Just Cut Spending

Fortuño Shows Us the Way

Puerto Rico’s chief executive believes in small government.

By Deroy Murdock

The gridlocked members of the congressional supercommittee should grab President Obama and decamp to a tropical island. Specifically, they should visit Puerto Rico, where a courageous leader is using free-market reforms to reinvigorate this previously moribund U.S. territory.

“We are clearly pro-growth,” says Republican governor Luis G. Fortuño. “And we do not apologize for that.”

Fortuño last Tuesday hosted a delegation of conservative luminaries who steamed into San Juan aboard the Holland America Line’s MS Eurodam, site ofNational Review’s latest Caribbean cruise.

Fortuño was inaugurated on Jan. 2, 2009, just 18 days before Obama. Since then, these two officials have marched in opposite directions, with opposite results.

“We were closer to the abyss than most states,” Fortuño says. “When I came into office, we were facing not just the worst recession since the ’30s, but the worst budget deficit in America, proportionally. We were literally broke. Actually, I had to fly up to New York to avoid a serious downgrade in our bonds. I came to realize actually that we did not have enough money to meet our first payroll. We had to take out a loan to do that. At that point, my wife asked me if we could ask for a recount.”

So, what did Fortuño do?

Unlike the free-spending Obama, and G. W. Bush before him, Fortuño declares: “We cut expenses.”

Fortuño set an example by giving himself a 10 percent pay cut. He trimmed his agency heads’ salaries by 5 percent. That bought him the credibility to chop overall spending by 20 percent. He booted some 20,000 government workers, through attrition as well as layoffs, saving $935 million. (Compare that to Bush/Obama’s 11.7 percent hike in the federal civilian headcount since the Great Recession began in December 2007 — excluding temporary Census jobs.) Fortuño has shifted remaining government workers from old-fashioned, statist defined-benefit pensions to modern, market-friendly defined-contribution plans.

Ranked No. 51 in 2009 — behind every state of the Union — in proportion of deficit to revenue, Puerto Rico now is 15th, with the $3.3 billion deficit Fortuño inherited (44 percent of revenues) now machete’d to $610 million (7.1 percent). Fortuño’s reforms, including merging government agencies, led Standard & Poor’s to upgrade Puerto Rico’s credit rating for the first time in 28 years. S&P, of course, famously downgraded U.S. sovereign debt last August, an historical first. Meanwhile, America’s national debt screamed past the $15 trillion mark on Wednesday.

Fortuño has sliced taxes. The corporate tax rate plunged last January from 41 percent to 30, en route to 25 percent in 2014. He cut average individual tax rates by one quarter this year, and plans to cut them in half within six years.

“You needed to obtain an average of 28 permits and endorsements to do anything,” Fortuño says, regarding regulatory relief. “You had to go to 20-plus different agencies to do that. Today, you go to one agency, and you get your permit there, or you can go to PR.gov, and get it online.”

As Fox Business Network’s John Stossel reported last June, some 250 Puerto Rican police officers previously scrutinized liquor-license applications. Fortuño now has a couple of civil servants handle those duties, with the process conducted largely online. Those cops now patrol the streets and pursue actual criminals.

“We have created a better business climate, and it shows,” Fortuño summarizes.

A five-year property-tax holiday and the scrapping of capital-gains and death taxes have helped push sales of existing homes up 35 percent this year (while they fell 7.9 percent on the mainland) and sales of new homes soaring by 92.2 percent (while they sagged by 9.9 percent up north).

CVS, Nordstrom’s, Pet Smart, P. F. Chang’s, Saks Fifth Avenue, and Victoria’s Secret all are opening stores in Puerto Rico. “They’re coming in brand new, for the first time, ever,” Fortuño says. Blu Caribe pharmaceuticals, Honeywell, and Merck are expanding manufacturing facilities. Venezuela’s Banesco is the first new bank to open in Puerto Rico in 13 years.

“Things are happening,” Fortuño smiles. “We are moving in the right direction. We are creating jobs in the private sector, not in the public sector, the way we should be. So, we can keep lowering taxes.”

Governor Fortuño in his office in San Juan’s 471-year-old La Fortaleza palace. Photo: Deroy Murdock.

Fortuño and I speak in his stunning baroque office in La Fortaleza, a former Spanish colonial castle completed in 1540. La Fortaleza is the western hemisphere’s oldest continuously operated executive mansion. Over the years, it has been seized by British and Dutch invaders as well as pirates of the Caribbean.

Fortuño is a political consultant’s dream. The father of triplets is a principled, well-spoken, and cheerful graduate of Georgetown University (my alma mater). He also seems to take a shot each morning of whatever his very first predecessor, Juan Ponce de León, discovered when he embarked from here to Florida in 1521 to find the Fountain of Youth. Though Fortuño looks 35, he is 51.

