America's last 10 years might be called “The Decade the Locusts Ate.’’ A nation that started with a credible claim to lead a second American century lost its way after the terrorist attacks of September 11, 2001. Whether the nation will continue on a path of decline, or, alternatively, find our way to recovery and renewal, is uncertain.
The nation began the decade with a growing fiscal surplus and ended with a deficit so uncontrolled that its AAA credit rating was downgraded for the first time in its history. Ten years on, Americans’ confidence in our country and the promise of the American Dream is lower than at any point in memory. The indispensable superpower that entered the decade as the most respected nation in the world has seen its standing plummet. Seven out of every 10 Americans say that the United States is worse off today than it was a decade ago. While many of the factors that contributed to these developments were evident before 9/11, this unprecedented reversal pivots on that tragic day - and the choices made in response to it. Those choices had costs: the inescapable costs of the attack, the chosen costs, and the opportunity costs.
Inescapable costs of 9/11 must be counted first in the 3,000 innocent lives extinguished that morning. In addition, the collapse of the World Trade Center and part of the Pentagon destroyed $30 billion of property. The Dow plunged, erasing $1.2 trillion in value. Psychologically, the assault punctured the “security bubble’’ in which most Americans imagined they lived securely. Today, 80 percent of Americans expect another major terrorist attack on the homeland in the next decade.
Were this the sum of the matter, 9/11 would stand as a day of infamy, but not as an historic turning point. Huge as these directs costs are, they pale in comparison to costs of choices the United States made in response to 9/11: about how to defend America; where to fight Al Qaeda; whether to attack Iraq (or Iran or North Korea) on grounds that they had chemical or biological weapons that could be transferred to Al Qaeda; and whether to pay for these choices by taxing the current generation, or borrowing from China and other lenders, leaving the bills to the next generation.
Unquestionably, much of what was done to protect citizens at home and to fight Al Qaeda abroad has made America safer. It is no accident that the United States has not suffered further megaterrorist attacks. The remarkable intelligence and Special Forces capabilities demonstrated in the operation that killed Osama bin Laden suggest how far we have come.
But the central storyline of the decade focuses on two choices made by President George W. Bush - his decision to go to war with Iraq and his commitment to cut taxes, especially for wealthy Americans, and thus not to pay for the wars in Iraq and Afghanistan.
The cost of his decision to go to war with Iraq is measured in 4,478 American deaths, 40,000 Americans gravely wounded, and a monetary cost of $2 trillion.
Bush justified his decision to attack Iraq on the grounds that Saddam Hussein might arm terrorists with weapons of mass destruction, arguing that “19 hijackers armed by Saddam Hussein…could bring a day of horror like none we have ever known.’’ In retrospect, even Bush supporters agree that we went to war on false premises—since we now know that Saddam had no chemical or biological weapons.
Suppose, however, that chemical weapons had been found in Iraq. Would that have made Bush’s choice a wise decision? What about the many other states that had chemical or biological weapons that could have been transferred to Al Qaeda, for example Libya, or Syria, or Iran? What about the state that unquestionably had an advanced nuclear weapons program, North Korea, which took advantage of the US preoccupation with Iraq to develop an arsenal of nuclear weapons and conduct its first nuclear weapons test?
As for cutting taxes for the wealthy, Bush’s decision left the nation with a widening gap between government revenues and its expenditures. Brute facts are hard to ignore: having entered office with a budgetary surplus that the CBO projected would total $3.5 trillion through 2008, Bush left office with an annual deficit of over $1 trillion that the CBO projected would grow to $3 trillion over the next decade.
Finally, and most difficult to assess, are opportunity costs, what could be Robert Frost’s “road not taken.’’ In the immediate aftermath of 9/11, the United States was the object of overwhelming international sympathy and solidarity. The leading French newspaper declared: “We are all Americans.’’ Citizens united behind their commander in chief, giving him license to do virtually anything he could plausibly argue would defend us against future attacks.
This rare combination of readiness to sacrifice at home plus solidarity abroad sparked imagination. Would Americans have willingly paid a “terrorist tax’’ on gas that could kick what Bush rightly called America’s “oil addiction’’? Could an international campaign against nuclear terrorism or megaterrorism have bent trend lines that leave Americans and the world increasingly vulnerable to future biological or nuclear terrorist attacks? What impact could $2 trillion invested in new technologies have had on American competitiveness?
That such a decade leaves Americans increasingly pessimistic about ourselves and our future is not surprising. American history, however, is a story of recurring, impending catastrophes from which there is no apparent escape—followed by miraculous recoveries. At one of our darkest hours in 1776 when defeat at the hands of the British occupying Boston seemed almost certain, the general commanding American forces, George Washington, observed: “Perseverance and spirit have done wonders in all ages.’’
President Obama should take a page from Ronald Reagan’s playbook in winning the final inning of the Cold War. Obama can challenge President Mahmoud Ahmadinejad to put his enriched uranium where his mouth is—by stopping all Iranian enrichment of uranium beyond the 5 percent level.
A quarter-century ago, Soviet leader Mikhail Gorbachev was touting a new “glasnost”: openness. President Reagan went to Berlin and called on Gorbachev to “tear down this wall.” Two years later, the Berlin Wall came tumbling down and, shortly thereafter, the Soviet “evil empire” fell as well.
While in New York for the opening of the UN General Assembly in September, Ahmadinejad on three occasions made an unambiguous offer: He said Iran would stop all enrichment of uranium beyond the levels used in civilian power plants—if his country is able to buy specialized fuel enriched at 20 percent, for use in its research reactor that produces medical isotopes to treat cancer patients.
Obama should seize this proposal and send negotiators straightaway to hammer out specifics. Iran has been enriching uranium since 2006, and it has accumulated a stockpile of uranium enriched at up to 5 percent, sufficient after further enrichment for several nuclear bombs. Iran is also producing 20 percent material every day, and it announced in June that it planned to triple its output. Halting Iran’s current production of 20 percent material and its projected growth would be significant.
A stockpile of uranium enriched at 20 percent shrinks the potential timeline for breaking out to bomb material from months to weeks. In effect, having uranium enriched at 20 percent takes Iran 90 yards along the football field to bomb-grade material. Pushing it back below 5 percent would effectively move Tehran back to the 30-yard line - much farther from the goal of bomb-grade material. Even more important, extracting from Iran a commitment to a bright red line capping enrichment at 5 percent would stop the Islamic Republic from advancing on its current path to 60 percent enrichment and then 90 percent.
Stopping Iran from enriching beyond 5 percent is not, in itself, a “solution” to its nuclear threat. Nor was Reagan’s proposal to Gorbachev. The question for Reagan was whether we would be better off with the Berlin Wall or without it.
Iran today is the most sanctioned member of the United Nations; it has been the target of five Security Council resolutions since 2006 demanding that it suspend all uranium enrichment. The United States and Europe have organized their own, tougher economic sanctions forbidding businesses from trading with Iranian companies and limiting Iran’s access to financial markets.
