weapon yet against extremism.

Sitting Down With Islamists and the West TALKING to Islamists is the new order of the day in Washington and London. The Obama administration wants a dialogue with Iran, and the British Foreign Office has decided to reopen diplomatic contacts with Hezbollah, the Shiite militant group based here. But for several years, small groups of Western diplomats have made quiet trips to Beirut for confidential sessions with members of Hamas, Hezbollah and other Islamist groups they did not want to be seen talking to. In hotel conference rooms, they would warily shake hands, then spend hours listening and hashing out accusations of terrorism on one side and imperial arrogance on the other. The organizer of these back-door encounters is Alastair Crooke, a quiet, sandy-haired man of 59 who spent three decades working for MI6, the British secret intelligence service. He now runs an organization here called Conflicts Forum, with an unusual board of advisers that includes former spies, diplomats and peace activists. Mr. Crooke has spent much of his career talking to Islamists. “It seemed to me there was a real need to understand what was happening inside Islamism better, and to valorize what they were saying in ways that could be understood in the West,” he said. That project seems inseparable from his broader argument about dialogue. To illustrate it, Mr. Crooke describes an episode from the conflict in Northern Ireland in which the British put two opposing factions into a room for talks, “naïvely imagining that talking would help.” It did the opposite, reinforcing their anger. So the negotiators tried another approach: they asked both sides to write down their history and vision for the future on a piece of paper. After three more years of talks, the factions finally reached the point at which they acknowledged the legitimacy of the other side’s piece of paper. “George Mitchell once said to me, ‘you don’t even have a political process until you accept that the other side has a legitimate point of view,’ ” Mr. Crooke said, referring to Mr. Mitchell’s landmark 1998 Good Friday Agreement in Northern Ireland and relating it to the many obstacles between the United States and Iran. “Does America have the will and the patience for that?” he said. “I’m not sure we’re there yet.”

Indonesia’s Voters Retreat From Radical Islam From Pakistan to Gaza and Lebanon, militant Islamic movements have gained ground rapidly in recent years, fanning Western fears of a consolidation of radical Muslim governments. But here in the world’s most populous Muslim nation just the opposite is happening, with Islamic parties suffering a steep drop in popular support. In parliamentary elections this month, voters punished Islamic parties that focused narrowly on religious issues, and even the parties’ best efforts to appeal to the country’s mainstream failed to sway the public. The largest Islamic party, the Prosperous Justice Party, ran television commercials of young women without head scarves and distributed pamphlets in the colors of the country’s major secular parties. But the party fell far short of its goal of garnering 15 percent of the vote, squeezing out a gain of less than one percentage point over its 7.2 percent showing in 2004. That was a big letdown for a party and a movement that had grown phenomenally in recent years, even as more radical elements directed terrorist attacks against Western tourists and targets. The party had projected that it would double its share of seats in Parliament even as it stuck to its founding goal of bringing Shariah, or Islamic law, to Indonesia, the world’s fourth most populous nation, with 240 million people. Altogether, the major Islamic parties suffered a drop in support from 38 percent in 2004 to less than 26 percent this year, according to the Indonesian Survey Institute, an independent polling firm whose figures are in keeping with partial official results. Political experts and politicians attribute the decline to voters’ disillusionment with Islamic parties that once called for idealism, but became embroiled in the messy, often corrupt world of Indonesian politics. They also say that the popular president, Susilo Bambang Yudhoyono, who is expected to be re-elected in July, appropriated the largest Islamic party’s signature theme of clean government through a far-reaching anticorruption drive. On a deeper level, some of the parties’ fundamentalist measures seem to have alienated moderate Indonesians. While Indonesia has a long tradition of moderation, it was badly destabilized with the end of military rule in 1998, which gave rise to Islamist politicians who preached righteousness and to some hard-core elements, who practiced violence. The country has only recently achieved a measure of stability.

Turkish Schools Under Scrutiny The first so-called Turkish schools in Central Asia were founded in the mid-1990s. Turkish educational institutions there -- as well as in countries from Russia to North America -- were set up by the Gulen movement led by Turkish Islamic scholar and author Fethullah Gulen. Gulen is a Sunni Muslim who advocates tolerance and dialogue among different religions. More than 65 Turkish educational institutions were once operating in Uzbekistan alone. There are some 25 Turkish schools, including boarding schools and two universities, in neighboring Kyrgyzstan. Tajikistan has six such institutions. Throughout Central Asia, Turkish schools are known for their strict educational methods and discipline and are highly regarded by students and parents. The majority of national and regional education contests are won by Turkish lyceum students. Easily passing English-language tests, many graduates win scholarships to Western universities. Parents go to great lengths to enroll their children in Turkish schools, hoping such education will guarantee bright futures for them. Yet, Turkish educational institutions have come under increasing scrutiny in Central Asia. Governments as well as many scholars and journalists suspect that the schools have more than just education on their agendas.  In Turkmenistan, education authorities have ordered Turkish lyceums to scrap the history of religion from curriculums. Uzbek officials have expressed suspicions that Turkish-school graduates in government offices and other key institutions use their positions to weaken the secular government. They charge that graduates of Turkish schools promote an aggressive form of Islam and even a role for Islam in political life. There is something of an irony in the fact that such charges are being directed at schools inspired by the teachings of Fethullah Gulen. Gulen, though controversial, is generally regarded as a moderate Islamic thinker who condemns extremism and terrorism and promotes tolerance and harmony in society. He has written more than 60 books on subjects ranging from religion, Sufism, social and education issues, to art, science, and sports. The 68-year-old scholar calls on Muslims to study both religion and modern science, including Darwin's theory of evolution.

Emerging Challenges and Requirements

Battle is joined IT IS the new frontier for military and intelligence activity: cyberspace. For years military experts and computer scientists have speculated about the possibility of a nation’s infrastructure being attacked using computers, rather than bombs. There have been dark warnings of the danger of a “digital Pearl Harbour”—an unexpected strike in which digital attackers shut down America’s electrical grid or air-traffic control systems, or hack into nuclear-power stations and cause them to overheat. In recent years such concerns have been heightened by the first real examples of large-scale cyber-attacks—on Estonia in 2007 and Georgia in 2008. In each case, government websites were brought down by a deluge of traffic, apparently from Russia. The actual damage done was minimal, but it has all added to the sense of urgency, in America in particular, about the need to protect critical infrastructure from such an attack. In the past few weeks there have been alarming reports that America’s systems have already been infiltrated. On April 8th the Wall Street Journal quoted “current and former national-security officials” who warned that “cyberspies” from China, Russia and elsewhere had broken into the systems that control America’s electrical grid and had installed software that could be used to disrupt it. And on April 21st the newspaper said foreign hackers had penetrated computers containing data about the F-35 Joint Strike Fighter. Does this mean America is suddenly under attack, and that war has broken out in cyberspace? It is difficult to believe that America, Russia and China are not all probing each other’s computer systems, and the picture is further complicated by the involvement of unofficial groups, such as those thought to have attacked Estonia and Georgia (whether or not they are backed by governments is a murky matter). But the most likely explanation for the sudden spate of scare stories is rather more mundane: a turf war between American government agencies over who should oversee the nation’s cyber-security. In one corner is the Department of Homeland Security, which operates the National Cyber Security Centre (NCSC), a body set up to co-ordinate America’s various cyber-security efforts. In the other corner is the National Security Agency (NSA), which thinks it ought to be in charge. At stake are tens of billions of dollars in funding promised for a multi-year cyber-security initiative.

