US must strip costs

Without the 1970s increase in regulation, GDP would today be 45% higher than it is

By Martin Hutchinson 

As Federal Reserve chairman Ben Bernanke unveils yet another attempt to print enough money to restart the moribund US economy, its true number-one need becomes increasingly clear. It's not lower tax, and only indirectly lower government spending and a better education system. 

In an era when global competition from middle-income and low-income countries has intensified beyond all historical experience, the top priority for policymakers and Americans in all walks of life must be to get excess costs out of the US economy. 

Internationally traded US businesses have been doing this for decades (partly through outsourcing production to cheaper-wage locations), thereby inflating US corporate profits close to record levels in terms of gross domestic product. However only a minority of the economy consists of internationally traded businesses and the remainder of it is barnacle- and weed-ridden beyond belief. 

In terms of cost, the US economy was never especially competitive in many sectors; it survived because of its vast size. Heavy industry became dominated by US manufacturers only after the 1862 Morrill tariff blocked British, German and other foreign imports. Behind the high tariff wall, the US built dominance in most industries in which economies of scale were important. Britain tried to compete from 1846 to 1932 on the basis of free trade, but with a relatively small domestic market its efforts were futile and British industry declined in global importance. 

When Will Death Spiral States Impose Taxes On Fleeing Citizens?

Pretty Soon

By Bill Frezza

One of the most fascinating characteristics of government borrowing - whether at the local, state, or federal level - is that debts contracted over time are obligations tied to specific geographical boundaries but not to the citizens living there when those debts were incurred. For example, while it's customary to say that each of the 210,000 residents of Stockton, California, are on the hook for their share of the bankrupt municipality's estimated $700 million in unpaid bills, the day one of them picks up and moves, personal responsibility for that debt drops to zero.

Imagine if that type of tax "evasion" were eliminated. How would it change America?

Government debts are accrued on your behalf by elected officials for whom you had a chance to vote, all supposedly representing your interests. In a democracy, all citizens are obliged to pay the government's bills as determined by the duly empowered taxing authorities - regardless of whether they voted for a particular officeholder or not. What's to stop legislators from passing laws that make debt obligations due and payable by any citizen who decides to leave for another jurisdiction? After all, they don't hesitate to take your money when you die.

Mayors and governors of most tax-and-spend, heavily unionized, low-growth cities and states are both desperate for revenue and tired of watching disgruntled citizens vote with their feet. Think how politically attractive it would be for them to make "economic deserters" pay their "fair share" of old debts. I can see the arguments already: "You can't move away from credit card debt or commercial debt, so why should government debt be so easy to dodge?" Politicians could easily win kudos from both public employee unions and the overtaxed residents left behind, for the mere cost of enraging emigrants who won't be around to exact retribution at the next election.

And can't you just see the progressive commentariat lining up behind a movement designed to deter well-heeled blue state residents from seeking refuge in those despicable red hinterlands? Like Glenn Close rising from the bathtub to take one more stab in Fatal Attraction, don't be surprised when death-spiral states resort to exit taxes as a last ditch effort to forestall their impending bankruptcies.

Why Things Are Falling Apart...

And What We Can Do About It

by Gordon T. Long

To understand the reasons why our financial system, our economy and our present policies are unsustainable, we need to come to grips with two simple truths. First, the economy and government are an interconnected system. As such the party attempting to steer it does not have controlling power over it. The second fact is that “faster, better, cheaper” always wins, replacing the inefficient and unsustainable. This is the reality within which the system operates.

The present foundation of the system, and our economy, is Financialization. This is not by design but rather by Darwinian evolution. It has unfortunately, become the basic engine of consumer growth through its' leveraging of collateral into debt and phantom assets, such as derivatives and bubble valuations. The limiting fact to this system is that ever-rising debt and leverage is unsustainable, once household assets and incomes stop rising.

Uncontrolled financialization & unsound money, without historic exception, consistently leads to:

• Malinvestment in the Private sector - In the private sector cheap money will naturally flow into high-risk, low-return investments. This leads to “McMansions in the Middle of Nowhere”
• Crony Capitalism in the Public sector - In the public sector, crony capitalism secures low risk, high-return investments. This leads to “Bridges to Nowhere.”

