Apple has traditionally been known as an apolitical company. Americans should be thankful that CEO Tim Cook is abandoning that approach to come to the U.S. Senate today to push for a change to one of the most ill-advised aspects of America's gargantuan tax code: its global corporate tax structure.
It is true that Apple holds $100 billion offshore, but rather than breaking out the pitchforks, Americans should ask why one of the world's savviest tech companies is behaving this way.
The United States, unlike nearly every other advanced economy, taxes foreign earnings brought back to its shores. That approach has forced American companies to fight global competitors with one hand behind their backs.
When Apple is competing with Samsung in the cell-phone market or Caterpillar is competing with Komatsu to determine who helps build the skyscrapers in tax-free Dubai, Apple's California-based and Caterpillar's Illinois-based workers are at a cost disadvantage because their employer must pay tax on its earnings in Dubai while Samsung and Komatsu do not.
To mitigate this disadvantage, companies have been allowed to defer paying this tax until they bring the money back to the United States. That creates an incentive to invest in international markets, not the United States. This is like America shooting itself in the foot. It's extremely difficult for a one-armed, one-footed company to compete against multinational corporations whose governments don't impose additional burdens on their international business operations.
In addition to being a drag on American businesses, it's also one of the most misrepresented aspects of the tax code. President Barack Obama and others who oppose removing this provision demonize it by calling it a tax loophole that "encourages American companies to ship jobs overseas." It's a charge that political fact-checkers have disputed, but the line lives on. The true effect is that it simply makes it more difficult for American goods and services to compete in a global marketplace.
In 2004, Congress passed the American Jobs Creation Act that included an opportunity for companies with foreign earnings abroad to bring that cash home at a 5.25 percent tax rate rather than the usual 35 percent. Companies brought over $300 billion back to the United States. Temporary reprieve is helpful, but for the sake of American workers the current system must be scrapped. Leveling the playing field for American companies permanently will pay dividends to shareholders, workers, and consumers alike.
Effectively confronting this job-destroying deception emanating from the Oval Office, the biggest megaphone the world affords, requires the voice of a master marketer with the credibility of leading the company that is perhaps most responsible for any residue of economic optimism remaining in the country.
As Cook recently stated, "I can tell you unequivocally Apple does not funnel its domestic profits overseas. We don't do that. We pay taxes on all the products we sell in the U.S., and we pay every dollar that we owe." Hopefully the Senate committee hearing from Cook will be as straightforward with the facts about how the U.S. tax system constrains American businesses overseas.
Apple has 50,000 employees nationwide and spurred the creation of nearly 600,000 jobs in manufacturing and software development. The company's iTunes app store birthed an entirely new industry: smartphone and tablet software design. The company has already paid out $9 billion in royalties to developers. If given the opportunity to bring back profits earned abroad under a fair tax system, imagine how those proceeds could transform the technology market and the American economy.
Haven't we suffered through self-imposed economic malaise long enough? We should view Tim Cook's stand as a call for all patriots to rise up and say enough playing politics -- let's help American companies invest in American jobs.
Mark R. Kennedy leads George Washington University's Graduate School of Political Management and is chairman of the Economic Club of Minnesota. He previously served three terms in the U.S. House of Representatives and was a presidential appointee to the Office of the U.S. Trade Representative's Advisory Committee on Trade Policy and Negotiations during George W. Bush's administration.
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The policy world has turned on Ken Rogoff and Carmen Reinhart with a vengeance. The two are the celebrated authors of multiple studies showing that very high levels of government debt have historically been associated with slower growth. After a review of one of their articles revealed a spreadsheet mistake, the ever-temperate Paul Krugman was driven to ask: "Did an Excel coding error destroy the economies of the Western world?"
John Maynard Keynes once said that "even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist."Apparently, this bondage is felt even more acutely when those practical men are in the thrall of a living, breathing pair of economists. Now that Rogoff and Reinhart have been discredited, the thinking seems to go, the masses who had been suffering under the yoke of austerity are now free to spend as they had always wished.
There are a number of reasons to see this as an overreaction. The episode is a bit analogous to a researcher finding that a daily Twinkie adds 10 pounds over a year. A subsequent study finds that, with different methodology, a daily Twinkie might add only 5 pounds over a year. Then the baying pack howls that they knew Twinkies were good for you all along, they abjure dieting, and stuff themselves with cake and cream filling. [Reinhart and Rogoff respond to the criticisms and put the dispute in the context of a broader literature without resorting to any talk of dessert cakes.]
An odd strain of the discussion has been the implication that the only restraint on unbounded budget deficits has been the Reinhart-Rogoff admonition that it could slow economic growth. In fact, there are other constraints. How much can Portugal or Greece or Cyprus spend beyond current tax revenue? They can spend the money they have in savings (negligible) plus the amount they can borrow in the open market (negligible) plus the amount that other countries or international financial institutions (IMF, ECB) are willing to lend them. The limitation, then, is not Harvard researchers' findings but rather the willingness of other leaders to risk their funds, as their thoughts teem with admonitions about "sending good money after bad."
Of course, countries such as the United States, France, or the UK can borrow on open markets. That does not free them from all non-academic constraints, however. If borrowing is excessive, a country begins to look riskier. The United States was downgraded in 2011, France in 2012, and the UK last week. Even the IMF, cheering now for a spending boost, has argued for offsetting medium-run budget cuts.
The Reinhart-Rogoff episode has prompted deeper ruminations about how grounded our economic beliefs really are. In the Wall Street Journal, Carl Bialik elicits a confession from the editor of the American Economic Review that peer review rarely involves line-by-line checks of authors' calculations. Bialik lays bare some of the inherent vagaries of working with historical macroeconomic data -- there are no controlled experiments and the numbers can be unreliable.
It is thoroughly healthy to review the limitations of empirical macroeconomics. It is the part of economics that deals with the most moving parts and has the least opportunity to isolate treatment effects from confounding variables. Economics does far better as a field when conditions are more favorable -- predicting how an auction will work, for example. Yet citizens and policymakers want to know what will happen with inflation, unemployment, and growth, and how these will be affected by government spending, taxes, and the money supply. These are all macroeconomic questions.
Let's stipulate, then, that macroeconomic point estimates should be treated as somewhat fuzzy. That was always acknowledged in the formal economics (standard errors), but it does not usually make for good newspaper copy. If multiple studies, using different data sources and different techniques, find similar results, then we will have steadily more confidence in those findings. This has always been true too, though in public debate participants tend to prefer a single bold study to a lengthy lit review.
The newfound caution about macroeconomic findings has, so far, been curiously selective. Foes of austerity argue that, after slaying the dreaded Reinhart-Rogoff result, they are not even bound by warnings of credit downgrades. After all, if only we adopt new fiscal stimulus, it will promote growth and pay for itself (debt/GDP will fall as GDP rises faster than debt).
How do we know this? Why should we believe that the stimulative effects of new spending will overcome people's worries about the new taxes that will inevitably follow? How can we calculate how much stimulus is appropriate? Are tax cuts or spending increases more appropriate? If we do not see booming economic growth after stimulus has been tried, how will we know that the stimulus was worthwhile, that it saved us from an even worse fate?
We have macroeconomic findings. Precisely calculated macroeconomic findings. Based on historical data. Published in peer-reviewed journals. Worked out on spreadsheets. Let the spending commence.
Yesterday the IMF chided the United States and the United Kingdom for their recent pursuit of austerity. The organization released its latest World Economic Outlook in anticipation of the annual World Bank-IMF spring meetings in Washington, when global financial dignitaries gather.
The IMF put forth top officials to discuss the organization's forecast -- which I'll take up in another post -- and also to critique the state of fiscal affairs in major countries. Carlo Cottarelli, the director of the IMF's fiscal affairs division, described 10 economies with serious fiscal problems -- debt in excess of 90 percent of GDP and rising. These 10 -- the United States, Japan, the UK, France, Italy, Spain, Belgium, Greece, Ireland, and Portugal -- account for 40 percent of world GDP (for all the headlines they draw, Greece, Ireland, and Portugal account for very little of that global GDP).
Cottarelli warned that there were numerous studies indicating that when debt hit 80 to 90 percent of GDP, growth would suffer. This seemed an oblique reference to the bubbling controversy over the work of Ken Rogoff and Carmen Reinhart. Count the IMF in the camp that think Rogoff and Reinhart are basically right. Cottarelli's conclusion, given his reading of the broader evidence, was that a country should not seek to stabilize debt/GDP at the 90 percent level, but rather should aim for significantly lower levels of debt.
While that might seem to support a call for austerity, the IMF's short-term policy conclusions were just the opposite. As the Wall Street Journal reported it:
"...the International Monetary Fund on Tuesday called on countries that can afford it -- including the U.S. and Britain -- to slow the pace of their austerity measures ... it warned euro-area policy makers against focusing too much on hitting tough deficit targets, saying they risked further deepening their downturn. ‘Fiscal adjustment needs to proceed gradually, building on measures that limit damage to demand in the short term,' the IMF said."
There were two interesting caveats to this call, however:
1. This recommendation to back off austerity only applied to countries that are not currently subject to market pressures.
2. Short-term easing needs to be paired with credible medium-term restraint. (Borrow more today; pay it back tomorrow).
Those caveats are critical and raise all sorts of questions. Fortunately, I was at Cottarelli's press conference and got to ask.
Take the "market pressures" exception. You know a country is experiencing "market pressures" when that country's bondholders are panicking, a debt sell-off is underway, and interest rates on sovereign debt are soaring. When no one wants to buy or hold your debt, it is an awkward time to try issuing more. On this, there is broad agreement.
But how do you know when investors are about to lose faith in your debt? Is there any reason to expect advance warning? When should preparations begin?
Cottarelli's response was that we do not really know in advance. We have to guess. There are some indications of vulnerabilities -- a country whose debt is held more by international investors is more vulnerable -- but it's an art, not a science.
An honest but unsatisfactory reply. It does little good to say that we know market pressures when we see them. Once the market has turned on your debt, it's too late. Budget processes are slow, with long lags from initial discussion to actual spending. If interest rates were to spike on U.S. debt in September 2014, borrowing for that time period is covered by the budgets currently under discussion in Congress. And, for the record, Federal Reserve data show that in 2011 roughly 46 percent of U.S. debt was held by international investors.
On the question of repaying additional short-term borrowing with medium-term frugality, I asked about judging the credibility of fiscal plans. The U.S. fiscal stimulus of 2009 was supposed to be a temporary measure, but worked itself into spending baselines. Congress regularly adopts measures that ‘balance' 10-year budgets, only to repeal those measures when the time comes. A classic example is the attempt to cut payments to Medicare providers, requiring a regular "doc fix" when it turns out there is a limit to the pro bono services doctors will provide. So how do we know that medium-term promises are credible?
Cottarelli suggested that a first step was to look at whether a plan contained sufficient detail. Beyond that, though, he acknowledged it was a much more difficult issue. His recommendation was to look at a country's past record of implementing fiscal adjustment.
Other than the recent austerity, to which they object, it was unclear which episodes in recent British or U.S. fiscal history offer reassurance on this count.
The rationale for the IMF's call to set aside austerity is pretty clear -- large parts of the world are slumping, central banks are doing all they can on the monetary side, so the IMF would like to see a boost to demand through looser fiscal policy (lower taxes or higher spending). The Reinhart-Rogoff controversy is a sideshow here. The IMF is not embracing ever-rising debt levels; it is pushing select countries to adopt a temporary slump-busting burst.
Yet if one runs through the IMF's own check-list of pre-requisites for short-term relaxation -- current debt at sustainable levels; freedom from worry about a market panic; credible medium-run plans for cuts -- none of them seem to apply. The IMF prescription appears less a careful calculation than a double gamble. It is a bet that further short-term measures are appropriate to address a slow-down that has now dragged on for five years, and also a bet that those who adopt the prescription will not have to pay a hefty price down the line.
Stephen Jaffe/IMF via Getty Images
True to form, the Venezuelan government and its Cuban minders have spared no effort or expense to ensure the outcome of Sunday's snap election to elect the late Hugo Chávez's chosen successor. Challenger Henrique Capriles has been game (and his singular effort to revive the fortunes of the Venezuelan opposition commendable), but in the end his lot has been to be cast as a mere prop in Venezuela's version of "casino democracy," where the house always wins.
Ironically, Capriles should privately be relieved that Chávez's appointed successor, the dour and robotic Nicolas Maduro, and not he, will inherit the ticking economic time bomb that Chávez has bequeathed his country. Most sober observers of the Venezuelan scene give the country's economy 12 months at most before the wheels start coming off. As I have written before, some may remember Chávez for his embrace of the country's marginalized, but all Venezuelans are now poised to reap the whirlwind of the balance of his legacy: soaring inflation, a bloated public sector, a crippled private one, electricity blackouts, shortages of basic goods, and one of the highest homicide rates in the world.
Far from demonstrating any appreciation for the gravity of the economic situation, Maduro has indicated he only intends to dole out more of the same. In fact, even as the campaign has been taking place, the government has been pushing a new law in the rubber-stamp National Assembly that further undercuts the private sector and concentrates even more economic power in the state.
The so-called Law against Monopolies and Other Similar Practices is a capricious measure that empowers the government to confiscate any business that it deems not acting in the public interest. Yet the law would discard traditional metrics for the determination of monopolistic practices and instead leave it up to a politically appointed board to decide if a company has a "decisive domain" over the setting of prices or other market conditions. (State-owned enterprises would be exempt under the law, further tilting the playing field against the private sector.)
In other words, any successful company runs the risk of confiscation at any time by crossing the government's arbitrary line of being "too successful." And with the judicial sector also controlled by the government, private companies are left with no outlet to appeal adverse decisions.
