Category: News and politics

The impact of language on understanding: two small examples

The morning Post is often the catalyst for my blogs. This morning’s edition provoked the following two comments.

According to the Post, in an article reviewing a speech by the justly highly respected Secretary of Defense, “President Obama has pledged to reduce projected spending on national security by $400 billion over the next 12 years, the ‘preponderance of which would come from the Department of Defense,’ Gates said.

That’s on top of $78 billion in long-term spending reductions that the defense secretary announced earlier this year, as well as $100 billion that he said would be cut from wasteful or inefficient programs and reallocated for new weapons and other purposes.”[1]

In the very next sentence the Post says: “All told, the cuts would leave the Pentagon with flat budgets — increasing just below the rate of inflation — until at least 2024.”[2] What does this mean? It means that on the basis of the proposed “cuts” defense spending would increase every year for the next twelve years at a rate slightly below the assumed inflation rate over that period, i.e. real spending would fall slightly. The $478 billion cut in spending over that same period, refers to cuts from currently budgeted or assumed increases over that period. Readers need to pay close attention to understand the meaning of such numbers.

Another article in today’s Post reports on a survey of public attitudes about raising the debt ceiling of the Federal government. The survey finds that more people are concerned about the dangers of raising the debt ceiling than of defaulting on the debt (77% to 73%).[3]  This is strange. The reason they worry about raising the debt ceiling is that it could lead to an even larger federal debt over time. The only reason to worry about that (aside from legitimate concerns about the negative effect on the economy of larger government expenditures, which, of course, could be paid for with tax revenue without an increase the debt) is that if the debt gets too large the government might default. So how is it that people worry more about something that might lead to default than they do about default itself?????

Trying to imagine the consequence of the U.S. government defaulting on its debt is rather like trying to imagine the affect of all out nuclear war. It is unimaginable. A short, temporary default (a failure to pay interest on and repay maturing debt for a few weeks) might not be catastrophic, but it would certainly destroy the high confidence the world now has in owning U.S. debt and would add a significant risk premium to any subsequent U.S. government borrowing. But a longer default would not only lock the U.S. out of domestic and international capital markets (no more borrowing), but would also destroy the dollar’s international reserve currency status (over half of dollar bank notes are held abroad) instantly, and bankrupt thousands of banks and other firms holding U.S. debt. The knock on effects to the world economy (of which we are very much a part) truly are beyond the world’s experience and beyond imagining.

The Rule of Law

The idea that government exists to serve the interests of the people rather than the other way around is modern. It underlies the attitude that Americans and the citizens of other democracies have toward their governments. The essence of this idea and of democracy is not that rulers are chosen by the people; it is that however they are chosen their rule—their powers—are limited by law. The rule of law and the limits it places on the power of the state to interfere with our lives is the essential foundation of our liberties, not voting.

Government involvement in the provision of a service or product is a game changer. There is a centrifugal force that draws private players, “special interests,” into influencing outcomes by influencing politicians and government bureaucrats rather than by competing with better services or products in the market place. This centrifugal force must be continually resisted by limiting what government gets involved in and by insisting on the rule of law. Failure to do so creates a government that looks and behaves more and more like, well, like what we are seeing. America has been exceptional in its success and in its attitudes toward the liberty on which it rests. This exceptionalism is worth fighting (continuously) to preserve.

Richard Lowry & Ramesh Ponnuru explain American exceptionalism as follows:

“It was, to simplify, the most individualistic elements of En­glish society — basically, dissenting low-church Protestants — who came to the eastern seaboard of North America…. America was blessedly unencumbered by an ancien régime. Compared with Europe, it had no church hierarchy, no aristocracy, no entrenched economic interests, no ingrained distaste for commercial activity. It almost entirely lacked the hallmarks of a traditional post-feudal agrarian society. It was as close as you could get to John Locke’s state of nature…. All of this made Amer­ica an outlier compared with England, which was an outlier compared with Europe.

“The late Seymour Martin Lipset defined [the American creed] as liberty, equality (of opportunity and respect), individualism, populism, and laissez-faire economics…. Liberty is the most important element of the creed. To secure it, the Founders set about strictly limiting government within carefully specified bounds.”[1]

War always weakens liberty. When forced, people usually chose security over liberty. A never-ending “War on Terror,” if permitted to continue for too long, threatens to significantly undermine the liberty we are trying to defend. The growing importance of our military might, and the industrial and political interests that feed and support it—the military-industrial complex—will ultimately destroy our exceptionalism. We have been saved so far by our deep tradition of limited use of our military might, our exceptionally capably, honorable, and professional military officers, and the civilian control of their activities. I have written about this theme before: “Eisenhower’s farewell address 50- years later”, “When Values Clash”, “Keep it lean”.