But Iran does not require the permission of the United Nations or, for that matter, the United States to advance its nuclear program within its borders. Nor are current or future sanctions likely to dissuade Iran from progressing steadily toward a nuclear weapon.
So far, Obama has essentially continued the Bush administration’s policy toward Iran with one addition: an authentic offer from the start of his administration to begin negotiations. Negotiations, however, have not been feasible because of sharp divisions within Iran. Those rifts were exacerbated after the June 2009 elections, in which Iran’s ruling powers (Supreme Leader Ayatollah Ali Khamanei, Ahmadinejad and the Revolutionary Guard) rigged the presidential vote and then moved to suppress the opposition Green Movement protests. In the last two years, they have tightened control over their society.
Enter Ahmadinejad’s proposal to stop all enrichment at the 5 percent level—without preconditions. Although differences between Ahmadinejad and the supreme leader have become evident, the United States should pay attention to the president’s offer.
Arguments against testing the offer are easy to make. An embattled Ahmadinejad may not be able to deliver. Iran will use negotiations to seek to relax or escape current sanctions. If a deal were reached, it would be more difficult to win international support for the next round of sanctions. An agreement that stops only the 20 percent enrichment could imply a degree of acceptance of Iran’s ongoing enrichment up to 5 percent.
Recognizing all of these negatives, however, the policy question remains: Would the United States be better off with Iran enriching its uranium to 20 percent or without it?
President Obama should act now to test Ahmadinejad’s word.
The human race is interconnected as never before. Is that a good thing? Ask the Lords of the Internet—the men running the companies Eric Schmidt of Google recently called “the Four Horsemen”: Amazon, Apple, Facebook, and Google—and you’ll get an unequivocal “yes.” But is it true? In view of the extraordinary economic and political instability of recent months, it’s worth asking if the Netlords are the Four Horsemen of a new kind of information apocalypse.
Don’t get me wrong. I love all that these companies have achieved. I order practically everything except haircuts from Amazon. I write this column on a MacBook Pro. I communicate with my kids via Facebook. It’s 6:55 a.m., and I’ve already run six searches on Google. Did I forget to mention that I’ve already received 29 emails and sent 14?
I also really like the Netlords. They are among the smartest guys on the planet. Yet they are also self-deprecating and sometimes very funny. (OK, not Steve Jobs.) So my question for them is a real question, not some kind of Luddite rant: does the incredible network you have created, with its unprecedented scale and speed, not contain a vulnerability? I’m not talking here about the danger of its exploitation by Islamist extremists or its incapacitation by Chinese cyberwarriors, though I worry about those things too. No, I mean the possibility that the global computer network formed by technologically unified human minds is inherently unstable—and that it is ushering in an era of intolerable volatility.
The communications revolution we are living through has been driven by two great forces. One is Gordon E. Moore’s “law” (which he first proposed in 1965) that the number of transistors that can be placed inexpensively on an integrated circuit doubles approximately every 18 months. In its simplified form, Moore’s Law says that computing power will double every two years, implying a roughly 30-fold increase in 10 years. This exponential trend has now continued for more than half a century and is expected by the techies to continue until at least 2015 or 2020.
The other force is the exponential growth of human networks. The first email was sent at the Massachusetts Institute of Technology in the same year Moore’s Law was born. In 2006 people sent 50 billion emails; last year it was 300 billion. The Internet was born in 1982. As recently as 1993 only 1 percent of two-way telecommunication went through it. By 2000 it was 51 percent. Now it’s 97 percent. Facebook was dreamed up by an über-nerd at my university in 2004. It has 800 million active users today—eight times the number of three years ago.
Russian venture capitalist Yuri Milner sees this trend as our friend (it has certainly been his). As the number of people online doubles from 2 billion to 4 billion over the next 10 years and the number of Internet-linked devices quadruples from 5 billion to 20 billion, mankind collectively gets more knowledge—and gets smarter. Speaking at a conference in Ukraine in mid-September, Milner asserted that data equivalent to the total volume of information created from the beginning of human civilization until 2003 can now be generated in the space of just two days. To cope with this information overload, he looks forward to “the emergence of the global brain, which consists of all the humans connected to each other and to the machine and interacting in a very unique and profound way, creating an intelligence that does not belong to any single human being or computer.”
In the future as imagined by Google, this global brain will do much of our thinking for us, telling us (through our handheld devices) which of our friends is just around the next corner and where we can buy that new suit we need for the best price. And if the best price is on Amazon, we’ll just click once and look forward to its next-day delivery. Maybe it’ll already be there when we get home.
That’s the kind of sci-fi scenario that gets a true nerd out of bed in the morning. But is it just a bit too utopian?
Exhibit one for a contrarian view is the recent behavior of global financial markets, the area of human activity furthest down the road of computerization and automation. According to math wonk Kevin Slavin, algorithms with names like the “Boston Shuffler” are the new masters of the financial universe. Whole tower blocks have been hollowed out to accommodate the computing power required by high-frequency (and very high-speed) trading. So how is this brave new world of robot traders doing?
Well, the VIX index of volatility—Wall Street’s so-called fear gauge, which infers the expected volatility of the U.S. stock market from options prices—reached an all-time high of 80 in the aftermath of Lehman Brothers’ failure and surged back up above 30 in early 2010 and again this summer. Part of this is just a good old-fashioned, man-made financial crisis, of course. But some of the volatility we’ve seen in the past four years is surely attributable to technology: think only of the “flash crash” of May 6 last year, when the Dow Jones industrial average plummeted 9 percent and then rallied in a matter of minutes.
Could the same kind of volatility spread into other markets as these become as wired and as integrated as Planet Finance? The answer must be yes. Consider how Greece’s fiscal woes have destabilized markets across Europe and around the world in recent months. Then there’s the market for consumer durables. We know that the speed with which new technologies have been adopted by American households has increased around eightfold over the past hundred years. But that speed of adoption has its obverse in the speed of obsolescence. Consumers are becoming ever more fickle. Millions bought RIM’s BlackBerry after its advent in 1999. But today the iPhone is the hotter handheld device, and I am far from alone in having a dead BlackBerry in my bottom desk drawer. In late September Amazon launched the Kindle Fire in a bid to challenge the iPad’s dominance of the tablet market. The name is appropriate. The market for such devices is on fire. The whole world is on wi-fire.
In politics, too, online electorates are becoming more volatile. The current race to find a Republican candidate for the presidency is a case in point. Only the other day Sarah Palin was a serious contender. Then Mitt Romney was a shoe-in. Until Rick Perry came along. Until Chris Christie came along. Meanwhile, the number of independent voters who have uncoupled themselves from the traditional parties has reached a historic high of 37 percent. Floating voters are the high-frequency traders of the political market.