The fall-out if such a law was to be implemented is not difficult to imagine: a further retraction of private sector activity, less production, and less opportunity for working Venezuelans. Just what the Venezuelan economy does not need at this critical juncture.
This is a far cry from the image of Nicolas Maduro that U.S. audiences were presented by the news media after he was named by Chávez as his successor. We were told the former bus driver was "pragmatic" and "likable." (Call it the Yuri Andropov Syndrome, after the soft-pedaling to the American public of the former KGB-head's supposed fondness for "Western jazz and scotch.")
Well, during this recent campaign, when the likable, moderate Maduro was not expelling additional U.S. personnel from the U.S. embassy in Caracas, accusing the United States of poisoning Hugo Chávez, or implicating former U.S. officials in attempts to assassinate either him or Capriles (depending on the day), he was making homophobic slurs about his opponent and characterizing the opposition as fascist coup-mongerers. And, at the same, planning further actions to destroy what is left of the private sector in Venezuela.
There will be those who will dismiss all this as just so much campaign bluster. They do so at risk to U.S. national interests. There is no evidence that Maduro is anything other than a deadly serious ideologue beholden to Cuba and to further pushing Hugo Chávez's destructive agenda. Consider him Chávez without the charm -- and come hell or high water he is about to be with us for another six years beginning this Sunday.
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I wrote here a while back when Mexican President Enrique Peña Nieto was elected that we should give him a chance. I said this for several reasons, among them: 1) he and a majority of his party are of a new generation that has turned its back on the old patron-client system that characterizes so much of the developing world, and 2) he knows that to lift the half of the population that still lives in poverty and suffers from massive economic inequality he must increase economic growth, which is possible only if monopolies are smashed and foreign investment welcomed. He's off to a good start, bringing his party with him and building coalitions with the center-right PAN and others.
Three of his administration's actions demonstrate my optimism.
First, like the last PRI president before him, Carlos Salinas, Peña Nieto has shown his resolve and ability to put reform and the public above his cronies by having the head of the national teachers' union arrested on corruption charges (see here and here). No matter that she helped him get elected -- she opposed his reform to strengthen the hand of the state to hire and fire teachers at the expense of the union's overweening power. It is easy to be cynical and say that she was arrested for being a political opponent. Maybe that is exactly what happened. But maybe the president doesn't care who was or was not a supporter of his campaign for the presidency -- corruption is in his sights. In the end, if she is truly corrupt and found guilty, Mexico is better for it no matter what motivated the arrest. With his act he wins respect and not a little fear from the caciques of other sectors who might oppose his reforms and try to take Mexico backwards. We should remember that Mexico is not yet Switzerland or Sweden and is still an evolving democracy. Think Chicago, or Louisiana before Gov. Bobby Jindal.
Second, he is taking on the richest man in the world -- Carlos Slim, who has for decades controlled telecoms in Mexico. Slim controls 80 percent of the country's fixed lines and 70 percent of its mobile phones. The reform the president has put forward (see here and here) would give the government the right to break up monopolies that constitute 50 percent of a market and to make it easier for foreigners to invest.
And finally, the really big prize: reform of the nationalized oil sector. This is the third rail of Mexican politics after Salinas in the late 1980s reformed the communal land system. Peña Nieto leads a party that for decades led with the cry "the oil is ours!" as it nationalized and ran the industry. While the state hasn't run the industry into the ground as Chavez did, it has never lived up to its potential as a key funder of the government and for the last eight years has seen its production capacity drop. The problems stem largely from keeping significant foreign investment and technology out of the industry. The president means to change all that and got a good start at it by getting his party to vote in favor of the reform that now moves to Congress.
While it is unlikely that the leftist parties will support Peña Nieto's reforms -- and certainly not the oil industry reform -- the center-right PAN should and supporters of Mexico, free trade and the free market definitely should. U.S. policy should be to congratulate Peña Nieto and his party and to encourage Mexico to open itself further by these reforms. These are hopeful days for Mexico.
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A couple months ago, the New Yorker posted a story and wonderful online video about a master pickpocket. This person was willing to demonstrate his art on camera. Even so, he moved so quickly that it can take multiple viewings to see just how he relived his target of his possessions. The key to it, of course, is misdirection. The pickpocket makes sure your attention is directed somewhere other than where the action is taking place.
This came to mind when reading Dan Drezner's rejoicing about recent polls showing improved U.S. public sentiment about trade. I welcome a new public receptiveness to trade as much as anyone, but Dan, in his euphoria, concludes:
"The spike in public enthusiasm from last year is politically significant. At a minimum, it suggests that President Obama won't face gale-force headwinds in trying to negotiate trade deals. Which means I could win my bet with Shadow Government's Phil Levy. Which is the only thing that matters."
Nor was Dan the only one to wax optimistic about trade prospects this past week. Mike Green thought things had gone rather well with Japanese Prime Minister Shinzo Abe's summit meetings with President Obama in Washington.
"Even on the trans-Pacific Partnership (TPP), where expectations were low, there was much more substance than met the eye.... The Japanese delegation had a quiet spring in their step after the summit and were keen to move on TPP in a matter of weeks..."
This, too, is promising. Peter Feaver had it exactly right when he noted that engagement with Japan could be an essential part of delivering on Obama administration promises of attention to Asia.
So, as far as public wisdom and the Asian pivot are concerned, these are both healthy developments. Yet, when it comes to prospects for trade policy accomplishments over the remainder of President Obama's term, anyone laying odds or taking wagers should pay close attention to where the action is. To that end, here are four questions to help maintain focus:
1. What will Japan's entry do for TPP prospects?
Japanese entry into the TPP, if it happens, will be a good thing. It will dramatically increase the economic significance of the TPP, and it will establish the agreement as the premier accord governing trade liberalization and economic rules in the Asia-Pacific region.
If Japan does not join, we have problems. The administration had previously suggested that Japan could enter in the next round, after this version of TPP concludes. That, however, would pose serious difficulties. Japan is no small economy able to sign on to an agreement with a few innocuous accession talks. If the TPP reaches a successful conclusion soon, after four or more years of negotiation, will there really be an eagerness to reopen the deal in the near future? But the size and complication of Japan's economic relations also mean that the task of concluding the TPP just got much harder. One former USTR recently opined at a conference that if Japan joins the talks the TPP will not be concluded in President Obama's term.
2. What do key interest groups think?
While it does not hurt to have the public embracing trade, U.S. agreements are not decided by referendum. I will leave it to all the political scientists buzzing around this site to provide details, but a more sophisticated approach would focus on the dynamics of the Congress. A more sophisticated approach would still think about the relations with key constituencies, such as organized labor. From the time President Obama first took office, it appeared clear that he had the votes in Congress to pass the pending FTAs with Colombia, Panama, and South Korea. Yet he did not put them forward until late in 2011, despite loud complaints from the business community. This at least suggests that there was something more than vote counting going on.
Along these lines, there was an alarming bit of news in the Hill recently. One promising feature of a trade deal with Europe was that it would seem immune from divisive questions about labor standards that had plagued FTAs with developing countries such as Colombia. The Hill, however, reported that "unions want to use negotiations on a U.S.-European Union (EU) trade deal as leverage to win stronger labor laws here in the United States."
If so, this does not bode well. Those are among the worst trade fears of Republicans on the Hill -- the prospect that labor legislation that could not pass a straight vote could instead be slipped in through the back door of a trade deal.
3. How are Congressional relations these days?
Per the constitution, trade is Congress' domain. Congress can try to delegate some of the negotiating power to the executive branch but ultimately must approve of any deal that is struck. If this is to work through periods of detailed negotiations, there must be good, open communication between the Hill and the White House. In particular, the committees that deal with trade -- House Ways and Means and Senate Finance -- must be on board. As it happens, these are the same committees that deal with the sort of taxation issues that have been a recent struggle. I'll leave it to the reader to grade the degree of comity between branches.
One less subjective measure, however, is whether Congress grants the executive trade negotiating authority (known as TPA -- trade promotion authority). The administration has also been saying for years that the idea of TPA is a reasonable one, but the time is not ripe. In the 2013 trade agenda, released today, the administration said it would work with Congress on obtaining such authority. That will be a contentious fight, since it will raise issues such as the permissible scope of labor provisions in an accord. The document does not set a date.
4. Who's your USTR?
It is also helpful, when negotiating complex trade agreements, to have a representative who will go forth and conduct the negotiations. The incumbent USTR, Ambassador Ron Kirk, reportedly just held his going-away party. Though there have been rumors, the administration has not yet named a new USTR, much less confirmed one. That could prove an obstacle to racing ahead with complex agreements.
So I see the trade policy landscape a little differently than Dan Drezner does. He may want to keep in mind that, if you don't keep your eye on where the action really is, someone may take your lunch money.
The conquering of the euro crisis seems like something out of a fairy tale. Faced with a gut-wrenching peril, our hero closes his eyes and chants an incantation: "Whatever it takes!" Suddenly, once-insurmountable troubles melt away and everyone lives happily ever after.
So what happened? Was it all in our minds? Was the episode anything more than a panicked bunch of bond traders, stampeding toward a precipice but now safely pacified and redirected?
As last summer turned into fall, Italy and Spain were wobbling. The two countries -- the third and fourth largest economies in the eurozone -- saw their bonds shunned by global investors. For the heavily indebted pair, a bond sell-off meant that interest rates rose and disaster loomed. At some point, the high price of borrowing would become unbearable. The eurozone nations had gathered funds to try to avert a crisis, but the sum would not be enough to cover the needs of such large member economies.
Then Mario Draghi, head of the European Central Bank, stepped in to save the day. He announced that the ECB would do whatever it took to save the currency. If extra funds were needed, the ECB would provide them through a program it called Outright Monetary Transactions -- the unlimited purchase of troubled nation bonds once those countries asked for help.
The effect of his announcement was dramatic. Bond yields fell as buyers relaxed. While the previous bailout fund might have been limited, the ECB's ability to print money and buy bonds was not. The restoration of calm was so successful that the ECB did not have to actually do a thing -- the mere announcement that it was willing to act relieved the pressure on Spanish and Italian borrowing.
It is hardly a novel idea to think that a dangerous market panic could be settled by words alone, so long as those words were credible and uttered by the right person. So, do we mark this up as an instance of judicious intervention? A daring move by Mario Draghi that saved the European project and merited his selection as the Financial Times' Person of the Year?
Maybe. The problem is that the sovereign debt problems plaguing Spain and Italy were only one part of a multi-dimensional crisis. The other problems remain, two in particular. First, the untenable contradictions of the eurozone's approach to banking have not been resolved. Second, the beleaguered countries along the eurozone's periphery are being asked to endure potentially unbearable levels of unemployment and economic stagnation.
The banking problem can seem the most obscure part of the problem. Yet as the global financial crisis demonstrated, the provision of credit is the lifeblood of an economy. Cut off credit and economic asphyxiation sets in quickly. Europe's additional discovery was that, in a single currency zone, money could flow very rapidly from any bank perceived as risky to others perceived as safe. Any hint that a bank's host country might leave the euro or that the bank might have gorged itself on dubious sovereign debt would be enough to start the exodus of funds. No funds, no credit, no economic activity.
Eurozone leaders resolved to fix this with a banking union. And then they ran into politics. Banking regulation is sensitive. There was little appetite for ceding control. Last week, discussing a recent bilateral move by France and Germany to coordinate their banking policies, the Financial Times' Wolfgang Münchau wrote:
"My suspicion is that the ultimate intent of the Franco-German legislation is to secure the position of their national champion banks ... The most important signal sent by the unilateral legislation in France and Germany is the lack of political will to sort out the banking mess, which is at the heart of the eurozone crisis. Instead, governments are seeking refuge in symbolic gestures ... The renationalisation of banking means that the monetary union is as unsustainable today as it was in July last year -- and now the policies needed to fix this problem have been abandoned."
This was one danger of Draghi's move. By alleviating the sense of impending doom, he also may have undermined the impetus for overcoming entrenched opposition to reform.
The growth and unemployment situation is not much better. A story this week, contrasting positive Spanish sentiment with dismal performance, detailed the economic turmoil in the country:
"...in the last quarter of 2012 ... the number of companies declared bankrupt soared by almost 40 per cent to 2,584. It was the highest number since the crisis began, suggesting that the situation for credit-starved Spanish companies is not only getting worse -- but getting worse faster than before ... Nor has there been any sign of a turnround in Spain's dismal unemployment numbers, which continue to rise towards 6 million, or more than 26 per cent of the workforce ... The IMF expects a drop in GDP of 1.5 per cent this year -- a worse recession than in 2012."
We also come upon another danger of Draghi's move: By restoring confidence in the euro, he paved the way for the currency to rise, which did no favors for eurozone exporters. That's hardly the cause of Spanish economic woes, but it is no help, either.
And then, as always, the democracies of Europe have politics. Spain's governing party is caught up in a political scandal. Italy is moving back to electoral politics after a technocratic interlude. It is not clear that difficult political choices will get much easier in either case.
The list of eurozone perils is alarmingly long. Yet a remarkable sense of calm prevails in the markets. Perhaps this will be a crowd-pleasing story book ending, the sort in which impossible obstacles are overcome and everyone goes home happy. Or perhaps it will be the kind of story one rarely sees out of Hollywood, in which our blissful hero opens his eyes, only to find that he had dreamt his salvation and the threats remained, more menacing than before.