The system in its present form has become too complex, fragile and insufficiently robust, that it is realistically unsustainable and un-governable. The unsustainable will collapse and be replaced by an arrangement that is sustainable. Creative destruction and “faster, better, cheaper” is the only sustainable system; the alternative is to cling to failed models until the system collapses.

"Any intelligent fool can make things bigger and more complex... It takes a touch of genius and a lot of courage to move in the opposite direction." (Albert Einstein)

Additionally, our economy and state are unsustainable for converging and disruptive systemic reasons, that go beyond the financial:

• Demographics—our aging populace and the impossible entitlements promises made
• Decline of Paid Work—automation and the Web are destroying more jobs than they create
• Diminishing Returns of Centralization—the more power the State grabs, the more broken the system becomes
• EROEI (energy returned on energy invested): energy may be abundant but expensive
• Healthcare in Crisis—our health declines as we spend 2X more per capita than our competitors
• The End of Consumerist Growth—if debt and income aren’t growing, neither can consumption
• Globalization—the genii cannot be put back in the bottle

What We Can Do about It

“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries… and partly from the incredulity of mankind, who do not truly believe in anything new until they have had actual experience  of it.” (Machiavelli, 1532)

The better choice is to embrace technological and social innovations and “faster, better, cheaper.”, since it eventually wins, regardless of our preferences.

This means GLOBALLY accepting and INNOVATIVELY moving RAPIDLY towards a DATA System:

    D- Decentralized

    A- Adaptive

    T- Transparent

    A- Accountable

We don’t get to choose, it is the natural order! 

Insane People Run Japan

When the money is spent, they will contract again and experience zero or negative growth

By Jeff Harding

Insanity

n. Mental illness of such a severe nature that a person cannot distinguish fantasy from reality, cannot conduct her/his affairs due to psychosis, or is subject to uncontrollable impulsive behavior. (See here.)

The above is a legal definition as distinguished from the popular quote (misattributed to Albert Einstein), “Insanity is doing the same thing over and over and expecting different results.” By either definition Japanese politicians and the economists who advise them qualify as “insane.”

New elected prime minister Shinzo Abe of the so-called “conservative” Liberal Democratic Party announced today,

Fresh from an election victory, Japan’s next prime minister, Shinzo Abe, pressed ahead with his top priority of reviving the sickly economy, vowing a hefty spending package and increasing the pressure on the central bank for quick action to pull the country out of recession and deflation. …

Mr. Abe, who said he would form a cabinet on Dec. 26, vowed a “large-scale” budget for government spending to help boost an economy heading toward a third straight quarter of contraction and to end decades of deflation. The budget will take into account the gap between oversupply and weak demand in the economy. …

Mr. Abe vows to force an “accord” on the BOJ to replace its looser goal of 1% inflation with a binding 2% target and to undertake “unlimited” monetary easing to achieve it. He has suggested radical measures for the bank, such as gobbling up government bonds to push more money into the economy and buying foreign bonds to weaken the yen. He has threatened to revise the law granting the central bank its independence if it refuses to cooperate.

The BOJ has resisted Mr. Abe’s ideas as unrealistic and potentially risky, but the new premier will have the chance to nominate replacements for the top three BOJ officials in March and April. Mr. Abe said he would revive the LDP-era Council on Economic and Fiscal Policy, indicating it will be another vehicle to pressure the BOJ.

Markets have responded enthusiastically to Mr. Abe’s campaign pledges since November. …

Crazifornia: How California Is Committing Suicide

As California goes, so goes the nation

By Bookworm 

Reading my friend Laer Pearce’s book Crazifornia: Tales from the Tarnished State – How California is Destroying Itself and Why it Matters to America made me crazy. Laer is a wonderful writer with straightforward, prose, a witty sense of humor that doesn’t overwhelm the narrative, and a commanding mastery of facts about California’s politics, business, education, and public policy. In theory, I should have galloped through Crazifornia in three hours. In fact, it took me three days to read.

