Meade on the End of the End of History

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But Westerners should never have expected old-fashioned geopolitics to go away. They did so only because they fundamentally misread what the collapse of the Soviet Union meant: the ideological triumph of liberal capitalist democracy over communism, not the obsolescence of hard power. China, Iran, and Russia never bought into the geopolitical settlement that followed the Cold War, and they are making increasingly forceful attempts to overturn it. That process will not be peaceful, and whether or not the revisionists succeed, their efforts have already shaken the balance of power and changed the dynamics of international politics.

and

In very different ways, with very different objectives, China, Iran, and Russia are all pushing back against the political settlement of the Cold War.

The relationships among those three revisionist powers are complex. In the long run, Russia fears the rise of China. Tehran’s worldview has little in common with that of either Beijing or Moscow. Iran and Russia are oil-exporting countries and like the price of oil to be high; China is a net consumer and wants prices low. Political instability in the Middle East can work to Iran’s and Russia’s advantage but poses large risks for China. One should not speak of a strategic alliance among them, and over time, particularly if they succeed in undermining U.S. influence in Eurasia, the tensions among them are more likely to grow than shrink.

What binds these powers together, however, is their agreement that the status quo must be revised. Russia wants to reassemble as much of the Soviet Union as it can. China has no intention of contenting itself with a secondary role in global affairs, nor will it accept the current degree of U.S. influence in Asia and the territorial status quo there. Iran wishes to replace the current order in the Middle East -- led by Saudi Arabia and dominated by Sunni Arab states -- with one centered on Tehran.

Source: Walter Russell Meade, "The Return of Geopolitics," Foreign Affairs, May/June 2014

Condetti on the Democrat's Money Advantage

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The campaign against inequality and the call for higher taxes and the regulatory burdens placed on extractive industries further the self-interest of the liberals who rule our world partly because those liberals are already established in society and have already made their money, partly because like David Cohen or Tom Steyer or George Soros or Elon Musk or Warren Buffett they stand to benefit financially from their preferred outcomes, but also because there are fortunes to be made, there is status to be gained, in justifying the continued expansion of the welfare state, in designing plans for the redistribution of tax dollars, in demonizing those sections of the elite, and that minority of Americans, which dissent from the ruling ideas.

Source: Matthew Continetti, "Oligarchy in the Twenty-first Century,"   The Washington Free Beacon, April 25, 2014

Kling on Over-reliance on the Production Function

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So, should we use the NPF to guide economic policy to try to achieve the best balance among growth and the distribution of income? Some possibilities:

(1) The criticisms of the aggregate NPF are not important, so that policy conclusions are still sound.

(2) Some of the criticisms are devastating, but we need some tool to guide policy, and until something better comes along our best choice is the aggregate NPF.

(3) Some criticisms are devastating, and as a result we should be very cautious and humble about making policy pronouncements based on our understanding of the NPF.

To me, (3) makes the most sense. But that is not a popular position at the moment.

Source: Arnold Kling, "What’s Wrong With the Neoclassical Production Function," askblog, April 25, 2014

Ridley Says the World's Resources Aren't Running Out

Source:  Matt Ridley, "The World's Resources Aren't Running Out," The Wall Street Journal, April 25, 2014

How many times have you heard that we humans are "using up" the world's resources, "running out" of oil, "reaching the limits" of the atmosphere's capacity to cope with pollution or "approaching the carrying capacity" of the land's ability to support a greater population? The assumption behind all such statements is that there is a fixed amount of stuff -- metals, oil, clean air, land -- and that we risk exhausting it through our consumption.

"We are using 50% more resources than the Earth can sustainably produce, and unless we change course, that number will grow fast -- by 2030, even two planets will not be enough," says Jim Leape, director general of the World Wide Fund for Nature International (formerly the World Wildlife Fund).
But here's a peculiar feature of human history: We burst through such limits again and again. After all, as a Saudi oil minister once said, the Stone Age didn't end for lack of stone. Ecologists call this "niche construction" -- that people (and indeed some other animals) can create new opportunities for themselves by making their habitats more productive in some way. Agriculture is the classic example of niche construction: We stopped relying on nature's bounty and substituted an artificial and much larger bounty.

Economists call the same phenomenon innovation. What frustrates them about ecologists is the latter's tendency to think in terms of static limits. Ecologists can't seem to see that when whale oil starts to run out, petroleum is discovered, or that when farm yields flatten, fertilizer comes along, or that when glass fiber is invented, demand for copper falls.

That frustration is heartily reciprocated. Ecologists think that economists espouse a sort of superstitious magic called "markets" or "prices" to avoid confronting the reality of limits to growth. The easiest way to raise a cheer in a conference of ecologists is to make a rude joke about economists.