U.S. Scrambles For Civilian Crisis Management Having overwhelmingly relied on military force to address global security crises in recent years, Washington now appears to be scrambling for alternative methods. While the military component will continue for the foreseeable future to form the backbone of the U.S. strategy in hotspots like Afghanistan and Iraq, it is liable to be complemented by increasingly robust civilian crisis-management efforts. Ambassador John Herbst, the coordinator for reconstruction and stabilization at the U.S. State Department, told RFE/RL on April 22 that the Obama administration is working "furiously" to set up a Civilian Response Corps (CRC). Herbst said he expects the CRC to become operational by summertime, and could continuously field up to 200 civilian reconstruction and stabilization experts in Afghanistan, Iraq, and elsewhere. Herbst said civilian stabilization efforts will in future be the instrument of preference in the U.S. crisis-management toolbox. "We, I'm confident, represent the future of not just the American response, but I would say, [all together], the American response, the allied response, even the global response to the problem of failed states in ungoverned spaces," he said. Herbst is currently touring Europe in a bid to coordinate U.S. efforts with those of its main allies. But he said he has cast his net far wider, having recently traveled to China, India, and Brazil, among other places, in search of potential partners. The need for a broader, longer-term civilian engagement in the world's hotspots is felt across the board in Washington. The need in Afghanistan is felt especially keenly. Addressing a conference at the Center for Strategic and International Studies in Washington on April 21, the U.S. undersecretary of defense for policy, Michele Flournoy, said the mission in Afghanistan needs more resources, and called for a "significant civilian investment." Flournoy said that it is "painfully clear that for several years, our effort on the ground has not been adequately resourced to defeat the insurgency and address the fundamental conditions that have enabled it to fester." The need for a broader, longer-term civilian engagement in the world's hotspots is felt across the board in Washington. The need in Afghanistan is felt especially keenly. Addressing a conference at the Center for Strategic and International Studies in Washington on April 21, the U.S. undersecretary of defense for policy, Michele Flournoy, said the mission in Afghanistan needs more resources, and called for a "significant civilian investment." Flournoy said that it is "painfully clear that for several years, our effort on the ground has not been adequately resourced to defeat the insurgency and address the fundamental conditions that have enabled it to fester."

'The Age of the Unthinkable' It’s a finding enthusiastically embraced by Mr. Ramo, who argues in these pages that today’s complex, interconnected, globalized world requires policy makers willing to toss out old assumptions (about cause and effect, deterrence and defense, nation states and balances of power) and embrace creative new approaches. Today’s world, he suggests, requires resilient pragmatists who, like the most talented Silicon Valley venture capitalists on the one hand or the survival-minded leadership of Hezbollah on the other, possess both an intuitive ability to see problems in a larger context and a willingness to rejigger their organizations continually to grapple with ever-shifting challenges and circumstances. So how should leaders cope with the sand-pile world? How can they learn to “ride the earthquake” and protect their countries from the worst fallout of such tremors? Mr. Ramo suggests that they must learn to build resilient societies with strong immune systems: instead of undertaking the impossible task of trying to prepare for every possible contingency, they ought to focus on things like “national health care, construction of a better transport infrastructure and investment in education.” He suggests that leaders should develop ways of looking at problems that focus more on context than on reductive answers. And he talks about people learning to become gardeners instead of architects, of embracing Eastern ideas of indirection instead of Western patterns of confrontation, of seeing “threats as systems, not objects.” Though Mr. Ramo sounds annoyingly fuzzy and vaguely New Agey when he tries to outline tactics for dealing with “the age of the unthinkable,” he’s at least managed, in this stimulating volume, to make the reader seriously contemplate the alarming nature of a rapidly changing world — a world in which uncertainty and indeterminacy are givens, and avalanches, negative cascades and tectonic shifts are ever-present dangers.

America in Terminal Decline? No Way, Says Geopolitical Expert George Friedman With its slumping economy, mountains of debt, ungodly deficits and overseas entanglements, many observers believe the end of the American era is at hand. Not so, according to George Friedman, founder of STRATFOR, a global intelligence company. In his latest book, The Next 100 Years, Friedman argues America's power on the world stage will actually increase in the 21st Century for three major reason: 1)The immense size of the U.S. economy: The current crisis is painful and America's deficits are shocking on an absolute basis but are "trivial" relative to the country's net worth, which Friedman estimates is about $340 trillion. 2) The unrivaled dominance of the U.S. Navy: Even in the digital age, control of the high seas is paramount in geopolitics. 3) The ability of the U.S. to absorb immigrants, both culturally and in terms of the nation's relatively low population density.

Re-thinking the Future: Capitalism 3.0 ?

Vive la différence! In Britain, Gordon Brown has declared—like Mr Sarkozy—that “laissez-faire has had its day”. Business chiefs clamour for Britain to get itself a proper industrial policy and stop relying on the mirage of finance. Howard Davies, head of the London School of Economics, wrote in praise of “French lessons on the state’s new role”. Even Peter Mandelson, a former European trade commissioner whom the French regard as a high priest of economic liberalism, recently turned up in Paris to learn more about what he calls industrial activism. “We have something to learn from continental practice,” he said, identifying French long-term strategic planning in such sectors as energy and transport. Behind the loose terms and caricature, however, what exactly does the French model consist of? Does it work? As governments try to work out the best balance between the market and the state, have the French got that balance right after all? A central feature of the French model is the state’s role as provider, cushioning citizens, redistributing wealth and propping up demand in hard times. But it has two other functions: planner and regulator. Long-term planning of public infrastructure is the best example of where it works well. Such French strategic planning is not only about long-term vision and infrastructure; it is also about putting in place the industrial supply chain needed to get there. The impulse to control, which underpins the French model, extends to the third function of the state too, that of regulator. The French are champion rule-makers. France’s big banks may have lost plenty of money, but they have certainly performed better than their British or American peers, and most are still in profit. One reason is tighter regulation. If the French model has broadly sheltered its people from credit-fuelled excess, kept demand buoyant and inequalities manageable, and delivered well scrubbed buildings and blooming flowerbeds to boot, does this mean that the model works? Or what is the catch? The answer lies in a generally disappointing macroeconomic performance, with low growth and high unemployment, and is explained by the flipside of each of the three roles the French model allocates to the state. But, as a senior French official points out, the Colbertist engineering culture is on the whole much better at devising and managing big planned projects than it is at dealing with bottom-up ideas and uncertain markets. France lacks start-ups, and its small firms have difficulty growing. Hardly any of the biggest companies listed on the Paris bourse were founded in the past 50 years.

