Signs are gathering that the European Union's most recent bail out has not stemmed the rising tide of concern in markets about Europe's fundamental financial or political solvency.

Britain's government barely prevented a rebellion by conservatives against their own Prime Minister forcing a national referendum on whether to remain in the European Union, and Britain isn't even principally exposed to the default risk because it does not participate in the common currency. Still, the Business Secretary is planning for "armageddon" of the euro's collapse.

Spain voted out its socialist government over the weekend, bringing in an opposition that ran on a "not the people who got you into this mess" platform but refused to commit itself to a program for reducing Spain's 40 percent unemployment rate for those under 25. Yields on Spanish bonds rose on the election results, suggesting a lack of confidence the new government will continue the draconian austerity measures that got its predecessor voted out.

One French commentator pointed out resentfully that once Berlusconi resigned, markets began to realize France was actually in a worse position than Italy. Even though Italian bonds are trading at 7 percent interest -- generally considered unsustainable levels -- Italy at least has a primary surplus, where France does not. France's debt may soon be downgraded, pulling it further into the contagion pool. Berlusconi's antics ensured he got attention that otherwise would have been scrutinizing France's balance sheet; technocratic Mario Monti removes that heat shield.

The European Financial Stability Fund, created to backstop governments shut out of lending markets, is nowhere near large enough to placate market concerns. Subtracting obligations to Greece, the EFSF has somewhere around $200 billion in the bank. Italy alone will need to refinance nearly $400 billion in the coming year. European countries being pulled down the drain are now sharp-edged in their calls to let Greece fail in order for the EFSF to have money to save others.

The debate has taken on a strong moral overtone, as David Gordon of the Eurasia Group has pointed out: thrifty northern Europeans believe those countries in trouble deserve it and are persuading themselves it would be wrong to shield sinners from the consequences. A Puritanical ethos has overtaken European solidarity.

Europeans may desire to shift the bail out to the IMF, but there is little prospect poorer countries will countenance using all available IMF reserves for rich Europeans during a time of global economic downturn. EU appeals to the Chinese and other potential sovereign lenders have not been successful. 

The European Commission, which has been shoved to the sidelines by national governments -- itself a rather striking statement of the limits of pooled sovereignty that is the core promise of the European project -- has tried to interject itself into the debate by advocating issuance of bonds by the EFSF, something Germany has adamantly refused.

Adopting the Euro bond proposal would constitute a change to the EU treaty -- which forbade bail outs at Germany's insistence -- requiring ratification in every EU country. It would surely fail in Germany, but it would also fail in numerous other EU countries.

All of which means that worse is yet to come for Europe's financial crisis. Markets are sure to continue testing governments' credibility. Banks' exposure has not been honestly assessed or politically owned up to in the condemnatory countries like Germany. The EU stress tests were widely dismissed as politicized and Germany is hoping markets will continue as carrion on profligate spenders rather than turn their attention to profligate lenders.

American conservatives have few reasons to cheer Timothy Geithner as Treasury Secretary, but the stress testing of American banks was serious, quiet, and gave our banking system essential time to strengthen balance sheets, which is something Americans can be thankful for this week.

The Castro regime's announcement that for the first time Cuban citizens will be able to buy and sell their own homes has spurred an outpouring of irrational exuberance that real change is finally coming to the island-prison of Dr. Castro. "To say that it's huge is an understatement," one interested observer told the New York Times. "This is the foundation, this is how you build capitalism, by allowing the free trade of property."

Another told Reuters, "The ability to sell houses means instant capital formation for Cuban families ... It is a big sign of the government letting go." Still another writes in the Christian Science Monitor that these are "incredibly meaningful changes."

Such optimism is ill-founded. In fact, it is indicative only of one of two things: either it betrays a brazen political objective (Time magazine: "Why the U.S. Should Drop the Embargo and Prop Up Cuban Homeowners") or it demonstrates just how low the bar of expectation has been placed for what the Cuban people need and deserve that we must celebrate mere crumbs tossed their way by the Castro dictatorship.

Indeed, sweep away the hype and all you see are daunting hurdles as to how this announcement will change in any way the regime's suffocating control of the Cuban population. The new order restricts people to "ownership" of one permanent residence and one vacation home (as if the average Cuban is in any position to own a second home); all transactions must be approved by the State; no explanation is given on how you grant titles to homes that either have been confiscated from their rightful owners, have been swapped multiple times in the underground economy, or which house multiple families because of the severe shortage of available housing; the construction industry remains state-controlled; and the regime itself admits this order reflects no backsliding on the preeminence of the State in controlling the country's economic and political systems.