But when our security is threatened we can be tempted to set our principles of respect for human dignity aside. The willingness of some short-sighted individuals to contemplate torture as a tool of warfare in such times illustrates this danger. A number of good articles have been written on this issue. One of the best was by Aryeh Neier: “Enhanced to the point of torture”. Other excellent discussions include: “The Torture Debate”, “Torture is immoral and doesn’t work”, and “Gitmo and us”.

The entertaining Robert Redford movie “The Conspirator,” is a dramatic illustration of the dangers and folly of setting aside the rule of law for what a ruler believes is the interest of the country. The movie depicts (whether historically accurate or not I do not know) the overriding of the important principle of the due process in the “interest” of national healing after the assassination of Abraham Lincoln. I recommend the movie.

Almost everything about government is a slippery slope that can only be prevented by continually challenging the entry and expansion of government into new areas and activities. Some times with proper limits and controls they are justified. More often they are not.

[1] Richard Lowry & Ramesh Ponnuru, “An Exception Debate” National Review Online, May 16, 2010.

Thinking about the Public Debt

The U.S. Federal Government spent $1.7 trillion dollars last year more than its tax revenue. It had to borrow that amount. This increased the outstanding public debt of the Federal government to 14.2 trillion dollars or 96 percent of GDP. This includes that part owned by the Social Security trust fund and the Federal Reserve but does not include the unfunded liabilities of Medicare, Medicaid and Social Security, which will add an additional $46 trillion to the deficit in present value terms over the next 75 years.

This year’s federal deficit is expected to be 1.4 trillion. Interest payments on this debt are forecast to be $287 billion this year (almost 8% of total outlays) and are expected to grow to three or four times that over the next decade as the stock of debt grows and interest rates rise.

This is not sustainable. Without spending cuts and/or tax increases this amount will not only continue growing without end but will increase as a share of GDP until bond holders are no longer willing to trust the government’s ability to pay the interest required. At that point they will dump U.S. Treasuries and the U.S. will be forced to default. Standard & Poors has already downgraded its “credit outlook” for the U.S. to negative.

All of this is by now well-known as is the fact that there is no longer any choice about the need to cut spending and/or raise taxes. But that is just the beginning of the search for responsible and effective governance by our representatives here in Washington. It makes a big difference which expenditures are cut and which taxes are raised. The deficit will fall and our ability to finance it will increase with the growth of our output/income. Specific spending cuts and tax increases effect income growth differently.

The job of our political representatives is to determine what the government should be doing within the set of things it is permitted to do by the Constitution and the resources the public wishes to make available. Their job is to carefully and wisely set priorities on the use of the limited resources available to them.

David Ignatius provides one of many examples that I strongly agree with: “Today, the United States is allocating about $110 billion annually for the Afghan war, about $3.2 billion for military and economic aid to Pakistan, and about $0.15 billion in special assistance to help Egypt’s democratic revolution. In terms of U.S. national interests, those spending levels don’t make sense. The pyramid is upside down.”[1]

The budget for the Defense Department in 2010, including our several wars, was $664 billion while the State Department (including all foreign aid) was $52 billion.  We have the best fighting machine the world has ever seen and rather mediocre diplomatic capabilities. Better and more extensive use of diplomacy and less use of drones and lesser-guided bombs can often produce better results (improved security for the U.S.). Spending more to develop well-trained (history, culture, language) Foreign Service officers and less to manufacture more munitions might be a good idea. It is hard to imagine that spending less on DOD and more on DOS wouldn’t improve our security for less money.

All spending should pass a strict cost benefit analysis but setting a cap on total spending relative to GDP (e.g., 18 or 19 percent) would be a useful disciplining tool for forcing more careful prioritization. So we must cut deeply but not evenly. We can and should spend less and get more benefit by better prioritizing what is really important to our safety and quality of life. This will not be an easy debate.

The same must be said for taxes. Not all taxes have the same effect on the economic growth that lifts our standard of living and makes a given debt easer to service. And not all taxes are equally fair.  So while the revenue generated by taxes should match the level of government spending over the business cycle, how that revenue is raised is as important as how it is spent.

