Tuesday, September 30, 2008

The Post-American World, by Fareed Zakaria

Want to feel good about the world and about yourself? Even empowered? Reading The Post-American World, by Fareed Zakaria, might do it. It accomplishes this by being a remarkably fine book. It is very carefully analyzed, it has a large scope, and it rings true. That it is optimistic is a nice plus. Fareed Zakaria comes across as an optimist and a realist at the same time. It is indeed a pleasure to read him.

There have been three tectonic power shifts in the last 500 years, says Zakaria: the rise of the West, the rise of the U.S., and the rise of the rest, which we are living through now. In 2006 and 2007 there have been 124 countries that grew at a rate of 4 percent or more, including more than 30 countries in Africa, two-thirds of the continent. The tallest building in the world is in Taipei, and it will soon be overtaken by one being built in Dubai. The biggest shopping mall is in Beijing, the biggest plane is built in Russia and Ukraine, the largest factories are all in China, the biggest movie industry is Bollywood, and the world's richest man is Mexican.

The number living on less than a dollar a day has fallen from 40 percent in 1981 to 18 percent in 2004. China has lifted more than 400 million out of poverty. And for the first time in history, we are witnessing global growth. It is the birth of a truly global order. Power is shifting from the nation-state up, down, and sideways. At the political/military level we are living in a one-power world. But in every other dimension--industrial, financial, educational, social, cultural--power is moving away from American dominance. What will a post-American world mean?

It feels like a very dangerous world. But, says Zakaria, it isn't. There is a trend away from major wars. Islam terror is a large and persistent problem, but it involves a small number of fanatics and is no as threatening as Hitler and Stalin were, or even China, in the 20th century. Since 2001, governments have been aggressively breaking up terrorist networks. Since 9/11, Al Qaeda has been unable to launch a major attack anywhere.

Today's relative calm has a deep structural basis: economics is trumping politics. We are living through the far largest increase ever in the world's economy. Between 1990 and 2007, the global economy grew from $22.8 trillion to $53.3 trillion. The financial force that has powered the new era is the free movement of capital. Currency traders swap about $2 trillion a day. Once a threat, the war on hyperinflation has been won. There are only 12 countries in the world today where inflation exceeds 15 percent, and most of them are failed states, such as Haiti.

Focusing on the gloom, says Zakaria, has left us unprepared to see that many of the problems we face are the problems of success. One way to see India and China is as two great global deflation machines, pumping out goods (China) and services (India) for a fraction of what they would cost to produce in the West. Urban India is bursting with enthusiasm--boisterous, colorful, open, vibrant, and ready for change. One of the poorest countries in the world, India nonetheless looks strikingly similar to the richest, America. Its democracy, 50 years old, is truly extraordinary. It is poised to become a great power at last. The nuclear agreement proposed between India and the U.S. is a big deal. It puts India on a par with U.S., Britain, France, Russia, and China.

But Zakaria advises the U.S. to reduce nuclear weapons; build broad rules, not narrow interests; recommit to the mechanics and institutions for problem-solving and adjudication; and engage with other countries.

The U.S. must stop cowering in fear and regain its confidence. By almost all objective measures, the U.S. is in a blessed position today. But somehow we have managed to spook ourselves in a time of worldwide peace and prosperity. Since 9/11 the terrorist alert has never fallen below yellow. The U.S. spent $1 trillion on military responses to Islam extremism. But only two or three extremely minor terrorist plots have been uncovered in the entire country. Diplomacy would be more efficient and cheaper, less than $10 billion. In the event of a terrorist attack, Stephen Flynn of the Council of Human Relations says we should first ensure that it causes as little disruption as possible--economic, social, and political. What we're doing now is likely to produce the opposite effect. At the end of the day, openness is America's greatest strength.

"Historically, America has succeeded not because of the ingenuity of its government programs but because of the vigor of its society. It has thrived because it has kept itself open to the world--to goods and services, to ideas and inventions, and, above all, to people and cultures. This openness has allowed us to respond quickly and flexibly to new economic times, to manage change and diversity with remarkable ease, and to push forward the boundaries of individual freedom and autonomy. It has allowed America to create the first universal nation, a place where people from all over the world can work, mingle, mix, and share in a common dream and a common destiny."

Thursday, July 24, 2008

Where's the Money Coming From, Part II

So we've established that money really will be forthcoming if we understand how to get it, that is, how it is created. This is a bit more difficult, indeed much too difficult and complex for a blog post. So what follows is a mere beginning or brief summary.

Money is usually defined as a medium of exchange, which we all know about and deal with every day. That's fine. But the main point about money is that it is all about borrowing, about debt. We'll get to that.