Why did I have a problem with this fascinating book? Because, when I started I did not know how deep the Crazifornia rot ran in the state, nor was I aware quite how infectious the insanity is when it comes to the rest of America. To keep up with the deluge of evidence proving that California is indeed crazy, I repeatedly stopped reading so that I could scratch out little notes to myself: “California’s all-powerful bureaucrats are an army of Leftist Rube Goldberg’s with guns.” “This is a perfect example of voter credulity and bureaucratic overreach.” “California takes a legislatively created energy crisis and makes it worse with more legislation.” The scariest note I wrote was also the shortest: “As California goes, so goes the nation.”

That last note is why you should read the book — and give it to friends and family — in the days remaining before the election. California isn’t just a basket case, it’s a proselytizing basket case, with its environmental zealots, community organizers, and wishful economic thinkers aggressively selling their ideas to other states and to the federal government. As Laer demonstrates, while the recession is slowing the other forty-nine states from buying into California’s governing philosophy, the Obama government is an enthusiastic supporter. Another four years of Obama, and California won’t be the only bankrupt crazy place in America.

Jordan’s King Abdullah Threatens to Shut Down Egypt’s Economy

The expulsion of Egyptian workers would be catastrophic for the disintegrating Egyptian economy

By David P. Goldman 

Speaking at a private meeting this week, Jordan’s King Abdullah warned that he had “bargaining chips” to use against the Muslim Brotherhood, which he denounced as a “new extremist alliance” in the Arab world. The news site AI-Monitor today translates a report from al-Hayat, citing sources from the meeting. “Rhe Jordanian monarch was full of reproach for Egyptian President Mohammed Morsi, who hails from the Muslim Brotherhood,” al-Hayat wrote. “The king added that the Egyptian leadership had ‘marginalized the Jordanian role during the Israeli-Palestinian negotiations to stop the recent aggression on the Gaza Strip.’”

The Muslim Brotherhood has targeted Jordan’s monarchy as the next domino to fall after Egypt. At the Dec. 10 meeting, King Abdullah accused Egypt of economic sabotage.

The king said that “Jordan was severely damaged as a result of frequent interruptions of Egyptian natural gas, which cost the state treasury about 5 billion Jordanian dinars [$7.04 billion],” stressing that the interruption of gas ”is the real reason behind the economic crisis plaguing the country.”

Under previous agreements with the Egyptian authorities, Jordan used to import 80% of its gas needs for the production of electricity, which equates to a daily amount of about 6.8 million cubic meters of imported gas. However, the pipeline which supplies gas to Jordan and Israel was subsequently the target of frequent bombings.

The Jordanian monarch warned that his country would retaliate:

King Abdullah II said that “Amman has bargaining chips through which it can send messages to Cairo, including the fact that 500,000 Egyptians are working in Jordan. Moreover, the kingdom is the only passageway for Egyptian vegetables being exported to Iraq, and tens of thousands of Egyptians working in the Gulf states are using the Nuweiba-Aqaba waterway in their travels.”

…Other official sources talked about the arrest of thousands of Egyptian workers who have breached the conditions of their residency in the past two weeks, as well as the deportation of about 1,900 of them to Egypt, according to Jordanian Minister of Labor Nidal Qatamin. He said his country is not targeting Egyptian laborers, saying that the deportation decisions resulted from “violations of the usual procedures and applicable laws.” Remarkably, according to official sources, of the 500,000 Egyptians working in Jordan, approximately 320,000 have violated the conditions of their residency.

It is unlikely that Jordan would take on Egypt without strong backing from Saudi Arabia. A further 1.7 million Egyptians work in Saudi Arabia and an additional 500,000 in Kuwait. The Egyptian diaspora is the last thing holding up Egypt’s economy. Workers’ remittances stood at $18 billion in 2010, according to the World Bank, or about half of Egypt’s present $36 billion trade deficit. The expulsion of Egyptian workers from the Arab monarchies would have catastrophic impact on the disintegrating Egyptian economy. Two million Egyptians worked in Libya before the civil war, but many fled the country earlier this year.