Beyond these challenges, however, is the fundamental fact that you cannot conjure private property rights, let alone the free trade in property, out of thin air. Those rights exist only where they are rooted in a credible, impartial, and transparent legal superstructure that can protect one's property, settle disputes, and guarantee transactions against the predations of the State. Anything less is a rigged game where the State is the dealer.

This is how the State Department's annual Human Rights Report characterizes Cuba's judicial system: "While the constitution recognizes the independence of the judiciary, the judiciary is subordinate to the imperatives of the socialist state. The National Assembly appoints all judges and can remove them at any time. Through the National Assembly, the state exerted near-total influence over the courts and their rulings ... Civil courts, like all courts in the country, lack an independent or impartial judiciary as well as effective procedural guarantees."

Translation: Cubans' ability to "own" property, trade, or leverage their property to build capital will continue to exist at the sufferance of the State. And what the State giveth, the State can taketh away. The bottom line is that, ultimately, all Cubans will really own is a piece of paper that says they own something.

Rather than empowering individual Cubans, the regime's goal in allowing the open trade of houses is to hopefully siphon more Cuban American money into the island's perennially bankrupt economy. With average Cubans on the island too poor to buy or improve their dilapidated dwellings, their hope is relatives in Miami and elsewhere will remit even more cash to the island attempting to improve their relations' situation. Indeed, the cynicism of relying on Cuban exiles to support the Cuban economy has never bothered the Castro brothers in the slightest.

The Castro regime recognizes the increasing unrest among the repressed and impoverished Cuban people for fundamental change, but they are capable only of prescribing more painkillers rather than the radical surgery that is needed to restore the nation's health. Pretending to devolve more autonomy in individuals' lives is just one more cruelty inflicted on the Cuban people over five decades of dictatorship, a cruelty made worse by the cheerleading from abroad.

I agree with many of the responses from other members of the Shadow Government community to my friend Kori Schake's assertion that "we have a national security vulnerability of epic proportions in our federal debt," and her contention that defense cuts need to be part of the solution to our fiscal woes. I will thus strive to avoid repeating many of the same arguments here.

My concern about Kori's approach to the defense budget is that it ignores the fact that the Pentagon has already taken significant cuts during the Obama administration. While President Obama submitted budgets to Congress which allowed for growth barely at the rate of inflation, the appropriators consistently cut the top-line amounts allocated for defense, leaving the Defense Department with less than what Secretary Gates had stated was required to fulfill the missions that the military had been tasked to complete.

Critics often go so far as to allege that, even with these reduced funding levels year after year, the Pentagon has escaped "real cuts." Most recently, the Associated Press did this in a story on Governor Mitt Romney's statement that, if elected, he would reverse President Obama's defense cuts. Yet the Associated Press overlooked an inconvenient fact in its "fact check": in the months prior to the passage of the August 2011 deal to raise the debt limit deal, Obama not only bragged in a major policy speech that defense spending had been cut by $400 billion on his watch, but also said he wanted to repeat the cuts. The follow-up round of $400 billion or more in military cuts will now be enacted as part of the immediate reductions required by the Budget Control Act of 2011.

So, the reality is, despite what many of us defense hawks would like, defense has indeed been put on the table for both Republicans and Democrats -- and cut very deeply.

This is concerning for two reasons.

Read on

A unicorn is a beautiful, make believe creature. But despite overwhelming evidence of its fantastical nature, many people still believe in them. Much of China policy is also underpinned by belief in the fantastical: in this case, soothing but logically inconsistent ideas. But unlike unicorns, our China policy excursions into the realm of make believe could be dangerous. Crafting a better China policy requires us to identify what is imaginary in our thinking about China. Author James Mann captures some in his book.

Here are my own top ten China policy unicorns:

1) The Self-Fulfilling Prophecy. This is the argument that has the most purchase over our China policy. Treat China like an enemy, the belief goes, and it will become an enemy. Conversely, treat China like a friend and it will become a friend. But three decades of U.S.-China relations should at least cast doubt on this belief. Since the normalization of relations with China the aim of U.S. policy has been to bring China "into the family of nations." Other than China itself, no nation has done more than the United States to improve the lot of the Chinese people and to welcome China's rise peacefully. And, rather than increase its deterrence of China -- a natural move given the uncertainty attendant to the rise of any great power -- the United States has let its Pacific forces erode and will do so further. We may soon go through our third round of defense cuts in as many years. Here is just one example of how unserious we are about China: As China continues to build up its strategic forces, the United States has signed a deal with Russia to cap its strategic forces without so much as mentioning China. Unless Beijing was insulted by this neglect, surely it could take great comfort in an anachronistic U.S. focus on arms control with Russia. But despite our demonstrations of benevolence, China still views the United States as its enemy or, on better days, its rival. Its military programs are designed to fight the United States. The self-fulfilling prophesy is far and away the most fantastical claim about China policy and thus the number one unicorn.