Coming soon: Capitalism 3.0 Capitalism is in the throes of its most severe crisis in many decades. A combination of deep recession, global economic dislocations and effective nationalisation of large swathes of the financial sector in the world's advanced economies has deeply unsettled the balance between markets and states. Where the new balance will be struck is anybody's guess. Those who predict capitalism's demise have to contend with one important historical fact: capitalism has an almost unlimited capacity to reinvent itself. Indeed, its malleability is the reason it has overcome periodic crises over the centuries and outlived critics from Karl Marx on. The real question is not whether capitalism can survive -- it can � but whether world leaders will demonstrate the leadership needed to take it to its next phase as we emerge from our current predicament. Capitalism has no equal when it comes to unleashing the collective economic energies of human societies. That is why all prosperous societies are capitalistic in the broad sense of the term: they are organised around private property and allow markets to play a large role in allocating resources and determining economic rewards. The catch is that neither property rights nor markets can function on their own. They require other social institutions to support them. So property rights rely on courts and legal enforcement, and markets depend on regulators to rein in abuse and fix market failures. At the political level, capitalism requires compensation and transfer mechanisms to render its outcomes acceptable. As the current crisis has demonstrated yet again, capitalism needs stabilising arrangements such as a lender of last resort and a counter-cyclical fiscal policy. In other words, capitalism is not self-creating, self-sustaining, self-regulating or self-stabilising. The history of capitalism has been a process of learning and re-learning these lessons. This 'mixed-economy' model was the crowning achievement of the twentieth century. The new balance that it established between state and market set the stage for an unprecedented period of social cohesion, stability and prosperity in the advanced economies that lasted until the mid-1970s. This model became frayed from the 1980s on, and now appears to have broken down. The reason can be expressed in one word: globalisation. The postwar mixed economy was built for and operated at the level of nation-states and required keeping the international economy at bay. The lesson is not that capitalism is dead. It is that we need to reinvent it for a new century in which the forces of economic globalization are much more powerful than before. Just as Smith's minimal capitalism was transformed into Keynes' mixed economy, we need to contemplate a transition from the national version of the mixed economy to its global counterpart. This means imagining a better balance between markets and their supporting institutions at the global level. Sometimes, this will require extending institutions outward from nation-states and strengthening global governance. At other times, it will mean preventing markets from expanding beyond the reach of institutions that must remain national. The right approach will differ across country groupings and among issue areas. Designing the next capitalism will not be easy. But we do have history on our side: capitalism's saving grace is that it is almost infinitely malleable.

Thimphu Journal: Recalculating Happiness in a Himalayan Kingdom If the rest of the world cannot get it right in these unhappy times, this tiny Buddhist kingdom high in the Himalayan mountains says it is working on an answer. “Greed, insatiable human greed,” said Prime Minister Jigme Thinley of Bhutan, describing what he sees as the cause of today’s economic catastrophe in the world beyond the snow-topped mountains. “What we need is change,” he said in the whitewashed fortress where he works. “We need to think gross national happiness.” The notion of gross national happiness was the inspiration of the former king, Jigme Singye Wangchuck, in the 1970s as an alternative to the gross national product. Now, the Bhutanese are refining the country’s guiding philosophy into what they see as a new political science, and it has ripened into government policy just when the world may need it, said Kinley Dorji, secretary of information and communications. Specifically, the government has determined that the four pillars of a happy society involve the economy, culture, the environment and good governance. It breaks these into nine domains: psychological well-being, ecology, health, education, culture, living standards, time use, community vitality and good governance, each with its own weighted and unweighted G.N.H. index. All of this is to be analyzed using the 72 indicators. Under the domain of psychological well-being, for example, indicators include the frequencies of prayer and meditation and of feelings of selfishness, jealousy, calm, compassion, generosity and frustration as well as suicidal thoughts.

Posted by dblwyo at 02:39 AM | | Comments (0)

May 05, 2009

Existential Crisis in the Agora I: Economy, Policy and US Strategic Outlook (Addons)

If the news over the last few months hasn't made it crystal clear to you last Friday's bankruptcy filing by Chrysler, with GM likely to soon follow, should make it clear that we are in the eye of the biggest economic storms in over sixty years. We're facing fundamental changes in the structure, nature and direction of the US economy which will define the limits of policy and prosperity for decades to come. The good news is that the Administration is doing extremely well in putting the right policies in place quickly and implementing them about as well as could be expected. The bad news is two-fold. First we've got a long way to go before this is over and we reach a growing economy again. The worse news is that longer-term growth prospects are extremely poor and will be potentially lower than at any time in the post-war period. Now that's big picture stuff but presumably you've all heard about growing income inequality, businesses and industries disappearing forever and all the rest of the symptoms of underlying structural flaws that have been accumulating since 1980. If we'd like to return to a modicum of growth we need to get the economy and society on a new footing. The good news is that not only does the administration realize this but it's already putting in place the necessary programs and investments that stand a reasonable chance of making it happen. We've heard no better summary of this existential crisis than this Rose interview with Lionel Barber, editor of the Financial Times. Memorize it and use it as a checklist !

Addons and Extensions:

We just put up a major survey of the structure of the US economy which is complementary background reading for how the economy works. In fact we'd almost say mandatory: It can be found here: Real Data Interlude I: Econ-ecostructure (GDP to Trade)

Economic Alternatives: Stagnation vs Re-structure

We've been covering the economic news for quite a while here, going back to early '08 at least so we won't dive into the details of the cycle, policies and politics as well as budgets. You can check back to skim over all that in the archive and/or we've listed some of the prior postings in the readings excerpts (NB: you'll also find a very extensive collection on the current situation, the long-term prospects for low growth, specific policy areas (Taxes, Regulation, Housing & Autos) and fundamental shifts in strategic policy which represent the biggest shift since 1980. Judging by the most recent poll results (discussed in the last post:Peace in the Public Square: the 100 Days and Re-emergence of Civitas (Updates) ) the public trusts the President and the Administration but still hasn't grasped the implications and is particularly angry about the on-going rescue of the Finance Industry. While the Administration has clearly laid out it's policies and how the pieces all work together the explanations are also still lacking something. We're going to take a shot at framing the discussion using three variations on a conceptual chart to try and read you into the context. No guarantees but let's see what we can do.