“I exercise,” Fortuño says. “I run races. That helps. Lots of water, and get some rest.”

Fortuño has been a fan of this publication for decades.

“I was a subscriber to National Review when I was a college student,” he says. “My roommate would get Sports Illustrated. I would get National Review. It shaped my thinking dramatically. I used it as a guide to what was happening in Washington at the time.”

Ronald Reagan and Margaret Thatcher are among Fortuño’s other inspirations. Volumes by and about those visionaries grace Fortuño’s bookshelves. A small sign on his desk replicates one in Reagan’s Oval Office. It explains Luis G. Fortuño’s success, begs Washington to listen, and simply reads: “It CAN be done.”

Celtic fans: you’re not singing anymore

In what country was a 17-year-old recently arrested for singing an outlawed song? Iran? China? No, it was the UK.

Imagine the scene. A dawn raid. A vanload of police officers batter down a front door. A 17-year-old boy is dragged from his home and driven away. He is charged with a crime and appears in court. His lawyers apply for bail, but the court decides his crime is too serious for that. So he is taken to a prison cell and remanded in custody.

by Kevin Rooney 

What was his crime? Terrorism? Rape? No, this 17-year-old was imprisoned for singing a song. Where did this take place? Iran? China? Saudi Arabia? No – it was in Glasgow, Scotland, where the 17-year-old had sung songs that are now deemed by the authorities to be criminal. The youth was charged with carrying out a ‘religiously aggravated’ breach of the peace and evading arrest.

Why haven’t you heard about this case? Why aren’t civil liberties groups tweeting like mad about this affront to freedom? Because the young man in question is a football fan. Even worse, he’s a fan of one of the ‘Old Firm’ teams (Celtic and Rangers), which are renowned for their historic rivalry, and the songs he sang were football ditties that aren’t everyone’s cup of tea. Draconian new laws are being pushed through the Scottish parliament to imprison fans for up to five years for singing sectarian or offensive songs at football games, or for posting offensive comments on the internet, and this 17-year-old fell foul of these proposed laws.

This is far from an isolated case. This young man is merely the latest victim of a new policy of intimidation directed at Celtic and Rangers supporters. Even before the new laws have officially been passed, there have been numerous arrests at or after football matches. Only last month, as I reported on spiked, Stephen Birrell, a Rangers fan, was jailed for eight months for expressing his hatred of Celtic fans on his Facebook page. In Scotland, sadly, what people say and write is now sufficient criteria for imprisoning them, as the centuries-old distinction between words and action is abolished.

In the absence of any criticism from civil liberties groups, it has fallen to fans themselves to take a stand against the proposed new laws. Despite being portrayed as ill-educated sectarian bigots, many Celtic fans have shown themselves to be intelligent and articulate defenders of free speech. A group called Celtic Fans Against Criminalisation has taken to the airwaves to argue against censorship and managed to mobilise 2,000 people for a public rally against the news laws in central Glasgow.

Even before the Offensive Behaviour at Football and Threatening Communication Act has been passed, the singing of songs has become a key target of heavy-handed policing. The Scottish police have persuaded UEFA to announce an investigation into ‘illicit chanting’ by Celtic fans at a home game against French side Rennes. Likewise, Rangers Football Club was recently fined £35,000 and their fans banned from their next European game for singing sectarian songs during a match against PSV Eindhoven. Not to be outdone, the Scottish Premier League has launched an official investigation into the singing of offensive songs by Celtic fans at a Hibs game that took place several weeks ago. Things have now reached such ludicrous levels that last Sunday’s Scottish newspaper reports on the Inverness Caledonian Thistle v Celtic game devoted more column inches to the songs sung by Celtic fans than to the teams’ performance on the pitch.

Why is something that has always been part of the Old Firm tradition – that is, the singing of Irish republican songs by Celtic fans and anti-IRA, loyalist songs by Rangers fans – suddenly been declared a massive problem? Of course, Irish rebel songs are not to everyone’s taste, but the irony is that - as memories of the Irish conflict fade - fewer fans tend to sing them anyway. Contrary to media reports, IRA songs are no longer a massive part of Celtic fans’ repertoire.

Nonetheless, to the extent that these songs, which clash against loyalist songs amongst Rangers fans, are still sung, they have been been an accepted part of Old Firm games for decades. The idea that they are offending vast swathes of rival fans is a myth that is fast becoming a self-fulfilling prophecy, as more and more public figures line up to prove their anti-sectarian credentials by denouncing ‘hateful songs’. The Celtic game against Rennes that is now subject to a UEFA enquiry was actually a peaceful, good-natured match, at which some fans sang Irish rebel songs to no doubt bewildered French football fans. It is hard to imagine how that 17-year-old arrested for allegedly singing IRA songs, which he is said to have done at this Celtic/Rennes match, was breaching the peace of anyone.