2) Abandoning Taiwan will remove the biggest obstacle to Sino-American relations. Since 2003, when President Bush publicly chided then-Taiwanese President Chen Shui-bian on the White House lawn with Chinese Premier Wen Jiabao at his side, the United States has been gradually severing its close links with Taiwan. President Obama's Taiwan policy has been the logical dénouement. Arms sales have been stalled, no Cabinet members have visited Taiwan since the Clinton years, and trade talks are nonexistent: there is essentially nothing on the U.S.-Taiwan policy agenda. The reaction from China? Indeed, it has moved on. But rather than bask in the recent warming of its relationship with Taiwan, China has picked fights with Vietnam, the Philippines, Japan, South Korea, and India. It does not matter what "obstacles" the United States removes, China's foreign policy has its own internal logic that is hard for the United States to "shape." Abandoning Taiwan for the sake of better relations is yet another dangerous fantasy.

3) China will inevitably overtake the U.S. and we must manage our decline elegantly. This is a new China policy unicorn. Until a few years ago, most analysts were certain there was no need to worry about China. The new intellectual fad tells us there is nothing we can do about China. Its rise and our decline are inevitable. But inevitability in international affairs should remain the preserve of rigid ideological theorists who still cannot explain why a unified Europe has not posed a problem for the United States, why post-war Japan never really challenged U.S. primacy, or why the rising United States and the declining Britain have not gone to war since 1812. The fact is China has tremendous, seemingly insurmountable problems. It has badly misallocated its capital thanks to a distorted financial system characterized by capital controls and a non-market based currency. It may have a debt to GDP ratio as high as 80 percent thanks again to a badly distorted economy. And it has created a demographic nightmare with a shrinking productive population, senior tsunami, and millions of males who will be unmarriageable (see the pioneering work of my colleague Nick Eberstadt).

The United States also has big problems. But we are debating them vigorously, know what they are and are now looking to elect the leaders to fix them. China's political structure does not yet allow for fixing big problems.

4) (Related to 3). China is our banker. We cannot anger our banker. In fact, China is more like a depositor. It deposits money in U.S. treasuries because its economy does not allow investors to put it elsewhere. There is nothing else it can do with its surpluses unless it changes its financial system radically (see above). It makes a pittance on its deposits. If the U.S. starts to bring down its debts and deficits China will have even fewer options. China is desperate for U.S. investment, U.S. treasuries, and the U.S. market. The balance of leverage leans towards the United States.

5) We are engaging China. This is a surprising policy unicorn. After all, we do have an engagement policy with China. But we are only engaging a small slice of China: the Chinese Communist Party (CCP). The party may be large -- the largest in the world (it could have some 70 million members). We do need to engage party leaders on matters of high politics and high finance, but China has at least one billion other people. Many are decidedly not part of the CCP. They are lawyers, activists, religious leaders, artists, intellectuals, and entrepreneurs. Most would rather the CCP go quietly into the night. We do not engage them. Our presidents tend to avoid making their Chinese counterparts uncomfortable by insisting on speaking to a real cross section of Chinese society. Engagement seen through the prism of government-to-government relations keeps us from engaging with the broader Chinese public. Chinese officials come to the United States and meet with whomever they want (usually in carefully controlled settings, and often with groups who are critical of the U.S. government and very friendly to the Chinese government). U.S. leaders are far more cautious in choosing with whom to meet in China. We do not demand reciprocity in meeting with real civil society -- underground church leaders, political reformers and so on. China has a successful engagement policy. We do not.

6) Our greatest challenge is managing China's rise. Actually, our greatest challenge will probably be managing China's long decline. Unless it enacts substantial reforms, China's growth model may sputter out soon. There is little if nothing it can do about its demographic disaster (will it enact pro-immigration policy?). And its political system is too risk averse and calcified to make any real reforms.