I have lived among both tribes. I studied various forms of ecology in an academic setting for seven years and then worked at the Economist magazine for eight years. When I was an ecologist (in the academic sense of the word, not the political one, though I also had antinuclear stickers on my car), I very much espoused the carrying-capacity viewpoint -- that there were limits to growth. I nowadays lean to the view that there are no limits because we can invent new ways of doing more with less.
This disagreement goes to the heart of many current political issues and explains much about why people disagree about environmental policy. In the climate debate, for example, pessimists see a limit to the atmosphere's capacity to cope with extra carbon dioxide without rapid warming. So a continuing increase in emissions if economic growth continues will eventually accelerate warming to dangerous rates. But optimists see economic growth leading to technological change that would result in the use of lower-carbon energy. That would allow warming to level off long before it does much harm.

It is striking, for example, that the Intergovernmental Panel on Climate Change's recent forecast that temperatures would rise by 3.7 to 4.8 degrees Celsius compared with preindustrial levels by 2100 was based on several assumptions: little technological change, an end to the 50-year fall in population growth rates, a tripling (only) of per capita income and not much improvement in the energy efficiency of the economy. Basically, that would mean a world much like today's but with lots more people burning lots more coal and oil, leading to an increase in emissions. Most economists expect a five- or tenfold increase in income, huge changes in technology and an end to population growth by 2100: not so many more people needing much less carbon.

In 1679, Antonie van Leeuwenhoek, the great Dutch microscopist, estimated that the planet could hold 13.4 billion people, a number that most demographers think we may never reach. Since then, estimates have bounced around between 1 billion and 100 billion, with no sign of converging on an agreed figure.

Economists point out that we keep improving the productivity of each acre of land by applying fertilizer, mechanization, pesticides and irrigation. Further innovation is bound to shift the ceiling upward. Jesse Ausubel at Rockefeller University calculates that the amount of land required to grow a given quantity of food has fallen by 65% over the past 50 years, world-wide.

Ecologists object that these innovations rely on nonrenewable resources, such as oil and gas, or renewable ones that are being used up faster than they are replenished, such as aquifers. So current yields cannot be maintained, let alone improved.

In his recent book "The View from Lazy Point," the ecologist Carl Safina estimates that if everybody had the living standards of Americans, we would need 2.5 Earths because the world's agricultural land just couldn't grow enough food for more than 2.5 billion people at that level of consumption. Harvard emeritus professor E.O. Wilson, one of ecology's patriarchs, reckoned that only if we all turned vegetarian could the world's farms grow enough food to support 10 billion people.

Economists respond by saying that since large parts of the world, especially in Africa, have yet to gain access to fertilizer and modern farming techniques, there is no reason to think that the global land requirements for a given amount of food will cease shrinking any time soon. Indeed, Mr. Ausubel, together with his colleagues Iddo Wernick and Paul Waggoner, came to the startling conclusion that, even with generous assumptions about population growth and growing affluence leading to greater demand for meat and other luxuries, and with ungenerous assumptions about future global yield improvements, we will need less farmland in 2050 than we needed in 2000. (So long, that is, as we don't grow more biofuels on land that could be growing food.)

But surely intensification of yields depends on inputs that may run out? Take water, a commodity that limits the production of food in many places. Estimates made in the 1960s and 1970s of water demand by the year 2000 proved grossly overestimated: The world used half as much water as experts had projected 30 years before.

The reason was greater economy in the use of water by new irrigation techniques. Some countries, such as Israel and Cyprus, have cut water use for irrigation through the use of drip irrigation. Combine these improvements with solar-driven desalination of seawater world-wide, and it is highly unlikely that fresh water will limit human population.

The best-selling book "Limits to Growth," published in 1972 by the Club of Rome (an influential global think tank), argued that we would have bumped our heads against all sorts of ceilings by now, running short of various metals, fuels, minerals and space. Why did it not happen? In a word, technology: better mining techniques, more frugal use of materials, and if scarcity causes price increases, substitution by cheaper material. We use 100 times thinner gold plating on computer connectors than we did 40 years ago. The steel content of cars and buildings keeps on falling.
Until about 10 years ago, it was reasonable to expect that natural gas might run out in a few short decades and oil soon thereafter. If that were to happen, agricultural yields would plummet, and the world would be faced with a stark dilemma: Plow up all the remaining rain forest to grow food, or starve.

But thanks to fracking and the shale revolution, peak oil and gas have been postponed. They will run out one day, but only in the sense that you will run out of Atlantic Ocean one day if you take a rowboat west out of a harbor in Ireland. Just as you are likely to stop rowing long before you bump into Newfoundland, so we may well find cheap substitutes for fossil fuels long before they run out.
The economist and metals dealer Tim Worstall gives the example of tellurium, a key ingredient of some kinds of solar panels. Tellurium is one of the rarest elements in the Earth's crust -- one atom per billion. Will it soon run out? Mr. Worstall estimates that there are 120 million tons of it, or a million years' supply altogether. It is sufficiently concentrated in the residues from refining copper ores, called copper slimes, to be worth extracting for a very long time to come. One day, it will also be recycled as old solar panels get cannibalized to make new ones.

Or take phosphorus, an element vital to agricultural fertility. The richest phosphate mines, such as on the island of Nauru in the South Pacific, are all but exhausted. Does that mean the world is running out? No: There are extensive lower grade deposits, and if we get desperate, all the phosphorus atoms put into the ground over past centuries still exist, especially in the mud of estuaries. It's just a matter of concentrating them again.