Money is a complex phenomenon that has evolved over millennia and continues to evolve. It has come to be described as an institution, that is, an accepted pattern of human behavior. Although at one time money was simply a commodity, such as cattle or, following that, gold or silver, the age of commodity money has given way to the age of paper money and other instruments. So money now is comprised of coins, paper money (usually Federal Reserve notes), demand deposits (checking accounts) and other closely related deposits, depending on how broadly economists choose to define money (M1, M2, etc.), and, more recently, credit cards.

An individual gets money at his/her bank, usually in the form of demand deposits, either from prior deposits from paychecks or from borrowing. A business enterprise gets money the same way. Demand deposits are the largest form of money in the United States. The banks that create demand deposits are part of the Federal Reserve System. The so-called Fed is the central bank of the United States, which, among other things, provides money to banks and others according to the tools at its disposal.

The Federal Reserve also provides money to the Congress and to the various other government agencies that demand it. This involves constitutions and other laws and rules and regulations. Most state governments and other governments such as cities and counties and others such as school districts are required to balance their budgets each year. But when we come to the U.S. Congress, we see that it does not have to balance its annual budget. It passes a budget each year, now in the trillions of dollars, which may be balanced but usually projects a deficit, usually of some hundreds of billions of dollars. Earlier we were talking monetary policy, which mostly involves the rate of interest and strongly affects the level of economic activity, that is Gross Domestic Product (GDP). Now we're talking fiscal policy, which may have an even greater effect on GDP. Here's where we see that nation-states can borrow the huge sums. Here's where we see where the real money is coming from, that is, from borrowing from the taxpayers, from you and me when we pay our federal income taxes.

Not surprisingly, there are arguments about how the process or the system works. I accept the theory of the endogeneity of money, which is that money is created in response to demand for money. In other words, money doesn't appear--that is, it isn't created-- unless someone demands it. The alternative to the endogeneity idea is the idea of the exogeneity of money, meaning that it is created by the issuer, which of course it is, but without mention of demand.

So it looks like we could afford universal health care, seeing we're spending twice as much per capita now as, say, Canada, with less coverage and not-as-good outcomes. But now we're getting into macroeconomics, not to mention political philosophy and a theory of human nature. And what about the skills and education of the labor force, and what about natural resources like water power and minerals? And aren't we reading about consumer confidence? The list goes on about things we have to understand.

Tuesday, July 22, 2008

Where's the Money Coming From? again

Sixty-five years ago Stuart Chase wrote a book entitled, Where's the Money Coming From, in which he offered five examples of instances in which a country, when faced with an urgent need for money, said that it did not have and could not acquire any, but which actually found the money, plenty of it, when it needed it for war. The partial exception to this is that Russia needed it not for war but for its five-year plan, while the others needed it for war. In any case, the point made by Stuart Chase was that finance actually is available and can be provided when a country needs it.

A perfect example of this was the United States finding the money to fight World War II beginning in 1941, when Japan invaded Pearl Harbor, although this occurred at about the worst possible time: during the Great Depression, when the country actually was poor and very short of money. Well, the money was found, billions and billions of it, to defeat Japan and Germany.

And yet only yesterday Al Gore expressed the fear that the money was not available to deal with global warming, which he feels is the most urgent problem in the world. This assessment is not at all surprising; almost everyone would agree with Mr. Gore that we can't afford to do much about global warming.

Why is this so? Not only do we have the examples in which the money is found when needed, but also we have the explanation provided by John Maynard Keynes in The General Theory of Unemployment, Interest and Money in 1936. This is indeed a puzzlement.

Saturday, June 14, 2008

Election 2008; A Comparison

As the national elections of 2008 approach, less than five months away, it's interesting, and a bit puzzling, to reflect on the presidential election that took place in 1968. Interesting because both elections will come to be, I think, pretty important and exciting as elections go. And too there are such similarities. We'll learn later about the differences.

In 1968 the Democratic convention was held in Chicago, and riots resulted in the form of protests against the Vietnam War. Lyndon Baines Johnson was president following the assassination of John Kennedy in 1963. Johnson had accomplished some remarkable things, notably civil rights legislation and a war on poverty that cut the level of poverty almost in half, to around 12 percent, about the same as now. (Yeah.) And he was the last president up to Bill Clinton to balance the budget. But the war was still going on and it was very unpopular, even though the invasion of South Vietnam by North Vietnam appeared to be pretty scary and something to defeat if possible, inasmuch as the Communists appeared to be still going strong internationally. The Communists did in fact take over South Vietnam, and Laos and Cambodia too, as I remember.