The criminalisation and demonisation of Old Firm football fans by the massed ranks of the Scottish government, police and media is a serious problem. Far from reducing ‘sectarian conflict’ in Scottish football, the new censorious laws and the accompanying police campaign have led to a dramatic increase in tensions, with fans now encouraged to spy on each other, to take offence at every comment, and to report rival fans to the police. In a very vicious cycle, the more rival fans are coaxed and cajoled into reporting offensive incidents, then the more arrests there are, and the more the authorities can cite such increases in arrests as a justification for tough new laws and sanctions. It is an open secret that over the past six months, police have been trawling Celtic Park for the remotest hint of a republican song being sung, so that they can arrest, prosecute and convict the person singing it in order to construct a PR image of mass religious hate crimes being committed. It is no coincidence that new and seemingly shocking arrest figures were released to the media in the week before a Scottish parliament vote on the proposed new laws.

The 17-year-old was finally released from prison after a successful campaign by Celtic Fans Against Criminalisation. But it is time that others, especially those who claim to support free speech, added their voices to the opposition to these tyrannical new laws. If we sit back and allow people to be imprisoned for saying (or singing) things that the state does not like, then we won’t be able to complain when the state decides to come after us.

Das ist Verboten !

Only a totalitarian New World Order can save us now says Naomi Klein

By James Delingpole

No Logo author Naomi Klein has a solution to climate change and it goes like this: punitive taxation; massive wealth re-distribution; the abolition of free trade and free markets; a state-enforced end to to the "cult of shopping"; the whole to be supervised by a New World Order of selfless illuminati (who presumably resemble Naomi Klein).

If it weren't so scary it would almost be funny, the way the leftie Canadian activist on the basis of no evidence whatsoever declares that the time has come to strip the human race of all its hard-won freedoms in order to save the planet from a non-existent problem. Unfortunately, Klein means it and her audience takes her seriously. Just read the first comment below her screed:

I can't say enough good things about this article. It's a manifesto for the next 100 years. Corporate capitalism is doomed by the immutable fact of finite resources; it will require planning and sharing to sustain civilization in the future, which is heretical thinking in the boardrooms of elite capitalists.

O-K. And the rationale for doing all this stuff would be what, exactly, Naomi? Some new devastating proof you've managed to unearth, perhaps, showing once and for all that the measurements are wrong and global warming didn't stop in 1998? A dazzling refutation of Svensmark's cosmic ray theory? Surprising new data showing that, contrary to the false consciousness promoted by the running dog lackey capitalist pigs who write our history books, totalitarian planning regimes of the kind you advocate in fact brought nothing but bounty, happiness and environmental loveliness to Stalin's Soviet Union, Hitler's Germany, Mao's China, Pol Pot's Cambodia and Kim Il Sung's North Korea?

Nope. All Naomi can manage by way of justification is this:

Before I go any further, let me be absolutely clear: as 97 percent of the world’s climate scientists attest, the Heartlanders are completely wrong about the science. The heat-trapping gases released into the atmosphere through the burning of fossil fuels are already causing temperatures to increase. If we are not on a radically different energy path by the end of this decade, we are in for a world of pain.

Er, Naomi. Here are some things you should know before you type out your next eco-fascistic horror rant. 1. That "97 per cent" figure: it's kind of an urban myth. 2. The heat-trapping gas and fossil fuel theory: it's at best moot, not least because the "feedbacks" – as you'd know if you'd bothered to do a scintilla of research – are still so ill-understood.  3. the "radically different energy path" bit: Says who? And on what evidence? 4. "a world of pain". Right. And you'll have done a cost benefit analysis here will you? You can show us that the freedom-destroying, economy-ruining totalitarianism you advocate will a) make the blindest bit of difference to global mean temperatures and b) cause less pain than a world where it's ever so slightly warmer and where people are free to shop without jackbooted Canadian eco-activists stamping up and down shrieking: "Das ist Verboten!"?

I don't think so.

Seeking freedom from the dangers and risks of liberty

The Road to Totalitarianism

by Henry Hazlitt

In spite of the obvious ultimate objective of the masters of Russia to communize and conquer the world, and in spite of the frightful power which such weapons as guided missiles and atomic and hydrogen bombs may put in their hands, the greatest threat to American liberty today comes from within. It is the threat of a growing and spreading totalitarian ideology.

Totalitarianism in its final form is the doctrine that the government, the state, must exercise total control over the individual. The American College Dictionary, closely following Webster's Collegiate, defines totalitarianism as "pertaining to a centralized form of government in which those in control grant neither recognition nor tolerance to parties of different opinion."