In 1972, the ecologist Paul Ehrlich of Stanford University came up with a simple formula called IPAT, which stated that the impact of humankind was equal to population multiplied by affluence multiplied again by technology. In other words, the damage done to Earth increases the more people there are, the richer they get and the more technology they have.

Many ecologists still subscribe to this doctrine, which has attained the status of holy writ in ecology. But the past 40 years haven't been kind to it. In many respects, greater affluence and new technology have led to less human impact on the planet, not more. Richer people with new technologies tend not to collect firewood and bushmeat from natural forests; instead, they use electricity and farmed chicken -- both of which need much less land. In 2006, Mr. Ausubel calculated that no country with a GDP per head greater than $4,600 has a falling stock of forest (in density as well as in acreage).
Haiti is 98% deforested and literally brown on satellite images, compared with its green, well-forested neighbor, the Dominican Republic. The difference stems from Haiti's poverty, which causes it to rely on charcoal for domestic and industrial energy, whereas the Dominican Republic is wealthy enough to use fossil fuels, subsidizing propane gas for cooking fuel specifically so that people won't cut down forests.

Part of the problem is that the word "consumption" means different things to the two tribes. Ecologists use it to mean "the act of using up a resource"; economists mean "the purchase of goods and services by the public" (both definitions taken from the Oxford dictionary).

But in what sense is water, tellurium or phosphorus "used up" when products made with them are bought by the public? They still exist in the objects themselves or in the environment. Water returns to the environment through sewage and can be reused. Phosphorus gets recycled through compost. Tellurium is in solar panels, which can be recycled. As the economist Thomas Sowell wrote in his 1980 book "Knowledge and Decisions," "Although we speak loosely of 'production,' man neither creates nor destroys matter, but only transforms it."

Given that innovation -- or "niche construction" -- causes ever more productivity, how do ecologists justify the claim that we are already overdrawn at the planetary bank and would need at least another planet to sustain the lifestyles of 10 billion people at U.S. standards of living?

Examine the calculations done by a group called the Global Footprint Network -- a think tank founded by Mathis Wackernagel in Oakland, Calif., and supported by more than 70 international environmental organizations -- and it becomes clear. The group assumes that the fossil fuels burned in the pursuit of higher yields must be offset in the future by tree planting on a scale that could soak up the emitted carbon dioxide. A widely used measure of "ecological footprint" simply assumes that 54% of the acreage we need should be devoted to "carbon uptake."

But what if tree planting wasn't the only way to soak up carbon dioxide? Or if trees grew faster when irrigated and fertilized so you needed fewer of them? Or if we cut emissions, as the U.S. has recently done by substituting gas for coal in electricity generation? Or if we tolerated some increase in emissions (which are measurably increasing crop yields, by the way)? Any of these factors could wipe out a huge chunk of the deemed ecological overdraft and put us back in planetary credit.
Helmut Haberl of Klagenfurt University in Austria is a rare example of an ecologist who takes economics seriously. He points out that his fellow ecologists have been using "human appropriation of net primary production" -- that is, the percentage of the world's green vegetation eaten or prevented from growing by us and our domestic animals -- as an indicator of ecological limits to growth. Some ecologists had begun to argue that we were using half or more of all the greenery on the planet.

This is wrong, says Dr. Haberl, for several reasons. First, the amount appropriated is still fairly low: About 14.2% is eaten by us and our animals, and an additional 9.6% is prevented from growing by goats and buildings, according to his estimates. Second, most economic growth happens without any greater use of biomass. Indeed, human appropriation usually declines as a country industrializes and the harvest grows -- as a result of agricultural intensification rather than through plowing more land.
Finally, human activities actually increase the production of green vegetation in natural ecosystems. Fertilizer taken up by crops is carried into forests and rivers by wild birds and animals, where it boosts yields of wild vegetation too (sometimes too much, causing algal blooms in water). In places like the Nile delta, wild ecosystems are more productive than they would be without human intervention, despite the fact that much of the land is used for growing human food.

If I could have one wish for the Earth's environment, it would be to bring together the two tribes -- to convene a grand powwow of ecologists and economists. I would pose them this simple question and not let them leave the room until they had answered it: How can innovation improve the environment?
---
Mr. Ridley is the author of "The Rational Optimist" and a member of the British House of Lords.

Kling on "The Erotic Reception of Piketty"

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Galbraith’s The New Industrial State was the best-seller that was greeted with erotic intensity in the late 1960s, but on its merits it fell short as well. One of its central themes was that entrepreneurialism was dead, replaced by Soviet-style planning at American industrial giants. As Deirdre McCloskey tartly observed, “Eight years after the first publication of The New Industrial State, Bill Gates founded Microsoft.”

So before we pronounce Piketty’s book a masterpiece, I suggest waiting to see how the economic arguments shake out.