Anyway Johnson had decided not to run for reelection, and Vice President Hubert Humphrey was the Democratic nominee. Richard Milhous Nixon was the Republican nominee, and, as everyone knows, he won the presidency, taking office in 1969. The riots in Chicago could well have been a deciding factor in that vote. Now in the news we're reading about some of the protests being planned for the Democratic convention to be held in Denver in August of 2008. Could they have similar consequences?

What is puzzling to some of us is why the protests now over the Iraq War, during a very unpopular presidency, and with the war very unpopular, are so muted compared with the uproar in 1968. Indeed casualties were much higher then: more than 58,000 Americans lost their lives, while the figure in the Iraq War is now only a little over 4000. The numbers reflect no doubt the existence of a draft in 1968, contrasted with an all-volunteer military force in Iraq today. One might suspect that were there a draft now the protests would be much louder. As for the outcome of the Obama-McCain election campaign now going on, that remains to be seen.

Wednesday, May 14, 2008

Evolution to a New Paradigm

It's time for a revolution. No, make that an evolution--an evolution to a new world order, a new paradigm. It's not the end of history; it could turn out to be the beginning, or at least a turning point. In any case, it seems to me it's time to stop thinking in isms. As J. Fagg Foster used to say, it will be better when all isms are wasms. (Pronunciation: say "was" and then add "ms" like at the end of "isms." But never mind; the important thing is not the pronunciation but the idea.)

That is to say, we should not be using capitalism, or socialism, or communism, or any other ism, as a criterion of judgment. Of course we can use them as useful patterns for organization, but not as our one and only model as we have tended to do in the past. Instead we should be planning a new model, not one patterned after a particular institutional structure but one guided by a judgment of how an economy should organize itself the better to serve people. And not just a national economy, but a global economy, divided up as much as desirable into political subdivisions. And one with the Internet as a tool, maybe the greatest thing that's come along in centuries.

Then what should be the guideposts if not isms? We don't know the answer to that question, but we do have a pretty good sense of changes needed, of the kinds of problems that need to be solved. We know we should be doing better about poverty. That's a huge, and obvious, problem. We need to organize our economy, or economies, to produce enough goods and services for everyone, and most of all, to distribute them to everyone. We actually have the technology to do that. The huge inequities in income at the present time, I submit, are the major reason we're in something like a recession, or a slump in the economy. And of course we know about other things we need to do, or to provide, such as education, health care, war and peace--we could go on. In other words, we need to provide for human welfare. It's that simple. As Elizabeth Kubler-Ross said, what could be simpler, and yet what could be more difficult.

But to go on, it might be apparent that one thing we need to get us going right is an Adam Smith, or a Karl Marx, or an Alfred Marshall, or a John Maynard Keynes, or a Milton Friedman. As far as I can tell, we don't have that.

So where should I go with this? Yeah, right now I'll go political. We need to choose the candidate for the presidency of the United States who can take us into a new paradigm. Hillary Clinton, Barack Obama, or John McCain. I'll leave it at that for today.

Democrats and Republicans Fix the Economy

Time to compare how Democrats and Republicans fix the economy? Let's do it. Let's start by comparing the Bill Clinton and George W. Bush economic performances.

When Bill Clinton took office as President in 1993, the GDP was at $7,451 billion (at the end of 1992). By the end of 1993 GDP had reached $7,952 b, and it continued to advance every year of his presidency, reaching $9,888 b by the end of 2000, which was an increase of $2,437 b, the longest advance of GDP in American history. During George W. Bush's presidency, the first year, in 2001, the GDP fell initially to $9,876 b, which can be assumed to be a result of Clinton's policies, but by the end of 2001 it had rebounded to $9,910 b, after which it advanced continuously to $11,676 b at the end of 2007, the latest figure available. This represents an increase of $1,788 b during the seven years of his presidency. Were we to compare this figure with that of Clinton at the end of seven years, we find an increase of $2,221 b for Clinton. That is: the gain under Clinton for seven years was $2,221 b; under Bush, $1,788 b. Now, to continue to the present date of April 3, 2008, the economy is reported to be heading towar a recession. About that, we'll have to wait and see. In any case, the economic growth under Bush has been the slowest of any postwar expansion, averaging just 2.8 percent a year, far below the 4.8 percent average posted by earlier postwar business cycles of similar length.

Now to look at the rate of unemployment. Following the same timetable as above, unemployment during the first seven years of Clinton's presidency dropped from 6.9 percent in 1993 to 4.0 percent in 2000, a drop of 2.9 percentage points. During the first seven years of Bush's presidency, unemployment rose from 4.7 percent in 2001 to 5.3 percent in 2008, an increase of 0.6 percentage points.