The primary standards for judging tax systems are neutrality and fairness. Neutrality means that the tax does not distort business and spending decisions so that the allocation of investment and economic resources are not distorted. A neutral tax damages economic growth less than, say, a tax that falls largely on investments. A neutral income tax, for example, treats all sources of income the same.

If tax revenue is raised in ways that do not discourage economic growth, income growth itself will increase tax revenue and reduce a given debt as a share of national income (an indicator of the government’s ability to services it). The arguments in favor of the most neutral possible tax structures are well-known and broadly accepted by economists across the political spectrum. The tax base (whether income or consumption) should be comprehensive making the marginal tax rate as low as possible.

Business income taxation double taxes the same income (by the business and again by the shareholders as individuals) and introduces wasteful and risky corporate behavior in their effort to minimize the tax. Everyone agrees that the corporate profits tax in the U.S. should be lowered more in line with the rates in other countries, but in fact the corporate tax should be abolished. It raises only modest revenue and causes great damage. I favor complete reliance on a flat comprehensive consumption tax (VAT) because it does not tax saving and thus encourages more investment and growth, is simpler to collect and is fairer. [2]

There is less agreement about what is fair. Everyone agrees that the rich should pay more taxes than the poor but how much more. Actually, under the existing tax code those with incomes in the top 1 per cent paid 40 per cent of all income tax revenue in 2006 and earned only 22 per cent of all income, the top 10 per cent paid 71 per cent and the bottom 50 per cent less than 3 per cent.

President Obama thinks that this is not progressive enough and wants to tax high income families even more and the Republicans think it is already too progressive both in terms of fairness and in discouraging investment that promotes faster growth.

A “flat” income tax, the same marginal tax rate for everyone with incomes large enough to pay taxes at all, is the most neutral rate structure when applied to a comprehensive income (or consumption) base. But it is also a good benchmark for discussing fairness. A flat rate means basically that someone with twice the income pays twice as much tax. I consider that fair, but of course our existing rate structure increases with income so that tax payments would more than double when income doubles. Increasing marginal rates is a rather open field. Where should you stop? Clearly our tax system needs to be made more neutral and more fair. The debate over how to do that will not be easy either.

[1] “Time to up the ante on Egypt”, The Washington Post, April 20, 2011, A17.

[2] Warren Coats, “U.S. Federal Tax Policy” , Cayman Financial Review, July 7, 2009

Libya: Further down the slippery slope

It is not easy to find the right balance between our relationships with sometimes repressive and always undemocratic (in the narrow sense of voting) regimes in the Middle East and the dissidents among their citizens who criticize them. But statecraft and diplomacy are the right tools not military force (e.g. drones). Defense Secretary Gates said as much when cautioning against imposing a no fly zone in Libya a week before we under took them. Now the pundits are chattering that we have not done enough. Gaddafi is still there. President Obama is inarticulately and ineffectively trying to resist further sliding down the slippery slope to another messy engagement with another Muslim country. But the odds are against him. When will we ever learn, when will we ever learn.

The Washington Post published two thoughtful op-eds on the subject today that are well worth reading.  The first by Michael Chertoff and Michael V. Hayden is called: “What happens after Gaddafi is removed”. The other by Sarah Sewall and Anthony Zinni is called: “The military interventions we don’t plan for–those to protect civilians”

China

I arrived today in Nanjing China for a “High-Level Seminar on the International Monetary System” organized by the G-20. The one-day seminar tomorrow will be opened by Vice Premier of the People’s Republic of China Wang Qishan and French President Nicolas Sarkozy. As one of the (relatively large number of) “lead speakers” I will discuss an enhanced role for the IMF’s SDR in the International Monetary System. The session I will speak in is:

Global liquidity management issues (including global financial safety nets and the role of the SDR):

Chair: Christian Noyer (Governor of the Bank of France)

Moderator: George Osborne (Minister of Finance of the United Kingdom)

Lead speakers: Alexei Kudrin (Minister of Finance of Russia), Yung Chul-Park (Seoul University), Olli Rehn (European Commissioner for Economic and Monetary Affairs), Hélène Rey (London Business School), Elena Salgado (Minister of Finance of Spain), Wang Jianye (Exim Bank chief economist), Kim Choong-Soo (Governor of the Bank of Korea), Jim O’Neill (Chairman of Goldman Sachs Asset Management), Obaid Al Tayer (Minister of State for Financial Affairs of UAE), Volker Wieland (Goethe University Frankfurt), Martin Crisanto EBE MBA (Minister of Finance of Equatorial Guinea), Warren Coats (Chicago economist and former IMF official).