7) China's decline will make our lives easier. China's decline may make the challenge for the United States more difficult for at least a generation. It could play out for a long time even as China grows more aggressive with more lethal weaponry (e.g., what to do with surplus males?). Arguably both Germany and Imperial Japan declined beginning after World War I and continuing through the disaster of World War II. Russia is in decline by all useful metrics. Even so, it invaded a neighbor not too long ago. A declining, nuclear-armed nation with a powerful military can be more problematic than a rising, confident nation.

8) We need to extricate ourselves from the "distractions" of the Middle East and South Asia to focus on China. This is a very popular unicorn among the cognoscenti. But how would this work? As Middle Easterners go through a historic revolution that could lead to the flowering of democracy or the turmoil of more extremism, how do we turn our attention elsewhere? Are we supposed to leave Afghanistan to the not-so-tender mercies of the Taliban and Pakistani intelligence? This view is particularly ironic given China's increased interests in the Middle East and our need for a partnership with India to deal with China. There is no way to create the kind of order we wish to see in Asia without exerting a great amount of influence over the oil producing states in the Middle East and by allowing India to become tied down in a struggle in South Asia. We are the sole superpower, our foreign policy is interconnected. "Getting Asia right" means "getting the Middle East and South Asia right."

9) We need China's help to solve global problems. This is further down on my list because it is not really a fantastical unicorn. It is true. What is a fantasy is that China will be helpful. We do need China to disarm North Korea. They do not want to, and North Korea is now a nuclear power. The same may soon be true with Iran. The best we can get in our diplomacy with China is to stop Beijing from being less helpful. It is a fact that the global problems would be easier to manage with Chinese help. However, China actually contributing to global order is a unicorn.

10) Conflict with China is inevitable. A fair reading of the nine "unicorns" above may lead to the conclusion that we are destined to go to war with China. It may be a fair reading, but it is also an inaccurate one. Sino-American relations will be determined by two main drivers; one we can control, the other we cannot. The first is our ability to deter aggressive Chinese behavior. The second is how politics develop in China. The strategic prize for Washington is democratic reform in China. Democracy will not solve all Sino-American problems. China may be very prickly about sovereignty and very nationalistic. But a true liberal democracy in China in which people are fairly represented is our best hope for peace. The disenfranchised could force their government to focus resources on their manifold problems (corruption, misallocated resources, lack of social safety net). The United States and the rest of Asia will certainly trust an open and transparent China more, and ties would blossom at the level of civil society. Historically, the United States has almost always been on China's side. It is waiting patiently to do so again.

For those who believe it is just a matter of time before China rides its commercial success to global hegemony, this week offered some compelling imagery: Europe, on its knees, reeling from political discord, rising bond yields, and bank downgrades; China, sitting atop its $3.2 trillion hoard of foreign exchange reserves, condescending to dictate the terms of European surrender.

Of course, Chinese Premier Wen Jiabao was not so tactless as to describe it as surrender. He actually expressed a "readiness to extend a helping hand and a readiness to increase (Chinese) investment in Europe." It wouldn't hurt, he went on, if Europe should decide to grant China market economy status, effectively lowering trade barriers.

Fareed Zakaria translates this into great power politics terms:

In a world awash in debt, power shifts to creditors. After World War I, European nations were battered by debts, and Germany was battered by reparation payments. The only country that could provide credit was the United States. For America, providing desperately needed cash to Europe was its entry into the councils of power, a process that ultimately brought a powerful new player inside the global tent. Today's crisis is China's opportunity to become a 'responsible stakeholder.'"

That's a twist on the original conception of what it meant to be a responsible stakeholder, but no matter. This interpretation falls apart as soon as one scratches at it a little.

The idea that a big infusion of Chinese cash would set Europe aright misinterprets the problems facing the Eurozone. Although the troubled countries there -- Greece, Ireland, Portugal, Spain, and Italy -- each took their own paths into difficulty, they are all in unsustainable fiscal situations. These require difficult choices about future taxes and spending, not just a quick bridge loan. Oddly enough, Zakaria recognizes this early in his piece, when discussing the implausibility of a "eurobond" solution, under which France and Germany would effectively co-sign loans taken out by their neighbors:

The minute such bonds are floated, Italy, Greece and the others would lose all incentive to make painful reforms; they could borrow all the money they need at German-subsidized rates, so why go through the dreary work of restructuring? The Germans know this -- hence their opposition."