Source:  Arnold Kling, "Clive Crook’s Best Sentence," ask blog, April 24, 2014

Mingardi on Intellectuals and Capitalism

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He sees the capitalist order proceeding from a "rationalizing attitude"--"an attitude which spurns allegiance to extra-rational values." Modern capitalism is "the propelling force of the rationalizing of human behavior," but this critical mind doesn't stop at the gates of modern factories, but also wages war to the very system it should hold dear, breeding egalitarian challenges to the legitimacy of capitalist inequality.

The argument in favor of capitalism, for Schumpeter, is a difficult one, that the masses naturally overlook: "any pro-capitalist argument must rest on long-run considerations. In the short run, it is profits and inefficiencies that dominate the picture."

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For Schumpeter, intellectuals as we know them are a creation of a capitalist society. True, we always had "people who wield the power of the spoken and the written word": but they were few in number, and their words could be accessed, debated and learned by a tiny fraction of the population. Capitalism nurtures intellectuals: on the one hand, a capitalist society is less keen to curb freedom of speech and discussion than any previous set of social institutions. On the other, innovation multiplies the means for the public debate: books become increasingly cheaper, newspapers mushroom everywhere, then of course you had radio and tv, and today social networks. Also, "one of the most important features of the later stages of capitalist civilization is the vigorous expansion of the educational apparatus and particularly of the facilities for higher education."

Yet this apparatus produces more intellectuals than could thrive economically, and this creates resentment. Schumpeter didn't think that hostility against capitalism could be considered just a feature of the intellectuals as a social group: but assigned them a particular role. Modern capitalism creates opponents of a different kind, especially among those to whom the long-term benefits of the market system are less apparent, namely workers. But they yearn for leaders and narratives. Intellectuals do not often enter politics or labour unions directly, but "they staff political bureaus, write party pamphlets and speeches, act as secretaries and advisers" etc. "In doing these things they to some extent impress their mentality on almost everything that is being done."

Source:  Alberto Mingardi, "Schumpeter, Intellectuals and Capitalism," econlog, April 25, 2014

K. Williamson on the Real Economy

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How to refute progressive fantasies — or, a red-pill economics

and 

The farther away we move from the physical economy into the manipulation of symbols through public policy, the more progressive ideas make apparent sense. And symbolism is more comfortable for progressives in general, owing to a disinclination to literally get their hands dirty.

and 

Though there are many exceptions, the closer a man’s occupation takes him to the physical economy, the more skeptical he is of progressive central-planning ambitions. You do not meet a great many left-wing corn farmers, copper-mine operators, oil drillers, or house builders. You do meet a fair number of progressives on Wall Street and Silicon Valley and on the campus of Harvard utterly failing to teach the likes of Mr. Carrillo (The Nation) the fundamentals of economics, prose composition, or anything else. Follow that road to its terminus and you end up at the place in which the secret to national prosperity appears, self-evidently, to be stimulating demand, as though the nation could grow wealthier by wanting more rather than by making more, as though we could consume that which has not been produced.

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None of those problems facing the poor — and they are the key problems — is an economic problem. All of them are political problems. For progressives, the obvious solution to that is less economics and more politics. The possibilities of economic division will always be limited by what there is to divide — so many houses, so many cars, so many apples and oranges, so many SweeTarts. Progressives don’t care what’s in the bag, so long as they get to be in charge of it. 

Source: Kevin D. Williamson, "Welcome to the Paradise of the Real," National Review Online, April 24, 2014

Munger on the Cause of Poverty

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We don't need nations, flags, and armies to make us prosperous.

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The first argument I usually hear, especially from people hearing about VPC (Voluntary Private Cooperation) for the first time, is this: “If markets are so great, why is most of the world poor?” The problem is that poverty is not what needs to be explained. Poverty is what happens when groups of people fail to cooperate, or are prevented from finding ways to cooperate. Cooperation is in our genes; the ability to be social is a big part of what makes us human. It takes actions by powerful actors such as states, or cruel accidents such as deep historical or ethnic animosities, to prevent people from cooperating. Everywhere you look, if people are prosperous it’s because they are cooperating, working together. If people are desperately poor, it’s because they are denied some of the means of cooperating, the institutions for reducing the transaction costs of decentralized VPC.

So forget about explaining poverty. We need to work on understanding prosperity.

Source: Michael Munger, "The Case for Voluntary Private Cooperation," The Freeman, April 16, 2014

Metzler on Redistribution

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What has worked in the United States for several centuries has worked well for many other countries in the past fifty years. Once China adopted capitalist methods, it moved millions out of low productivity agriculture, taught them new skills, and raised their wages. Korea sends its young to learn new skills in the United States. That enabled it to move successfully from a low wage provider of unskilled labor to a technically advanced country with a skilled labor force. And it increased freedom along with wealth. Other examples are Hong Kong, Singapore, and Taiwan—free, capitalist democracies. Add Chile, Peru, and Mexico among others.

France is at the opposite pole. Mired in its hatred of capitalism and demands for redistribution, it has maintained its low share of income going to the top 1 percent. But the cost is high. The young and innovative leave France for the UK and other shores. The French get massive redistribution and unemployment for many who remain behind.