Other speakers during the day include Dominique Strauss-Kahn, the Managing Director of the IMF, Timothy Geithner (US Secretary of the Treasury), Robert Mundell (Columbia University), Jean-Claude Trichet (President of the ECB—European Central Bank). I will try hard to sleep tonight in my new time zone and to stay awake tomorrow.

China is amazing. Nanjing is only the third Chinese city I have visited and I will not really see it until after the conference which is being held at a lake resort in the countryside outside of Nanjing (The Purple Palace). It was the capital of the Ming and several other Dynasties and with many interesting things to see. Driving through Nanjing this evening I could have been in LA on the freeway system or in Boston in the long tunnels under the city (though the quality of construction is better here in China). The skyline is beautiful with every effective use of lighting. They even apply capitalist pricing to the highways (toll roads), which are magnificent. Beijing, which I have seen more fully, is typical of a number of major cities in China, of which Shanghai is the most famous, in their impressive, modern buildings and infrastructure. I have described Beijing as what New York City might look like if it were modern (i.e., not old and run down). To be fair to NYC, its charm and attraction is not (any longer) its buildings but its vibrant and very diverse cultural life. I am not able top judge that aspect of life in China’s major cities.

Walking through Beijing Capital International airport for my connecting flight to Nanjing, it was like any other modern international airport (Terminal 5 of Heathrow, Dubai International, etc). Well organized, efficient, clean and full of familiar shops. Very unlike the old, deteriorating, and unattractive terminals at JFK.

Chinese people strike me as more like us than most any other people (including Europeans) I have met. And who do I mean by “us?” I don’t mean Anglo Saxons like myself. I mean the hard working, innovative, entrepreneur types who are creating most of the wealth in this country like Google founders, Larry Page (American born Jew) and Sergey Brin (Russian born Jew), or Steve Jobs, who was born in San Francisco to a Syrian father and German-American mother, and, of course, also includes many Anglo Saxons like myself.

China’s dramatic growth over the past 30 years resulted from the Chinese government gradually freeing the economy from the bottom up, starting with agriculture. The state got out of the way and let individuals make profits if they could. And the Chinese proved to be very entrepreneurial. They are willing to work very hard and innovatively to make money. China’s real output has grown more than 10 percent per year on average since these reforms began and it came almost totally from the rapid growth of the private sector, largely individuals and very small firms that grew larger in the space the government allowed. What the government has done is provide the infrastructure (road, power, etc) that has allowed private entrepreneurs to get their products to market efficiently. They excel in every society they live in.

The Chinese (English language) newspaper given to me on the plane earlier today had an amazing article about problems with illegal immigrants coming to China from Africa, the Middle East and elsewhere for better jobs and pay and more opportunity than then can get at home. I found that amazing. The good thing about people working hard to get ahead is that it is not a zero sum game. They add to overall wealth and everyone gains.

Another Long War?

Today’s headlines are: LONG ROAD AHEAD Top French Official: Intervention Could Last ’Awhile’.. Gaddafi Vows ’Long War’

Two days ago I posted the following blog: https://wcoats.wordpress.com/2011/03/19/a-new-war/ reproduced below:

“So the next war has started. At least we are not acting alone, though we seemed to have followed more than lead. Try to remember the emotions that led us into it. Natural sympathy for the rebels/insurgents/freedom fighters—for the under dogs is one of the reasons. And disgust for the mad man Gaddafi is another. And of courage there is the American testosterone charged swagger that we can squash the villain so why not.  Hold those thoughts, as it seems to you now looking forward with only a few bombs dropped so far. Try to remember it six months from now, two years from now, five years from now (We have been fighting in Afghanistan for over nine years and have been in Iraq for seven).

“Looking back it will seem very different. We will know by then who the new guys are and whether they are better or worse than Gaddafi. We will not know whether we were right to side with the Sunnis or the Shias (which ever it turns out to be). Some of us will say that it was not wise to take sides in this great intra Muslim struggle. We will have poured more billions into someone else’s economy at a time when we MUST cut back our government’s spending of money it doesn’t have thus forcing us to cut domestic spending even more than otherwise.

“I have no idea how this will go (which is one of the compelling reasons why we are being very fooling to undertake it), but I do know that it will all look very different looking back.”