As it is, President Morsi was forced to postpone negotiations on a proposed $4.8 billion loan from the International Monetary Fund,  after scrapping a proposed tax increase that the IMF considered a condition for the package. With a government budget deficit at 11% of GDP and a trade deficit at 16% of GDP, Egypt must cut expenditures to survive financially. No Egyptian government, though, appears capable of persuading a population half of which lives on less than $2 a day to accept austerity. 

After the Fiscal Imbalance is Resolved: What Then?

After all, we did not get where we are by accident

by Mario Rizzo

Let us suppose that not only the immediate fiscal cliff problem is solved but also the long-run fiscal imbalance is corrected. What then? Presumably federal spending will then be on a sustainable trajectory which is able to cope with cost-of-living increases. Ordinary trend economic growth will already have been figured into the sustainability of the spending trajectory.

So what room is there for more spending without derailing the whole “solution?”  Consider that the contemporary federal government – executive and legislature –exists for the purpose of giving favors to various groups in exchange for electoral support.  Thus, even assuming the unlikely event that the long-term imbalance is resolved, how do we stay within the solution range?  After all, we did not get where we are by accident.

Only a real change in the philosophy (ideology) of government will work. The pragmatic solutions of those who do not challenge the welfare-warfare state, root and branch, are not enough. They are not “pragmatic” enough!

Silence of the Feminists

So many oppressed Muslim women, so few words about them

BY THEODORE DALRYMPLE

The British courts recently asked me to prepare a report on a young Muslim woman of Pakistani descent, and to do so I had to visit her at home. I spoke to her in a room in which a television screen as large as a cinema vied for predominance with embroidered pictures of Mecca and framed quotations from the Koran.

She told me a story with which I was only too familiar. One of eight brothers and sisters, she soon discovered that, while her brothers could do anything they pleased, including crime, she and her sisters were expected to lead spotless lives of infinite tedium and absolutely no choice. At 16, without her consent, she was betrothed to be married to a first cousin in Pakistan, whom she had never met and did not wish to meet. She ran away to avoid being taken back “home” and married off under duress; but in need of companionship and protection (having been until then a virtual prisoner in her parental home), she soon married a young man of Pakistani descent who turned out to be neither a companion nor protective, but criminal and violent. Eventually, she returned to her parents, who gave a less than warm welcome to the prodigal daughter.

She begged to be allowed to go to work, but at first her family said that this would heighten the shame she had brought on them by running away and refusing to marry her cousin. Her brothers in particular accused her of thinking that she was a Western woman, than which (in their eyes) there could be no worse insult. Eventually, however, they gave way; the money might be useful. She had been working ever since, for about ten years.

When she described her work, her manner changed. She became animated, almost passionate, having been subdued before. Though her work was only in a clerical capacity (she had been promoted once or twice), she spoke of it with love. It was her daily release from prison, the only time she was allowed out; it was her window on the world; it was the entirety of her social life; it was air after suffocation.

It occurred to me that if I were an employer, I would want otherwise oppressed Muslim women to work for me. An attitude toward work such as theirs is not common, at least not in Britain. For them, work represents freedom and happiness, not drudgery and exploitation.

But the attitude of her brothers—born, after all, in Britain—stuck in my mind. They were integrated enough to want Westernized lives for themselves but not integrated enough to want such lives for their sisters. It is not difficult to see the reasons for this. But where are our feminists, fearlessly fighting for speech codes and the use of the impersonal she in academic books, when women such as this suffer such severe oppression? Hardly a peep is heard from them. 

Hobbit

Why J.R.R. Tolkien’s Enduring Popularity Is a Cause for Hope in Our Popular Culture

By David P. Goldman 

Peter Jackson’s first of three “Hobbit” films took a thrashing from the critics, who disliked the effect produced by the new 48-frames-per-second projection system. This makes everything a bit too clear, a bit too smooth, such that sets and costumes seemed artificial to some. It is off-putting at first. Halfway through the film, though, I suddenly thought, “This is the way I saw the world when I was a child!” There are many wonderful things about Jackson’s film, of which the choice of Martin Freeman as Bilbo Baggins stands at the top of my list; unlike the listless Elijah Wood, a boy playing the role of the middle-aged Frodo in the “Rings” trilogy, Freeman is a grown-up. He is a master of English understatement but also an actor of great range, and he carries the film brilliantly. As in the “Rings” trilogy, the sets and settings are marvelous. Especially gratifying was the inclusion of many of Tolkien’s poems with affecting settings by Howard Shore.