Source: Allan H. Meltzer, "The United States of Envy," Defining Ideas (Hoover Institution), April 17, 2014

Levin on Confirmation Bias

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I personally think the sources of our party differences lie at least as much in different philosophical outlooks as in different material interests or natural dispositions (though those do matter, surely). I think our Left and Right, very broadly understood, are each implicitly attached to a different set of ideas about human perfectibility and human limits, different notions of what the shape and purpose of society are, and different understandings of what kinds of knowledge could be available to us to address social problems. . . . But I think these different outlooks incline us to emphasize different kinds of questions and prioritize different kinds of goods in the effort to improve our society, and that this means the Left and Right often talk past one another in our political debates. It also means that both are very deeply vulnerable to confirmation bias.

My view of that subject leads me to think that arguments (and facts and figures and other information) do matter a great deal in politics, though maybe not as much as any of us might like. But it also leads me to think that the permanence of the limits of human reason and the fact that every party only sees part of the whole means no one — not even people who agree with me — is ever likely to be entirely right when it comes to big, complicated social questions. In terms of the structure of our governing institutions, it therefore leads me to the same conclusion Madison reached, which is that we need a system that keeps all sides from getting too much power and forces them to confront and compromise with one another in practical terms. However much we might regret it, this is a system that assumes we will never fully persuade one another in politics, and indeed that assumes we are probably all wrong — which we probably are. . . .

American progressives have long contended that as social science enables us to overcome some of the limits of what we know, it should also be permitted to overcome the constitutional limits on what government may do. They take themselves to be an exception to the rule that all parties see only parts of the whole, and therefore an exception also to the ubiquity of confirmation bias, and so they demand an exception to the rule that no party should have too much raw power. This is basically what Paul Krugman was getting at.

But the progressives’ understanding of how social science can come to know society and of how such knowledge might be put into effect has itself been a point of great contention with conservatives — who tend to think that a society’s knowledge exists mostly in dispersed forms and therefore that public policy should work largely by enabling the dispersed social institutions of civil society, local community, and the market economy to address problems from the bottom up through incremental trial-and-error learning processes.

Source:  Yuval Levin, "Confirmation Bias and Its Limits," National Review, April 9, 2014

Galbraith on Piketty

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First, he conflates physical capital equipment with all forms of money-valued wealth, including land and housing, whether that wealth is in productive use or not. He excludes only what neoclassical economists call “human capital,” presumably because it can’t be bought and sold. Then he estimates the market value of that wealth. His measure of capital is not physical but financial.

This, I fear, is a source of terrible confusion.

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With this passage he makes a distinction that he previously blurred: between wealth justified by “social utility” and the other kind. It is the old distinction between “profit” and “rent.” But Piketty has removed our ability to use the word “capital” in this normal sense, to refer to the factor input that yields a profit in the “productive” sector, and to distinguish it from the source of income of the “rentier.”

As for remedy, Piketty’s dramatic call is for a “progressive global tax on capital”—by which he means a wealth tax. Indeed, what could be better suited to an age of inequality (and budget deficits) than a levy on the holdings of the rich, wherever and in whatever form they may be found? But if such a tax fails to discriminate between fortunes that have ongoing “social utility” and those that don’t—a distinction Piketty himself has just drawn—then it may not be the most carefully thought-out idea.

In any case, as Piketty admits, this proposal is “utopian.”
and

Source: James Galbraith,  "Kapital for the 21st Century," Dissent, Spring 2014.

Taranto on Citizen's United and Benden Eich

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Thomas's conclusion (quoting an earlier opinion of his own): "I cannot endorse a view of the First Amendment that subjects citizens of this Nation to death threats, ruined careers, damaged or defaced property, or pre-emptive and threatening warning letters as the price for engaging in "core political speech, the 'primary object of First Amendment protection.' "

That last argument is one that has drawn wide support on the court in other contexts. In McIntyre v. Ohio Elections Commission (1995), a 7-2 majority struck down an Ohio law prohibiting the distribution of anonymous campaign literature. In an opinion joined by five of his colleagues (Thomas separately concurred), Justice John Paul Stevens wrote that "the decision in favor of anonymity may be motivated by fear of economic or official retaliation, by concern about social ostracism, or merely by a desire to preserve as much of one's privacy as possible." The applicability of that observation to Eich's predicament is obvious. 

In NAACP v. Alabama (1958), the Warren court unanimously quashed a state subpoena for the NAACP's membership list. "This Court has recognized the vital relationship between freedom to associate and privacy in one's associations," Justice John Harlan noted. "Inviolability of privacy in group association may in many circumstances be indispensable to preservation of freedom of association, particularly where a group espouses dissident beliefs."

Source: James Taranto, "Justice Thomas Was Right," The Wall Street Journal, April 4, 2014

Dan Mitchell on Rational Fiscal Policy

Daniel J. Mitchell, A Golden Fiscal Rule Nurtures Prosperity, The Wall Street Journal, April 6, 2004

IMF data show nations that imposed genuine spending restraint for multiyear periods reaped big benefits.

The current debate between advocates of "austerity" and "growth" is frustrating for anyone who supports limited government. Austerity folks assert that deficits are economic poison and that balanced budgets, largely achieved with higher taxes, should be the goal of fiscal policy. So-called growth advocates believe more government deficit spending will boost economic performance.