Now I should describe this failure to grant tolerance to other parties not as the essence of totalitarianism, but rather as one of its consequences or corollaries. The essence of totalitarianism is that the group in power must exercise total control. Its original purpose (as in communism) may be merely to exercise total control over "the economy." But "the state" (the imposing name for the clique in power) can exercise total control over the economy only if it exercises complete control over imports and exports, over prices and interest rates and wages, over production and consumption, over buying and selling, over the earning and spending of income, over jobs, over occupations, over workers — over what they do and what they get and where they go — and finally, over what they say and even what they think.

If total control over the economy must in the end mean total control over what people do, say, and think, then it is only spelling out details or pointing out corollaries to say that totalitarianism suppresses freedom of the press, freedom of religion, freedom of assembly, freedom of immigration and emigration, freedom to form or to keep any political party in opposition, and freedom to vote against the government. These suppressions are merely the end-products of totalitarianism.

All that the totalitarians want is total control. This does not necessarily mean that they want total suppression. They suppress merely the ideas which they don't agree with, or of which they are suspicious, or of which they have never heard before; and they suppress only the actions that they don't like, or of which they cannot see the necessity. They leave the individual perfectly free to agree with them, and perfectly free to act in any way that serves their purposes — or to which they may happen at the moment to be indifferent. Of course, they sometimes also compel actions, such as positive denunciations of people who are against the government (or who the government says are against the government), or groveling adulation of the leader of the moment. That no individual in Russia today gets the constant groveling adulation that Stalin demanded chiefly means that no successor has yet succeeded in securing Stalin's unchallenged power.

Once we understand "total" totalitarianism, we are in a better position to understand degrees of totalitarianism. Or rather — since totalitarianism is by definition total — it would probably be more accurate to say that we are in a better position to understand the steps on the road to totalitarianism.

We can either move, from where we are, toward totalitarianism on the one hand or toward freedom on the other. How do we ascertain just where we now are? How do we tell in what direction we have been moving? In this ideological sphere, what does our map look like? What is our compass? What are the landmarks or constellations to guide us?

It is a little difficult, as nebulous and conflicting usage shows, to agree on precisely what liberty means. But it isn't too difficult to agree on precisely what slavery means. And it isn't too difficult to recognize the totalitarian mind when we meet one. Its outstanding mark is a contempt for liberty. That is, its outstanding mark is a contempt for the liberty of others. As de Tocqueville remarked in the preface to his "France Before the Revolution of 1789,"

Despots themselves do not deny the excellence of freedom, but they wish to keep it all to themselves, and maintain that all other men are utterly unworthy of it. Thus it is not on the opinion which may be entertained of freedom that this difference subsists, but on the greater or the less esteem that we have for mankind; and it may be said with strict accuracy, that the taste a man may show for absolute government bears an exact ratio to the contempt he may profess for his countrymen.

The denial of freedom rests, in other words, on the assumption that the individual is incapable of managing his own affairs.

Three main tendencies or tenets mark the drift toward totalitarianism. The first and most important, because the other two derive from it, is the pressure for a constant increase in governmental powers, for a constant widening of the governmental sphere of intervention. It is the tendency toward more and more regulation of every sphere of economic life, toward more and more restriction of the liberties of the individual. The tendency toward more and more governmental spending is a part of this trend. It means in effect that the individual is able to spend less and less of the income he earns on the things he himself wants, while the government takes more and more of his income from him to spend it in the ways that it thinks wise. One of the basic assumptions of totalitarianism, in brief (and of such steps toward it as socialism, state paternalism, and Keynesianism), is that the citizen cannot be trusted to spend his own money. As government control becomes wider and wider, individual discretion, the individual's control of his own affairs in all directions, necessarily becomes narrower and narrower. In sum, liberty is constantly diminished.

One of the great contributions of Ludwig von Mises has been to show through rigorous reasoning, and a hundred examples, how government intervention in the market economy always finally results in a worse situation than would otherwise have existed, even as judged by the original objectives of the advocates of the intervention.

I assume that other contributors to this symposium will explore this phase of interventionism and statism rather fully; and therefore I should like to devote particular attention here to thepolitical consequences and accompaniments of government intervention in the economic sphere.

I have called these political accompaniments consequences, and to a large extent they are; but they are also, in turn, causes. Once the power of the state has been increased by some economic intervention, this increase in State power permits and encourages further interventions, which further increase State power, and so on.