The chart shows the possible alternative timepaths that the economy could end up following - in fact the likely ones. The red line is a sustained "Great Recession" which would be as close to disaster as we'd ever want. Fortunately fast and heavy action by this and the preceding Administration and the Fed have likely avoided that, barring some catastrophe. The real danger, and a real one because of the structural flaws, is that we get trapped into a long-term L-shaped recovery like Japan since the 1990s. The best available alternative is a gradual U-shaped recovery which is what current policy is aimed at creating, unfortunately followed by a very weak recovery with low growth, very low new job creation and a continued deterioration in incomes, well-being and the overall health of society. To get onto the path (green line) of a higher, sustained and self-reinforcing growth path requires that those structural flaws be fixed.

 From Crisis to Recovery: Phases, Policies and Risks

For even a weak recovery a lot of things have to go right and at each major cusp point there will be serious downside risks that could abort the recovery. In a normal economic cycle growth in consumer spending causes business to invest in new capital equipment and hire more workers. The post Tech Bust saw the lowest post-war job creating economy because growth prospects were so poor. In fact the only thing that held up the economy at all was the Housing ATM; without it we'd have the kind of recovery we're now facing again. When both consumer and business spending are low there's NO source of demand but government spending. Once the pump gets turning over after the priming it hopefully becomes self-sustaining, organic if you will. Given the cyclic and structural weaknesses we're facing that will require continued government spending for several years or we'll fall back into recession. To get to the higher growth path and make it self-sustaining we need a more efficient economy where infrastructure is not a bottleneck, where we aren't vulnerable to surges in energy prices and healthcare isn't an exponentiating drain on business and the rest of society. More importantly it also requires new jobs to be created which result from innovation in technology and business that lead to new industries. Finally the potential new jobs have to have the right kind of workers - a real set of inter-connected and complex dependencies. But stop me when you think you haven't heard the rationale for new policy strategies in Education, Energy and Healthcare as vital to our long-term well-being. We've been deferring these issues - which we've known what to do about for at least 30 years. (Oil and Other System Shocks: Beyond Iraq & Georgia, 911 Memorial: Fix the Problem Don't Repeat the Crash") Now we no longer have that luxury.

Long-term Economic Policy: From Stimulus to Investment

One of the knocks on current policy - actually a twofer - is that we're going to pile up a bunch of debt and trigger a major inflation. Both are basically unfounded nonsense that don't understand how things will work out for several reasons. First, on debt, the faster the economy grows the easier it will be to repay any debts and reduce the burden. Investing in that growth is a sensible decision. Government spending that subsidizes consumption in the long-run would create problems but government spending that puts the economy on a new base will grow the economy as a whole. Associated with that is that over the last two decades businesses and consumers have run up huge debts of their own but they are changing to more rational, conservative and prudent savers which will reduce the overall debt levels of society, leave plenty of cash flow for funding constructive investments and put us on that healthier path. As for inflation that will be a risk only if the massive injections of funds by the Fed are left in the system as the economy recovers. Right now the amount of sloshing funds (call it Liquidity) is enormously less than the talking heads tell you because it's not moving as fast. Think of it this way Liquidity = Money Supply (M) times the speed of circulation (Velocity). Right now M has gone up hugely but V has dropped even more; it'll take years to repair the damages done to the financial system but when we get there it'll be just as easy for the Fed to withdraw the excess funds as it was to inject them. Let's hope we manage to get to where that's a problem. The real danger is that too many opstrepterous orothodxies will force something premature and do to our economy what the ECB has done to Europe in the downturn; making a bad situation worse. BtW - we got out of the Great Depression because of WW2 spending but didn't have to because the New Deal policies were working until they were aborted in the mid-30s and re-started the Depression. Let's settle for once-burned thrice-shy please ! Whether we manage to do the right things gets back to the question of can we get the economy on a self-sustaining feedback loop !

The short-term emergency spending is designed to arrest a collapse and won't do that, neither will the short/intermediate-term stimulus spending. Even the current scheduled follow-on spending is likely to lead to an anemic recovery (which is btw the long-term forecast of the Fed, the CBO, OECD and the IMF; sounds like a consensus to me). A prosperous future that's sustainable comes about only from the strategic policies in the key areas. And one that makes a better life for the next generation comes about only from fundamental change.

THAT's the challenges we're facing !

Economic Symptoms

Rust sleeps: The travails of Detroit Detroit may be the archetypal down-and-out rust-belt city, but to call it “dying” masks a more complex reality. Greater Detroit still has three to four million residents, a world-class university next door in Ann Arbor and the bone structure of a great city, as a car-industry consultant with the ear of a poet put it over lunch one day. Why, then, the relentless focus on its failings? Nearly everyone you meet is either weary or angry at seeing their home town made the butt of jokes on late-night television and the subject of anguished political commentary. But no one denies that the region’s property market is abysmal, its finances a mess and its industrial base shrinking at an alarming rate. Instead, Michiganders, despite being self-deprecating to a fault, make a point their countrymen won’t want to hear: Detroit is no longer the nation’s worst-case scenario, but on its leading edge, the proverbial canary in the coal mine. “It’s like the rest of the country is getting to where Detroit has been,” said Peter De Lorenzo, who writes the acerbic and very funny Autoextremist.com blog. That means that smug mock-horror is no longer the appropriate reaction to the frozen corpse. Instead, get ready for a shock of recognition. The numbers tell an even more compelling story: the UAW and the Detroit carmakers are in rare unity in pointing out that wages account for only about 10 per cent of the companies’ total costs. Their inability to compete rests on a number of factors other than wages, including consumers’ unwillingness to credit GM or Ford with making cars these days as good as, or even better than, Toyota’s or Honda’s, according to rankings from Consumer Reports magazine and JD Power’s Initial Quality Studies. If Detroit’s designers and engineers are doing an objectively better job, the fault may lie with their marketing and public relations chiefs. Or perhaps too many Americans have bad memories of clunky old cars. In one of the most vivid illustrations of the so-called quality gap bedevilling Detroit, the Pontiac Vibe and Toyota Matrix small cars are made on the same assembly line, at a GM-Toyota joint venture plant in California, but the latter model sells for at least $1,200 more than the former. But this problem pales next to what is arguably the industry’s biggest burden: America’s lack of universal healthcare. GM has more than twice as many retirees on its books than it does active workers. Healthcare costs alone account for a gap of $1,500 between the price of a Detroit vehicle and a Japanese one, and are the main reason Detroit cannot compete with the Japanese on lower-margin small cars. In 2007, the UAW signed away many of its remaining perks in a contract negotiation with the Big Three, agreeing to pay new hires lower wages of as little as $14 an hour and to assume management of retirees’ healthcare in exchange for lump-sum payouts from the carmakers. Analysts said that the concessions would have made GM, Ford and Chrysler competitive by 2010. But then petrol prices spiked, Wall Street staggered, world car markets collapsed, and now all bets are off. Detroit’s crisis, in other words, is the result of both bad choices and worse luck. With or without bail-out aid, the carmakers are shedding tens of thousands of jobs, and heading toward failure. Detroit is bracing itself.