DANIEL ROLAND/AFP/Getty Images
The United States, protected by two oceans and with a global range of allies and interests, has found for a century that it must go abroad to shape and lead a dangerous world. But President Barack Obama seems, in some respects, to prefer to stay home. Whereas George W. Bush's foreign policy was maximalist, Obama's is minimalist. A foreign policy assessment only halfway through his presidency is no doubt unfair -- he may yet vanquish Iran's nuclear weapons program, put an overdue end to Syria's bloody civil war, stand down Chinese aggression in Asian waters, and oversee a historic wave of trade liberalization. But he has not yet. The Obama Doctrine appears less ambitious. Here are its elements to date:
Nation-building at home, not abroad. President Obama took office so determined to "end the war" in Iraq that he failed to negotiate a follow-on force to sustain stability there. In Afghanistan, after a decade of allied sacrifice and real gains, the administration astonishingly is now flirting with the "zero option" of leaving no U.S. forces there after 2014. Obama prefers to focus on "nation-building at home." But will he be able to if Iraq or Afghanistan backslide into civil war, or if Syria's violent spillover engulfs the Middle East? For all the tactical efficacy of drone strikes, the United States cannot possibly defeat terrorism without at the same time working to build free and prosperous societies in countries, like Pakistan, that nurture it.
Resisting transformationalism. Notwithstanding excellent speeches about bridging the gap between America and the Muslim world, President Obama has treaded more gingerly in his policies. He did not support Iran's Green Revolution and has stood back from the opportunities inherent in the Arab Awakening, allowing post-strongman societies in the Middle East to devise new political arrangements for themselves. Obama has a nuanced understanding of the limits of power and the tragedy of international politics from his oft-cited reading of Reinhold Niebuhr. But the greater tragedy may be declining to use America's great power to more actively support Arab and Iranian liberals desperate to build free societies against fierce opposition from Islamist and ancien regime forces.
"Leading from behind." In Libya, Syria, and now Mali, we have seen Washington's European allies push for, or carry out themselves, armed interventions to uphold human rights and regional stability. Americans are used to being the hawks in world affairs, and Europeans the doves -- but those roles have reversed under President Obama. This turns the transatlantic bargain on its head: Europeans now seem more concerned with policing out-of-area crises, with America playing a supporting role. But is such passivity really in Washington's interest? Can Europe really lead in matters of war and peace without America at the front?
Rebalancing American power toward Asia. America's "pivot" has been welcomed in much of Asia and across party lines in Washington. But as Joseph Nye argues, the United States has been pivoting to Asia since the end of the Cold War. It would be more accurate to say that Obama himself pivoted away from seeking a G-2 condominium with China to balancing against it. His administration's support for liberalization in Myanmar has been historic -- but senior U.S. officials say the process is driven by Naypyidaw, not Washington. It is also unclear if the pivot is more than a rhetorical policy; President Obama has already authorized defense budget cuts of nearly $900 million and supports more.
Unsentimentality towards allies. Even amidst the rebalance, Asian allies like Japan and friends like India have felt neglected by this American president. Similarly, Obama's attention to the transatlantic relationship seems inversely proportional to the affection Europeans feel for him. Despite significant defense transfers, the U.S. administration appears as concerned with preventing Israel from attacking Iran as preventing Iran from developing nuclear weapons. Hard-headedness is a virtue in international relations. America's allies, however, expect it to be directed more at U.S. adversaries than at our friends.
A trade policy high in ambition, if not results. President Obama commendably seeks to double U.S. exports as part of an economic recovery program. His administration has sketched out a transformative vision of an Atlantic marketplace and a Trans-Pacific Partnership. But movement on both has been very slow -- at least as slow as the three years it took for Obama to send Congress free trade agreements, with Korea and other countries, negotiated by his predecessor. The potential for an ambitious trade opening is promising -- if Obama can deliver.
President John F. Kennedy said America would pay any price and bear any burden in support of liberty. President Obama has made clear that under his leadership, America will not do quite so much. But strategic minimalism and a focus on the domestic means problems abroad only grow, inevitably pulling America into crises on less favorable terms. The world looks to America for strategic initiative to solve its thorniest problems. At the moment, demand for this leadership is greater than supply.
This article appeared over the weekend in the special Security Times edition prepared for the Munich Conference on Security Policy and published by Germany's Times Media. The paper as it appeared in print is available at www.times-media.de .
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By Ambassador Roger F. Noriega and José R. Cárdenas
Last week, ahead of President Obama's meeting with the Business Roundtable, the Roundtable and the U.S. Council for International Business released a report saying that, "the success of American companies, and of the U.S. workers they employ, increasingly hinges on their success as globally engaged companies."
Indeed, there is some optimism in Washington that President Obama, free from political constraints in his second term (i.e., Big Labor opposition to free trade), can implement a robust international trade agenda as a sure-fire way to create new jobs at home, markets for U.S. goods and services, and investment opportunities abroad. Much of that talk is focused on action regarding the Trans-Pacific Partnership and a trans-Atlantic free-trade agreement with Europe.
We have just co-authored a paper for the American Enterprise Institute -- "An action plan for US policy in the Americas" -- the essence of which can be distilled down to the following: Mr. President, stop ignoring Latin America!
If the President's objective is to use trade to help jump-start the U.S. economy and create more jobs here at home, then Latin America has to be part of the equation. That's because when you look beyond the rogue behavior of Venezuela's Hugo Chávez and his populist ilk, clearly the Western Hemisphere is home to some of the most dynamic markets in the world.
Since 2003, an estimated 73 million Latin Americans have risen out of poverty. Moreover, between then and 2010, the average Latin American income increased by more than 30 percent, meaning that today nearly one-third of the region's nearly 570 million population is considered middle class. And in just the next five years, regional economies are projected to expand by one-third.
Given the Americas' close historical, cultural, familial, and geographic ties, linked by common values and mutual interests, what that means for U.S. businesses is millions of new consumers with an ingrained affinity for U.S. goods and services.
Greater economic integration will also create momentum to deal with other challenges in the region, from security issues to modernizing immigration policy -- not to mention rendering obsolete once and for all the retrograde populist agendas of some who prefer looking to the past rather than the future.
It's time that U.S. policymakers dispensed once and for all with Old Think when it comes to Latin America: that is, what is it the U.S. can do for the region. Today, it is what we can do together to benefit all the peoples of the hemisphere and boost our own recovery and competitiveness. If President Obama is to pursue an aggressive trade agenda in his second term, the incentives are powerful for a fundamental reassessment of relations right here in our own hemisphere.
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By Julian Eagle Platón and Will Inboden
Does the United States benefit from having a strategic competitor? We share the common assessment that the U.S.-China relationship will be the most important geopolitical relationship this century. The complex competition between these two powers will play out not just in Asia but across the globe. Much commentary rightly focuses on the many ways a rising China may threaten U.S. interests.
But is this competition from China merely a threat, or also potentially an opportunity for the U.S.? We think it can be the latter.
Competition is good. We welcome competition in the marketplace. As one of the fundamentals of market capitalism, we have anti-trust laws to break up monopolies and allow competition to flourish. Competitive markets are more innovative and efficient than monopolistic markets, as competitors constantly strive for improvement and advantage.
These benefits translate to the political sphere. David Landes' The Wealth and Poverty of Nations accurately identifies competition as a critical factor in Europe's ascent to world leader for half of the last millennium. "Enterprise was free in Europe. Innovation worked and paid, and rulers and vested interests were limited in their ability to prevent or discourage innovation. Success bred imitation and emulation..." Even inventions created elsewhere in the world (e.g. gunpowder) reached their maximum potential via European rivalries.
Lack of competition can breed complacency and inefficiency, hence the constant soul-searching of U.S. foreign policy wonks following the Cold War and the demise of the Soviet Union as our chief rival. A competitor focuses and invigorates thinking, while providing a benchmark to measure progress. Chinese competition can spur America to address its weaknesses, driving the U.S. to reach new heights.
Here we are optimistic. America's capacity to compete remains strong; indeed the fundamentals of American power are undiminished. The U.S. enjoys a position of almost unparalleled geographic privilege. Natural resources are abundant, particularly arable land, new petroleum and natural gas reserves, and renewable resource capacity. America benefits from secure borders and negligible territorial disputes. And access to two oceans facilitates continued maritime supremacy. China faces a critical shortage of arable land, numerous territorial disputes, uneasy and resentful neighbors, and comparatively limited access to the sea.
The U.S. also possesses a demographic advantage, which can continue if the U.S. maintains and reforms our open immigration system, and arrests our recent decline in fertility rates. Future immigrants will add to the population, spur greater entrepreneurship, widen the tax base, and help soften the burden of the baby boomer retirement. China faces the triple demographic peril of a shrinking and aging population with a growing gender imbalance.
Even economically, American competitiveness remains strong. The recent recession and ongoing budget travails notwithstanding, the U.S. continues to be the dominant creative force in the world. U.S. firms are strongly competitive in world markets. The U.S. also retains a significant advantage in soft power, evidenced by the greater willingness of regional powers to work with the U.S. over China.
Historically, America has a record of responding well to competition, even amidst adversity. During the 1970s, American stagnation and decline was exemplified by an ignominious retreat from Vietnam, Watergate, the oil embargo, stagflation, the Iranian hostage crisis, and an apparently ascendant Soviet Union. Similarly, Japanese economic competition in the 1980s, during another downturn in the American economy, had many prognosticators warning of looming Japanese supremacy. Japan's economy was surging and Japanese investors - steered by the powerful Ministry of International Trade and Industry - purchased scores of American assets. Ezra Vogel's 1980 book Japan As Number One crystalized this thinking.
In both cases, the magnitude of the competition was not nearly as threatening as the predictions. And in both cases the U.S. responded positively to the challenge. The Reagan economic expansion and military build-up in the 1980s helped end the Cold War, and the increased productivity and economic growth of the 1990s enabled the U.S. to meet Japan's economic challenge.
Does Chinese competition rise to the level of the Cold War contest of the superpowers? Certainly not yet, and hopefully never. Skeptics highlight China's relative weakness in comparison to the U.S., particularly in military power. Moreover, Chinese territorial ambitions in the East and South China Seas do not yet equate to Soviet domination behind the Iron Curtain and designs beyond.
China also fails to present a competing worldview in the manner of Soviet communism. Authoritarian capitalism has many hindrances and has not demonstrated an enduring appeal, as bribing populations to support authoritarian leaders can only stave off demands for self-determination in boom times. When the economy begins to lose steam, the cracks in such a scheme can be fatal. Deep flaws are already apparent in China's vaunted economic growth, in the form of environmental degradation, a speculative real estate bubble, and soaring local debt.
Continued sober and accurate analyses of rival capabilities are essential to avoid exaggerated threats and wasted resources. Imagined threats are rightfully discarded, but it is imperative to respond to actual competition. Another risk comes from tunnel vision focused exclusively on the chief rival. This necessitates an awareness of potential competition from unlikely sources, and the flexibility to respond appropriately.
It is evident, however, that the Chinese leadership views the U.S. as a threat, and that China's remarkable growth positions it as the chief competitor to the U.S. So, how can we make the most of this going forward, to ensure that competition remains free of conflict? After all, competition may have driven European supremacy in the last millennium, but it also caused incessant warfare that ultimately eroded Europe's global dominance.
First, we must identify areas of cooperation and competition, building frameworks to make the most of the former, and be assertive on the latter. The dicey challenge comes from those issues that cut across both cooperation and competition (e.g. China's holdings of U.S. debt; dual-use technology exports). The U.S. can enhance its comparative advantage in soft power by bolstering our alliances in the Asia-Pacific. Among other things, this means working with regional partners to deepen our economic engagement in Asia, such as completing the Trans Pacific Partnership to expand a liberalized trade regime. The U.S. must also address our internal weaknesses and inefficiencies. Serious debt reduction efforts will improve American efficiency and help restore economic growth, while boosting science, technology, engineering, and math education will ensure the intellectual capital necessary to compete.
Competition is not easy; it is an unending struggle demanding sacrifice and hard choices. But to stagnate in complacency carries a greater cost of decline. The magnitude of China's "threat" may vary considerably with circumstance, but the existence of competition is undeniable. We should welcome the rise of a peer challenger as an opportunity to push ourselves to be better.
Julian Eagle Platón is a graduate student at the LBJ School of Public Affairs at the University of Texas-Austin. Will Inboden is an assistant professor at the LBJ School, and co-curator of Shadow Government.
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A relentlessly-optimistic Dan Drezner has thrown down the gauntlet! (Well, more like a dinner napkin, really, but same idea). He defends the prospects for trade progress in President Obama's second term and descends from generalized good cheer into specifics. With a meal on the line, he writes:
"I'm willing to bet that at least two out of the following four things will happen during Obama's second term:
1) A Trans-Pacific Partnership that is ratified by Congress;
2) Bilateral investment treaties with India and China;
3) A transatlantic integration agreement;
4) A new services deal within the auspices of the WTO."
Now, for those of you wagering at home -- not that Foreign Policy condones such behavior -- the question is not just which of us has the clearer crystal ball; you also want to think about the point spread. Over at Cato, Simon Lester offers some initial guidance to eager bookies:
"I would rate the chances of seeing completed China/India investment treaties or a U.S.-EU FTA at close to zero; a ratified TPP at around 10 percent; and a WTO services agreement at around 25 percent."
While I like the implication -- a 97.5 percent chance that I feast at Drezner's expense -- I would differ a bit on the odds.
The challenge of handicapping these events is that they are not precisely defined. A "transatlantic integration agreement" could run anywhere from an accord that promises modest services integration and regulatory cooperation to a full-fledged free trade agreement between the United States and the European Union. A bilateral investment treaty could range from a new consultation mechanism to adoption of the complete U.S. model BIT.
Thus, a central question: How readily can the Obama administration push through a minimalist version of any of these trade measures? There is a clear incentive to do so. Agreements ought to be easier if you can drop the hard parts. Signed and passed agreements constitute a legacy. Only quibbling trade geeks will ever weight the virtue of those agreements by the extent of their coverage. This is one reason for the long history of bilateral or plurilateral trade agreements around the globe that delivered very modest amounts of liberalization: they all delivered a signing ceremony for leaders.