The most powerful brief statement of this interaction with which I am acquainted occurs in a lecture delivered by the eminent Swedish economist, the late Gustav Cassel. This was published in a pamphlet with the descriptive but rather cumbersome title: From Protectionism Through Planned Economy to Dictatorship.[1] I take the liberty of quoting an extensive passage from it:

The leadership of the state in economic affairs which advocates of Planned Economy want to establish is, as we have seen, necessarily connected with a bewildering mass of governmental interferences of a steadily cumulative nature. The arbitrariness, the mistakes and the inevitable contradictions of such policy will, as daily experience shows, only strengthen the demand for a more rational coordination of the different measures and, therefore, for unified leadership. For this reason Planned Economy will always tend to develop into Dictatorship….

The existence of some sort of parliament is no guarantee against planned economy being developed into dictatorship. On the contrary, experience has shown that representative bodies are unable to fulfill all the multitudinous functions connected with economic leadership without becoming more and more involved in the struggle between competing interests, with the consequence of a moral decay ending in party — if not individual — corruption. Examples of such a degrading development are indeed in many countries accumulating at such a speed as must fill every honorable citizen with the gravest apprehensions as to the future of the representative system. But apart from that, this system cannot possibly be preserved, if parliaments are constantly over-worked by having to consider an infinite mass of the most intricate questions relating to private economy. The parliamentary system can be saved only by wise and deliberate restriction of the functions of parliaments….

Economic dictatorship is much more dangerous than people believe. Once authoritative control has been established it will not always be possible to limit it to the economic domain. If we allow economic freedom and self-reliance to be destroyed, the powers standing for Liberty will have lost so much in strength that they will not be able to offer any effective resistance against a progressive extension of such destruction to constitutional and public life generally. And if this resistance is gradually given up — perhaps without people ever realizing what is actually going on — such fundamental values as personal liberty, freedom of thought and speech and independence of science are exposed to imminent danger. What stands to be lost is nothing less than the whole of that civilization that we have inherited from generations which once fought hard to lay its foundations and even gave their life for it.

Cassel has here pointed out very clearly some of the reasons why economic interventionism and government economic planning lead toward dictatorship. Let us now, however, looking at another aspect of the problem, see whether or not we can identify, in an unmistakable way, some of the main landmarks or guideposts that can tell us whether we are moving away from or nearer to totalitarianism.

I said a while back that three main tendencies mark the drift toward totalitarianism, and that the first and most important, because the other two derive from it, is the pressure for a constant increase in governmental intervention, in governmental spending, and in governmental power. Let us now consider the other two tendencies.

The second main tendency that marks the drift toward totalitarianism is that toward greater and greater concentration of power in the central government. This tendency is most easily recognizable here in the United States, because we have ostensibly a Federal form of government and can readily see the growth of power in Washington at the expense of the states.

The Moochers of Zuccotti Park

Good riddance to Occupy Wall Street

by Heather Mac Donald

There’s no more full-throated a defender of property rights than a member of the anticapitalist Left asserting the right to colonize someone else’s property. “Whose park? Our park!” chanted members of the Occupy Wall Street encampment in Zuccotti Park as the New York Police Department belatedly broke up the illegal occupation yesterday morning. “This is our home!” True to form, several of the newly rousted Zuccotti squatters broke into another local park outside Trinity Church after a brief discussion about whether to “liberate another piece of property.”

While the number of people who commandeered Zuccotti Park was pathetically small—several hundred a night—compared with the weight of media attention lavished upon them, their sense of entitlement to take other people’s property, whether public or private, is unfortunately widespread. It is shown by the increasingly vocal and self-righteous members of the graffiti cult and their elite enablers; by the young gutter punks who sprawl across city sidewalks on the West Coast, demanding money for drugs and booze; by the anarchist members of the No Global movement who vandalize businesses and banks; and by squatters, who remain active in Europe, though their presence in New York City virtually evaporated during the law-and-order mayoralty of Rudolph Giuliani. The demand by student participants in the Occupy Wall Street protests that they be allowed to welsh on their student loans simply because they don’t want to pay them displays a similar sense of royal privilege over other people’s property—in this case, the assets of taxpayers who extended the loans.

Zuccotti Park had to be cleared for the sake of the businesses and residents in downtown New York whose livelihoods and lives have been severely burdened by the protesters’ monopolistic takeover. Equally pressing was the need to reassert the rule of law. Yet it’s too bad that some large piece of abandoned land in the middle of nowhere couldn’t be donated to the movement so that it could continue to show the world “what democracy looks like,” as one of the rousted protesters proclaimed.

Actually, we know what the Occupy brand of democracy looks like. In the 1980s, Los Angeles gave an abandoned rail yard to the homeless; crime became so pervasive there that the camp was quickly shut down. In the 1990s and early 2000s, L.A.’s homeless simply took over the sidewalks in Skid Row with tents and tarps. Prostitution, assaults, gang retaliation, predation, drug overdoses, and defecation on the property of struggling local businesses were rampant. No surprise, then, that as the Occupy movement spread, so did lawlessness in the encampments, which had declared their hostility to oppressive police patrols.