Computing power has grown exponentially. So has the human network. But the brain of Homo sapiens remains pretty much the same organ that evolved in the heads of African hunter-gatherers 200,000 years ago. And that brain has a tendency to swing in its mood, from greed to fear and from love to hate.
The reality may be that by joining us all together and deluging us with data, the Netlords have ushered in a new Age of Volatility, in which our primeval emotions are combined and amplified as never before.
We are LinkedIn, but StressedOut. And that “cloud” of downloadable data may yet turn out to be a thundercloud.
The United States is in the third year of a grand experiment by the Obama administration to revive the economy through enormous borrowing and spending by the government, with the Federal Reserve playing a supporting role by keeping interest rates at record lows.
How is the experiment going? By the looks of it, not well.
The economy is growing much more slowly than in a typical recovery, housing prices remain depressed and the stock market has been in a slump—all troubling indicators that another recession may be on the way. Most worrisome is the anemic state of the labor market, underscored by the zero growth in the latest jobs report.
The poor results should not surprise us given the macroeconomic policies the government has pursued. I agree that the recession warranted fiscal deficits in 2008–2010, but the vast increase of public debt since 2007 and the uncertainty about the country’s long-run fiscal path mean that we no longer have the luxury of combating the weak economy with more deficits.
Today’s priority has to be austerity, not stimulus, and it will not work to announce a new $450 billion jobs plan while promising vaguely to pay for it with fiscal restraint over the next 10 years, as Mr. Obama did in his address to Congress on Thursday. Given the low level of government credibility, fiscal discipline has to start now to be taken seriously. But we have to do even more: I propose a consumption tax, an idea that offends many conservatives, and elimination of the corporate income tax, a proposal that outrages many liberals.
These difficult steps would be far more effective than the president’s failed experiment. The administration’s $800 billion stimulus program raised government demand for goods and services and was also intended to stimulate consumer demand. These interventions are usually described as Keynesian, but as John Maynard Keynes understood in his 1936 masterwork, “The General Theory of Employment, Interest and Money” (the first economics book I read), the main driver of business cycles is investment. As is typical, the main decline in G.D.P. during the recession showed up in the form of reduced investment by businesses and households.
What drives investment? Stable expectations of a sound economic environment, including the long-run path of tax rates, regulations and so on. And employment is akin to investment in that hiring decisions take into account the long-run economic climate.
The lesson is that effective incentives for investment and employment require permanence and transparency. Measures that are transient or uncertain will be ineffective.
And yet these are precisely the kinds of policies the Obama administration has pursued: temporarily cutting the payroll tax rate, maintaining the marginal income-tax rates from the George W. Bush era while vowing to raise them in the future, holding off on clean-air regulations while promising to implement them later and enacting an ambitious overhaul of Wall Street regulations while leaving lots of rules undefined and ambiguous.
Is there a better way? I believe that a long-term fiscal plan for the country requires six big steps.
Three of them were identified by the Bowles-Simpson deficit reduction commission: reforming Social Security and Medicare by increasing ages of eligibility and shifting to an appropriate formula for indexing benefits to inflation; phasing out “tax expenditures” like the deductions for mortgage interest, state and local taxes and employer-provided health care; and lowering the marginal income-tax rates for individuals.
I would add three more: reversing the vast and unwise increase in spending that occurred under Presidents Bush and Obama; introducing a tax on consumer spending, like the value-added tax (or VAT) common in other rich countries; and abolishing federal corporate taxes and estate taxes. All three measures would be enormously difficult—many say impossible—but crises are opportune times for these important, basic reforms.
A broad-based expenditure tax, like a VAT, amounts to a tax on consumption. If the base rate were 10 percent, the revenue would be roughly 5 percent of G.D.P. One benefit from a VAT is that it is more efficient than an income tax—and in particular the current American income tax system.
I received vigorous criticism from conservatives after advocating a VAT in an essay in The Wall Street Journal last month. The main objection—reminiscent of the complaints about income-tax withholding, which was introduced in the United States in 1943—is that a VAT would be a money machine, allowing the government to readily grow larger. For example, the availability of easy VAT revenue in Western Europe, where rates reach as high as 25 percent, has supported the vast increase in the welfare state there since World War II. I share these concerns and, therefore, favor a VAT only if it is part of a package that includes other sensible reforms. But given the likely path of government spending on health care and Social Security, I see no reasonable alternative.
Abolishing the corporate income tax is similarly controversial. Any tax on capital income distorts decisions on saving and investment. Moreover, the inefficiency is magnified here because of double taxation: the income is taxed when corporations make profits and again when owners receive dividends or capital gains. If we want to tax capital income, a preferred method treats corporate profits as accruing to owners when profits arise and then taxes this income only once—whether it is paid out as dividends or retained by companies.
Liberals love the idea of a levy on evil corporations, but taxes on corporate profits in fact make up only a small part of federal revenue, compared to the two main sources: the individual income tax and payroll taxes for Social Security and Medicare.
In 2009-10, taxes on corporate profits averaged 1.4 percent of G.D.P. and 8.6 percent of total federal receipts. Even from 2000 to 2008, when corporations were more profitable, these taxes averaged only 1.9 percent of G.D.P. and 10.3 percent of federal receipts. If we could get past the political fallout, we could get more revenue and improve economic efficiency by abolishing the corporate income tax and relying instead on a VAT.
I had a dream that Mr. Obama and Congress enacted this fiscal reform package—triggering a surge in the stock market and a boom in investment and G.D.P.—and that he was re-elected.
This dream could become reality if our leader were Ronald Reagan or Bill Clinton—the two presidential heroes of the American economy since World War II—but Mr. Obama is another story. To become market-friendly, he would have to abandon most of his core economic and political principles.
More likely, his administration will continue with more of the same: an expansion of payroll-tax cuts, short-term tax credits, promises to raise future taxes on the rich, and added spending on infrastructure, job training and unemployment benefits. The economy will probably continue in its sluggish state, possibly slipping into another recession. In that case, our best hope is for a Republican president far more committed to the principles of free markets and limited government than Mr. Bush ever was.
It was a scene to curdle liberal blood. A ballroom full of New York hedge-fund managers playing poker…to raise money for charter schools.
That’s where I found myself last Wednesday: at a Texas Hold ’Em tournament to raise money for the Success Charter Network, which currently runs nine schools in some of New York’s poorest neighborhoods.
While Naomi Wolf was being arrested for showing solidarity with the Occupy Wall Street movement, there I was, consorting with the 1 percent the protesters hate. It’s no surprise that the bread-heads enjoy gambling. But to see them using their ill-gotten gains to subvert this nation’s great system of public education! I was shocked, shocked.
Except that I wasn’t. I was hugely cheered up. America’s financial elite needs a compelling answer to Occupy Wall Street. This could be it: educate Harlem…with our poker chips.
Life, after all, is a lot like poker. No matter how innately smart you may be, it’s very hard to win if you are dealt a bad hand.