Yet there are some significant obstacles to "going lite." Here are four:
1. Commercial significance. It would be dramatically easier to negotiate the TPP if issues such as intellectual property or state-owned enterprises were omitted. Those issues are divisive both within the United States and between participating countries. Yet they are on the agenda because key industries care about them and see opportunity in regulating the behavior of trading partners. While the Obama trade legacy will not be significance-weighted, there needs to be a minimum level of business enthusiasm to get an agreement through.
2. Balance. Any agreement has to offer something for each party. The narrower the agreement, the less likely all the participants come away with something they like. This is a problem with a services-only deal within the WTO: Usually developed countries are demandeurs for services market access while developing countries are demandees. Of course, the developed countries could go off on their own and sign a plurilateral services agreement among themselves (still under WTO auspices), but that poses some problems. It does not win domestic services firms the market access they crave, it ticks off the developing countries who have been circumvented, and it may limit negotiating space for any future, broader WTO agreement that might draw the developing countries in.
3. Leverage. In the early days of post-war trade talks, agreements came along every couple years. If your industry's concerns were not taken up in one round, you could be reasonably confident you could push for them in the next. In the last forty years, though, there have been only two completed global trade agreements (the Tokyo and Uruguay Rounds). FTAs have been concluded more frequently, but generally only one per country pair. Now suppose you're a U.S. agricultural producer with longstanding concerns about European agricultural practices. How do you react to the prospects of a limited U.S.-EU trade deal that leaves out agriculture? You hate it. You probably think that this is your moment of maximum leverage to reform EU policies; a limited agreement gives that leverage away. The argument would be similar for a modest BIT with India or China; anyone with investment concerns might see a limited agreement as worse than no agreement at all, since the chances of revisiting the topic would be small.
4. Precedents/Congress. The United States has been relatively formulaic in its approach to trade agreements, moving from the NAFTA model, to "NAFTA+" to "Chile+" - the same basic structure, with a few improvements. No major deviations from the same 'high standards' model of a trade agreement. That was one of the attractions of the TPP -- it was a group of countries who had committed to a fuller, deeper version of trade liberalization, matching the U.S. standard of depth and breadth. A standardized approach solves two particular challenges for U.S. trade policy. First, the country undertakes multiples negotiations, spread over time. Second, any administration must reach an understanding with Congress, which has constitutional authority over trade. A fixed template makes it harder for successive trading partners to try to exempt sensitive sectors. It also means that carefully negotiated understandings with Congress need not be reworked with every agreement. While an FTA- or BIT-lite may ease external negotiations, it can complicate discussions with Congress and with future trading partners.
So a 'lite' approach may be hard to swallow.
There is certainly more to chew on as we think over trade prospects for the next term. I have yet to cook up a full alternative set of odds. But am I confident in my skepticism? You bet.
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On the eve of the election, Dan Drezner offered a wonderfully optimistic vision of foreign economic policy to come. He backed the view that we would see the issue move to the forefront and progress made, whatever the outcome of the vote. He catalogued the trade and investment deals that are currently mid-negotiation and concluded that success was likely:
"All of these deals are being negotiated by the Obama administration, so I think we can assume that the president has signed off on them ... Furthermore, regardless of who wins Congress, these are the kinds of deals that still fall under that shrinking category of 'doable in a reasonably bipartisan fashion.'"
I found it all very sweet. Dan was writing from Paris. Like Proust's madeleine, his hopeful predictions stirred up memories of 2008 and of 2010 -- more innocent times gone by, when my Democratic friends held great hope on the international economic front. In 2008, post-election, they would explain that President-elect Obama had multilateralism in his blood and that his recalcitrance on trade agreements had just been an election tactic to win over the unions. Why, they explained, we'd probably see the pending free trade agreements (S. Korea, Colombia, Panama) passed in lame duck session.
Two years later, with those same agreements still pending, there were hopeful murmurings that President Obama, chastened by the 2010 midterm election losses, would triangulate, just as President Clinton had in 1994. He would seek out areas of bipartisan agreement with the Republicans. What area seemed more promising than advances on trade? Of course, the agreements did eventually pass, but only after a bitter partisan conflict on the Hill. All that was accomplished was the completion of the 2006-2007 trade agenda; the administration and its allies in Congress explained that it was 'premature' to talk about measures such as renewed Trade Promotion Authority (normally a prerequisite for passage of any serious agreement). There was no forward progress. The WTO talks were left to linger. The vaunted Trans-Pacific Partnership (TPP) is actually a revived Bush administration project; participants hoping for a November 2011 conclusion saw the date come and go.
Thus, a recurrent disconnect between hope and experience. I was not going to be so churlish as to take issue with Dan's reveries, until I saw Shadow Government guru Will Inboden actually take them seriously last week. So duty calls.
Reasons for skepticism about trade negotiation progress in President Obama's second term:
-If, on a 10-point scale, the first term free trade challenges were a 'degree of difficulty' 2, then this term's challenges are an 8 or a 9. In the first term, to be called a free trader, the president just had to get a willing Congress to vote on three pre-packaged, already complete agreements. That took him 2.5 years and ended up in a bloody fight. Even so, it really just required a weekend's lobbying for a vote. Getting a TPP or a US-EU trade agreement would require sustained engagement, starting very soon, and the expenditure of substantial political capital. There are divisive, difficult issues such as intellectual property protection and the treatment of state-owned enterprises on the table in TPP; there's the question of agriculture with the EU. If the president and his team could barely handle the first term tasks, those of the second look technically much more daunting. It is difficult to list the issues on which the president has shown the kind of sustained political engagement that would be required (e.g. working to persuade reluctant groups like Pharma or farmers to live with an agreement they viewed as problematic). Perhaps health care is an example, though even then the president was criticized for tossing it to Congress and walking away while members fought.
-It may be useful to distinguish between President Obama's political cost/benefit of negotiating a trade and of concluding one. Negotiating a "21st century trade agreement" makes one look visionary and constructive. Everyone can imagine that the ultimate deal will be filled with the things they like and devoid of any deal breakers (even if all those doing the imagining have sharply conflicting visions). Concluding such a deal means not only resolving such conflicts, but also alienating President Obama's political base. The 2011 votes on the pending FTA's discredited the old notion that House Democrats were split in their views on trade; instead, they seemed relatively unified in opposition. I am not sure what evidence Dr. Drezner is reviewing that promises bipartisan support for upcoming trade agreements. Of course, President Obama might decide that he will largely pass his second term agenda with Republican support in the House, leaving Democrats to seethe, but if that it is his strategy, his early post-election statements have concealed it well. If, instead, President Obama is determined to pursue a partisan line, he needs his forces united, not divided. Nothing will split them more readily than a good trade fight. And all of this assumes that the president's reluctance to advance the trade agenda was politically instrumental, as opposed to a reflection of his true beliefs.
-Trade agreements take time. If the president is to get anything completed, he needs to start right away. TPP is nowhere near ready, despite years of talks; most of the hard, most controversial issues have been deferred. The president is surely aware that the window for second-term presidents to achieve things is narrow. Does he want to devote that time to trade liberalization? He has not seemed inclined even to attack the divisive issue of environmental change, something he seems to care significantly more about.
We can be grateful that the president has indulged in more protectionism than embracing futile tariffs on Chinese tires and endorsing the "Buy America" concept. The problem is that U.S. trading partners will not be infinitely patient in awaiting the conclusion of the deals under discussion. From a broader foreign policy perspective, the TPP is absolutely central to the administration's pivot to Asia. Europeans are eagerly backing the idea of an FTA as one of the few positive signals they might send to investors amidst the still-looming euro zone crisis. There will be serious foreign policy consequences if the president fools us thrice on support for trade.
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From an economic perspective, should we be optimistic or pessimistic in the wake of the election? The redoubtable Wolfgang Munchau offered an appealing and different way to think about this in the Financial Times over the last couple weeks. In the context of the euro crisis, he asked not what a crystal ball foretells for the future of the euro crisis, but rather what you have to believe in order to be optimistic about that future. How heavily tinted do your rose-colored glasses have to be for things to look good?
So, what does one have to believe to be optimistic about the U.S. economic situation? There certainly are such optimists. A fundamental premise of the Obama campaign was that the president had adopted all the right economic palliatives, but that they just took time to kick in.
There are at least a couple broad economic arguments one could make in support of a cheery view. Carmen Reinhart and Ken Rogoff cannot usually be accused of excessive cheerfulness in their forecasts. They have been vehemently arguing that downturns that stem from financial crises take a long time to sort out. This is a prompt to lower our expectations. We need not be disheartened by weak economic performance, the message goes. These things just take a long time; they get better eventually. This suggests restored confidence in tools (such as the stimulus) that might otherwise seem to have been ineffective. It would seem to promises payoffs to the patient and perseverant. That was an Obama campaign theme: Give it more time.
This plug for patience is consistent with the second principal positive premise: It's all cyclical. Economists have long discussed the booms and busts of business cycles. Such discussions had faded during decades of relative prosperity (sometimes referred to as "the great moderation"). Moderation is now out the window, so we can turn back to some familiar cyclical arguments. Why should things turn around? Cars and dishwashers and machine tools wear out. People can put off replacement purchases for a while, but eventually they need something new. Along the same lines, young people who may have stayed in their parents' house a while longer than otherwise finally go out, get married, get a place, and furnish it. The price of the house they had looked at may finally seem to have bottomed out. These are all cyclical arguments for a turnaround. Enthusiasts of such explanations point to blips in consumer confidence like buds signaling the start of spring.
If one buys this reasoning, President Obama will now get to reap the benefits of his work and take credit for the inevitable recovery to follow. Had Gov. Romney won, the reasoning goes, he would have unjustly taken credit for the good times to come. Perhaps.
What does one see with untinted glasses? U.S. economic growth has to come from somewhere. It is hard to argue that it will emerge from a bold revival of consumer spending. Pessimism on this point is part of what is behind discussions of a "new normal" that features slower growth. Consumers are still working their way out of debt, the country is still borrowing, and the future liabilities toward an aging population loom large. This is a difficult time for a spending binge. The impending fiscal cliff is one sign of this, though much bigger pension and entitlement challenges remain unaddressed. If you tax people now, they have less money to spend. If they worry about future taxes, they may well save to meet those coming obligations. That would be in lieu of spending.
If the growth is not to come from selling to U.S. consumers, what about selling abroad? The Obama administration did this math quite a while back. The president set a goal of doubling exports in 5 years. Laudable, but how to achieve it? The administrations proposals largely centered around small export promotion initiatives and initial success was claimed when exports rebounded from their recession lows. When the administration finally moved to pass the free trade agreements with Korea, Colombia, and Panama, it claimed those, too, as part of its plan to double exports. Serious new market-opening could help spur markets, but the only such initiative that President Obama has pushed forward -- an expanded version of President Bush's Trans-Pacific Partnership -- faces major obstacles.
In terms of growth through exports, all of these policy measures pale in comparison to the economic health of trading partners. For the United States, NAFTA looms largest, taking almost 1/3 of U.S. exports in 2011. Any economic booms to be found there? The latest IMF World Economic Outlook predicted that Canadian growth would slow from 2.4 percent in 2011 to under 2 percent in 2012 and 2013. Mexican growth, while faster, was 5.6 percent in 2010, 3.9 percent in 2011, and is supposed to keep decelerating through 2017. So where else might we see growth? The European Union takes 18 percent of U.S. exports, but it has its own well-publicized troubles. The latest figures show that Germany may be approaching a recession. China buys about 7 percent of U.S. exports, but its growth has also slowed. Add in a troubled Japan and we've now described just over 60 percent of U.S. export markets.
In all likelihood, the actual picture is worse than just described. These tepid growth prospects assume nothing drastic will happen to throw off the world economy. One of the striking things about this last election season was that there were any number of foreign policy and economic crises that could have exploded. Syria came closest, but Iran, U.S. fiscal troubles, and the euro crisis all remained relatively quiescent. That may be considered good fortune, or it could be the result of hard policy work sweeping problems under the rug. It was no accident that the fiscal cliff arrived after the election. Treasury Secretary Geithner was pretty blatant about asking European countries to move smoothly past deadlines that might have ignited an economic conflagration. I do not have the expertise to speculate about why Israel was so well-behaved over election season, despite its deep-seated concerns about Iran. The upshot was that there was no Middle East conflagration disrupting oil supplies.
These all appear to be problems deferred, not problems solved. Such deferrals often lead to more explosive outcomes later on. To foresee that these potential problems will all remain tranquil for the four years to come would require one to look through a particularly garish set of lenses.
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Governor Romney delivered a major speech at the Clinton Global Initiative on Tuesday, focusing on foreign assistance, global development, and how U.S. policy should evolve in these fields. He laid out a vision for placing development assistance squarely in the center of the nexus of trade, investment, and policy reforms. He sees the private sector and capitalism at the center of human progress (read "economic growth" for those in the business), and he also stressed the central place of institutions that support political freedom and rule of law (read "democracy and governance" for those who follow this stuff closely). He strongly endorsed 10 years of progress on public-private partnership in development -- a major factor in development since the Bush administration, adopted energetically by the Obama administration, and a central focus of the Clinton Global Initiative (so, no, he was not in favor of "privatizing foreign aid," just as no one would say that about Hillary Clinton when she talks about public-private partnerships through her Global Partnerships Initiative, as she does here).
Finally, he emphasized what serious development thinkers have been talking about but have only found limited appetite for within development bureaucracies -- a much larger focus on small and medium sized enterprises.
Governor Romney's speech is by far the most detailed speech by either of the major candidates on development in this electoral cycle and likely the most detailed speech of any candidate during the primaries in this cycle.