The maudlin self-image of the OWS occupiers is perfectly in keeping with the West’s post-sixties romanticization of protest. “We move forward in the grand tradition of the transformative social movements that have defined American history,” one protester wrote on Occupy Wall Street’s website after yesterday’s police action. “We stand on the shoulders of those who have struggled before us, and we pick up where others have left off. We are creating a better society for us all.” A fawning media heard more of the same on Tuesday morning from the shouting protesters: “We are unstoppable; another world is possible”; “We shall overcome”; “We are doing something revolutionary.” A genuinely revolutionary act might have been living for free for two months without the cornucopia of insanely cheap goodies that capitalism and free trade showered upon the OWS protesters, from laptops, iPhones, and abundant electricity for recharging them to mountains of fresh food, warm clothing, and medical supplies.

Yes, some large or politically influential businesses win wholly unjustified government subsidies, as well as exemptions from the high taxes that less connected businesses have to pay to fund the growing welfare state. (The green energy movement, of course, is as voracious a consumer of unfair government favoritism as any failing bank.) But the fact that capitalism can be distorted by politics says nothing about its unmatched power to raise the standard of living almost universally and create the wealth that is the precondition for so many modern rights, such as women’s liberation from arranged marriages. Occupy Wall Street proved incapable of making such distinctions, however. At their core, the protests represented another outbreak of that perennial temptation in bourgeois society: to take for granted the norms and institutions that make Western prosperity and freedom possible.

From pariah to fiscal darling

Lessons for U.S. from Canada's "basket case" moment

By Randall Palmer and Louise Egan

Finance officials bit their nails and nervously watched the clock. There were 30 minutes left in a bond auction aimed at funding the deficit and there was not a single bid.

Sounds like today's Italy or Greece?

No, this was Canada in 1994.

Bids eventually came in, but that close call, along with downgrades and the Wall Street Journal calling Canada "an honorary member of the Third World," helped the nation's people and politicians understand how scary its budget problem was.

"There would have been a day when we would have been the Greece of today," recalled then-prime minister Jean Chretien, a Liberal who ended up chopping cherished social programs in one of the most dramatic fiscal turnarounds ever.

"I knew we were in a bind and we had to do something," Chretien, 77, told Reuters in a rare interview.

Canada's shift from pariah to fiscal darling provides lessons for Washington as lawmakers find few easy answers to the huge U.S. deficit and debt burden, and for European countries staggering under their own massive budget problems.

"Everyone wants to know how we did it," said political economist Brian Lee Crowley, head of the Ottawa-based thinktank Macdonald-Laurier Institute, who has examined the lessons of the 1990s.

But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth.

It would eventually oversee the biggest reduction in Canadian government spending since demobilization after World War Two. The big cuts, and relatively small tax increases, brought a budget surplus within four years.

Canadian debt shrank to 29 percent of gross domestic product in 2008-09, from a peak of 68 percent in 1995-96, and the budget was in the black for 11 consecutive years until the 2008-09 recession.

For Canada, the vicious debt circle turned into a virtuous cycle which rescued a currency that had been dubbed the "northern peso." Canada went from having the second worst fiscal position in the Group of Seven industrialized countries, behind only Italy, to easily the best.

It is far from a coincidence that the recent recession was shorter and shallower here than in the United States. Indeed, by January, Canada had recovered all the jobs lost in the downturn, while the U.S. has hardly been able to dent its high unemployment.

"We used to thank God that Italy was there because we were the second worst in the G7," said Scott Clark, associate deputy finance minister in the 1990s.

Canada's experience turned on its head the prevailing wisdom that spending promises were the easiest way to win elections. Politicians of all kinds and at all levels of government learned that austerity could win.

"I WILL DO IT"

The turnaround began with Chretien's arrival as prime minister in November 1993, when his Liberal Party - in some ways Canada's equivalent of the Democrats in the U.S. - swept to victory with a strong majority. The new government took one look at the dreadful state of the books and decided to act.

"I said to myself, I will do it. I might be prime minister for only one term, but I will do it," said Chretien.

A shrewd political strategist, Chretien believed Canadians were on board, after they were shocked and embarrassed a year earlier when Standard & Poor's downgraded Canadian foreign currency debt to AA plus from AAA.

He wanted history to remember him as the man who rescued Canada from financial ruin and humiliation.

Chretien sat his skeptical cabinet down and laid down the hard truth. He would get rid of the deficit, it would be painful and unpopular and nobody would be spared. There was no choice, no room for negotiation. It had to be done.