Americans used to believe in social mobility regardless of the hand you’re dealt. Ten years ago, polls showed that about two thirds believed “people are rewarded for intelligence and skill,” the highest percentage across 27 countries surveyed. Fewer than a fifth thought that “coming from a wealthy family is essential [or] very important to getting ahead.” Such views made Americans more tolerant than Europeans and Canadians of inequality and more suspicious of government attempts to reduce it.
Yet the hardships of the Great Recession may be changing that, giving an unexpected resonance to the Occupy Wall Street movement. Falling wages and rising unemployment are making us appreciate what we ignored during the good times. Social mobility is actually lower in the U.S. than in most other developed countries—and falling.
Academic studies show that if a child is born into the poorest quintile (20 percent) of the U.S. population, his chance of making it into the top decile (10 percent) is around 1 in 20, whereas a kid born into the top quintile has a better than 40 percent chance. On average, then, a father’s earnings are a pretty good predictor of his son’s earnings. This is less true in Europe or Canada. What’s more, American social mobility has declined markedly in the past 30 years.
A compelling explanation for our increasingly rigid social system is that American public education is failing poor kids. One way it does this is by stopping them from getting to college. If your parents are in the bottom quintile, you have a 19 percent chance of getting into the top quintile with a college degree—but a miserable 5 percent chance without one.
Your ZIP code can be your destiny, because poor neighborhoods tend to have bad schools, and bad schools perpetuate poverty. But the answer is not to increase spending on this failed system—nor to expand it at the kindergarten level, as proposed by Nicholas Kristof in The New York Times last week. As brave reformers like Eva Moskowitz know, the stranglehold exerted by the teachers’ unions makes it almost impossible to raise the quality of education in subprime public schools.
The right answer is to promote the kind of diversity and competition that already make the American university system the world’s best. And one highly effective way of doing this is by setting up more charter schools—publicly funded but independently run and union-free. The performance of the Success Charter Network speaks for itself. In New York City’s public schools, 60 percent of third, fourth, and fifth graders passed their math exams last year. The figure at Harlem Success was 94 percent.
The American Dream is about social mobility, not enforced equality. It’s about competition, not public monopoly. It’s also about philanthropy, not confiscatory taxation.
I’ll cheer up even more when I hear those words at a Republican presidential debate. Or maybe next week we should just tell the candidates to shut up and play poker.
After years when young Americans yearned only to be occupied on Wall Street, suddenly they have taken to occupying it. It’s easy to scoff at this phenomenon. I know, because I have.
This is certainly not America’s answer to the Arab Spring—the Bobo Fall perhaps, unmistakably both bohemian and bourgeois. But it’s still worth taking seriously. What is it that makes evidently educated young people yearn to adopt leftist positions that are eerily reminiscent of the ones their parents adopted in 1968?
Check out the protesters’ website, which on Monday featured a speech by Slovenian critical theorist Slavoj Žižek. At first I thought this must be some kind of parody, but no, he really exists—red T-shirt, Krugman beard, and all: “The only sense in which we are communists is that we care for the commons. The commons of nature. The commons of what is privatized by intellectual property. The commons of biogenetics. For this and only for this we should fight.”
Yeah, man. Property is theft. Ne travaillez jamais. And all that.
There are three possible explanations for this retrogression to the language of ’68. 1. Increasing inequality exemplified by Wall Street is worth protesting against.2. So is the fact that only a handful of bankers have been prosecuted for their part in the financial crisis.3. Demonstrating is way cool.
Yet if I were a young American today, occupying Wall St. would not be my objective. Just reflect for a minute on the unbridled economic mayhem that would ensue if the protesters actually succeeded. The headline “Goldman Sachs Under Control of Hip Teenage Revolutionaries” would be the last straw for an already fragile economic recovery.
Now ask yourself what the financial crisis really means for today's 15- to 24-year-olds. Not only has it raised the probability that they will be unemployed after graduation. More seriously, it has massively increased the debt that they will have to service when they do get jobs.
Never in the history of intergenerational transfers has one generation left such a mountain of IOUs to another as the baby boomers are leaving to their grandchildren.
When you do the math, there is only one logical political home for today’s teens and 20-somethings ... and that is the Tea Party. For who else is promising to slash Medicare and Social Security and keep the tax burden at its historical average?
Let’s just remind ourselves of the report of the Trustees of the Social Security and Medicare trust funds back in 2007, which projected a rise in the cost of these two programs from 7.3 percent of gross domestic product to 17.5 percent by 2030. The trustees warned that to achieve actuarial balance—in other words, solvency—for these two programs would require (for Social Security) an increase of 16 percent in payroll tax revenues or an immediate reduction in benefits of 13 percent. For Medicare we are talking a 122 percent increase in payroll taxes or a 51 percent cut in spending.
As Laurence Kotlikoff and Scott Burns pointed out in The Coming Generational Storm, by 2030 there will be twice as many retirees as there are today but only 18 percent more workers. Unless there is really radical reform of entitlement programs - especially Medicare - the next generation of American workers will be paying roughly double the taxes their parents and grandparents paid. This is what Kotlikoff and Burns mean by “fiscal child abuse.”
Of these harsh realities the occupiers of Wall Street seem blissfully unaware. Fixated on the idea that they somehow represent the 99 percent of people who scrape by on 80 percent of total income, they fail to see that the real distributional conflict of our time is not between percentiles, much less classes, but between generations. And no generation has a keener interest in slashing future spending on entitlements than today’s teens and 20-somethings.
So occupying Wall Street is not the answer to this generation’s problems. The answer is to occupy the Tea Party—and wrest it from the grumpy old men who currently run it.
Call it the Iced Tea Party.
This essay is not about Steve Jobs. It is about the countless individuals with roughly the same combination of talents of whom we’ve never heard and never will.
Most of the 106 billion people who’ve ever lived are dead—around 94 percent of them. And most of those dead people were Asian—probably more than 60 percent. And most of those dead Asians were dirt poor. Born into illiterate peasant families enslaved by subsistence agriculture under some or other form of hierarchical government, the Steves of the past never stood a chance.
Chances are, those other Steves didn’t make it into their 30s, never mind their mid-50s. An appalling number died in childhood, killed off by afflictions far easier to treat than pancreatic cancer. The ones who made it to adulthood didn’t have the option to drop out of college because they never went to college. Even the tiny number of Steves who had the good fortune to rise to the top of premodern societies wasted their entire lives doing calligraphy (which he briefly dabbled in at Reed College). Those who sought to innovate were more likely to be punished than rewarded.
Today, according to estimates by Credit Suisse, there is approximately $195 trillion of wealth in the world. Most of it was made quite recently, in the wake of those great political and economic revolutions of the late 18th century, which, for the first time in human history, put a real premium on innovation. And most of it is owned by Westerners—Europeans and inhabitants of the New World and Antipodes inhabited by their descendants. We may account for less than a fifth of humanity, but we Westerners still own two thirds of global wealth.