 

Watching Us Save, One Cart At A Time While much of America's retail landscape sits idle during this recession, these workers have a reason to warm up: even as Americans cut spending, business at Wal-Mart has never been better. That gives Wal-Mart managers like Sprague a unique opportunity. For her, peering into shopping carts is like reading economic tea leaves, yielding anecdotal measures of consumer confidence and a front-line view of precisely how consumers are reining in expenses. Wal-Mart managers are often the first people to sense a recession is coming because they'll notice an increase in items discarded near cash registers, a signal that anxious shoppers are reconsidering purchases. In her store, Sprague has seen another barometer of spending discipline: an increase in the number shoppers carrying grocery lists, many of which get dropped along the aisles. "Yesterday I picked up four of them," she says while walking toward the meat department. Even when they reach the registers, customers remain nervous about money. They've become far more likely to shop on paydays, so Sprague recently rejiggered the work schedule to bring in extra cashiers on the 1st and 15th of each month. Cashiers are now constantly hitting the subtotal key (to help customers see a running tally as they scan items) and voiding items to get the final bill under a certain dollar amount. "[Customers are] making buying decisions at the register after [they've] already shopped off a list," Sprague says. While managers like Sprague watch national data for signs the economy is bottoming out, they're also watching in-store indicators of consumer confidence. Frieson, the senior VP, says a rebound in sales of adult apparel and jewelry will signal to him that the economy is turning up. He's also tracking the percentage of sales that come from groceries versus general merchandise; when more than 40 percent of revenue in a store like Westminster's is coming from groceries, it's a sign people are buying only essentials. "Look in the carts—the carts really tell the story," Frieson says.

 

In Slumping Economy, a Shift in Shopping Habits PACO UNDERHILL, author, "Why We Buy": We cannot sustain the juggernaut of consumption that we have had here in the United States over the past decade. PAUL SOLMAN: But you want us to be spending as much, don't you? PACO UNDERHILL: I want you to be spending what you can afford. We have Americans out there whose credit card debt exceeds their annual income. We have an entire generation of Americans with little or no fiscal discipline or financial knowledge. Our houses are too big. Our cars are too big. Our debts are too big. Our bellies are too big. Now it's time to go on a diet. PAUL SOLMAN: Do you think that because many of us can't afford to shop as much now, we feel more isolated? PACO UNDERHILL: I think so, yes. And many Americans are deeply frightened. They are frightened because they are facing things that most of them have never thought of in the context of their lifetime. We also know that there is something in our culture called shopping sickness. One of the fundamental issues I think we're trying to discover as consumers is that there are no acquisitions that are transformational. Acquiring that iPod or that tube of lipstick or that Maserati doesn't change us into anyone other than what we were to start out with and that, therefore, our relationship to consumption here has to be more real.

Strategic Economic Outlook

IMF Says Global Recession Is Deepest Since Great Depression The global economy is in the grips of a deepening recession that isn't likely to turn around until sometime next year, the International Monetary Fund said. The IMF, which had been slow to apply the word to the current downturn, also released a new definition of global recession. Overall, the world economy is now expected to contract 1.3% this year -- a sharp reduction from the IMF's January estimate of 0.5% growth for 2009 -- and then grow just 1.9% in 2010, well below the global growth rate before the economic crisis hit. "By any measure," the IMF's twice-yearly World Economic Outlook concluded Wednesday, "this downturn represents by far the deepest global recession since the Great Depression." Treasury Secretary Timothy Geithner said that "only 17 of the 182 economies followed by the IMF are expected to grow faster this year than they did last year. Some 71 -- including 30 of the world's 34 advanced economies -- are expected to shrink." Ahead of a gathering of Group of Seven finance ministers and central bankers this week, as well as the spring meetings of the IMF and the World Bank, the IMF urged global leaders to keep up the momentum that began at the Group of 20 summit this month. The fund is anticipating that G-20 countries will pursue fiscal-stimulus measures totaling about 2% of gross domestic product this year and 1.5% next year, but said that may not be enough. "It is now apparent that the effort will need to be at least sustained, if not increased, in 2010, and countries with fiscal room should stand ready to introduce new stimulus measures as needed to support the recovery," the IMF said. That's likely to be a subject of debate at the G-7 meeting; European leaders thus far are resisting U.S. pressure to pursue additional stimulus measures. Advanced economies, which are expected to contract 3.8% this year and see no growth in 2010, should also continue to pursue rate cuts and unconventional monetary measures to support demand and counter deflationary pressures, the fund said.

 

Three Scenarios for Economy's Path There is no doubt where the economy is now. "By any measure, this downturn represents by far the deepest global recession since the Great Depression," the International Monetary Fund declared Wednesday. But there's more than the usual uncertainty about where it is going. The key is the U.S. Even though its slice of the world economy is smaller than it once was, it's still huge. The U.S. led the world into the abyss, and it will lead the world economy out of it. But how fast and when? The alphabet can help to imagine the possibilities and the path of the economy. There's the letter V: the kind of quick rebound that usually follows a deep recession. Or U: a longer recession and slow recovery. There is L: years of painfully slow growth. And W: a temporary upturn as the economy feels the jolt of fiscal stimulus that quickly wears off. Finally, there's the big D, not the shape but another Great Depression. With history a guide, consider three starkly different scenarios. But the Federal Reserve caused the deep recessions of the 1970s and 1980s when it put its foot on the brake to stop inflation; it ended them when it let up. This time, Fed has its foot to the floor and the economy is still slowing. And so much stock-market and housing wealth has evaporated that a quick turn in consumer spirits seems unlikely. Plus, the repair of the banks remains far from complete, restraining lending. The odds of the V: 15%. If one asked a roomful of economists two years ago to put odds on a repeat of the Great Depression, nearly all would have said zero. In early March, The Wall Street Journal posed the question to about 50 forecasters -- defining depression as a decline in output per person of more than 10%, four times worse than the decline the IMF anticipates. On average, they put odds at one in seven; several put them above one in four. "This is a Depression-sized event," says economic historian Barry Eichengreen of the University of California at Berkeley, citing the global decline in industrial production and world trade. The big difference: In 1929, governments dithered, or worse. In 2009, they've rushed to the rescue. The odds of the big D: 20%. For a decade after its stock market and real-estate bubble burst in 1990, Japan bumped along at an annual growth of just 0.5%. It was dubbed the Lost Decade, and it could happen here. The recession ends but the economy plods along, growing too slowly to bring down unemployment for years. As the IMF observed this week, recoveries following recession caused by financial crises are "typically slower." Those following recessions that occur simultaneously across the globe "have typically been weak." An unfolding depression could scare Congress to act boldly, but the L is less ominous -- and perhaps more likely as a result. There would be months when the economy appeared to be strengthening so the temptation to wait-and-see would be strong. Put the odds of the L at 55%. That adds to 90%. So put 10% odds on the U, less pleasant than the euphoric V but far less painful than a Lost Decade. That's the rough consensus of economic forecasters; it means U.S. unemployment grows for another year and a half. Bottom line: The odds favor a long slog.