The chill in the room was such that newly appointed junior minister for veterans affairs, Lawrence MacAulay, called his wife afterward to say he would soon be out of a job.

"He said, 'Darling, I will be back home in the next election. I will be defeated, because the prime minister explained to us this morning what he intended to do,'" according to Chretien's recollection.

MacAulay, who represents the Prince Edward Island fishing community of Cardigan, has been reelected six times and sits in the House of Commons today. He couldn't be immediately reached for comment to recall the conversation.

RAISING THE ALARM

Canada's scrape with disaster had been building for a long time.

Over a decade earlier, top finance department bureaucrats had begun raising the alarm about the problem of rising debt, a hangover from the big government era of the 1970s.

The Last Days of the Euro

Why France and Germany are likely to strike a momentous deal on fiscal union sooner than anyone thinks.

 

By Jonathan Wilmot.

We seem to have entered the last days of the euro as we currently know it.

That doesn’t make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen – probably by mid-January – to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks.

That may sound overdramatic, but it reflects the inexorable logic of investors realizing that – as things currently stand – they simply cannot be sure what exactly they are holding or buying in the euro zone sovereign bond markets.

In the short run, this cannot be fixed by the ECB or by new governments in Greece, Italy or Spain: it’s about markets needing credible signals on the shape of fiscal and political union long before final treaty changes can take place. We suspect this spells the death of “muddle-through” as market pressures effectively force France and Germany to strike a momentous deal on fiscal union much sooner than currently seems possible, or than either would like. Then and only then do we think the ECB will agree to provide the bridge finance needed to prevent systemic collapse.

We think the debate on fiscal union will really heat up from this week when the Commission publishes a new paper on three different options for mutually guaranteed “Eurobonds”, continue at the summit on 9 December and through a key speech by President Sarkozy to the French nation scheduled for the 20th anniversary of the Maastricht Treaty (11 December).

While these discussions may give some short-term relief to markets, it seems likely that the process of reaching agreement will involve some high stakes brinkmanship and market turmoil in subsequent weeks. (Not unlike the US debt ceiling debate this summer, or the messy passage of TARP in 2008.)

One paradox is that pressure on Italian and Spanish bond yields may get quite a lot worse even as their new governments start to deliver reforms – 10-year yields spiking above 9% for a short period is not something one could rule out. For that matter, it’s quite possible that we will see French yields above 5%, and even Bund yields rise during this critical fiscal union debate.

Moreover, this could happen even as the ECB moves more aggressively to lower rates and introduce extra measures to provide banks with longer-term funding. And US bond yields may fall – or at least not rise – despite improving US growth data through end-year. Equally, global equity markets and world wealth could follow a more muted version of their early Q1:2009 sell-off until the political brinkmanship is resolved – see exhibits below.

In short, the fate of the euro is about to be decided. And the pressure for the necessary political breakthroughs will likely come from investors seeking to protect themselves from the utterly catastrophic consequences of a break-up – a scenario that their own fears should ultimately help to prevent.

The culture of defeat

Germany’s Collective Self-Debasement

by Paul Gottfried

German historian Wolfgang Schivelbusch published a far-ranging 2003 study on the culture of defeated nations that focuses on three cases: the American South after the Civil War, the French after their defeat in the Franco-Prussian War in 1871, and Germany after WWI. According to Schivelbusch, defeated nations (Verlierernationen) as typified by the three cases he investigates stress myths that mitigate their defeat and create a favorable view of those who fought for their “lost cause.” Before its recent conversion to PC, the American South was paradigmatic for the way nations handle defeat, and there is little to be found in Germans’ attitudes after 1918 that does not mirror how the South saw itself after 1865.

Defeated powers, according to Schivelbusch, insist they were overwhelmed rather than really defeated, and they tend to pin the blame on their triumphant enemy’s unfair advantage or dishonorable tactics or on some internal foe who betrayed their side. The German legend of being knifed in the back in 1918 has its counterpart in the French view of the treacherous, cowardly government of Louis Napoleon that tricked them into war and then sued for peace against the Prussians; or the perfidy of General Longstreet, who supposedly showed his defeatist attitudes by joining the Reconstruction government after the Late Unpleasantness.

The only significant exception to the “culture of defeat” that Schivelbusch describes is his own country after 1945. In the introduction he suggests that the enormity and extravagance of the German exception may have driven him into writing his study. Unlike other societies he analyzes, including the Germans after WWI, contemporary Germans seem to luxuriate in “collective self-debasement.” Germans not only claim no honor for their soldiers in WWII but glorify their enemies who inflicted fire-bombing on their hapless civilians, or in the Soviet case, cut a swath across Central Europe murdering and raping. This ethic of self-rejection has gone so far that German historians and journalists delight in accepting blame for their wretched country in earlier European conflicts, and they typically view all of German history before 1933 as a lead-in to the Third Reich.