There has been a series of responses (including a GREAT post from my friend Paul Bonicelli yesterday and a thoughtful op-ed from Amb. Mark Green and Rob Mosbacher) to Governor Romney's speech, not surprisingly, as it outlined a bold plan for American assistance moving forward.
In sum, serious thinkers about development and America's role in it have been positive in their praise as they recognize the depth of the thinking behind this speech and know that the most serious change and advancement in U.S. development policy have happened under Republican presidents.
Governor Romney's strategy would place U.S. assistance on the cutting edge of development theory and practice. By linking greater investments in economic growth and the institutions that promote liberty with a renewed vigorous global trade agenda and pro-growth domestic policies under a Romney administration, along with the sorts of investments in assistance Gov. Romney described in his speech, we are talking about a very powerful combination of forces that are pro-development and help the United States share in that prosperity.
Development theorists and practitioners talk about "private sector led development," but when push comes to shove and the money is allocated, the temptation is always to fund pressing social service delivery projects or photogenic or politically connected causes. At the end of the budget allocation race, policy reform investments that support economic growth, and investments that support democracy and governance --the two sorts of investments that most development practitioners know matter -- often get left behind.
Finally, Governor Romney's speech recognizes the changed world that we live in and the need to change our development policy, processes, systems, and priorities to reflect this changed world. First, foreign aid can help but is dwarfed by trade, investment, remittance, and private philanthropy by foundations, individuals, church groups, and corporations. He cited the central fact that U.S. economic engagement has changed over the last 40 years with massive foreign direct investment flows going to middle, lower, and poor countries in massive amounts, the massive flows of remittances and, the massive amounts of private charity. At the same time his description of "corrupt governments" suggests a skeptical view towards various forms of budget support and an interest in aid transparency initiatives.
Another central change from the past is that the United Nations Development Program estimates domestic resource mobilization in low income countries will reach $394 billion by 2015. Compare that to global ODA of approximately $120 billion, and domestic resources are only going to get bigger over time as societies continue to move up the ladder of development. Foreign aid is a minority shareholder in the business of development already. Development practitioners can provide expertise, technical support, and strengthen the institutions that support private sector led growth and democratic governance, but ultimately over time/in due course (please note emphasis here, so no panicked misinterpretations, please) we want to be moving out of the direct social service delivery business and instead have governments themselves "pick up the tab" using domestic resources similar to the way that PEPFAR is evolving.
The global economic situation means that budget austerity is impacting foreign assistance around the world including the Netherlands, Canada, Spain, Ireland, Italy, and possibly the UK. We should assume that the 150 Account (the account in the U.S. budget where foreign aid is housed) which has until now has defied gravity is going to be examined in the light of trillion dollar deficits and $16 trillion in debt. Regardless of the overall topline number, questions about aid effectiveness and development priorities are going to be at the forefront of any U.S. development conversation under any administration just as that conversation is happening in the rest of the "DAC" (the Major League Baseball Commission equivalent for foreign aid donor) countries. Pressing humanitarian needs (such as ending polio in our time) will always be a part of the U.S. foreign assistance policy as the U.S. still stands ready to respond in situations international disaster relief, but long term foreign aid's role needs to change with the changed global context.
Governor Romney sees foreign assistance as a form of "soft power." It is clear that Governor Romney sees foreign assistance as an instrument of American power and influence and one that we should use to ensure that the 21st century is an American century.
Note: While Dan Runde co-chairs the Romney Campaign's International Assistance Working Group, the blog post above contains Mr. Runde's own opinions.
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Ah, the emotional roller-coaster ride that is modern central banking; the way our collective hopes and mutual funds soar and plunge with the advent of each new acronym from Europe - EFSF, SMP, and LTRO. Yesterday, a new bout of global financial euphoria erupted with the ECB announcement of OMT. The Financial Times lead headline proclaims: "ECB signals resolve to save euro."
To set the scene, the troubled nations along the periphery of the eurozone have recently been plagued by high and rising interest rates when they try to borrow. For countries that have racked up a substantial amount of debt, high interest rates translate pretty quickly into spending obligations they cannot meet. Greece, Ireland, and Portugal all had problems of this sort, but were small enough to be bailed out by their eurozone brethren. Spain and Italy are too big for that, so when their interest rates began to climb, it looked like a mortal threat to the euro project.
Traditionally, when a sovereign nation has bills it cannot pay, it can resort to printing money. The central bank will buy up the sovereign's unloved bonds, thus injecting newly-printed money into the economy, driving up the price of the bonds, and, in turn, driving down interest rates. But Spain and Italy cannot do that. A key facet of having a common currency is that only the European Central Bank (ECB) has this power. Yesterday, the ECB came up with yet another plan to do so.
Why so many plans? Why not just print money until the pain goes away? There's a downside to the printing. When countries satisfy insatiable spending desires by printing money, ever-increasing piles of currency chase after a limited number of goods and inflation ensues. There are cautionary tales seared into national memories, like the scenes from Weimar Germany in which people carried wheelbarrows full of cash to make their daily purchases.
With such memories in mind, Germany demanded some conditions when it gave up its Deutsche Mark for the euro: No bailouts and no central bank financing of sovereign borrowing. The ECB would have a mandate even simpler than that of the Fed in the United States -- it would just seek to avoid inflation. These strictures have proven an obstacle for the modern ECB, as it has sought to engage in bailouts and central bank financing of sovereign borrowing.
So how did the ECB end up choosing between its founding principles and the salvation of the euro project? For much of the last decade, lenders perceived sovereign bonds around the eurozone as equally safe, more or less. Spain could borrow at rates close to those that Germany faced, all of which were low. Then, in the wake of the financial crisis, these "spreads" -- the difference in borrowing rates -- began to grow. Germany still paid very little, but Greece, Spain, Italy and others began to pay a lot. There are a couple different explanations for why, and which one you pick should largely determine whether you think yesterday's ECB action will work.
Explanation #1: While Greece had real trouble, markets panicked and fled from otherwise viable economies. This looked like a classic bank run, in which a healthy institution could be run into the ground under a public stampede. Just as in a bank run, if a lender of last resort steps in and reassures the twitchy masses that everything is fine, that reassurance will be self-fulfilling. In the case of Spain and Italy, the argument would go, if people were not so worried about the countries' ability to finance their debts, they would charge lower interest rates and the countries would have no trouble financing their debts. In this scenario, the ECB's move yesterday was its boldest attempt yet to quell the panic.
Explanation #2: When Greece got into trouble, it roused investors from their slumber. Whereas they had previously just assumed that all euro zone sovereigns were equally risky, they now pored through the books more closely. They did not like what they saw. Countries were on unsustainable fiscal paths. The ratio of debt to GDP was high and climbing. There were attempts at government reform, but they were politically painful and looked in any case to be too little, too late. Better to get out while one could. Sell.
While the ECB is largely betting on the first explanation, it is worried about the second. Under its new plan for Outright Monetary Transactions (OMT), it will buy up the debt of troubled countries. It significantly relaxed two limitations it had earlier put on such measures: it is not demanding that it get repaid before everyone else (a clause that had scared away private investors) and it is lowering standards for the kind of collateral it will accept. At the same time, countries must formally ask for help and sign up to a reform program. Further, the ECB will only buy short-term debt.
A number of problems loom:
If recent experience is a guide, there will be a period of elation on the belief that the ECB has solved the euro zone problem. Then people will begin to read the fine print and the roller coaster will begin its next descent.
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Read more about the Indo-U.S. strategic partnership here.
Critics of the civilian-nuclear deal between the United States and India -- proposed in 2005 and ratified in 2008 -- have more recently charged that its supporters oversold the broader benefits of Indo-U.S. strategic partnership. Their critique has been given unearned momentum by the Indian parliament, which passed nuclear liability legislation that does not meet international standards, effectively making it impossible for U.S. companies to build civilian-nuclear plants in India. Critics have also been emboldened by a certain drift in U.S.-India relations since 2009 -- for which both sides bear responsibility -- and by India's own lackluster economic performance, which diminishes its attractiveness as the pivotal U.S. partner in 21st century Asia. But these developments do not mean the relationship was oversold. The more accurate charge is that it has not yet been fully consummated.
The Obama administration sent decidedly mixed messages to New Delhi upon taking office in 2009. Bush administration officials had argued convincingly that a shared appreciation for managing the balance of power in Asia was at the core of the U.S.-India entente -- music to the ears of leaders in a country that has still not recovered from the psychological scars of a war with China in 1962. However, early in their tenure, senior Obama administration officials reportedly told Indian counterparts that the United States was no longer "doing balance of power in Asia," while senior U.S. officials, including the president and secretary of state, gave credence for a time to the notion of a Sino-American "G-2" condominium in Asian and global affairs.
This unnerved Indian officials who believed Washington had chosen New Delhi -- not Beijing -- as its privileged partner in rising Asia. Spurned Indian officials fell back on old non-alignment instincts and began speaking of "triangulating" between the United States and China. But events happily changed the discourse: China's militant assertiveness in 2010-11 reminded officials in Washington and across Asia of the growing danger posed by budding Chinese power. President Obama's self-declared "pivot" to Asia in 2011 moved the United States much closer to the Indian position of sustaining a regional equilibrium not tilted in China's direction -- a project of such immensity that India cannot achieve it absent close alignment, if not alliance, with the United States. Nonetheless, the early damage to a U.S.-India relationship whose central logic is rooted in the balance of power caused mistrust that still lingers.
More recently, Indians have been disappointed that the United States, after reassuring them for a decade that U.S. forces would finish the job they started in Afghanistan, will withdraw combat forces from Afghanistan through 2014. Beyond its intrinsic importance, Afghanistan was in fact a key test of the proposition that the United States, as a new strategic partner, could help India solve its toughest security challenge: the propensity of its neighbors to export terrorism into India, with state support. The Taliban's eventual return to control in at least parts of Afghanistan, as well as Pakistan's virulently anti-Indian security services as NATO forces draw down, will undermine Indian security in tangible ways. For many Indians, the United States' lack of staying power reconfirms old suspicions about American unreliability. It reinforces the conviction that India may have more to gain from collaborating with Russia and Iran to support Afghan groups committed to the Taliban's defeat than from relying on (and working with) the United States to do the job.
Americans, in turn, have been disappointed by India's apparent willingness, for a time, to risk its U.S. relationship over energy trade with Iran. The good news is that India has moved to reduce oil and gas imports from Iran, earning New Delhi a waiver from U.S. third-party sanctions set to take effect next month. This is particularly significant in light of India's energy-import dependence and its previous reliance on Iran as a top supplier. But American officials have spent precious time and energy over the course of several years urging India to cut back on its Iran trade -- time and energy that would have been better spent forging ahead on a wider agenda for Indo-U.S. cooperation, were it not for Indian reluctance to take American appeals to heart. New Delhi would have benefited more from early movement on this issue, rather than making a show of standing up to the United States even as India, out of concern for its own interests, systematically reduced its dependence on Iranian energy supplies.
Americans excited about the rise to great-power status of the world's largest democracy have also questioned how India's passivity toward the Arab uprisings has served Indian interests, much less prospects for partnership with both Washington and reformist Arab regimes. While India's election commission did assist in organizing Egypt's first democratic elections, New Delhi has been seriously behind the curve in Libya, Egypt, and Syria (though it has not blocked U.N. Security Council actions on the latter). It is Indian interests that suffer from such passivity, in the form of cool relations with post-revolutionary countries strategically positioned on its western doorstep. Such passivity has undermined the case, not just in Washington but internationally, that India is ready to provide global public goods and assume genuine responsibilities beyond its borders as a permanent member of the Security Council.
Nonetheless, over the past three years India and the United States have made quiet progress in consolidating their new relationship. India is the world's largest arms importer, and the United States is at the top of its list of defense suppliers -- notwithstanding American disappointment that India did not choose a U.S. fifth-generation fighter jet as part of its ongoing military modernization. Indian armed forces exercise more with U.S. counterparts than those from any other country -- a remarkable development for two countries that were on opposite sides of the Cold War divide. Intelligence-sharing is at historic highs; Washington and New Delhi cooperate more actively on counter-terrorism than ever before. The two countries are also more closely aligned on Pakistan as a result of the degeneration of the U.S.-Pakistan alliance over the previous three years. Perhaps most importantly, India and post-pivot America see eye-to-eye on the immense strategic challenge posed by China's ascendance; the Indo-American dialogue on East Asian security has been richly rewarding for both sides.
The hard truth is that Indo-U.S. relations would be better were India and the United States each doing better. India was a most attractive partner when it was growing at near-double digit rates annually, putting it on track to emerge as the world's largest economy before 2050. For many Americans today, India is a less attractive partner as economic growth slumps, the government stalls on key reforms necessary to unlock the economy's vast potential, populism trumps effective policymaking, and politicians seem unable to break partisan gridlock to govern effectively. Funnily enough, Indians could say exactly the same thing about America under President Obama.
More than any other economic danger looming on America's immediate horizon, including a possible break-up of the eurozone, sequestration poses the greatest single threat to American recovery in the near term. This arcane process came into force when the congressionally-mandated "super-committee, "officially known as the Joint Committee on Deficit Reduction, failed in its mission. As a result, the sequester calls for reductions in government spending totaling $1.2 trillion over the next nine years, of which $984 billion, or $109 billion annually, will be realized from across-the-board budget reductions.
Although defense accounts for only 14 percent of the budget deficit, when entitlements are taken into account, the annual $109 billion dollar cut will be evenly divided between defense and non-defense reductions, with some small reductions in entitlements contributing to the non-defense side of the ledger. Put another way, once the sequester comes into effect, defense-related appropriations will have to be reduced by $55 billion annually. And these reductions will be of the sledgehammer variety: Every "program, project and activity" will be reduced by the same percentage, regardless of its relative importance to the overall enhancement of national security.