Read on

I've just returned from a week of fishing at a remote lake in Canada, blissfully disconnected from just about every other concern in life except for what the fish were biting on. (For any fellow anglers among our readers, the answers are: not much action from the elusive muskie, but lots of action on Cisco Kids for northern pike including a 20-pounder I landed, Yamamoto Senko worms did well for smallmouth bass, and the reliable jig and minnow produced a limit every day of walleye). Our meals were the opposite of the Singaporean haute cuisine that Peter Feaver indulged in during his own recent trip, but for my money it's hard to beat the traditional "shore lunch" we enjoyed of fresh-caught fried walleye, fried potatoes, and fried onions, all cooked over an open fire on a deserted island.

After that northern idyll, my return this week to the United States was jarred by a litany of grim headlines: plummeting stock markets, an unprecedented credit-rating downgrade, yet another round of sovereign debt crises in southern Europe that further imperil the Eurozone, and violent rioting throughout the United Kingdom. Herewith a few thoughts.

The credit rating downgrade puts a painfully vivid exclamation point on my observation a couple of weeks ago about the Obama administration presiding over an America in decline. Like "leading from behind," there's just no way to put a positive spin on the word "downgrade." Yet the downgrade is but the latest symptom -- along with unemployment, growing debt and deficits, and declining markets -- of a more fundamental problem: President Obama has consistently failed to articulate a persuasive account of what drives economic growth. Even more than different priorities over issues like tax rates and loopholes, spending cuts, and entitlement reform, this failure is emblematic of the economy's persistent weakness throughout his presidency. As Jeb Bush and Kevin Warsh lay out in this compelling WSJ op-ed, the Obama administration appears completely devoid of any strategy for economic growth. More pointedly, President Obama has not demonstrated an appreciation for the essential role of business in capital formation and wealth creation. He seems to see the business community as an unfamiliar entity whose primary purpose is to generate revenues for the government, rather than an engine of job creation and improving living standards for American citizens. This is why so many commercial leaders -- from Fortune 500 CEOs to small business owners -- fundamentally mistrust this administration. After all, why trust a White House that fails to appreciate your indispensable role in economic growth, and repeatedly threatens you with higher taxes and increased regulations?

Yet at least Americans are not violently rioting in the streets and looting small and large businesses alike, which has sadly been the case in the United Kingdom. Back during his campaign, David Cameron often lamented what he described as Britain's "broken society" of fractured families, endemic welfare dependency, growing violent crime, and a burgeoning cultural coarseness and dissolution of order and moral standards. It was a grim diagnosis that generated agreement among the likes of Daily Mail readers but snide dismissal as Eton moralizing from other quarters. I observed much of this decline firsthand during my recent years of living in London, where traditional British order and decorum persisted in some pockets but was too often eclipsed by endemic social breakdown and national decline. The riots now display this to the world. On one level they are simply opportunistic hooliganism amplified by social media. But on a deeper level they are a toxic display of the nihilism and pathologies of the Broken Society. Scotland Yard, already reeling from its unseemly role in the recent phone-hacking scandal, has performed ambivalently in this much bigger test that cuts to the core of its legitimacy as the protector of order and safety. Meanwhile the Cameron government, which has always been perched awkwardly between its emphasis of a "new brand" of compassionate Toryism and its traditional role as the law and order party, now faces its own crisis of governance and identity. As the perpetually insightful Tim Montgomerie observes, after some shaky first steps the prime minister seems to have reasserted authority yet now faces a series of new battles that will do much to define his premiership.

As I posted earlier, I have been in Singapore for a series of lectures and meetings with strategic studies specialists inside and outside of government, courtesy of the wonderful people at the S. Rajaratnam School of International Studies. This was not my first visit to Southeast Asia, but it was my first (and hopefully not last) visit to Singapore.

I usually gain more from these exchanges than I give out, and that was the case this time. For folks who like to talk strategy -- and who like to sample extraordinary cuisines while doing so -- there is no place better than Singapore. Singapore is a tiny country, essentially a city-state, that punches well above its weight in international affairs both because of its record of economic success and because it takes seriously the need to think and act strategically. And, Singaporeans love to dine.

American visitors like myself get asked lots of tough questions and, since my visit coincided with the gruesome spectacle of the debt crisis, my answers often left me (and perhaps my audiences) second-guessing American power and purpose.