Both miss the point. What matters, as Milton Friedman taught us, is the size of government. That's the measure of how much national income is being redistributed and reallocated by Washington. Spending often is wasteful and counterproductive whether it's financed by taxes or borrowing.

Rather than fixating on deficits and debt, I suggest another goal: Ensure that government spending, over time, grows more slowly than the private economy. Evidence from economies around the world shows this is the best path to bring down deficits and nurture prosperity.

Call it the golden rule of fiscal policy. Here's how it would work in the United States. The White House projects nominal GDP will climb 4.7% annually over the next 10 years, while the Congressional Budget Office estimated average growth of 4.5% over that time period. The golden rule simply requires that the burden of government spending climb at a slower rate. Even if the federal budget grew 2% each year, about the rate of projected inflation, that would reduce the relative size of government and enable better economic performance by allowing more resources to be allocated by markets rather than government officials.

A golden rule has several advantages over fiscal proposals based on balanced budgets, deficits or debt control. First, it correctly focuses on the underlying problem of excessive government rather than the symptom of red ink. Second, lawmakers have the power to control the growth of government spending. Deficit targets and balanced-budget requirements put lawmakers at the mercy of economic fluctuations that can cause large and unpredictable swings in tax revenue. Third, spending can still grow by 2% even during a downturn, making the proposal more politically sustainable.

Nations that followed versions of the golden rule have enjoyed significant improvements in fiscal aggregates. Data I've crunched from the International Monetary Fund's World Economic Outlook database—which includes all spending at all levels of government—show several notable examples of countries that imposed genuine spending restraint for multiyear periods. They've reaped big benefits, with reductions in the burden of government (as a share of economic output) and rapid reductions in deficits (both nominally and as a share of gross domestic product).

Consider Canada, which allowed spending to grow on average 0.8% per year between 1992 and 1997. During that five-year period, the amount of economic output diverted to government shrank by 9.4 percentage points of GDP. And red ink shrank by nearly the same amount, turning a large deficit into a surplus.

Sweden's government budgets expanded by an average of just 1.9% annually between 1992 and 2001, and the burden of government spending declined by a whopping 15 percentage points of GDP. This helped restore growth and also generated a budget surplus.

In Germany, government spending grew an average of less than 0.2% per year between 2003 and 2007. The public sector's claim on economic output dropped by 5.4 percentage points and a significant budget deficit became a surplus. In New Zealand between 1991 and 1997, government spending grew an average 0.5% annually. The economy revived, government spending dropped by 11 percentage points of GDP, and the budget went into surplus.

Most recently, Latvia has cut spending since 2008, with outlays dropping by an average of more than 4% per year. This has reduced the burden of government spending by more than seven percentage points of GDP and slashed a large deficit to less than 1% of economic output.

Other nations have successfully followed a golden rule, including Ireland (1985-89), Slovakia (2000-04), Singapore (1998-08), Italy (1996-2000), Lithuania (2008-present), Taiwan (2001-06), Israel (2002-05), Estonia (2008-11), Iceland (2008-present), and the Netherlands (1995-2000).

Al of these nations achieved better economic performance. The IMF's economic data show above-average growth in the nations that restrained spending, both during and after the period of fiscal discipline. Latvia, Sweden and Germany are doing better today than most other European nations. New Zealand and Canada have enjoyed faster growth since they reduced the size of government.

And then there is the United States under Bill Clinton. According to data from the Office of Management and Budget, total spending at all levels of government grew by "just" 3.5% per year from 1992-98. That's not very impressive compared with some other nations, but nominal GDP grew considerably faster, so the overall burden of spending declined as a share of economic output. This was the boom when the federal government went from having a big deficit to a budget surplus.

Spending has grown even more slowly in recent years—albeit after a huge spike at the federal level in 2009 because of so-called stimulus. Total federal, state and local spending has climbed by an annual average of only 0.1% over the past four years, reducing both the burden of spending and the level of red ink. This spending restraint is helping to offset the economic headwinds of higher taxes, red tape and ObamaCare.

Can any government maintain the spending restraint required by a fiscal golden rule? Perhaps the best model is Switzerland, where spending has climbed by less than 2% per year ever since a voter-imposed spending cap went into effect early last decade. And because economic output has increased at a faster pace, the Swiss have satisfied the golden rule and enjoyed reductions in the burden of government and consistent budget surpluses.

Nobody in Washington has proposed a duplicate version of the Swiss debt brake, but Congressman Kevin Brady's Maximizing America's Prosperity Act is somewhat similar. The Texas Republican would limit non-interest spending so that it grows more slowly than potential GDP. Outlays could still climb by an average of more than 3% over the next 10 years, but nominal GDP is expected to grow at a faster rate, so the overall burden of government would fall. In the long run, that's the best guarantor of American prosperity.

Mr. Mitchell is a senior fellow at the Cato Institute.