It is instructive to compare events in Egypt with those in Libya. Egypt has a significant middle class and a significant and deepening civil society. The prospects for Egyptian democracy are hopeful following its homegrown protests that started less than two months ago and resulted in the ouster of long ruling President Mubarak. Yet these events took decades to mature and even in Egypt the final outcome remains uncertain. Egyptian protesters where united in their demands for Mubarak’s ouster. But then what? Many different visions of his replacement and of the future regime are in conflict with each other. The Economist printed an excellent brief on the struggles between different interests now under way in Egypt. “The Arab Uprisings: Democracy’s Hard Spring” March 10, 2011. But Egypt has a foundation from which to build and the outcome is hopeful. Libya will look more like Afghanistan and Iraq. It only took us a few months to forget the hard lessons of Iraq.

Two weeks ago I feared that we might do this. You can review my earlier warnings at my blog: “Libya and the drums of war” March 10; “More on Libya” March 12; and “Libya: Let’s not make it our war” March 13, 2011.

A New War

So the next war has started. At least we are not acting alone, though we seemed to have followed more than lead. Try to remember the emotions that led us into it. Natural sympathy for the rebels/insurgents/freedom fighters—for the under dogs is one of the reasons. And disgust for the mad man Qaddafi is another. And of courage there is the American testosterone charged swagger that we can squash the villain so why not.  Hold those thoughts, as it seems to you now looking forward with only a few bombs dropped so far. Try to remember it six months from now, two years from now, five years from now (We have been fighting in Afghanistan for over nine years and have been in Iraq for seven).

Looking back it will seem very different. We will know by then who the new guys are and whether they are better or worse than Qaddafi. We will not know whether we were right to side with the Sunnis or the Shias (which ever it turns out to be). Some of us will say that it was not wise to take sides in this great intra Muslim struggle. We will have pored more billions into someone else’s economy at a time when we MUST cut back our government’s spending of money it doesn’t have thus forcing us to cut domestic spending even more than otherwise.

I have no idea how this will go (which is one of the compelling reasons why we are being very fooling to undertake it), but I do know that it will all look very different looking back.

Libya: Let’s not make it our war

More voices are being raised to urge caution before sliding into yet another war. General Wesley K Clark’s reflections deserve careful reading and reflection, before the old cold warriors, still looking for new causes, seduce an empathetic public and their representatives into another economically and politically draining war. “Libya doesn’t meet the test for U.S. military action”

What we do need to do is redouble our support (directly to the extent it is accepted and via international organizations) to the new governments of Arab countries to build and strengthen institutions that support the rule of law, the rights of individuals, a free press, and other checks and balances on the exercise of political power. We should encourage the development of the legal framework and institutions that promote entrepreneurship, justice, and tolerance of religious and other differences. The Arab Spring can be the beginning of a positive transformation of a backward part of the world or another false start. It is not up to us, but we can contribute to a more promising outcome if we choose to.

More on Libya

Here are some sensible thoughts from my friend Steve Clemons

Dear Friends and Colleagues:

There is a big rush by some to impose a no-fly zone over Libya.  Bill Clinton’s voice has joined others like Senators John McCain, John Kerry, and Joseph Lieberman as well as former New Mexico Governor Bill Richardson in calling for NATO and the US to impose a no fly zone.

I think this is a mistake — and is more of an emotional impulse than one that really helps the Opposition in Libya.  The blowback costs could be huge — and there are other options, perhaps much better ones, to try and help those trying to rid themselves of Moammer Gaddafi’s rule.

My thoughts are here:

http://www.thewashingtonnote.com/archives/2011/03/no-fly_zone_ove/
No-Fly Zone Over Libya Could Backfire & Undermine Protests in Middle East

All best,

Steve Clemons

Libya and the Drums of War

Once again the drums of war are beating. President Obama has said that “President Gaddafi must go” with no obvious plan for removing him. Indeed, we would all like to see him go and it would be painful to watch him attach his own citizens. But many distasteful things happen in life that we can do nothing about or choice to do nothing about for reasons of prudence. We are not (yet) at war with Libya. Libya has not attacked us or our interests. We would be extraordinarily foolish to attack Libya.

We should support the principles our nation was founded upon and operates under. These include “that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.” We should support in appropriate ways those in the world, including Libya, who share these values. This does not include war or measures that would suck us down a slippery slope to war.

Two recent Washington Post articles sound the right warnings and ask the right questions. They are well worth reading: Anne Applebaum “The Arab World Isn’t Clamoring for Our Help” and George Will “Then What?”