It gets worse. The sequester does not begin to bite until January 2, 2013 -- that is, until the beginning of the second quarter of the upcoming fiscal year. That means that the entire $55 billion must be found from programs that had not yet been obligated during the first quarter of the fiscal year. To the extent that such commitments will have been made, the amount of funding susceptible to reductions will itself be reduced, and the percentage of reductions will accordingly increase. Finally, because President Obama is expected to exempt the military personnel accounts, which total some $141 billion, and Congress is expected to exempt the contingency-related accounts (which are the major source of funding for the war in Afghanistan), there will remain some $375 billion, from which $55 billion will have to be found, resulting in a 15 percent reduction in all other defense programs.
The impact of that reduction will be highly disruptive to both the current and longer term defense program. It will result in massive reductions in weapons systems, though not in personnel. It will render the pivot to Asia meaningless; any plans for increasing our military muscle in that region will be completely undermined by the reduction in shipbuilding, aircraft, missile, drones, and a host of other acquisition programs. Our presence in the rest of the world will at best fare no better, and, in light of the so-called pivot, will probably suffer even more.
All the foregoing has long been well-known to Washington's defense cognoscenti and especially its bean counters. What is less well-known, and at least equally alarming, is the impact of the sequester on the economy as a whole. As the recently released study by the Bipartisan Policy Center points out (full disclosure: I am a member of the Center's Task Force on Defense Budget and Strategy), the sequester will result in the loss of about a million jobs in 2013 and 2014 and America's GDP will decline by half a percent. Moreover, of these million lost jobs, it can safely be asserted that at least half will come from the non-defense sector. In other words, the sequester is not just a defense problem that should agitate only hawks. It is a national problem, and it demands immediate relief.
Despite the urgency of the sequester's challenge, the administration continues to sit on its hands. No draft legislation has emerged from the White House that would at least postpone the sequester for a reasonable period to enable Congress to try its hand at another effort to reduce the deficit. The administration's allies on the hill, particularly in the Senate, have been equally nonchalant about the coming programmatic and economic disaster.
Such nonchalance carries with it a very high risk, however, and not only for the economy. In addition to its impact on the government's budget, the sequester will also trigger the WARN Act, which requires employers to give a minimum of sixty days notice to private and public sector employees whose jobs are being targeted for possible termination. Those politicians seeking re-election to national office should take note that Nov. 2, 60 days before Jan. 2, when the sequester comes into force, is just four days before election day. They may find it very uncomfortable having to explain to potentially hundreds of thousands of people who have been given WARN Act pink slips why they deserve to be returned to office after they did nothing about the sequester. America's economic house is burning; the Neros of Washington had better act soon, or they may find that their political fate will echo that of their ancient Roman namesake.
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Now that summer is upon us, the global economic problems are no less serious, but perhaps our blogging can be. This is summertime, when one just wants to roll down the car windows, crank up some classic songs on the iPod, and sing along.
The pressure on Germany to fix Europe's looming problems is something I've addressed before, more seriously. The ever-louder pleading for Chancellor Merkel to just do it already, though, has lately put me in mind of other sorts of importunings. So, with apologies to Billy Joel, herewith a reworking of his 1977 classic, "Only the Good Die Young" (redone as "Stopping the PIIGS Bank Run"):
Come on, Angela, don't make me wait/ You Protestant countries start much too late/ Ah but sooner or later it comes down to fate/ You know what must be done/ When they sold you the euro and took the Deutsche Mark away/ They promised restraint and said we'd converge some day/ Ah but they never told you the price that you'd pay/ Now that Bankia's come undone
Stopping the PIIGS bank run/ That's what I said/ Stopping the PIIGS bank run
You might have heard we run with a dangerous crowd/ Private investors just can't be found/ Our national budgets often tend to run aground/ Ah but that never hurt no one
So come on Angela show me a sign/ Send up a signal I'll throw you a line/ Those old time treaties you're hiding behind/ Just won't get it done
Darlin stopping the PIIGS bank run/ I tell you stopping the PIIGS bank run/ Stopping the PIIGS bank run
You get a fiscal treaty/ And more input as a consolation/ You'll set a brand new goal/ And no risk of an export hole/ But Angela they didn't give you/ Quite enough information/ You didn't count on Greece/ When you were counting on low debt/GDP
And they say there's political union for those who will wait/ Some say it's better though there may be a taint/ But wouldn't you rather laugh with the sinners/ Than cry with the saints?/ The sinners are much more fun
You know you've got to stop the PIIGS bank run/ I tell you stopping the PIIGS bank run now/ You've got to stop the PIIGS bank run
You said your voters told you/ All they worried about was inflation/ They worry about subsidies/ Transfers that continue endlessly
Come on, come on, come on Angela/ Don't make me wait/ You Protestant countries start much too late/ Sooner or later it comes down to fate/ You might as well get it done/ You've got to stop the PIIGS bank run/ Tell you baby/ You've got to stop the PIIGS bank run
Imagine this with an interwoven saxophone and you should be all set for summer crooning on the autobahn. Of course, from a policy standpoint, Chancellor Merkel should probably have some of the same concerns about giving in that the apocryphal Virginia would have had in the Billy Joel original.
Washington is abuzz with speculation about a possible interim deal that might help defuse the brewing crisis over Iran's nuclear program. Color me skeptical.
That said, one thing seems clear. Iran's increased interest in negotiations has been driven almost entirely by its search for relief from harsh Western sanctions imposed in the last six months.
A top official from the Obama administration recently told me that "from what we are seeing, the threat of an Israeli strike hardly figures right now in Iranian calculations. On the contrary, everything indicates that what really worries Iran's leaders is the impact of sanctions and the danger that they could spark domestic unrest." Senior Israeli intelligence analysts have reached a similar conclusion, noting in conversations that, "at the moment, Iran doesn't think Israel will attack [without endorsement from the U.S.] . . . . The need for sanctions relief is the reason they're back at the table."
Of course, the centerpiece of the sanctions campaign has been the U.S. decision at long last to target the Central Bank of Iran (CBI). Foreign financial institutions that continue dealing with the CBI to make payments for Iranian oil now risk being cut off from the U.S. banking system. Only countries that show significant reductions in purchases by late June will qualify for exemptions.
In response, the European Union has agreed to end all imports of Iranian oil as of July 1. Japan -- Iran's second largest customer -- has already secured a U.S. waiver for its efforts to slash imports. Other major purchasers of Iranian crude, including South Korea, India, South Africa, and Turkey, are scrambling to follow suit. There are even signs that China, Iran's biggest buyer, may be reluctantly cutting back, or at least taking advantage of the shrinking demand for Iranian product to negotiate significant price reductions.
At the moment, the impact on Iranian revenues is shaping up to be truly major. Oil sales account for more than half of Iran's national budget. Some estimates now suggest that Iranian exports could drop by as much as 30-40 percent in the next several months. To find buyers for the rest, Iran may well be forced to offer steep discounts, further cutting into its revenue stream.
As a result, Iran now stands at the precipice of its most severe economic crisis since the devastation of the Iran-Iraq war in the 1980s. With memories of 2009's popular uprising still fresh in their minds, Iran's ruling mullahs are no doubt concerned over the risks they run by continuing down a path of unbridled confrontation, one that promises to double down on the substantial misery they've already inflicted on the Iranian people. Thus -- surprise, surprise -- we get the regime's recent negotiations gambit and the prospect, however slim, of meaningful compromise.
Given the obvious success that CBI sanctions have had in escalating pressure on Iran, an interesting question is why it took so dreadfully long for Washington to pull the trigger. After all, the basic idea of attacking Iran's oil sales by targeting the CBI has been around for years. I can recall discussions on the topic within the U.S. government as far back as 2006. Indeed, I vividly recall President Bush at numerous meetings beseeching his advisors to provide him new sources of leverage for pressuring Iran, and explicitly raising the idea of going after the CBI. Equally vividly, I recall Treasury Secretary Hank Paulson shooting the idea down, labeling it the "nuclear option" and direly predicting that it would wreak havoc on global markets and the U.S. economy. And that was largely that. The supposed Master of the Wall Street Universe had spoken and further discussion, for all intents and purposes, was closed off.
Distressingly, what I don't remember is anyone stepping forward to back up Paulson's reflexive conclusion about the unworkability of CBI sanctions with any hard analysis or data. Despite President Bush's obvious interest in the issue, and its potential import on a matter of vital national interest, I don't think any of the relevant agencies -- Treasury, State, the CIA -- ever took it upon themselves to produce a serious study of what the actual impact of CBI sanctions would be on international markets, much less what steps the U.S. might take to mitigate any adverse consequences. Regrettably, I also don't recall any of the president's advisors -- myself included -- ever taking action to challenge Paulson's thesis by tasking the intelligence community to model it systematically. In retrospect, I think it's an instance where the "process," the bureaucracy, clearly failed to serve the president well.
As far as I can tell, a similar failure also beset the Obama administration -- at least until Congress presented it with the fait accompli of CBI legislation late last year. It's widely understood that Treasury Secretary Tim Geithner, like Paulson before him, opposed CBI sanctions, fearing that they would panic the oil markets, send already-high gasoline prices skyrocketing, and tip the U.S. economy back into recession. Once again, the Treasury Secretary's edict was more or less taken on faith, unsupported by serious study and unchallenged by the bureaucracy.
Thankfully, not everyone was quite so complacent. Here, I'm thinking in particular of my colleague at the Foundation for Defense of Democracies (FDD), Mark Dubowitz. Refusing to accept the conventional wisdom that CBI sanctions had to be off the table, Dubowitz led an expert team in systematically analyzing the potential oil market impact. The result was a detailed assessment -- the first, at least as far as I'm aware -- that modeled what would happen to petroleum prices and Iranian revenues under different supply restriction scenarios. FDD's confidential report demonstrated that it would indeed be possible to fashion a sanctions regime against the CBI that could dramatically affect Iranian revenues without triggering a devastating disruption in global energy markets.
Dubowitz's study provided members of Congress with the analytical tools they needed to push back effectively against the doomsday scenarios, and heavily informed the CBI legislation crafted in late 2011 by Senators Kirk and Menendez that was overwhelmingly adopted. And when the Obama administration finally relented in the face of this Congressional tidal wave, FDD's assessment assisted administration experts in developing a nuanced implementation strategy to maximize pressure on Iranian revenues without triggering a massive oil shock.
So far, the measure looks remarkably successful. Iran's customer base is dwindling. Those that remain are now in position to demand discounts of as much as 20 percent as Iranian oil increasingly takes on the qualities of a distressed asset. Reductions in the amount of Iranian crude on the market have been adequately covered by corresponding increases in production by countries like Saudi Arabia and Iraq. While the sanctions did coincide with a temporary spike in global prices earlier this year, that seems to have had more to do with a crescendo of speculation about an imminent Israeli military strike than with U.S. action against the CBI. Accordingly, as that speculation has receded, oil prices have gone down. While the market no doubt remains tight, it has clearly stabilized -- and all the while Iran faces the likelihood of tens of billions of dollars in lost revenues, driving it back to the negotiating table in search of relief.
That a weapon this effective was not deployed several years ago, at a time when Iran's nuclear program was far less advanced, is indeed a great pity. It's also a potent reminder of the kinds of shortcomings that the U.S. government is perfectly capable of -- even when it comes to the most pressing national security issues. And it's as important an example as I can recall of the potentially vital contribution that private think tanks are capable of making to the policy-making process, when they challenge conventional wisdom and bring their intellectual capital and resources to bear decisively on those critical questions that the government, for whatever reason, has neglected, overlooked, or -- quite mistakenly -- already decided that it has all the answers to.
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Europe did not collapse this last week. That was something of a pleasant surprise, since portents of the economic grouping's demise have been accumulating for years now. In lieu of collapse, there were just more troubling signs: the fall of the government in the Netherlands; unemployment approaching 25 percent in Spain and a credit rating downgrade; French elections that featured growing nationalist strength and a likely split with Germany over austerity.
This raises a question. Given all the analyses proclaiming "the end is nigh," when, exactly, might we expect it? Some European friends would argue that this is the point -- we shouldn't expect it. This sort of brinksmanship is the way of Europe. Crises loom, there is wailing and lamentation, a summit is held, someone makes a concession (the Germans a likely candidate) and the crisis is averted. Thus it has been and thus it shall always be, they say. This is largely a matter of faith, but one must admit that it is a reasonable description of the recent European experience.
Here, though, is an alternative interpretation, presented in the form of a parable:
Imagine a friend who earns $3,000 a month, but has an unhealthy tendency to spend $5,000 a month. You observe this and remark to yourself: "This is unsustainable; it's got to stop." You wait for your friend to realize this.
But it turns out your friend has some savings he can use. These savings tide him over for a while, but when he burns through those, you once again figure his time has come. Surely he must now change his behavior.
But your friend finds he can take out a home equity loan. This funds his lifestyle for months more until, at last, those funds are exhausted, too. Time's up, you think.
But your friend announces that he still has plenty of borrowing room on his credit cards. The good life continues (albeit at a rather high interest rate). Sooner or later, of course, he maxes out his cards. This has got to be the end of it, you think. But then your friend mentions that he has heard about this loan shark downtown...
So what's the moral of the story? Is it not to worry -- your friend always finds a way? Or is it that a difficult adjustment can be postponed at ever-increasing cost? And what of the original question -- at what point does "the end" come? Is it when you first recognize that the situation is non-viable? Or is it when the loan shark finally shows up with his truncheon to collect?