J.R.R. Tolkien’s enduring popularity is cause for hope in popular culture. He did not write fantasy so much as roman à clef about the past and future of the West. His Hobbits are the English standing against totalitarian aggression — the two towers of Berlin and Moscow — with decency and courage. “Alone among 20th century novelists, J.R.R. Tolkien concerned himself with the mortality not of individuals but of peoples. The young soldier-scholar of World War I viewed the uncertain fate of European nations through the mirror of the Dark Ages, when the life of small peoples hung by a thread. In the midst of today’s Great Extinction of cultures, and at the onset of civilizational war, Tolkien evokes an uncanny resonance among today’s readers,” I wrote when the first of the Rings films appeared. I am no maven where Christian literature is concerned, but Tolkien’s theological depth impressed me:

Gloves Come Off in Google vs. Germany

Expect Newspapers to Lose by Winning

By Mike "Mish" Shedlock

European newspapers, especially those in Germany, France, and Italy are upset that Google does not share ad revenue with them for headlines that come up in online searches. I am not talking about entire articles I am talking about links to articles.
My position is that Google is actually doing the newspapers a favor. By posting headlines, the online newspapers get more hits (and thus more ad revenue) than they would otherwise. In this sense, Google is providing a free service and the newspapers should be happy that Google links to them at all.
The newspapers and politicians do not see it that way and Gloves come off in Google v Germany.

 Google and German newspaper publishers are poised to trade blows at a parliamentary hearing at the end of January over plans to allow Germany’s print media to charge internet search engines for displaying links to newspaper articles.

Chancellor Angela Merkel’s Christian Democrats and their Free Democrat junior partners want to force online news aggregators like Google to ask permission to publish links to and excerpts of newspapers’ web offerings – an extension of copyright that many lawmakers hope will allow publishers to charge license fees of Google and its rivals.

The proposal is intended to allow newspapers better to recoup some of the revenue they have lost as advertisers and readers migrate to the web.

The legislative push is increasingly also attracting the notice of newspaper owners and politicians in other European countries such as France and Italy. 

With newspapers across Europe struggling to make money, publisher groups in France, Italy, Portugal and Switzerland have joined their German peers to call for “regulation of the digital economy” and “rebalancing the economy of the web”. 

After Connecticut: the myth of America’s ‘gun culture’

The obsession with the guns used in school shootings overlooks the cultural factors behind these modern outbursts of nihilistic violence

by Brendan O’Neill 

Following the horrific massacre of 26 people, including 20 children, at a school in Connecticut, there has been more heated debate about America’s so-called gun culture. In the eyes of most observers, it is a given that it is the availability of guns in the US that leads to these mass shootings in schools. Apparently, the ease with which guns can be sourced - thanks to the Second Amendment to the US Constitution, which guarantees Americans the right to bear arms - makes it inevitable that American kids will run the risk of being slain by gun-toters.

Is this true? Really? Even a fleeting glance at some of the statistics on school shootings - especially the fact that multiple-victim shootings were extremely rare before the 1980s - should reveal there is more to these outbursts than the availability of guns. After all, guns have been around in the US for a very long time, but it is only over the past 30 years that mass shootings in schools have become relatively common (‘relative’ being a crucial word here). The fetishisation of the means through which school-killers carry out their acts is really a way of avoiding confronting the cultural factors that might shape such acts. The obsessive focus on the technical execution, the guns used, looks like a massive displacement activity, brought about by an unwillingness to examine the potential cultural underpinnings of the school-massacre trend. The ‘gun culture’ is the wrong culture to be talking about.