 

'I'm Not Dr. Doom. I'm Dr. Realist.'  You think the Obama administration is on the right track with the stimulus packages and Chairman of the Federal Reserve Ben Bernacke pumping money into the system? Yes, I have to give credit to the administration. Within 30 days of coming to power, they did an $800 billion stimulus package, a new program to deal with mortgages and foreclosures, and also a bank plan that, when Treasury Secretary Tim Geithner came with details, made the markets rally sharply.  Again, the glass is only half full because in order to do things with speed, they did not do them perfectly. Each one of these three programs has some flaws. The fiscal stimulus could have been more front-loaded. For the mortgages, eventually you are going to need the reduction of the face-value principal of the mortgages. And on the banks, I believe the PPIP [Public-Private Investment Program] plan can work for banks that are solvent. But . . . after the stress tests, it is going to be obvious that even some of the largest banks are so fundamentally in trouble that you cannot buy their toxic assets. You need to take over these banks on a temporary basis, clean them up and then sell them back to the private sector. How do you feel about the deficit that the Obama administration is building up? In the short term I am supportive of it, because if we didn't have these fiscal deficits, the recession would become a depression. I think we need to stimulate demand in a situation in which every component of aggregate demand is sharply falling -- consumption, residential, inventory, exports. On the other side, I do agree that this is not a free lunch. What is going to fuel the next growth cycle? That is a difficult question because the periods of high growth in the United States in the last 25 years have been characterized by an asset and credit bubble. The real estate bubble of the '80s ended up with pain in the [savings-and-loan] crisis. Then came the tech bubble, which ended up in another crash and led to a recession. And now we have this more generalized housing and credit bubble, which ended up in a big disaster. . . . We have to switch our capital into things that are more productive and more stable in terms of social growth. That is going to be a challenge. And the potential growth rate might fall to a much lower rate.

 

5 rules for post-recovery investing The Great Depression was long enough and painful enough to form the habits of a generation. The members of that generation became dedicated savers, avoiding debt, paying in cash and keeping both eyes focused on the long run. The current downturn, what I call the Great Recession, since it is already the longest recession since World War II, will do the same. In the new world that emerges after the recovery, people will save differently, spend differently, look at debt differently and think about the future differently. Differently how? Well, no one is exactly sure. It's awfully hard to figure out a change like this in the midst of it. But be sure of this: Every company in the global economy that doesn't have its head stuck in the sand is trying to figure out this new world. And for investors, getting it right -- owning shares in the companies that are in tune with this emerging world and avoiding the shares of those that do business as if nothing has changed -- will be the difference between profit and loss in the decade ahead. The Congressional Budget Office predicts the U.S. economy won't return to full-trend growth until 2015. And full-trend growth -- sustainable economic growth without rising inflation -- even then isn't going to be what it was before the global financial crisis. The Federal Reserve, which I'd place among the optimists on this issue, says full-trend growth isn't going to be the 3% annually of the pre-crisis economy but more like 2.5% or even as low as 2%. Harvard University economist Dale Jorgenson, who taught Fed Chairman Ben Bernanke, projects just 1.6% annual growth through 2030. If Jorgenson is anywhere near correct, the Great Recession would make the Great Depression seem like a picnic to many people.

Policies: Taxes, Regulation, Housing, Autos

Tax Fantasies of the Right and Left In thinking about taxes, let's start with a few hard realities: About 20 percent of household income is paid in federal taxes -- income taxes, payroll taxes, excise taxes, corporate taxes. There's no reason that number cannot rise to 23 or 24 percent once the current recession has passed without hurting long-term economic growth. Indeed, we've had that level of taxation before in the United States, as recently as 2000, and many other prosperous and growing economies do, as well. At the same time, it's not a good idea to try to raise all that extra money just from households with annual incomes of more than $250,000. That may have been a winning campaign promise for candidate Obama, but it makes for lousy economic policy. A quick back-of-the-envelope calculation suggests that balancing the budget solely on the backs of those making more than $250,000 a year would almost surely require pushing marginal income tax rates well above 50 percent. That's a level at which taxes begin to discourage people from working and investing. Almost certainly, it is a level that would prompt them to invest significant time and money to find new ways to evade taxes. A lot of liberals make the argument that its okay to soak the rich because the rich have captured nearly all the income growth in the past couple of decades. There's no disputing that income inequality has increased. But it's also important to remember that there is only so much a progressive tax code can do to counteract the market. With the top 10 percent of households already paying 55 percent of the total federal tax bill, we're hitting against that limit. Rather, it's probably time to consider ways of tinkering with the market so that it doesn't produce such unequal outcomes. That might include boosting workers' skills and bargaining power, or breaking up the oligopolies that allow lawyers and investment bankers and hedge-fund managers to earn so much more than everyone else.

So what's the "right" level of taxation?

 

Before Tea, Thank Your Lucky Stars THE link between success and luck is stronger than many people think. Analysis of this connection provides a useful framework for weighing the issues raised around the country at recent “tea parties,” where orators in high dudgeon bemoaned their “crippling” tax burdens. Responding to President Obama’s plan to let the Bush tax cuts for top earners expire in 2010, one protester’s placard read, “Spread your own damn wealth around!”  Other protesters contended that the tax system already strains the vital connection between individual effort and reward and warned that further tax increases might destroy it. But these accusations don’t withstand scrutiny. The current system is much fairer than many people believe, and the president’s proposal will make it both fairer and more efficient. Contrary to what many parents tell their children, talent and hard work are neither necessary nor sufficient for economic success. It helps to be talented and hard-working, of course, yet some people enjoy spectacular success despite having neither attribute. (Lip-synching members of boy bands? Money managers who bet clients’ retirement savings on subprime-mortgage-backed securities?) Far more numerous are talented people who work very hard, only to achieve modest earnings. There are hundreds of them for every skilled, perseverant person who strikes it rich — disparities that often stem from random events. Even in markets where luck plays no role, minuscule differences in performance often translate into enormous differences in salaries. As economists have only begun to realize, pay differences often vastly overstate differences in performance — not only in traditional winner-take-all labor markets like entertainment and sports, but also in more conventional arenas. In law, consulting, investment banking, corporate management and a host of other occupations, the ablest performers are often paid hundreds or even thousands of times as much as others who perform nearly as well. Another important message of recent research is that a person’s salary depends far more on where she is born than on her talent and effort. The president’s proposal is modest: raising the top marginal tax rate from 35 percent to 39.5 percent, its level when Bill Clinton left office and well below the corresponding level in most other industrial countries. There has never been a shortage of talented people willing to work hard for success — even in countries with top rates much higher than 50 percent. And the president’s proposal would not cause such a shortage in 2010. It would, however, promote more efficient provision of public services, in much the same way that contingent fee contracts often promote more efficient provision of services in the private sector. For example, when lawyers are willing to waive fees unless their client wins, wrongfully injured accident victims often gain legal representation they couldn’t otherwise afford. Similarly, when government levies higher tax rates on the wealthy, we can provide public services that the wealthy and others greatly value but that would otherwise be beyond reach. Under such a tax system, the heavier tax bill becomes payable only if we’re lucky enough to end up among life’s biggest winners. Financially successful tax protesters seem blissfully unaware of how incredibly fortunate they are. To borrow from the late Ann Richards and her description of the first President Bush, they were born on third base and thought they’d hit a triple.