Still I had some takeaways:

Geostrategic tragedies happen when leaders hesitate to act and cling to beliefs in the face of all evidence. Prior to World War II, the British were confident that Singapore was an impregnable fortress, a "Gilbratar of the East." If the Japanese were foolhardy enough to attack it, the big guns on Singapore's hills would destroy the naval armada before it could reach the shore. And so they might have, if the Japanese had attacked from the sea. Instead, the Japanese launched an attack on the northern part of the Malaya peninsula and fought a bloody advance through the jungle in order to attack Singapore from Johore to the north, not, as the British expected, from the sea to the south. This strategic disaster unfolded over two months, so there was plenty of time for the British to adjust their defensive plans. But they didn't. Of course, the British also missed an opportunity perhaps to block the Japanese attack from the outset, if only the Brits had executed their planned preemptive raids to seize more advantageous terrain. But they didn't. And slowly, inexorably, the Japanese advanced until they trapped a very sizable British force in a tiny perimeter with limited water supplies. I kept asking myself as I visited those sites: are U.S. strategists clinging to mistaken beliefs that will come back to haunt us? Have we, through hesitation and uncertainty, ceded the initiative to forces that are not as complacent as we are?

Read on

A calamity like Japan's massive 9.0 earthquake last week is certain to rock Japan's economy and, in turn, global commerce. There is no good way to put a number on this coming shock, though one early assessment was the fall of more than six percent in Japan's Nikkei stock market index on Monday.

Instead, we can sound a general alarm and suggest where the impacts are most likely to appear. Here are four broad areas likely to see significant repercussions:

Interconnectedness
Several years ago, there was talk of whether Asia's flourishing economies had "delinked" from the consumer-driven economies of the West. That talk faded away with the global financial crisis. A sharp downturn in the United States and Europe depressed global trade and buffeted Asia.

Now the question is how shocks are transmitted from Asia back to the West. Japan, a trade surplus country, has not been a major source of net demand for the world economy. But it is tightly interwoven into the global manufacturing network. It demands parts from around Asia and the rest of the world and is a supplier of key components. Thus, when Japanese factories shut down and supply chains are temporarily broken, this could well leave factories elsewhere with either a slimmed-down order book or with critical ingredients out of stock.

Energy
The nuclear plant crises that followed the tsunami damage have inevitably rekindled debates about the safety and desirability of nuclear power. These debates come at a time of high oil prices and a sustained push to move away from carbon fuels for environmental reasons. The problem is that modern economies run on energy, demand is expected to boom, and there are a finite number of economically viable alternatives. There have been arguments that rational economic calculations will drive decisions and that we just need to be cautious about the design maintenance and siting of nuclear reactors. As we all familiarize ourselves with the various degrees of nuclear plant meltdown, it will be interesting to see if the debate remains this dispassionate. A turn away from nuclear energy would effectively curtail global energy supplies in the medium to long run and have a negative effect on global growth.

Read on

Secretary of Defense Gates is right. It would be a tragic irony if, having come this far in Iraq, the United States faltered and failed to fund adequately the next phase of the mission. Even with adequate funding, the mission will be hard enough.

Congress is right to take a hard look at the Iraq situation. The security needs in Iraq exceed anything the U.S. State Department ever has dealt with in the past. The current plan, which will shift the burden almost entirely from the Department of Defense to State, is distinctly inferior to the original plan, which envisioned a renegotiation of the Status of Forces agreement to allow a modest U.S. military presence as a stabilizing factor. The administration fumbled the original plan and while Gates hints at the possibility of reviving it at the eleventh hour, it may be too late. The current plan relying on the U.S. State Department to do more than it ever has done before is a barely satisfactory Plan B. But it is manifestly superior to Plan C, which involves walking away from Iraq entirely and hoping for the best. I believe once Congress has looked at and thought about the situation carefully, it must conclude that funding the State Department plan is the only responsible course of action available at this point.

I understand the frustration of people who believe the Iraq war was a mistake from the start, but I do not understand their desire to compound what they believe to be one error with strategic blunders of comparable proportions: abandoning Iraq or failing to provide the resources necessary to keep Iraq on a successful trajectory.

In an alternate universe, today's Washington Post would have a screaming, 4-column front-page headline:

U.S. must reduce deficit, IMF warns

Responding to the imaginary lead story, a contrite President Obama, fresh from ignoring his own deficit-cutting panel's recommendations in this week's State of the Union address, would appear before the media with International Monetary Fund chief Dominique Strauss-Kahn at his side, looking on sternly. The president, with a glance back at Strauss-Kahn, would step up to the podium and sheepishly retract his newly-announced grab bag of spending plans. "Never mind. Back to the drawing board."

When pressed by reporters ("Really?"), the president would reply, "The IMF has spoken. What can we do?"

It is in this alternate universe that the hopes of G-20 enthusiasts reside. Despite the best efforts of Treasury Secretary Tim Geithner in Seoul last fall, the G-20 rejected plans for automatic criteria that might have pushed unbalanced economies into rehab. Instead, the countries settled for a world in which the IMF would play the leading role, naming and shaming countries with excessive borrowing or lending.