What about those budget deficits Democrats are so often accused of? Clinton's presidency ended with a surplus of $5.6 trillion. Bush spent all of that and had accumulated a deficit of $8.5 trillion by July, 2006. It continues to grow.

How did they do this? There are two major tools available: monetary policy and fiscal policy. As for monetary policy, both parties generally favor lowering the rate of interest to stimulate the economy and both have had occasion to do this during their tenure. Although this can be done only by the Federal Reserve, the Fed has during these two presidencies been quite cooperative, lowering rates when indicated.

This leaves fiscal policy, the other major tool. The Democratic philosophy is to pursue a progressive tax structure and to use government spending as a stimulus as needed. Clinton as soon as he assumed the presidency raised taxes on the top brackets from 35 percent to 39 percent and lowered taxes on the lowest brackets by increasing the Earned Income Tax Credit. These actions bore fruit with eight years of increasing GDP, as noted above, and even a budget in surplus (the last budget surplus prior to Clinton's had been achieved by Lyndon Johnson in 1969.) The Republicans, on the other hand, tend to favor lowering taxes on the rich to stimulate the economy through increased investment. This policy has been pursued by Bush, with the results noted above--less growth and more unemployment than under Clinton, plus something we haven't yet noted here, huge budget deficits. The $3 trillion budget proposed by Bush for Fiscal Year 2009 has a proposed deficit of $400 billion, along with cuts in Medicare and Medicaid, health and human services, and education--cuts that will fall more heavily on lower income recipients. The Bush budget deficits, I would suggest, have been a major factor in keeping the economy going during most of the Bush presidency, although now, even with huge deficits, we appear to be going toward recession.

One extraneous point, if I may: I would fault Clinton for not using some of his surplus for needed social programs and/or such useful national projects as improving Amtrak.

Tuesday, February 26, 2008

The President of the University of Colorado

Bruce Benson has been named by the Board of Regents of the University of Colorado to be the new president of that institution, frequently, and appropriately, referred to as the flagship institution in the state of Colorado. I feel that the selection falls short for the following reasons.

One, such a selection suggests that the people of Colorado are willing to give at least the appearance of valuing low taxes over providing excellence in higher education. Surely our citizens do not wish to continue to provide almost the lowest (that is, 49th) level of support for higher education of any state in the nation. We are a relatively wealthy state, one that can afford to educate its citizenry, and this is indeed important. Accordingly, we should embrace a commitment to quality, and this should be apparent to the community, to the faculty, and, most of all, to the students. The selection of someone with superior competence in fundraising but no academic background in higher education does not indicate such a commitment.

Second, the president is the most important employee of the University, and as such he/she should qualify as likely to be one who can best guide the university in the pursuit of higher education and can best speak to the community about it. He should embody a passion for learning, for the quest for ideas, for the search for truth. While it is possible that Mr. Benson may prove to be such a choice, his resume does not suggest that degree of excellence or that kind of life experience. The Regents have not succeeded in persuading the community of the superiority of his qualifications.

Thursday, January 24, 2008

How to Stimulate the Economy #2

How to avoid a recession? After more than sixty years of study and observation of U.S. income, I too have a proposal.

The Fed has already reduced the interest rate, which can be expected to be somewhat helpful in a matter of months. Fiscal policy, however, is the better tool for the state we're in. Our question is how best to increase employment and GDP. The Congress can choose its own programs or choose to affect private spending; it should do both. We should be looking at both speed and strength of stimulus. And while we're at it, we should be cognizant of the effect of what we do on current problems and goals.

The most predictable and the fastest and most powerful tool is government spending. Recall that when the U.S. entered World War II we went from 14% unemployment to a low of around 2% in a matter of months. At that time we started spending on munitions; we don't want more of that now. At the present time we should activate programs that would best fit goals for America, say, e.g., health care for low income children, or universal health care, or providing education for all pre-school children. Or the first steps in addressing the problem of global warming. Or rebuilding our crumbling roads and bridges. Any of these programs or a combination of them could be pursued until full employment is achieved.

Private spending could be a supplement to this. The best way to increase it would be to provide income to the poorest among us. The richest country in the history of the world has a population of around 13% living in poverty. This could and should be alleviated. The IRS could implement a negative income tax, i.e., send checks to those whose income is well below the poverty level. This would be similar to the Earned Income Tax Credit and could be simply an expansion of that to anyone, working or not, having an income below a certain level. These people would be likely to spend all that they receive--an immediate and sizable stimulus.