The post-Connecticut commentary gives the impression that America is in thrall to The Gun. A writer for the New York Review of Books summed up the rather elitist East Coast view of the problem when he described the gun as ‘our Moloch’ - a modern-day version of the pagan god to whom children are sacrificed. Strikingly, he depicts the gun almost as a sentient force, godlike indeed. ‘Like most gods, it does what it will, and cannot be questioned’, he says. Here, the shooter’s moral agency, or the broader cultural influences he may have been subjected to, are downplayed in favour of depicting the gun itself as the determiner of events and judge over life and death. In a desperate effort to get around the inconvenient fact that guns are mere tools, no more responsible for evil in our societies than knives are, the writer goes into denial. ‘The gun is not a mere tool [or] bit of technology’, he insists. ‘It is an object of reverence.’

The Invisible Government, Revealed

The intelligence community is a state within a state 

By TOM ENGELHARDT

Weren’t those the greatest of days if you were in the American spy game? Governments went down in Guatemala and Iran thanks to you. In distant Indonesia, Laos, and Vietnam, what a role you played! And even that botch-up of an invasion in Cuba was nothing to sneeze at. In those days, unfortunately, you–particularly those of you in the CIA–didn’t get the credit you deserved.

You had to live privately with your successes. Sometimes, as with the Bay of Pigs, the failures came back to haunt you (so, in the case of Iran, would your “success,” though so many years later), but you couldn’t with pride talk publicly about what you, in your secret world, had done, or see instant movies and TV shows about your triumphs. You couldn’t launch a “covert” air war that was reported on, generally positively, almost every week, or bask in the pleasure of having your director claim publicly that it was “the only game in town.” You couldn’t, that is, come out of what were then called “the shadows,” and soak up the glow of attention, be hailed as a hero, join Americans in watching some (fantasy) version of your efforts weekly on television, or get the credit for anything.

Nothing like that was possible–not at least until well after two journalists, David Wise and Thomas B. Ross, shined a bright light into those shadows, called you part of an “invisible government,” and outed you in ways that you found deeply discomforting.

Their book with that startling title, The Invisible Government, was published in 1964 and it was groundbreaking, shadow-removing, illuminating. It caused a fuss from its very first paragraph, which was then a shockeroo: “There are two governments in the United States today. One is visible. The other is invisible.”

I mean, what did Americans know at the time about an invisible government even the president didn’t control that was lodged deep inside the government they had elected?

Wise and Ross continued: “The first is the government that citizens read about in their newspapers and children study about in their civics books. The second is the interlocking, hidden machinery that carries out the policies of the United States in the Cold War. This second, invisible government gathers intelligence, conducts espionage, and plans and executes secret operations all over the globe.”

Misery Spread Widely

The reality is people will sell their freedoms for what they perceive to be safety and security

By Gordon T. Long

The 'something for nothing' mentality is now firmly in charge in the developed economies. As the G7 economies cascade lower under their past, present and future entitlement & politically connected reward policies, misery is now being spread widely! Misery being spread widely is the product of socialism, as real growth disappears and money printed out of thin air fills in for the lack of real income growth. All of this is paid for by the money you earn and store your wealth in, buying less and less, while your balance in the bank stays the same. The attacks on wealth and job creation are set to accelerate as politicians loot and plunder the private sectors to pay the unpayable promises and support those that don’t produce, by dis-incenting and enslaving those that do. Effectively, penalizing those who lead a prudent and productive lifestyle.

The cynical would argue that the goal is not to spur economic growth and job creation but instead is intended to formant economic collapse, grow government dependence, gather power as the man-made disaster unfolds, take freedoms and redistribute what wealth is left to the special interests in charge. This may very well be true but it could also be a matter of human nature and the generational re-learning of what role a government must be restricted to playing.

"A great civilization is not conquered from without, until it has destroyed itself from within. The essential causes of Rome's decline lay in her people, her morals, her class struggle, her failing trade, her bureaucratic despotism, her stifling taxes, her consuming wars."  – Will Durant, The Story Of Civilization III, Epilogue, 1944

"Greece Is Not Japan"

Basket cases

By Tyler Durden

"Greece is not Japan" - at least that is the forecast reality when comparing official IMF projections for the two depression-torn countries. Yet one needs to see the projected GDP/debt chart side by side to truly appreciate the humor and lunacy of Greek economic expectations. We give Greece 3-4 years before its ongoing socio-economic collapse, and its relentless plunge in GDP, brings it on par with Japan's basket case economy. End result: both countries will proudly sport debt/GDP in the 250% ballpark by the middle of the decade. But for now, let's pretend that Greece is not Japan.