Back in our universe, the president continues with his plans for green energy 'investments' and promises to get serious about the deficit at some unspecified future date. The IMF did, in fact, issue its name-and-shame warning and the Washington Post did, in fact, run the story -- on p. A16, just 15 pages after its lead story about how the Office of Personnel Management released federal workers too late for Wednesday's snow storm.

The president delivering the State of the Union address in person is a relatively recent phenomenon. Before Woodrow Wilson restored the practice, even populists like Andrew Jackson and Theodore Roosevelt fulfilled this Constitutional requirement by sending an address to be read to the Congress, which is curious, since the State of the Union is the president's most important speech, both substantively and symbolically. It gives him the opportunity to set a governing agenda, a chance to grab the commanding heights at the beginning of a legislative year. With all of the Congress, president's cabinet, justices of the Supreme Court, and Joint Chiefs of Staff arrayed, it theatrically reinforces that our executive is the primus inter pares of our political system. 

This year's State of the Union message will be especially important for President Obama, since a new Congress has just taken office after an election widely considered a referendum on the first half of the president's term in office, and the opposition has an activist agenda that, if adroitly implemented, would effectively sideline the president for the coming two years.

The main theme of the president's address should be economic: outlining job creation and debt reduction strategies. He needs to steal these issues from the Republicans who carried the election. While it is factually incorrect to characterize the economic crisis that began in 2008 as "the worst economic crisis since the Great Depression," that mantra is a political winner for the president. It buys him more latitude if he can frame the issue as staving off disaster, and he needs to effectively challenge the Republican narrative that his policies have deepened the recession. Other successes will not supersede a failure in reducing unemployment. The president needs to carry the argument that he is dedicated to job creation, a perception that has been undercut by his extended attention to other issues like health care reform, and on which the 2012 presidential election will likely hinge.

Read on

Two news items emanating from Vietnam in the past few days show the considerable challenges this promising nation still faces. The stories at first glance would seem to have little in common. The first, from the Washington Post, relates an appalling incident in which Vietnamese security thugs attacked a U.S. diplomat attempting to visit the dissident and Catholic priest, Father Nguyen Van Ly, under house arrest. The second, from the New York Times, describes the economic turbulence besetting Vietnam as its state-run industries and unstable currency face the harsh reality checks of international finance and market forces. Undergirding both stories is a common theme: the liability of one-party rule by Vietnam's Communist Party and its decrepit authoritarianism.

Much of the prevailing debate about the Chinese model of authoritarian capitalism (and its Russian cousin) overshadows the fact that other nations, such as Vietnam, are trying to follow a similar path. It is a mixed record. Since Vietnam's Politburo inaugurated the "Doi Moi" economic liberalization reforms in 1986, the country has experienced substantial growth averaging around 7 percent per year. Behind these impressive numbers are the countless Vietnamese citizens whose lives and livelihoods have been considerably improved over the past two decades.

Yet as the late economist Herb Stein declared in his eponymous law: "if something cannot go on forever, it will stop." Such is the case with the hopes for enduring growth in a brittle system such as Vietnam's, where the Communist Party still plans much of the economic activity and vainly tries to insulate its state-owned enterprises from market discipline. The Times story includes a statistic that dramatizes the inefficiency of Vietnam's government-owned companies: they absorb 40 percent of the capital invested in the country but produce only 25 percent of its gross domestic product. Such capital misallocations are having deleterious consequences, such as inflation, credit rating downgrades, rising interest rates, and a stagnant stock market.

Read on

The Chinese and the Russians have joined forces to launch an assault on U.S. financial hegemony! From China Daily:

China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.

This all signifies... not much. At most, it is a symbolic attempt to lodge a complaint against perceived U.S. mismanagement of the dollar as a global reserve currency.

Remember, hardly anyone is required to use the dollar. They do so because it is convenient. This is true domestically as well as internationally. A pundit could try to barter a column for a latté, with no money involved, but it would require finding just the right politically-curious barista. It's much easier to use dollars to facilitate exchange.

Globally, there is nothing novel about discovering an exchange rate between the Chinese RMB and the Russian rouble. Once you have each currency's exchange rate against the dollar, it's just straightforward division to calculate (known as the cross rate).

The problem for Beijing and Moscow is that if their trade does not balance - and China, at least, has occasionally had a problem with that - someone is left holding a bag of roubles or renminbi. Other than buying Russian goods, there's only so much one can do with roubles. That's what sets apart the big global currencies, like the dollar or the euro. Even if you don't want to shop in New York, you can always go to a Middle Eastern bazaar and buy a few barrels of oil. 