This is an imperfect parable for Europe's situation in a number of ways. First, not all troubled European countries got there because of profligate spending. Spain and Ireland, for example, saw good fiscal positions go bad when they had to backstop troubled banks. Nor can one argue that Spain and Greece are continuing to live 'the good life' -- they're suffering real pain. It's just that the major adjustments they have made appear insufficient. And Europe's crisis is multifaceted; in addition to sovereign debt there are faltering banks and uncompetitive economies.
The real problem with the parable is that it tends to suggest that the growing costs are all financial. The more troubling costs may be political. Part of the way Europe has pushed past previous decision points has been to shunt aside democratic input -- as when new governments were installed in Greece and Italy, or when the major Greek political parties had to pre-commit to support an austerity plan, or in the push for a zone-wide austerity pact to be enforced from Brussels. Here the "loan shark with a truncheon" takes the form of more extreme movements in these countries taking up a nationalist cause and winning growing support, as with Marine Le Pen's Front National in France, or the slipping support for New Democracy and Pasok in Greece. Indebted and shamed nations in Europe, pushed around by their neighbors, rallying to a nationalist cry, what could go wrong? Europe does have a history along these lines.
The euro zone has bought itself time and may continue to do so for a while, but the costs seem to be mounting.
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Trilateral dialogues come in many forms. Those that mix allies with competitors can have the deleterious consequences of diminishing like-mindedness for the sake of inclusivity. More successful trialogues combine like-minded countries that can bring capabilities to bear in ways that cut across national and regional divides, creating an effect that is greater than the sum of its parts.
One of the unfortunate consequences of the rhetoric surrounding the U.S. "pivot" to Asia was the perception that Washington, even as it intensified its commitment to trans-Pacific leadership, was pivoting away from Europe, home to its historic allies. U.S. Assistant Secretary of State for East Asia Kurt Campbell is working hard to correct that interpretation and transcend regional divides -- by leading a U.S. push to coordinate with Europe on Asia in unprecedented ways.
As he told the Trilateral Forum Tokyo organized by the German Marshall Fund of the United States and the Tokyo Foundation today, there are enormous opportunities for the Atlantic allies to work together in a structured, systematic way in rising Asia. These include:
Burma, where a historic political opening can be constructively encouraged (and where backsliding on liberalization can be deterred) through close coordination between the United States and the European Union, including via a graduated loosening of the sanctions that helped spur Burma's military government to opt for managed political change -- and where the allies can bring to bear lessons learned in Europe (for instance, in the Balkans) to support Burma's fragile process of ethnic reconciliation.
China, where U.S. and European concerns over issues like human rights, protection of intellectual property, and rule of law are convergent, and where the West wields much more leverage than commonly understood as a result of being China's dominant trade and investment partners.
Asian institution-building, where no one can teach Asian nations with only a superficial history of multilateral cooperation more about how to build durable and robust regional institutions in the fields of security, trade and investment, and transnational governance.
Security issues, where Europeans have not been pivotal players since the days of gunboat imperialism a century ago, but where a more global Europe must step up its game as competition among Asia's rising and established powers creates dangerous security dilemmas that threaten international security and prosperity.
This is more than just talk: American and European officials now meet regularly on an Asia-specific agenda; the United States and the EU have agreed to roll out a new mechanism for transatlantic cooperation on Asia at the next ASEAN Regional Forum summit this summer. This is an initiative that should be welcomed by Asian officials who overwhelmingly believe Europe punches below its weight in Asia, despite the resilience of European power and ideas in the world, deep economic ties, and the increasingly global impact of developments across the Indo-Pacific region.
The reality is that for too many European nations -- and for too many European Union officials -- China trade policy has been a substitute for an all-of-Asia strategy that encompasses the full spectrum of Western interests and leverages Western ties to powers of great significance, including Japan, South Korea, India, and Indonesia. For their part, American officials until recently have given little creative thought to connecting the two alliance systems that the United States has built and nurtured for 60 years, spanning the Atlantic and Pacific oceans, into a more global arrangement that transcends bureaucratic stovepipes constructed for another era.
Asia's rise is a global phenomenon, not simply a regional one: to take just one example, consider how China's rise affects global energy markets, global governance, and developments in Africa, the Middle East, and Latin America. At the same time, military modernization and intensifying competition within Asia -- between Japan and China, North and South Korea, and India and China, for instance -- implicates Western powers with deep ties to Tokyo, Seoul, New Delhi, and Beijing.
Power shifts within Asia promise to displace existing balances in ways that will require the United States, to sustain its leadership, to secure every advantage it can in a more fluid environment by working with its friends, many of whom are in Europe. From the Asian perspective, every key power has a compelling stake in Europe's ability to emerge from its sovereign debt crisis and restore economic growth. Despite wishful thinking about decoupling between the West and the rest, the global economy cannot grow sustainably as long as Europe, a primary market for and source of Asian trade and investment, is in the grip of recession.
Given the overlapping interests of Asian and Western democracies, it only makes sense to coordinate much more systematically, rather than relying on a set of outdated regional toolkits unadapted to a more globalized century. Similarly, to the extent that China is both a top economic partner and top security concern for so many countries, it only makes sense for them to use their combined influence to manage relations with Beijing from a position of strength -- rather than succumb to a more national approach that will disadvantage every country that cannot alone match China's clout.
For these reasons, the U.S. State Department's effort to bridge that Atlantic and Pacific communities, if matched by seriousness in European and Asian capitals, promises to pay dividends for Western interests in a more non-Western world.
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President Obama will join his 34 regional counterparts in Cartagena, Colombia this weekend for the Sixth Summit of the Americas. The theme of this year's meeting is "Connecting the Americas: Partners for Prosperity."
A more appropriate theme would be, "Whatever happened to the Inter-American Democratic Charter?"
That landmark document, signed a decade ago by all the governments of the hemisphere (excluding Cuba), in Lima, Peru, states, "The peoples of the Americas have a right to democracy, and their governments have an obligation to promote and defend it."
But the rise to power of Venezuela's Hugo Chávez and a passel of other leftist populists has turned that commitment on its head, as they have systematically gutted their country's democratic institutions and trampled on nearly every article enshrined in the Charter with nary a peep of protest from other governments in the region.
Indeed, the region's fading commitment to defending democracy has even dominated headlines leading up to the Summit. The ringleader in this case has been Ecuadorean rabble-rouser Rafael Correa, who in high dudgeon has declaimed that he is boycotting this year's summit because thoroughly undemocratic Cuba was not invited.
Castro's Cuba, which would not recognize a democratic principle if one walked up and slapped him in the face, has never been invited to a summit because conforming to the most elementary standards of democratic governance is a prerequisite to attend.
Predictably, Hugo Chávez was the first to rush to Correa's defense, saying that although he would attend the summit (health permitting), "This will be the last so-called Summit of the Americas without Cuba. The next one wouldn't occur," and that a "good number of us" will advocate Cuba's inclusion at the next such gathering.
He added that he had discussed the issue with leaders from Argentina, Bolivia, Nicaragua, Ecuador, and Brazil.
It wasn't long before Argentina and Brazil also weighed in, toeing the same line. "This has to be the last summit in which Cuba does not participate," said Argentine Foreign Minister Hector Timerman in an appearance with his Brazilian counterpart Antonio Patriota.
You know a regional commitment to promoting and defending democracy is in trouble when otherwise mature countries like Argentina and Brazil are lining up in support of Cuba's inclusion in the Summit of the Americas.
But the issue also goes beyond the incongruence of a Stalinist regime participating in a meeting of popularly elected governments. As noted, a deafening regional silence has accompanied populist encroachments on democratic norms and institutions over the past few years, whether they have occurred in Venezuela, Ecuador, Bolivia, or Nicaragua.
It may be true that there are limits to the appeal of the Chávez model throughout the region, but according to Freedom House's annual Freedom in the World (2012) report, Chávez's "quasi-authoritarian populism still stands as a threat to the region's political stability."
President Obama has an opportunity when he travels to Colombia on Saturday to make clear that the Charter is not just another regional declaration to be signed and forgotten. Instead, it stands as the crowning achievement of the region's history of perseverance and grit -- at great human cost -- to move past its authoritarian past and establish democratic governance as the hemispheric norm.
The president must unabashedly reassert the abiding relevance of the Inter-American Democratic Charter as one that transcends ideology and fuzzy notions of Latin "solidarity" and remains the foundation for any lasting regional peace and prosperity.
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It is bad enough to read that the military has launched a coup in Mali and ousted the democratically elected President Amadou Toumani Touré. Even those of us who believe that Francis Fukuyama made a sound and defensible point about the "end of history" know that there will continue to be setbacks for a long time in much of the developing world. Just because there is now no credible social, economic, or political argument in defense of tyranny does not mean that there won't still be attempts to make that argument by self-serving or even well-meaning putchists.
But it is most disheartening to learn how and why the coup came about just weeks before a scheduled election that was to peacefully replace Touré, only the second democratically elected president of a democratic Mali. Worse still to learn of the reaction to this coup by Malians who should know better.
Mali was somewhat of a success story in the African Sahel region. Only five years ago it hosted the Community of Democracies gathering attended by U.S. Deputy Secretary of State John Negroponte. As we planned for this event (I was then the deputy assistant administrator for democracy and government programs at USAID), there was considerable internal discussion of how well things might go and what the optics would be like for the world's democracy promoters (states as well as NGOs) to gather in Bamako for this important meeting. All were aware that there was of course still much poverty and lack of development in Mali along with unresolved tribal and sectional strife. But the elected government of Touré had been for several years working with the IMF and World Bank and other international donors to cut spending and regulation and improve governance. So it was deemed worthwhile to hold the meeting there. It was a success and the Malian government was a gracious host.
Fast forward to today, a few days after an ill-planned coup by what appear to be incompetent military leaders who have already broken their promises to begin restoring democratic order. Sanctions have been imposed and there are reports that the rebels in the north have taken advantage of the chaos and are furthering their rebellion and implementing sharia law, while as many as 200,000 people are fleeing.
So, democracy has been violently interrupted and al Qaeda, which has designs on Mali as it does in the rest of the Sahel, now has a widening gap in which to insert themselves and to work their wicked will.
But all these problems are compounded by the reaction of the Malians themselves. The coup has been welcomed by various civic groups, peasant leaders as well as other important sectors. Their interest in maintaining democratic processes is as weak, apparently, as the Touré government. The reason is because they have not seen sufficient improvements to their livelihood and an end to the northern rebellion. They have also grown fed-up with the way in which foreign interests have been able to, in their view, exploit the country and its land resources. Their motto is "peace first, elections later."
This is the enduring problem we see in several areas of the developing and democratizing world: Democracy and markets cannot make enough headway before the people become disillusioned to the point of being willing to welcome a coup if it will achieve the objectives they seek. There seems to be no permanent turning away from democracy and polls continue to show that people support democracy and want it for their country. We see this in parts of Latin America, Africa, and Asia. But some people in some states and regions are not willing to endure the progress that democracy can make only slowly. And there is a severe shortage of indigenous far-sighted leaders who should be encouraging the public to work tirelessly and patiently for democratic success instead of taking advantage of public disillusionment and rancor to promote themselves.
This is not a flaw in democracy, representative institutions, or law-based governance. The question is not whether freedom and liberty under law is the solution to lack of development and disorder. They are the only elements that can bring sustained order and progress.
The question is how long will it take and will the public endure the wait? That question is answered only by cultural factors, but Western and international forces can help with wise policy and firm commitments to the democratic path. Now is the time for the West and the U.N. and related organizations to stand shoulder-to-shoulder with African organizations and the leaders of other African countries who are condemning the coup, imposing sanctions, and insisting on a return to normal democratic order. It is also time to support, encourage, and even warn Mali's civil society leaders that they should not make a deal with the devil, as it were, by welcoming violations of democratic order in hopes that good can come of it. Good is very likely not to come of it, especially with a deepening and widening rebellion in the north that the incompetent military cannot control and that is being used to its advantage by terrorist groups like al Qaeda.
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In the last couple of days, Western media has been abuzz with rumors sourced from Chinese social media websites, Falun Gong-sponsored news outlets, and analysts in Hong Kong of an attempted coup in Beijing. The only thing lending credence to these rumors is the seeming existence of a power struggle that resulted in the sacking of Chongqing Party Secretary Bo Xilai. This is the most significant removal of a government official since 2006 when Shanghai Party Chief Chen Liangyu was fired during a corruption probe.
The recent string of events have made for exciting political drama, but let's remember that only nine men in China know what is really going on. This holds true in the case of Bo Xilai and his deputy Wang Lijun, as well as the current status of security chief Zhou Yongkang (some of the recent rumors are swirling around him). Given the uncertain political environment, those nine will not be talking much anytime soon.
While we do not know why Bo was removed and other bits of "Zhongnanhaiology," recent incidents have revealed some useful information about the respective roles of power and ideology in China. And these, in turn, show that change is coming to China, even if we don't know what that change will look like.
First, Bo Xilai's ouster was about power, rather than ideology. From the central leadership's rhetoric, especially Wen Jiabao's statements about the need to avoid another Cultural Revolution, one would think that Bo's fall from grace had mostly to do with his embrace of some form of Maoism. Indeed, it's a convenient picture for the central leadership to paint for an international audience -- that they ousted Bo to prevent China from making a "left turn." While there may be a kernel of truth to this, the "red songs" were more of a means to an end for Bo. Likewise, Bo's supposed "red ideology" provided Chinese leaders a good pretense to remove a threat to central power.
Bo was aiming for a place in the Standing Committee to increase his own power. And his real "crime" according to the leadership is not what he did in Chongqing, but how he did it. In executing his dual "sing red strike black" campaigns, Bo established a separate center of power around himself that did not rely on the central leadership. Bo was establishing his own power base and as a result became somewhat of a national sensation (some Chinese citizens were even writing songs about him). His power resulted from his own self-promotion, and not because he was favored by the leadership. He was a populist, but more importantly he was a populist operating as the face of the party and demonstrating a way of governing that was different from the central leadership.