A nontrivial portion of that wealth ($6.7 billion) belonged to Steve Jobs and now belongs to his heirs. In that respect, Jobs personified the rising inequality that is one of the striking characteristics of his lifetime. Back in 1955 the top 1 percent of Americans earned 9 percent of income. Today the figure is above 14 percent.
Yet there is no crowd of young people rampaging through Palo Alto threatening to “Occupy Silicon Valley.” The huge amounts of money made by Jobs and his fellow pioneers of personal computing are not resented the way the vampire squids of Wall Street are. On the contrary, Jobs is revered. One eminent hedge-fund manager (who probably holds a healthy slice of Apple stock as well as the full array of iGadgets) recently likened him to Leonardo da Vinci.
So the question is not, how do we produce more Steves? The normal process of human reproduction will ensure a steady supply of what Malcolm Gladwell has called “outliers.” The question should be, how do we ensure that the next Steve Jobs fulfills his potential?
An adopted child, the biological son of a Syrian Muslim immigrant, a college dropout, a hippie who briefly converted to Buddhism and experimented with LSD—Jobs was the type of guy no sane human resources department would have hired. I doubt that Apple itself would hire someone with his résumé at age 20. The only chance he ever had to become a chief executive officer was by founding his own company.
And that—China, please note—is why capitalism needs to be embedded in a truly free society in order to flourish. In a free society a weirdo can do his own thing. In a free society he can even fail at his own thing, as Jobs undoubtedly did in his first stint in charge of Apple. And in a free society he can bounce back and revolutionize all our lives.
Somewhere in his father’s native Syria another Steve Jobs has just died. But this other Steve was gunned down by a tyrannical government. And what wonders his genius might have produced we shall never know.
Ronald Reagan and Barack Obama have at least one similarity. They both were confronted by
great economic challenges when they became president.
Mr. Reagan's immediate challenge was that inflation and interest rates were out of control. He met this great test by allying with the Federal Reserve chairman, Paul Volcker, in accomplishing a return to price stability, even through the 1982 recession when the unemployment rate hit 10.8%.
Reagan's success is not in doubt. Inflation and interest rates were reduced dramatically, and the recovery from the end of 1982 to the end of 1988 was strong and long with an average growth rate of real GDP of 4.6% per year. Moreover, Reagan focused on implementing good economic policies, not on blaming his incompetent predecessor for the terrible economy he had inherited.
Mr. Obama was equally in position to get credit for turning around a perilous economic situation that had been left by a weak predecessor. But he has pursued an array of poor economic policies, featuring the grand Keynesian experiment of sharply raising federal spending and the public debt. The results have been terrible and now, two and a half years into his administration, Mr. Obama is still blaming George W. Bush for all the problems.
Friday's downgrade of the U.S. credit rating by Standard & Poor's should have been a wake-up call to the administration. S&P is saying, accurately, that there is no coherent long-term plan in place to deal with the U.S. government's fiscal deficits.
The U.S. Treasury could have responded in two ways. First, it could have taken the downgrade as useful information and then focused on how to perform better to earn back a AAA rating. Instead, it chose to attack the rating agency as incompetent and not credible. In this respect, U.S. officials were almost as bad as Italian Prime Minister Silvio Berlusconi, who responded to warnings from S&P and Moody's about Italian government debt by launching police raids on the offices of the rating agencies in Milan last week. The U.S. Treasury's response also reminds me of Lehman Brothers blaming its financial problems in the summer of 2008 on evil financial analysts and short-sellers.
The way for the U.S. government to earn back a AAA rating is to enact a meaningful medium- and long-term plan for addressing the nation's fiscal problems. I have sketched a five-point plan that builds on ideas from the excellent 2010 report of the president's deficit commission.
First, make structural reforms to the main entitlement programs, starting with increases in ages of eligibility and a shift to an economically appropriate indexing formula. Second, lower the structure of marginal tax rates in the individual income tax. Third, in the spirit of Reagan's 1986 tax reform, pay for the rate cuts by gradually phasing out the main tax-expenditure items, including preferences for home-mortgage interest, state and local income taxes, and employee fringe benefits—not to mention eliminating ethanol subsidies. Fourth, permanently eliminate corporate and estate taxes, levies that are inefficient and raise little money.
Fifth, introduce a broad-based expenditure tax, such as a value-added tax (VAT), with a rate around 10%. The VAT's appeal to liberals can be enhanced, with some loss of economic efficiency, by exempting items such as food and housing.
I recognize that a VAT is anathema to many conservatives because it gives the government an added claim on revenues. My defense is that a VAT makes sense as part of a larger package that includes the other four points.
The loss of the U.S. government's AAA rating is a great symbolic blow, one that would cause great anguish to our first Treasury secretary, Alexander Hamilton. Frankly, the only respectable reaction by our current Treasury secretary is to fall on his sword. Then again, "the buck stops here" suggests that an even more appropriate resignation would come from our chief executive, who, by the way, is no Ronald Reagan.
The global crises of financial and housing markets are now being superseded by new crises of governments. The fiscal challenges for the weaker members of the eurozone are early warnings, as are analogous problems in American state governments weighed down by unfunded pension and healthcare liabilities. Without action, this new crisis of state competence could soon become just as damaging as its recent financial predecessor.
This week's US debt deal, along with the prospect of debate on fiscal solutions in the run-up to the 2012 elections, provides some room for optimism. But America's fiscal problems have deep roots. The recession of 2007-2009 stemmed from the unprecedented bust in the housing market, driven by reduced lending standards and propelled by congressional pressures on private lenders and the reckless expansions of Fannie Mae and Freddie Mac. It is, however, important to recognise that this mistake is now understood and will not be repeated.
In the aftermath of the debt ceiling agreement there will be calls for further stimulus for America's economy. This would be a grave mistake. In the financial turmoil of 2008, bail-outs by the US and other governments were unfortunate, but necessary. However, the subsequent $800bn American stimulus package was largely a waste of money that sharply enlarged the fiscal hole now facing our economy.
President Barack Obama's administration has consistently overestimated the benefits of stimulus, by using an unrealistically high spending multiplier. According to this Keynesian logic, government expenditure is more than a free lunch. This idea, if correct, would be more brilliant than the creation of triple A paper out of garbage. In any event, the elimination of the temporary spending is now contractionary and, more importantly, the resulting expansion of public debt eventually requires higher taxes, retarding growth.
I agree that budget deficits were appropriate during the great recession and, for that reason, the kind of balanced-budget rule currently proposed by some Republicans should be avoided. However, since government spending is warranted only if it passes the usual hurdles of social rates of return, the fiscal deficit should have concentrated on tax reductions, especially those that emphasised falls in marginal tax rates, which encourage investment and growth.