 

Akerlof and Shiller: Good Government and Animal Spirits The principal long-term result of the current financial crisis should be improved financial regulation. After the immediate crisis is over, we need to restructure our fragmented system. This process will take years to complete since, if properly done, it should get at the heart of the regulatory structure. This is not as radical as it sounds, for while many observers equate U.S.-style capitalism with unconstrained free markets, the story is more complicated. Americans have long understood that for the economy to work well, government must play an important supporting role. They've also long understood the important role that self-regulatory organizations (SROs), such as trade associations and exchanges, play in cooperation with government regulation. An understanding of animal spirits -- the human psychology and culture at the heart of economic activity -- confirms the need for restoring the role of regulators as guiding hands in a healthy, productive free-enterprise system. History -- including recent history -- shows that without regulation, animal spirits will drive economic activity to extremes. The debate about the proper role of government in the economy goes far back in American history. At the beginning of the 19th century, the Democrats were fiercely opposed to government intervention, while the Whigs thought that the government should provide the backdrop for a healthy capitalism. On the federal level, this would mean support for a bank of the United States and a system of national roads, as part of the "American System" advocated by Henry Clay starting in the 1820s and supported by John Quincy Adams. Andrew Jackson and later Martin van Buren were against such federal government intrusions. Controversy about the proper relationship of the government and the economy has continued since then. The recent economic turmoil has brought back to the table many questions that had been considered settled. People are seeking new answers, urgently. Public antipathy toward regulation supplied the underlying reason for this failure. The U.S. was deep into a new view of capitalism. Americans believed in a no-holds-barred interpretation of the game. We had forgotten the hard-earned lesson of the 1930s: Capitalism can give us real prosperity, but it does so only on a playing field where the government sets the rules and acts as a referee. Contrary to a widespread impression the current situation is not really a crisis of capitalism. Rather we must recognize that capitalism must live within certain rules. And our whole view of the economy, with all of its animal spirits, indicates why the government must set those rules. It may be true that in the classical economic paradigm there is full employment. But with animal spirits, waves of optimism and pessimism cause large-scale changes in aggregate demand. Since wages are determined partly by considerations of fairness, these changes in demand do not translate uniformly into shifts in prices and tend to cause shifts in employment. When demand goes down, unemployment rises. It is the role of the government to mute those changes.

 

Matters of Principal TO stanch the hemorrhage of foreclosures, we don’t need another bailout. What we need is a fix — and the wisdom to see what is in our own self-interest. An avalanche of foreclosures is coming — as many as eight million in the next several years. The plan announced by the White House will not stop foreclosures because it concentrates on reducing interest payments, not reducing principal for those who owe more than their homes are worth. The plan wastes taxpayer money and won’t fix the problem.  For subprime and other non-prime loans, which account for more than half of all foreclosures, the best thing to do for the homeowners and for the bondholders is to write down principal far enough so that each homeowner will have equity in his house and thus an incentive to pay and not default again down the line. This is also best for taxpayers, who now effectively guarantee the securities linked to these mortgages because of the various deals we’ve made to support the banks. For these non-prime mortgages, there is room to make generous principal reductions, without hurting bondholders and without spending a dime of taxpayer money, because the bond markets expect so little out of foreclosures. Typically, a homeowner fights off eviction for 18 months, making no mortgage or tax payments and no repairs. Abandoned homes are often stripped and vandalized. Foreclosure and reselling expenses are so high the subprime bond market trades now as if it expects only 25 percent back on a loan when there is a foreclosure. The taxpayers need not and should not be responsible for making up the difference between the payments due bondholders before a loan is modified, and those due after modification. Why? Because the bondholders and the banks, the ultimate beneficiaries of homeowner payments, will be better off if mortgages are modified correctly and foreclosures stopped. The government “owes” them nothing more than that.

“This Time They Are More Interested”

 

How the U.S. Will Save GM and Chrysler So what is the final rescue plan likely to look like? For starters, it will certainly require that workers accept a wage and benefit package that would bring labor costs down to the levels of Toyota and Honda plants in the United States. In February, the UAW took a big step in that direction by accepting a two-tiered wage structure that cut the pay of new hires roughly in half. But with the government insisting that labor costs come down immediately, unionized workers will have to accept immediate reductions in base pay, along with increased cost sharing for their health insurance. Even that's probably not enough, however. The generous defined-benefit pension plan that UAW workers have always gotten will need to be replaced by company contributions to individual 401(k) plans. And to reduce the tens of billions of dollars that both GM and Chrysler have committed to fund a new retiree health plan, the government is likely to insist that benefits be trimmed and that half of the money come in the form of stock in the new companies. Both companies will also have to lay off tens of thousands of additional employees as they eliminate brands, close more plants and outsource more non-core functions. Chrysler's product line will be reduced to Jeeps, minivans and trucks, along with a new line of passenger cars using Fiat-designed platforms and engines. GM, meanwhile, will be left with its Chevrolet, Cadillac and Buick nameplates, along with GMC trucks. Going through bankruptcy would allow both companies to bypass state laws and dramatically reduce the number of dealerships without having to take the time and bear the expense of buying back the franchises from their owners. Still unresolved, however, will be the tricky question of what to do about the hundreds of thousands of cars now on those dealers' lots. The worst outcome would be to force the dealers to dump them on an already depressed market at deep discounts. The toughest negotiations will be with the GM bondholders and Chrysler bankers, who have already been told by Rattner & Co. that nearly all of what they get will be in the form of stock in the new company, rather than cash (which they don't have) or new debt (which the Treasury is eager to minimize). The only question now is how much of the new companies they will own. Given the amount of money it is likely to put into the automakers, the government will be entitled to more than half of the stock of the reorganized companies. Then there is the union's health fund, which will probably be entitled to stakes of 20 to 25 percent, reflecting not only the reduced cash payments it will receive but also all the other concessions made by active and retired workers. At Chrysler, there's also the matter of Fiat's contribution of technology and management services, which it offered for a 20 percent share. That leaves only about 10 to 15 percent of each company. Bankers and bondholders will kick and scream and call it unfair, but in the end they'll take it because, like everyone else in this adventure, they'll conclude that it's better than the alternative. And that's the way GM and Chrysler will be saved.