Such a mindset is evident in how German politicians present the decision to save the Greeks from their self-inflicted bankruptcy. Serious arguments could be cited for Angela Merkel and her Christian Democratic government’s decision to help out the profligate Greeks; for example, German creditors’ entanglement in the Greek debacle, Germany’s centrality as the EU’s economic force, and the German economy’s present dependence on the euro. Nonetheless, German politicians and intellectuals have appealed to the image of Germany as a moral leper in order to justify further loans to Greece and other “scapegrace” EU members. A leading German economic historian and a direct descendant of Germany’s renowned nineteenth-century classicist and theologian Albrecht Ritschl has insisted that such payments be viewed as the reparation debts that Germans never fully paid for starting WWI. Ritschl is upset that his countrymen were never sufficiently fined for the Great War’s horrendous crime, which has turned them “into the greatest debtor nation in world history.” Paying off the Greeks should be only a modest beginning in compensating the world for the sins of Kaiser Bill.

Other politicians, such as Gregor Gysi of the Party of Democratic Socialists (read: retread communists) and the chancellor (who represents something that substitutes for Germany’s center-right), argue that if the Greeks do not receive German economic aid, all hell might break loose. The EU could be endangered, with Germany thereafter propelled toward a national resurgence that could threaten peace in Europe. The Krauts, it seems, aren’t quite ready for political prime time. All the wars they’ve unleashed (supposedly with zero help from the other side) show that they have to be imprisoned in some international structure lest they feel tempted to act out. From reading such descriptions, one gets the impression that the EU must be kept intact as a loony bin for a psychotic country.

Perhaps the most comical argument for bailing out Greece has come from Merkel’s CDU Labor Minister and outspoken feminist Ursula von der Leyen, who has been vocal in her support for “helping the Greeks get back on their feet.” In a recent appearance on a weekend talk show hosted by TV celebrity Günther Jauch, Ms. von der Leyen went after those who criticize Greece’s spending habits and bloated state bureaucracy. According to van der Leyen, such a captious judgment does not take into account the close resemblance between the “Greeks at the present hour and the Germans in 1945, when we were a battered people.” To the Labor Minister, assisting the Greeks seems the proper thing to do. It is “like the CARE-packages that the Americans sent us after the War.”

This last comparison borders on the lunatic, except when a German politician is trying to be “nice.” Then it simply reflects the dominant national culture. Perhaps the Germans should insist on a fundamental right which the Americans once exercised: to carpet with bombs an enemy country and then hang its leaders as war criminals. Once having done this, the Germans could get on with the good stuff, such as providing those they’ve mercilessly “battered” with chocolate bars and sewing kits. Like other German politicians, von der Leyen is accustomed to the double kowtow (der doppelte Kotau), which involves simultaneously sucking up to the Yankees and non-German Europeans. Whereas Germans were once feared for lunging at their neighbors’ necks, now they’re delighted to be at everyone’s feet.

Presumably the banks, which made loans to the Greeks at the German government’s urging, will have to be saved as a first step to dealing with Greek insolvency. An article in the relatively right-wing Preußische Allgemeine Zeitung explains a ridiculous situation: The Germans have the same representation in the EU Council as Cyprus and Malta combined, yet they contribute 28% of the organization’s available capital as opposed to the 0.3% given by Cyprus and Malta. Germans are watching their earnings decline while paying for other countries’ insolvency, yet they seem determined to make their problem even worse. Although Germans gripe about the bailout, the vast majority support leftist parties that will give away even more of their money to foreign governments. German voters snub and even despise parties such as the Republikaner which oppose the bailouts.

The Republikaner, who have been critical of Muslim immigration and bailouts and whose members favor a freer market economy, had been under the surveillance of the Verfassungsschutz, a German agency set up to monitor “extremist” parties thought to threaten the German constitutional order. The surveillance soon ended because there is nothing about the party that could possibly threaten the German constitution. The major “democratic” parties, including the former communist party, had a hand in influencing the decision to investigate their opponents’ “extremism,” and the cloud under which they arranged to place the Republikaner with the partisan Verfassungsschutz worked well. Their incipient opposition received no more than 0.4 percent of the votes cast in the 2009 general elections. By contrast, the antinational, antifascist, socialist bloc is expected to run the next German government.

Given the systematically instilled distrust of themselves and their history, one must assume that German voters will follow their antifascist chancellor, who in the face of collapsing EU economies has called for a “far more unified Europe.” Merkel hopes to strengthen the EU prison house created for her country of would-be juvenile delinquents.