Despite relief at the debt-ceiling agreement, America's fiscal situation remains deeply problematic. Any attempt to head off a crisis of government competence must begin with serious long-term reform. Reductions in the long-term path of entitlement outlays have to be put on the table, with increases in ages of eligibility a part of any solution.
We also need sharp reductions in spending programmes initiated or expanded by Mr Obama and his extravagant predecessor, George W. Bush. Given the inevitable growth of the main entitlement programmes, especially healthcare, increases in long-term federal revenue must be part of an overall reform.
So what, specifically, can be done? An effective future tax package would begin by setting US corporate and estate tax rates permanently to zero, given these taxes are inefficient and generate little revenue. Next, it would gradually phase out major "tax-expenditure" items, such as tax preferences for home-mortgage interest, state and local income taxes, and employee fringe benefits.
The structure of marginal income-tax rates should then be lowered. Marginal rates should particularly not increase where they are already high, such as at upper incomes. The bulk of any extra revenue needed to make up the difference should then be raised via a broad-based, flat-rate expenditure tax, such as a value added tax. A rate of 10 per cent, with few exemptions, would raise about 5 per cent of gross domestic product.
Of course, such a new tax would be a two-edged sword: a highly efficient tax, but politically dangerous. To paraphrase Larry Summers from long ago, we don't have VAT in the US because Democrats think it is regressive, and Republicans think it is a money machine. We will get VAT when Democrats realise it is a money machine, and Republicans realise it is regressive. Obviously, I worry about the money machine property, but I see no serious alternative for raising the revenue needed for an overall next-stage reform package.
The raucous debt-ceiling debate represents a good start in forging a serious long-term fiscal plan. Substantial additional progress will be needed, sadly much of which will probably have to await the outcome of the next US election. Yet progress must be made - or the impending crises of governments, signalled by possible downgrades of US debt, will make the 2008-2009 recession look mild.
Keynesian economics—the go-to theory for those who like government at the controls of the economy—is in the forefront of the ongoing debate on fiscal-stimulus packages. For example, in true Keynesian spirit, Agriculture Secretary Tom Vilsack said recently that food stamps were an "economic stimulus" and that "every dollar of benefits generates $1.84 in the economy in terms of economic activity." Many observers may see how this idea—that one can magically get back more than one puts in—conflicts with what I will call "regular economics." What few know is that there is no meaningful theoretical or empirical support for the Keynesian position.The overall prediction from regular economics is that an expansion of transfers, such as food stamps, decreases employment and, hence, gross domestic product (GDP). In regular economics, the central ideas involve incentives as the drivers of economic activity. Additional transfers to people with earnings below designated levels motivate less work effort by reducing the reward from working.
In addition, the financing of a transfer program requires more taxes—today or in the future in the case of deficit financing. These added levies likely further reduce work effort—in this instance by taxpayers expected to finance the transfer—and also lower investment because the return after taxes is diminished.
This result does not mean that food stamps and other transfers are necessarily bad ideas in the world of regular economics. But there is an acknowledged trade-off: Greater provision of social insurance and redistribution of income reduces the overall GDP pie.
Yet Keynesian economics argues that incentives and other forces in regular economics are overwhelmed, at least in recessions, by effects involving "aggregate demand." Recipients of food stamps use their transfers to consume more. Compared to this urge, the negative effects on consumption and investment by taxpayers are viewed as weaker in magnitude, particularly when the transfers are deficit-financed.
Thus, the aggregate demand for goods rises, and businesses respond by selling more goods and then by raising production and employment. The additional wage and profit income leads to further expansions of demand and, hence, to more production and employment. As per Mr. Vilsack, the administration believes that the cumulative effect is a multiplier around two.
If valid, this result would be truly miraculous. The recipients of food stamps get, say, $1 billion but they are not the only ones who benefit. Another $1 billion appears that can make the rest of society better off. Unlike the trade-off in regular economics, that extra $1 billion is the ultimate free lunch.
How can it be right? Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people? Keynes, in his "General Theory" (1936), was not so good at explaining why this worked, and subsequent generations of Keynesian economists (including my own youthful efforts) have not been more successful.
Theorizing aside, Keynesian policy conclusions, such as the wisdom of additional stimulus geared to money transfers, should come down to empirical evidence. And there is zero evidence that deficit-financed transfers raise GDP and employment—not to mention evidence for a multiplier of two.
Gathering evidence is challenging. In the data, transfers are higher than normal during recessions but mainly because of the automatic increases in welfare programs, such as food stamps and unemployment benefits. To figure out the economic effects of transfers one needs "experiments" in which the government changes transfers in an unusual way—while other factors stay the same—but these events are rare.
Ironically, the administration created one informative data point by dramatically raising unemployment insurance eligibility to 99 weeks in 2009—a much bigger expansion than in previous recessions. Interestingly, the fraction of the unemployed who are long term (more than 26 weeks) has jumped since 2009—to over 44% today, whereas the previous peak had been only 26% during the 1982-83 recession. This pattern suggests that the dramatically longer unemployment-insurance eligibility period adversely affected the labor market. All we need now to get reliable estimates are a hundred more of these experiments.
The administration found the evidence it wanted—multipliers around two—by consulting some large-scale macro-econometric models, which substitute assumptions for identification. These models were undoubtedly the source of Mr. Vilsack's claim that a dollar more of food stamps led to an extra $1.84 of GDP. This multiplier is nonsense, but one has to admire the precision in the number.
There are two ways to view Keynesian stimulus through transfer programs. It's either a divine miracle—where one gets back more than one puts in—or else it's the macroeconomic equivalent of bloodletting. Obviously, I lean toward the latter position, but I am still hoping for more empirical evidence.
The way to restoring America's AAA credit-rating starts with President Obama moving beyond
blaming the economy on the admittedly inept George W. Bush.
Standard & Poor's recent downgrade of the U.S. government shows how far the world has moved into a crisis of governments.
The official reactions to the S&P action have not been promising. The Obama administration attacked S&P's competence, and the U.S. Congress has threatened hearings, apparently aimed at bullying S&P and the other agencies from further downgrades.
The main substantive criticism was that S&P made a $2 trillion mistake in its baseline projection of 10-year deficits. Of course, these projections came from the Congressional Budget Office, which lost its credibility in these matters when it scored President Obama's health care reform plan as reducing 10-year deficits - mostly because of the inclusion of phantom reductions in Medicare payments to doctors.
In truth, S&P's downgrade stemmed mainly from its legitimate concern that the U.S. government has no coherent medium- or long-term plan to eliminate budget deficits and stabilize the path of public debt. This judgment is accurate and courageous and goes some distance in offsetting the hit to S&P's reputation that came from the AAA ratings that it gave not so long ago to mounds of mortgage-backed securities built on subprime garbage.
Unfortunately, Obama's main response to S&P's downgrade and the economic crisis more generally has been to continue blaming almost everything on his admittedly inept predecessor, George W. Bush, and on the Republican Congress.