There are perks to issuing a global currency; it's nice to be able to print money that's accepted around the world. There are also responsibilities. If the U.S. Federal Reserve prints too much, all those bags of dollars will drop in value. China, sitting atop many of those bags, has been particularly vocal about its concern.

That's why the Chinese premier is in Russia, issuing joint proclamations, trying to take the dollar down a peg. The Chinese and the Russians may be joining forces, but given the way global finance works, they're mostly going to end up simply encumbering each other.

As part of the developed world's most dramatic effort to put its public finances on solid footing, the Conservative Liberal Democratic government in Britain announced significant reductions to its defense program yesterday. Their review is a fearless example to others, including the United States.

Prime Minister David Cameron's government put health care and (somewhat oddly) development assistance off limits, subjecting most departments to a reduction of 25 percent from their current budgets. Defense was reduced only around eight percent across four years. An equivalent reduction in U.S. defense spending would clip $56 billion dollars (the entirety of the British defense budget) in the same time frame. By contrast, Sec. Robert Gates is seeking to keep U.S. defense spending increasing by one percent per year.

And what did they cut? Most importantly, they did not reduce their commitment to the wars we are fighting, although they plan to significantly reduce their forces as their commitments wind down. They are reducing their civilian defense workforce by 25,000 and their uniformed military by 17,000. The army will take the smallest reduction, appropriately, given their tempo of operations through 2015 (the period of cuts).

The reductions will make Britain less able to fight continuously, as we and they have been doing since 2001. But they have preserved the ability to project 30,000 troops to a fight, a feat no other country except us could likely achieve. They even added funding for additional helicopters and mine-resistant vehicles important to operations in Afghanistan.

The British cut by 40 percent their tanks and artillery, betting they will be less valuable in future wars than capabilities currently employed in the war in Afghanistan. I'm not sure that's true, but it's not an unreasonable view -- in fact, it is also Secretary Gates's rubric for U.S. forces.

The cuts do mean Britain will be even less able to fight wars unless they are fighting alongside the United States, but they gave that option up in the 1998 Defense Review. The further diminution is of degree, not type. It will be most prevalent in Britain's air and maritime operations. Four frigates will be decommissioned. Both the navy and air force will be reduced by 5,000 people each.

Harrier jets, MRA4 reconnaissance aircraft, and R1 battlefield surveillance aircraft will be eliminated; C-130J airlifters will be retired a decade early. As currently envisioned, it will create a gap in carrier air through 2019. This could be attenuated by a faster shift to unmanned airframes (that is not in the spending plan) or greater cooperation with France and other power-projection countries (although it is heresy to say so on Trafalgar Day, the French could, for example, deploy fighters on British carriers and vice versa).

They have kept crucial niches of excellence valuable to remaining a first-tier military, including:

• The nuclear deterrent (more slowly modernized but to retain continuous at-sea deployments; related Less to spending than to disarmament, operational warheads to be reduced by around one-fourth);
• aircraft carriers (two, although they are reducing their aircraft buys and allowing a gap in fighter capability while transitioning to JSF);
• cyber security (increasing spending to around $27 billion per year);
• special forces (increasing their numbers);

But Britain's value as a strategic ally of the United States is not just the quantity or quality of their military forces. Their value is crucially dependant on their willingness to fight. And here, Britain really is different and better than most other potential allies of the United States. Britain losing the will to fight is a subject very much worrying U.S. defense experts; these defense reductions to not call into doubt that fundamental sensibility.

Britain's reductions are substantial, and one wishes they had not been necessary. But the Cameron government deserves an awful lot of credit for facing Britain's debt crisis and making hard choices that accept risk in the near term to put their country on stronger strategic footing. The British set sensible priorities and programmed to them, making cuts that do not damage their ability to protect and advance their interests. Lots of other countries are set to make reductions in defense spending, including the United States; probably none -- including us -- will do as proficient a job as Defense Minister Liam Fox and the British defense establishment have done.

The politics of debt reduction will drive the severity of budget cuts; we Republicans should be actively building intellectual capital to make smart choices at different budget top lines. We would be much better positioned had Secretary Gates's instruction for the Quadrennial Defense Review been to design sensible defense programs at several different baseline budget levels (say, varying by $50 billion dollars a year). That would have permitted a debate -- and given the elected leadership a real choice -- over where to accept risk, which is the essential question.