Second, power is what is propelling Chinese politics during this time of transition. China is now run more like a mafia state with a dozen or so powerful families in charge. Bo's was one of them. The rules of the game are as such: "If you go after us, then we will go after you." This might be another contributing factor to Bo's demise. His deputy was allegedly probing Bo's own family for corruption, and Bo responded by allegedly interfering in the investigation and attempting to sideline his once powerful chief. Unfortunately for Bo, his power struggle with Wang was not as important as Beijing's struggle with him. The leadership's longtime reservations about Bo's political style combined with his sudden vulnerability made for an excellent pretext to "go after" him.
While Bo's story is about power, it should not obscure the fact that there is an ideological struggle going on inside China. The struggle is a competition of ideas pitting those aligned with Chinese reformers and the "real" Chinese private sector against very powerful state owned enterprises and the party bosses who benefit from them. The former know that Beijing's growth model will come to an end unless serious capitalist reform is enacted. The latter know that if those reforms are enacted the party (and party) is over for them.
Even more so than the sacking of Bo and the evident tension it is creating, the existence of a struggle over the future of the Chinese economy demonstrates a lack of consensus in China, notwithstanding the intellectual faddishness about the "Beijing Consensus." This intellectual fad -- a battle between Beijing's model of state-led economics and Western liberal economics -- is a creation of the West. But the real battle is inside China -- will it become more capitalist and grow or will it sputter?
This lack of consensus shows that while it is impossible to predict what will happen in China (muddling along, collapse, stagnation), one thing is becoming clear -- China will change over the next decade. As the economic model comes increasingly into question, other internal problems will come home to roost, including disastrous population policies, widespread corruption at the highest levels of government, and inert political leadership.
As we watch these events unfold, it behooves us to remember that one of the reasons outsiders are paying attention to the idea that there may be a coup in China is that the military is the only institution that can keep the country together. Political crisis in China could pave the way for a PLA-led China. If anything, the downfall of Bo tells us is that the transition in China is not as smooth as it seems. Power struggles are real as party leaders fight over an inverted Golden Rule -- in China, he who makes the rules gets the gold. While the particulars of the Bo case are uncertain, two things are clear: The leaders are no longer all powerful and reform is badly needed. The question is, will China make the kind of changes it objectively needs or will it become a stagnating PLA-led state?
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In the course of Congressional testimony this week supporting the Obama administration's $525 billion defense spending request for FY 2013, the Pentagon leadership was dire about the consequences of any further cuts to defense. In particular, Secretary Panetta and General Dempsey are seeking to prevent the law going into effect that would require an additional $500 billion to be cut across the coming decade.
The Pentagon leadership professes itself fine with this year's cuts. Panetta has said "the United States military will remain capable across the spectrum. We will continue to conduct a complex set of missions ranging from counterterrorism, ranging from countering weapons of mass destruction, to maintaining a safe, secure and effective nuclear deterrent. We will be fully prepared to protect our interests, defend our homeland and support civil authorities." General Dempsey fully endorsed the new guidance. Yet they both insisted no further cuts were possible without grave damage to our national security.
In seeking to persuade members of Congress to repudiate the 2011 Budget Control Act that established the topline spending levels, Panetta's tactic was to shame: "We have made no plans for sequester because it's a nutty formula, and it's goofy to begin with, and it's not something, frankly, that anybody who is responsible ought to put into effect." To be clear, he is declining to comply with the law.
Dempsey's tactic was to cry wolf: he said that if the sequestration cuts went into effect, "we would not any longer be a global power." This is nonsense. The Budget Control Act necessitates a 15 percent cut to DOD spending across ten years, in a budget that has doubled in the past decade. A budget that constitutes 42 percent of the entire world's defense spending, in a world in which all but two or three of the other big spenders are friends and allies likely to support our endeavors. A budget that after sequestration takes effect will hover at 2004 spending levels -- and the year 2004 was a profligate one in defense spending.
The United States has eleven aircraft carrier battle groups; no other country in the world sails more than one. We have three times as many modern battle tanks, four times the number of fourth-generation tactical aircraft (and are already fielding the fifth generation), more than three times as many naval cruisers and destroyers, 19 times as many tanker aircraft and 48 times as many unmanned aerial vehicles as any other country. The additional public investment since 2001 has also allowed the U.S. military to develop and use cutting-edge equipment such as drones, better body and vehicle armor and more precise bombs. We have an operational and technological edge that is literally pricing our allies out of participation, and that leaves our adversaries incapable of winning so long as we are willing to pursue our objectives.
Secretary Panetta is right that our national interest would be best served by the president submitting a budget that reforms entitlements to put our country on a sustainable spending path. The president has not done that. Secretary Panetta might perhaps take his concern about the devastating effects of sequestration to the president, who has committed to veto any relief for DOD from the Budget Control Act.
But that General Dempsey would project American power as so fragile -- at a time when our strength is being tested on several fronts -- is incredibly injudicious. If he cannot maintain America's ability to operate military forces throughout the world on an annual budget equivalent to our spending in 2004, he does not deserve to be the Chairman of the Joint Chiefs of Staff. Admiral Mullen was right: Our military has lost the ability to budget. We have a whole generation of military leaders with no experience operating cost-effectively. This, too, is a serious deficiency in our defense.
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"The budget is policy," my former boss Don Rumsfeld once told me. The Obama administration's fiscal year 2013 defense budget demonstrates just how right the former "SecDef" was.
The new defense budget is more than about mere dollars, though its cuts are certainly serious. More important, however, is the programmatic content of those cuts and their implications for our credibility overseas.
The administration has made much of its so-called "pivot" toward Asia. But the budget does no such thing. Apart from the rotation of some 2,500 Marines to Australia, hardly the heart of the region, the budget actually represents a step backwards. Eight thousand Marines will move further away from the mainland as they redeploy from Okinawa to Guam. Missile defense funding, a critical component of any credible American defense posture in Asia, is being cut back. So too are shipbuilding and tactical aviation programs, though maritime and tactical air forces are meant to be the backbone of America's Asian posture.
With respect to Europe, however, the administration did not disappoint. As promised, two brigades will be withdrawn from Europe. The cutback in missile defense funding will inevitably affect the so-called European Phased Adaptive Approach, which was meant to be a more credible, and supposedly less costly, way of addressing the Iranian threat.
As for the Middle East, it is clear that notwithstanding administration protestations to the contrary, the decline of America's posture in the region will not be limited to land forces and Marines. The cutback in the shipbuilding program ensures that Iran will face a less powerful American presence over the next few years.
Even as it has cut back on weapons procurement, the administration has done nothing about the bloated defense civilian force, other than to give them a pay raise. Defense civilians, whose numbers are rapidly approaching those of uniformed personnel, are consuming ever larger portions of service budgets. The Defense Business Board has argued that as many as 110,000 civilians could be removed from the rolls with no harm done to DoD efficiency. Needless to say, the DBB's advice has fallen on deaf ears, even though civilian personnel reductions would release funds for weapons system programs.
The administration vigorously protests assertions that it is presiding over America's decline. The defense budget tells another story. It is not a matter of Washington leading from behind. Instead what is becoming clear is that Washington is not prepared to lead at all.
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Within the next 24 hours, observers say, we are likely to see an agreement reached among Greek political parties that will clear the way for a second bailout from Europe and the IMF. Observers have been saying this for two months now, but never mind. It is certainly possible that the members of the Greek ruling coalition will meet the demands of "the troika" of lenders -- the European Commission, the European Central Bank, and the International Monetary Fund. And even plausible suggestions of a crisis resolution have tended to bring a feeling of euphoria to markets -- a good Greek word.
There are optimists and pessimists about Euro zone prospects. I'm in the latter camp, but it's interesting to see where the analyses diverge. You would probably get broad agreement that the essence of the euro zone problem is that a number of countries on Europe's periphery have racked up unsustainable levels of debt. There is also a general consensus that if those peripheral countries followed the traditional prescription of devaluing their currency (by leaving the euro zone), this would be a large economic shock for Europe and, thus, for the rest of the world (note, though, the different views among Northern European leaders on whether Greece alone might be expendable).
The divergence in opinion really comes in the analysis of potential solutions. Here are three ways one might look at fixes:
Europe as a whole handle the debt issue?
This is the question the optimists ask. The answer, they find, is yes, Europe could. While individual countries within the euro zone have debt problems, the zone as a whole is roughly in balance. If everyone agrees that the money is there and that failure to find a solution could be very costly, then it's just a matter of a little obligatory posturing before the money is reshuffled and the matter solved. Another way of putting this would be that economic hurdles are difficult to overcome, but political hurdles are trivial.
2. Could current national leaders in the Euro Zone handle the debt issue? Posing the question this way takes political constraints a little more seriously. While there are certainly now phone numbers and interlocutors for an apocryphal Kissingerian call to Europe, the major players are still national. Chancellor Merkel ultimately answers to a German electorate, President Sarkozy to a French citzenship, and Prime Minister Papademos to a Greek. Those German voters are distinctly unenthused about bailouts and a central bank that is willing to print money to solve problems. Those Greek voters are distinctly unenthused about austerity programs in the face of 19 percent unemployment. With these political constraints, the problem looks significantly harder. The question becomes whether these leaders can overcome the reluctance of their respective electorates and 'do what must be done.' Those who analyze at this level are hanging on every report out of Athens and Berlin.
countries commit that all future governments will follow the paths agreed today?
This is the pessimists' playground. What happens when leaders fail to persuade their electorates that their unpopular measures were really necessary? They're usually ousted in the next election. There are certainly some policies that, once undertaken, are very difficult to revoke. But the central issues in Europe now revolve around annual national budgets, for which commitments are eminently reversible. One can try to lock in good behavior at a constitutional level -- as much of Europe just did with its brand new fiscal pact, and as it did at the zone's inception with the Stability and Growth Pact. These have proven exceedingly difficult to enforce in practice.
A story on Greek politics in the New York Times nicely captured the essence of this last problem.
"After years of turning its back on its social welfare platform, the Socialist Party, known as Pasok and Greece's dominant political force since 1974, has virtually disintegrated, falling to fifth place with 8 percent support, according to a poll that the firm Public Issue released on Tuesday.
...The most probable winner of future Greek elections would be New Democracy, which held power from 2004 until 2009, when Greece's debt soared from slightly more than 100 percent of its gross domestic product to at least 127 percent.
Its leader, Antonis Samaras, has been criticized repeatedly by European leaders as irresponsible, but with every new tax increase in Greece, some voters are warming to his constant critique of austerity in the absence of growth measures. The party is leading in opinion polls, with Public Issue putting its support at 31 percent of the vote."
The story also noted that "the hard left and extreme right are rising."
Thus, Greek acquiescence today guarantees nothing after the next vote. The magnitude of this problem is not lost on the major European players. In fact, the quest for a solution can be seen as the unifying theme behind Northern European proposals to address the crisis: the fiscal austerity pact, fiscal union, Brussels oversight of national budgets, even political union. Each of these would insulate future tax and spending decisions from the whims of Greek voters.
Barring a momentous development along such constitutional lines, Greek voters still have a say. So if, in the near future, there is an announcement of an accord among current political leaders, the question will be which Greek word is most pertinent: euphoria, or democracy.
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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.
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The Nov. 23 deadline for a "Supercommittee" budget agreement is fast approaching, and no such agreement is as yet in sight. The Pentagon appears to be panicking over the prospect of sequestration, and with it a reduction of some $600 billion in defense-related spending over the next decade. Secretary of Defense Leon Panetta's warnings have become ever more dire. He has said that sequestration will "invite aggression from U.S. adversaries", that it will result in a "hollow force" of "ships without sailors" and "brigades without bullets."
The Secretary should know better. Not because sequestration, if implemented, would not be a disaster for DoD, but because the absence of an agreement, which would trigger a sequester, does not mean that sequestration will ever come to pass. It is important to note that the sequester would only come into force for the Fiscal Year 2013 budget; in other words, nearly a year must still pass before any cuts are mandated. And the Congress thus has nearly a year to legislate the sequester into the dustbin of history.
It has happened exactly that way before, as Mr. Panetta knows only too well. He was a veteran of the House Budget Committee in 1988 when the Congress reached a budget deficit agreement that wiped out a $20 billion sequestration that was supposed to have been "automatically" triggered by the 1985 Balanced Budget Emergency Deficit Control Act, popularly known as Gramm-Rudman-Hollings. And he was chairman of the House Budget Committee in 1990, when he played a major role in the enactment of Congressional legislation that again circumvented the 1985 Act by lowering sequestration levels from the "automatic" $16 billion that the Act would have mandated to just over $4.5 billion in budget reductions. Again in 1991, with Mr. Panetta still serving as House Budget Committee chairman, a smaller sequester of some $190 million was rescinded in subsequent legislation that year when the purported savings were found to be the result of a miscalculation.
It is arguable that the long term health of America's defense posture would be better served if the Supercommittee fails to produce an agreement than if it does. It will be much harder for the Congress to rescind a budget deal to which all sides agreed, than to rescind a sequester that was the product of an absence of agreement. Even under the best of circumstances, it is unlikely that Defense could avoid cuts of $200-300 billion in a deal that totals $1.2 trillion; and those cuts will be difficult, if not impossible to restore. On the other hand, the Congress can be expected to rescind sequestration precisely because of the warnings that the Pentagon's top leaders have issued. And once the Congress returns to square one, the prospects for protecting the Defense budget will radically improve.
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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.
Shadow Government is a blog about U.S. foreign policy under the Obama administration, written by experienced policy makers from the loyal opposition and curated by Peter D. Feaver and William Inboden.