Another familiar theme is the unwillingness of the evil rich to pay more taxes. (I have one modest proposal that could save the President valuable time in this regard. Rather than continuing to repeat the long phrase "millionaires and billionaires," I suggest a merger: "mibillionaires." I know it looks funny and is hard to say on a first try, but after three or four repetitions it becomes strikingly mellifluous.)
The way forward to restoring our AAA rating begins with Obama taking seriously the surprisingly sound report by his recent bipartisan debt and deficit commission. Building on those recommendations, I have constructed a fiscal plan:• Make structural reforms to the main entitlement programs starting with increases in ages of eligibility and a shift to an economically appropriate indexing formula.
• Eliminate the unwise increases of federal spending by Bush and Obama, including added outlays for education, farm and ethanol subsidies, and expansions of Medicare and Medicaid.
• Lower the structure of marginal tax rates in the individual income tax.
• Pay for the rate cuts by gradually phasing out the main tax-expenditure items, including preferences for home-mortgage interest, state and local income taxes, and employee fringe benefits.
• Permanently eliminate federal corporate and estate taxes, levies that are inefficient and raise comparatively little money.
• Introduce a broad-based expenditure tax, such as a value-added tax (VAT). Depending on the structure of exemptions, a rate of 10% should raise about 5% of GDP in revenue.
The VAT system is present in most developed countries and can be highly efficient because it has a flat rate, falls on consumption and has built-in mechanisms for ensuring compliance. However, a VAT is also a magnet for criticism by conservatives - who worry about the promotion of a larger government.
I share this concern and would defend a VAT only if it can be firmly linked to the other parts of the reform package. But more fundamentally, given the projected path of entitlement spending, I see no reasonable alternative.
It is hard to imagine President Obama becoming the leader of this kind of broad fiscal initiative. Though he has endorsed some pieces of some of these components, the embrace has been halting. He is hedging, not leading.
Thus, as S&P observed, uncertainty about our fiscal path will likely not be resolved at least until the outcomes of next year's crucial elections.
The one person with the power to eliminate part of this uncertainty is the President, who could nobly decide not to stand for reelection, thereby following in the footsteps of Lyndon Johnson and Calvin Coolidge. Johnson was forced out by a different type of crisis, Vietnam, and he hung on too long, delaying his announcement until he saw his poor performance in the New Hampshire primary and in subsequent electoral polls. Coolidge is a more dignified model, as he opted out in 1927 while things were going fine. In fact, Obama could borrow Coolidge's memorable phrase, "I do not choose to run."
The rise of offshoring of intermediate inputs raises important questions for commercial policy. Do the distinguishing features of offshoring introduce novel reasons for trade policy intervention? Does offshoring create new problems of global policy cooperation whose solutions require international agreements with novel features? In this paper we provide answers to these questions, and thereby initiate the study of trade agreements in the presence of offshoring. We argue that the rise of offshoring will make it increasingly difficult for governments to rely on traditional GATT/WTO concepts and rules—such as market access, reciprocity and non-discrimination—to solve their trade-related problems
Two acclaimed political economists explore the origins and long-term effects of the financial crisis in historical and comparative perspective.
Welcome to Argentina: by 2008 the United States had become the biggest international borrower in world history, with almost half of its 6.4 trillion dollar federal debt in foreign hands. The proportion of foreign loans to the size of the economy put the United States in league with Mexico, Pakistan, and other third-world debtor nations. The massive inflow of foreign funds financed the booms in housing prices and consumer spending that fueled the economy until the collapse of late 2008.
The authors explore the political and economic roots of this crisis as well as its long-term effects. They explain the political strategies behind the Bush administration's policy of funding massive deficits with the foreign borrowing that fed the crisis. They see the continuing impact of our huge debt in a slow recovery ahead. Their clear, insightful, and comprehensive account will long be regarded as the standard on the crisis.
“Treat people as they want to be and you help them become what they are capable of being.” —Johann Wolfgang von Goethe
What is the motivating force behind all human interaction—in families, in communities, in the business world, and in relationships from the personal level to the international level? DIGNITY. It is the desire to be treated well. It is an unspoken human yearning that is at the heart of all conflicts, yet no one is paying attention to it.
When dignity is violated, the response is likely to involve aggression, even violence, hatred, and vengeance; the human connection is the first thing to go. On the other hand, when people treat each others with dignity, they feel their worth is recognized, creating lasting and meaningful relationships. Surprisingly, most people have little understanding of dignity. While a desire for dignity is universal, knowing how to honor it in ourselves and others is not.
After working as a conflict resolution specialist for twenty years, I have observed and researched the circumstances that give rise to dignity violations. On the other hand, when the following ten elements of dignity are honored, people feel their dignity has been recognized and that they have been treated well. Relationships flourish under these conditions. The Ten Essential Elements of Dignity
Acceptance of Identity. Approach people as being neither inferior nor superior to you. Give others the freedom to express their authentic selves without fear of being negatively judged. Interact without prejudice or bias, accepting the ways in which race, religion, ethnicity, gender, class, sexual orientation, age, and disability may be at the core of the other people’s identities. Assume that others have integrity.
Inclusion.Make others feel that they belong, whatever the relationship—whether they are in your family, community, organization, or nation.
Safety. Put people at ease at two levels: physically, so they feel safe from bodily harm, and psychologically, so they feel safe from being humiliated. Help them feel free to speak without fear of retribution.
Acknowledgement. Give people your full attention by listening, hearing, validating, and responding to their concerns, feelings, and experiences.
Recognition. Validate others for their talents, hard work, thoughtfulness, and help. Be generous with praise, and show appreciation and gratitude to others for their contributions and ideas.
Fairness. Treat people justly, with equality, and in an evenhanded way according to agreed-on laws and rules. People feel that you have honored their dignity when you treat them without discrimination or injustice.
Benefit of the Doubt. Treat people as trustworthy. Start with the premise that others have good motives and are acting with integrity.
Understanding. Believe that what others think matters. Give them the chance to explain and express their points of view. Actively listen in order to understand them.
Independence.Encourage people to act on their own behalf so that they feel in control of their lives and experience a sense of hope and possibility.
Accountability. Take responsibility for your actions. If you have violated the dignity of another person, apologize. Make a commitment to change your hurtful behaviors.
Our desire for dignity resides deep within us, defining our common humanity. If our capacity for indignity is our lowest common denominator, then our yearning for dignity is our highest. And if indignity tears relationships apart, then dignity can put them back together again.
Our ignorance of all things related to dignity—how to claim our own and how to honor it in others, has contributed to many of the conflicts we see in the world today. This is as true in the boardroom and in the bedroom, as it is in politics and international relations. It is true for all human interaction. If we are to evolve as a species, there is no greater need than to learn how to treat each other and ourselves with dignity. It is the glue that could holds us all together. And it doesn’t stop there. Not only does dignity make for good human relationships, it does something perhaps far more important—it creates the conditions for our mutual growth and development. It is a distraction to have to defend oneself from indignity. It takes up our time and uses up our precious energy. The power of dignity, on the other hand, only expands with use. The more we give, the more we get.