Kotkin on "Thought" Orthodoxy

Article Link

From the article:

Let’s call it “the debate is over” syndrome, referring to a term used most often in relationship with climate change but also by President Barack Obama last week in reference to what remains his contentious, and theoretically reformable, health care plan. Ironically, this shift to certainty now comes increasingly from what passes for the Left in America.

These are the same people who historically have identified themselves with open-mindedness and the defense of free speech, while conservatives, with some justification, were associated more often with such traits as criminalizing unpopular views – as seen in the 1950s McCarthy era – and embracing canonical bans on all sorts of personal behavior, a tendency still more evident than necessary among some socially minded conservatives.

But when it comes to authoritarian expression of “true” beliefs, it’s the progressive Left that increasingly seeks to impose orthodoxy. In this rising intellectual order, those who dissent on everything from climate change, the causes of poverty and the definition of marriage, to opposition to abortion are increasingly marginalized and, in some cases, as in the Steyn trial, legally attacked.
Source:  Joel Kotkin, The Spread of "Debate is Over" Syndrome," The Orange County Register, April 4, 2014

Meade on Obama's Foreign Policy Paradox

Walter Russell Mead, "The President's Foreign Policy Paradox," The Wall Street Journal, March 28, 2014

Obama's global wish list can't be achieved while decreasing commitments overseas.  More than five years into his presidency, Barack Obama still wrestles with the foreign-policy contradiction that has dogged his administration from the beginning: The president has extremely ambitious goals but is unusually parsimonious when it comes to engagement.

Commendably, President Obama is not satisfied with the global status quo and wants a world fundamentally different than the one we live in. He wants a world in which poverty is on the wane, international law is respected, and the U.S., if it must lead, can do so on the cheap, and from behind.
To get to this world, Mr. Obama wants nuclear proliferation stopped, new arms-control agreements ratified, and the eventual abolition of nuclear weapons. He wants a tough global climate treaty that will keep carbon emissions at levels low enough to prevent further global warming. He wants the Arab-Israeli dispute settled and a new relationship with Iran. He wants terrorism to be contained and Afghanistan to be stable when the Americans leave. He wants to reassert U.S. power in the Pacific, and to see China accept the territorial status quo. He wants democracy advanced, human rights protected, poverty reduced, women empowered, and lesbians and gays treated better world-wide.
This is a transformative agenda that would resonate with visionary American presidents like the two Roosevelts and Woodrow Wilson. But while Mr. Obama embraces a powerful and compelling global vision, he also seeks reduced American commitments and engagements overseas. He wants substantial cuts in military spending and wants to reduce America's profile in Europe and the Middle East.

This is a paradox, but it is understandable. Mr. Obama is channeling the voters. Just as Americans want to eliminate the federal budget deficit without cutting Social Security or Medicare, they want a more peaceful and democratic world with less heavy lifting from the U.S. Who wouldn't want an easier life in a nicer world?

Unfortunately, it's hard to transform and democratize the world while saving money and reducing overseas commitments. A world based more on the rule of law and less on the law of the jungle requires an engaged, forward-looking, and, alas, expensive foreign policy. If, for example, you want to put the world on the road to abolishing nuclear weapons, you have to make sure that nonnuclear states like Ukraine don't have to worry about land-grabs from nuke-wielding neighbors like Russia.
When Ukraine agreed to give up its "legacy" nuclear weapons—missiles and warheads placed on Ukrainian territory when it was part of the Soviet Union—the U.S., U.K. and Russia pledged to protect its territorial integrity. That promise is clearly a dead letter, and it just became much harder to persuade countries that beautifully phrased treaties signed by great powers can replace nuclear weapons as instruments of self-defense.

Even more troubling is the belief that a peaceful world can be painlessly built without political heavy lifting at home or abroad. Two of the five veto-wielding Permanent Members of the U.N. Security Council—China and Russia—are aggressive, undemocratic countries with significant territorial claims against neighbors. They also consider reducing American power and prestige as one of their most important national interests.

The authority and legitimacy that come from U.N. mandates won't exist where Russian and Chinese interests are engaged, and so the U.S. will have to choose between disengaging on issues like the occupation of Crimea (and future territorial moves by Russia and China) and taking action outside the U.N. system.

Mr. Obama is unintentionally making it harder for himself and future American presidents. His appealing vision of an easy, cheap and beautiful world order helps build expectations that no real world president can achieve. The disillusionment that follows when those expectations aren't met reinforces the cynicism that makes it hard for all presidents to build public support for national efforts abroad.

Successful American foreign policy not only demands sacrifice and risk, but it also inevitably brings failures and setbacks. The values and interests that Americans care most strongly about can't be defended without a foreign policy that sometimes taxes our wallets and tests our will. But engagement isn't guaranteed to make things work out. The world is complicated, foreign policy is hard, and Americans even at our best are neither omniscient nor omnipotent.

The White House is shocked by the Russian campaign against Ukraine and the administration's inability to predict or counter Vladimir Putin's moves. Mr. Obama is experiencing what the president in other contexts has called a "teachable moment." Perhaps it will bring about a more sustainable approach to foreign policy. But President Obama created unrealistic expectations for himself in happier times—democracy in the Middle East, destruction of al Qaeda, victory in Afghanistan, greater American popularity abroad, a reset with Russia, pivoting to Asia—all while making deep cuts to defense budgets. This will weigh on him now.