Long-term Strategic Policy

Why Obama Is Leaving the Reagan Era Behind When It Comes to Economic Policy Reagan's economic legacy didn't end there, though. Economists generally agree that the sky-high tax rates of the 1970s needed to come down, and that Reagan's policies helped lay the foundation for the economic boom that followed, including the 18 million jobs created during his presidency. But because Reagan never made any real effort to cut spending in his second term and kept his tax cuts in place, his policies also had some decidedly negative consequences. "Reagan's fiscal policy was certainly a stimulus to the economy, and if that stimulus had been removed after the economy got back to full employment, then I would have found very little to criticize," says Benjamin Friedman, an economist at Harvard who was an outspoken critic of Reagan in the 1980s. "When the economy is at less than full employment, government deficits are a good idea. That's why they're a good idea now. What's a bad idea is keeping the government in significant deficit when the economy has recovered." Deep red. But keeping the government in deficit is exactly what Reagan did. Despite his years of lip service to balancing the budget, total discretionary spending had climbed almost 16 percent by the time he left office, dwarfing the Carter budgets he had once criticized. Revenues, limited by Reagan's tax cuts, were never able to keep pace. The result was a spiraling national debt that nearly tripled during his two terms, hitting $2.7 trillion.Some of Reagan's aides, including William Niskanen, the former chairman of Reagan's council of economic advisers, believe there is a simple explanation for these growing deficits: Reagan's tax cuts simply did not do what supply-side economists said they would do. Because the cuts didn't substantively increase tax revenues, they didn't allow Reagan to shrink the deficit. They also didn't decrease the size of government by choking off spending. "The 'starving the beast' hypothesis is understandably popular among politicians--that you can have tax cuts without a deficit increase--but it's just empirically wrong," says Niskanen, now chairman emeritus of the Cato Institute. "That idea has destroyed for several decades the traditional Republican commitment to fiscal responsibility."This, many historians believe, may be Reagan's real legacy. "The combination of military spending, tax cuts, and ultimately a failure to control most domestic spending led to a fiscal straitjacket by the end of the decade," says Zelizer.

 

Obama asks for ideas on curbing federal spending Think you can do better than your federal boss? President Barack Obama wants to know how. Obama on Saturday announced a plan for federal workers to propose ways to improve their agencies' and departments' budgets. The president said employees' ideas would be key as his Cabinet officials cut millions from the federal budget and trim the deficit. "After all, Americans across the country know that the best ideas often come from workers, not just management," Obama said in his weekly radio and Internet address. "That's why we'll establish a process through which every government worker can submit their ideas for how their agency can save money and perform better. We'll put the suggestions that work into practice." Obama's pitch comes at the end of a week focused on federal spending. On Friday, Democrats in Congress neared a deal on Obama's budget proposal and inched closer to passing a bill that would result in some $500 billion in deficits. To confront that perception, Obama earlier in the week ordered officials to identify $100 million in savings to achieve over time — a relative pittance against the broader plan, his aides later acknowledged.

 

Only 1 way out of big economic hole Check 'em off. President Obama's first 100 days: done. Now get ready for the hard part: the next 1,000 or so days. That's about how long the United States and the rest of the world have to turn the anemic economic growth that now seems likely into the kind of strong economic growth we need to pay down the huge pile of debt we've created in our efforts to stave off a global financial meltdown. Without growth higher than is now projected, the burdens of this crisis will linger for a generation in the form of lower living standards and higher interest rates, taxes and inflation. And, unfortunately, the world's economic experts know even less about creating stronger growth -- without creating a bubble -- than they do about fixing a global credit crunch and a deep recession. It's not that stopping the global financial crisis was easy. Or that the world banking system is fixed and the world economy is on the road to a turnaround. Despite considerable progress, it remains very much a work in progress. It's just that the next part is even harder. Most of the world's economies -- the United States', the United Kingdom's and Japan's, in particular -- have dug themselves very, very deep holes in an effort to end the economic and financial crises. Strong economic growth, for a decade or so, offers the only comfortable way out of the hole. Alternatives such as runaway inflation or Draconian cuts in living standards have major, what shall we say, disadvantages. But all the signs point to what amounts to only anemic economic growth at best. The world economy, according to projections by the International Monetary Fund, will contract 1.3% this year and grow just 1.9% in 2010. Unemployment in the major world economies won't peak until near the end of 2010, the organization projects. And the longer-term news for growth is just as depressing: The U.S. economy, for example, won't return to its full potential growth until 2015, according to the Congressional Budget Office. To the degree that economists agree on how to create faster but sustainable growth, they recommend:

  • Eliminating or reducing inefficiencies and bottlenecks in the economy. In the U.S., those efforts would include things as different as improving the efficiency of the road-and-rail infrastructure and reducing the paperwork and record-keeping expenses in the health care system.
  • Improving the quality and productivity of the work force. In the short run, the next three to five years, that means financing training programs to enable workers to gain new skills or improve those they already have. In the longer run, it means improving the education system so that more kids stay in school and actually learn the skills they need for the 21st-century economy.
  • Making investment capital cheaper and more readily available to high-risk but potentially high-reward companies that are creating industries or revitalizing existing ones.

To its credit, the White House understands the need to create faster growth in any recovery.

History Review and Readings: Prior Posts

Economic Warning and Outlooks

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You, Economics and the Elections , The Coming Economic Crisis

Economic Crisis in a Nuts Shell: Jump Out of the Window ?

Understanding Economics: Introduction to Macroeconomics & Businss Cycles

WRFest 2Mar08(Policy): More Economics - Realities vs Rhetorics

Readings (Economy): It Really is the Economy, Stupid Frog

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This is a Rescue, Not A Bailout: And It's Your Life

Marketing Elephant Pills: Struggling to Explain the Rescue

Calm Down: the Fat Lady Ain't Sung, Yet

Wobble Wheels Wakeup: Crisis, Response, Policy, Execution

Economic Policy: Requirements, Politics & Policies

Populist Panderings, the Candidates and Real Solutions

First Things: Financial Crisis, Economy and Barry

Miracles on Pennsylvannia Ave: Make it So, No. 1 !

To Boldly Go Where We Must: Speech, Budget and Dr. Noes

Back in the US: Economic Realities vs Partisan Posturings

Re-building On A Rock: Policy, Economy & Values

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