There is no greater leadership challenge than to lead with dignity, helping us all to understand what it feels like to be honored and valued and to feel the incalculable benefits that come from experiencing it.
The leadership challenge is at all levels—for those in the world of politics, business, education, religion, to everyday leadership in our personal lives.
Peace will not flourish anywhere without dignity.
There is no such thing as democracy without dignity, or can there be authentic peace if people are suffering indignities.
Last but not least, feeling dignity’s power—both by honoring it and locating our own inner source of it—sets us up for one of humanities greatest gifts—the experience of being in relationship with others in a way that brings out the best in one another, allowing us to become more of what we are capable of being.
We exploit variation in U.S. gubernatorial term limits across states and time to empirically estimate two separate effects of elections on government performance. Holding tenure in office constant, differences in performance by reelection- eligible and term-limited incumbents identify an accountability effect: reelection-eligible governors have greater incentives to exert costly effort on behalf of voters. Holding term-limit status constant, differences in performance by incumbents in different terms identify a competence effect: later-term incumbents are more likely to be competent both because they have survived reelection and because they have experience in office. We show that economic growth is higher and taxes, spending, and borrowing costs are lower under reelection-eligible incumbents than under term-limited incumbents (accountability), and under reelected incumbents than under first-term incumbents (competence), all else equal. In addition to improving our understanding of the role of elections in representative democracy, these findings resolve an empirical puzzle about the disappearance of the effect of term limits on gubernatorial performance over time.
Two decades ago affairs between the United States and Cuba had seen little improvement from the Cold War era. Today, US-Cuban relations are in many respects still in poor shape, yet some cooperative elements have begun to take hold and offer promise for future developments. Illustrated by the ongoing migration agreement, professional military-to-military relations at the perimeter of the US base near Guantánamo, and professional Coast Guard-Guardafrontera cooperation across the Straits of Florida, the two governments are actively exploring whether and how to change the pattern of interactions.The differences that divide the two nations are real, not the result of misperception, and this volume does not aspire to solve all points of disagreement. Drawing on perspectives from within Cuba as well as those in the United States, Canada, and Europe, these authors set out to analyze contemporary policies, reflect on current circumstances, and consider possible alternatives for improved US-Cuban relations. The resulting collection is permeated with both disagreements and agreements from leading thinkers on the spectrum of issues the two countries face—matters of security, the role of Europe and Latin America, economic issues, migration, and cultural and scientific exchanges in relations between Cuba and the United States. Each topic is represented by perspectives from both Cuban and non-Cuban scholars, leading to a resource rich in insight and a model of transnational dialogue.
Rafael Hernandez is the editor of Revista Temas, Cuba's leading magazine in the social sciences. He has been professor and researcher at the University of Havana and the High Institute of International Relations; director of US studies at the Centro de Estudios sobre America; and a senior research fellow at the Instituto Cubano de Investigacion Cultural "Juan Marinello" in Havana.Loren Barberia is a program associate at the David Rockefeller Center for Latin American Studies at Harvard University.
Using the most comprehensive data file ever compiled on air pollution, water pollution, environmental regulations, and infant mortality from a developing country, the paper examines the effectiveness of India’s environmental regulations. The air pollution regulations were effective at reducing ambient concentrations of particulate matter, sulfur dioxide, and nitrogen dioxide. The most successful air pollution regulation is associated with a modest and statistically insignificant decline in infant mortality. However, the water pollution regulations had no observable effect. Overall, these results contradict the conventional wisdom that environmental quality is a deterministic function of income and underscore the role of institutions and politics.
Novelists have a better track record than economists at foretelling the future. Consider then Gary Shteyngart’s timely comic novel Super Sad True Love Story (Random House, 2010), which provides a rather graphic vision of what lies in store for the world economy. The novel takes place in the near future and is set against the backdrop of a United States that lies in economic and political ruin. The country’s bankrupt economy is ruled with a firm hand by the IMF from its new Parthenon-shaped headquarters in Singapore. China and sovereign wealth funds have parceled America’s most desirable real estate among themselves. Poor people are designated as LNWI (“low net worth individuals”) and are being pushed into ghettoes. Even skilled Americans are desperate to acquire residency status in foreign lands. This is sheer fantasy of course, but one that seems to resonate well with the collective mood. A future in which the US and other advanced economies are forced to play second fiddle to the dynamic emerging economies in Asia and elsewhere is rapidly becoming cliché. This vision is based in part on the very rapid pace of economic growth that emerging and developing economies experienced in the run-up to the global financial crisis of 2008-2009. Latin America benefited from a pace of economic development that it had not experienced since the 1970s, and Africa began to close the gap with the advanced countries for the first time since countries in the continent received their independence. Even though most of these countries were hit badly by the crisis, their recovery has also been swift. Optimism on developing countries is matched by pessimism on the rich country front. The United States and Europe have emerged from the crisis with debilitating challenges. They need to address a crushing debt burden and its unpleasant implications for fiscal and monetary policy. They also need to replace growth models which were based in many instances on finance, real estate, and unsustainable levels of borrowing. Japan has long ceased to exhibit any growth dynamism. And the eurozone’s future remains highly uncertain—with the economic and political ramifications of its unraveling looking nothing less than scary. In such an environment, rapid growth in the developing world is the only thing that could propel the world economy forward and generate increasing demand for rich-country goods and services—the only silver lining in an otherwise dreary future. The question I address in this paper is whether this gap in performance between the developed and developing worlds can continue, and in particular, whether developing nations can sustain the rapid growth they have experienced of late. I will not have anything to say on the prospects for the advanced economies themselves, assuming, along with conventional wisdom, that their growth will remain sluggish at best. My focus is squarely on the developing and emerging countries and on the likelihood of continued convergence.
Does democratic governance expand wealth and prosperity? There is no consensus about this issue despite the fact that for more than half a century, rival theories about the regime-growth relationship have been repeatedly tested against the empirical evidence, using a variety of cases, models and techniques. To consider the issues, Part I of this paper reviews and summarizes theories why regimes are expected to influence economic growth directly, either positively or negatively. After considering these debates, Part II discusses the technical challenges facing research on this topic and how it is proposed to overcome these. Part III presents the results of the comparative analysis for the effects of democratic governance on economic growth during recent decades. The descriptive results illustrate the main relationships. The multivariate models check whether these patterns remain significant after controlling for many other factors associated with growth, including geography, economic conditions, social structural variables, cultural legacies, and global trends. The evidence supports the equilibrium thesis suggesting that regimes combining both liberal democracy and bureaucratic governance are most likely to generate growth, while by contrast patronage autocracies display the worst economic performance. The conclusion considers the implications.