Mr. Obama came into office telling voters what they badly wanted to hear, which was that on foreign policy, they could have it all. No risks to be run, no adversarial great powers to oppose, and no boots on the ground. Now he must tell them that he, and they, were wrong, and he must choose. Does he give up on some of his dreams for improving the world, or does he begin to urge the country to pay a higher price and run greater risks to make the world better and safer?

The truth is that he—and we—will have to do some of both. As a country we are going to be working harder than we wanted in a world that is more frustrating than we hoped.

Mr. Mead is a professor of foreign affairs and humanities at Bard College and editor at large of the American Interest.

Henninger on Why the Left Can't Govern

Daniel Henninger, “Why Can't the Left Govern,” The Wall Street Journal, March 26, 2014

The Left can win elections. Why can't it run a government?

Surveying the fall in support for the governments of Barack Obama, New York City's progressive Mayor Bill de Blasio and France's Socialist President François Hollande, a diagnosis of the current crisis begins to emerge: The political left can win elections but it's unable to govern.

Once in office, the left stumbles from fiasco to fiasco. ObamaCare, enacted without a single vote from the opposition party, is an impossible labyrinth of endless complexity. Bill de Blasio's war on charter schools degenerated into an unseemly attack on poor New York minority children. François Hollande's first act in 2012, like a character in a medieval fable, was to order that more tax revenue be squeezed from the French turnips.

Mr. Obama's approval rating is about 43%, Mr. de Blasio's has sunk to 45% after just two months in office, and Mr. Hollande hit the lowest approvals ever recorded in the modern French presidency. The left inevitably says their leaders failed them. The failure looks self-inflicted.

Three European academics asked themselves recently how 19 United Nations summit meetings have been unable to produce a treaty on global warming. Why the cause of climate change has fallen apart is described in "Melting Summits," a paper and cautionary tale just published in the Academy of Management Journal by Elke Schüssler of Germany, Charles Clemens Rüling of France and Bettina Wittneben of the U.K.

No idea in our time has had deeper political support. Al Gore and John Kerry have described disbelievers in global warming as basically idiots—"shoddy scientists" in Mr. Kerry's words. But somehow, an idea with which "no serious scientist disagrees" has gone nowhere as policy. The collapse of the U.N.'s 2009 Copenhagen climate summit was a meltdown for the ages.

In an interview with the Academy of Management about her paper, Bettina Wittneben of Oxford University, who supports a climate-change treaty and has attended 13 climate meetings, summarized the wheel-spinning: "Sometimes I just find myself shaking my head after talking to participants in recent COPs [the U.N.'s climate meetings]. They'll come back from the meetings simply brimming with enthusiasm about the networking they've done, the contacts they've made, the new ideas about their research they had or the new angles to lobbying they thought of. But ask what progress was made in terms of global policy initiatives, and all you get is a shrug."

Put differently, it's not about doing something serious about global warming. It's really all about them (a virus threatening American conservatism as well). The "them" at the U.N. summits included not just the participating nations but a galaxy of well-financed nongovernmental organizations, or NGOs.

They travel under their own acronyms. The environmentalists are ENGOs, the trade unions are TUNGOS, indigenous peoples are IPOs, business and industry are BINGOs and women, gender and youth groups are YOUNGOs.

These are the left's famous change agents. The authors dryly describe what they actually do as "field maintenance." Instead of being "catalysts for change," they write that "more and more actors find COP participation useful for their purposes, but their activity is increasingly disconnected from the issue of mitigating climate change."

And little wonder. The failed efforts to get the global-warming treaty done reflect the issue's departure from anything practical. It's impossible to read this history of global warming's demise without hearing resonances of ObamaCare's problems.

The text of the climate-change treaty at Copenhagen in 2009 included "thousands of 'brackets,' or alternative wordings." A participant described the puzzle palace: "There are more and more parallel processes, and everything must be negotiated at the same time. The number of . . . negotiation issues has increased and many of these issues . . . are discussed in different places at the same time. . . . Very few people understand the whole thing." Maybe they could just pass it to find out what's in it.

One organization specialist calls this phenomenon "social deadlock." ObamaCare is social deadlock. But the American left keeps doing it. This isn't the 1930s, and smart people on the left might come to grips with the fact that the one-grand-scheme-fits-all compulsion is out of sync with the individualization that technology lets people design into their lives today.

Rather than resolve the complexities of public policy in the world we inhabit, the left's default is to simply acquire power, then cram down what they want to do with one-party votes or by fiat, figuring they can muddle through the wreckage later. Thus the ObamaCare mandates. Thus candidate de Blasio's determination, cheered on by the city's left-wing establishment, to jam all its kids through an antique public-school system. The ObamaCare mandates are a mess, and the war on charter schools is an embarrassment.

Making the unworkable work by executive decree or court-ordered obedience is one way to rule, and maybe they like it that way. But it isn't governing.