How Oil Is Holding Russia Back—and How It Could Save It

Putin’s Petroleum Problem

By Thane Gustafson 

Last winter, a wave of mass demonstrations suddenly broke the surface calm of Russian politics. A new middle class, born of the oil-based prosperity of the last decade, took to the streets to voice its opposition to the perceived corruption of the political elite, especially United Russia, the ruling party of then Prime Minister Vladimir Putin. For a time, as the protest movement gained momentum, the very foundations of the regime appeared to shake. But in the March 2012 presidential election, Putin managed to win comfortably in the first round, and despite widespread charges of manipulation, even the opposition conceded that he had earned a convincing victory. 

The unprecedented protests and Putin's return to the presidency renewed speculation about whether Russia will keep moving toward political and economic modernity or lapse back into Soviet-style stagnation instead. The answer to that question can be found in the country's most important economic sector: oil. Since the collapse of the Soviet Union, the Russian government has become increasingly dependent on revenue from oil exports. It taxes the lion's share of the profits of producers and transfers them to the rest of the economy through state-mandated investment programs and state-funded welfare, pensions, and subsidies. The spectacular growth of state income generated by oil has helped keep Putin in power, enabling him to secure the support of key interest groups and maintain, at least until recently, a high level of popularity. 

For now, high oil prices are keeping this system running. But sustaining it requires a steadily expanding stream of revenue from commodities, especially oil. In the coming years, however, oil profits are more likely to shrink than grow. For the past two decades, Russia has coasted on an oil legacy inherited from Soviet days. The assets of that era are now deteriorating. Russia is not running out of oil, but it is running out of cheap oil. Much of the oil still in the ground will be more difficult and costly to find and produce. As expenses go up, profit margins will decline. At the same time, the oil industry will have to spend more of its remaining profits on its own renewal. 

Neither Russia's oil industry nor the Russian state, however, is adequately prepared to deal with the coming challenge. Both have spent the last two decades competing for control of the country's oil assets instead of cooperating to modernize the industry and prepare for the next stage of development. The state's fiscal and regulatory system, although it has been successful in extracting revenue, constrains investment and stifles innovation. The result is an industry that lags behind its foreign peers, and this at the very moment that the global oil industry is experiencing an unprecedented technological revolution. At the same time, Russia is showing some of the classic signs of what economists call "Dutch disease," the economic stagnation, especially in manufacturing, caused by an overreliance on commodity exports at the expense of other parts of the economy. In the words of Alexei Kudrin, Russia's finance minister from 2000 to 2011, "The oil industry, from being a locomotive for the economy, has become a brake." 

Preventing Politics in Egypt

Why Liberals Oppose the Constitution

By Marina Ottaway

From the moment when Hosni Mubarak fell from power in February 2011, few issues have proved more divisive in Egyptian politics than the writing of a new constitution. Now, even though the formal process is theoretically coming to an end, the battle over the constitution is drawing the country dangerously close to an all-out civil war. The constituent assembly, Egypt's constitutional committee, has approved a draft of the document, which will be submitted to a popular referendum, and probably approved, on December 15. Secular forces, however, oppose the constitution -- its passage would mark a return to politics as usual in which Islamist parties have the upper hand, liberals remain on the fringes, and authoritarianism could reemerge, this time under the auspices of the Muslim Brotherhood.

To prevent the approval of the constitution, secularists have taken to the streets in increasingly large demonstrations, denouncing the constitution and President Mohamed Morsi as illegitimate and threatening massive civil disobedience. If Islamist parties mobilized their followers in response, something they have so far refrained from doing on a large scale, violence would be inevitable. A major flare-up could split the security forces and confront the military with a dilemma: either seize power again, as it did after the overthrow of Mubarak, or sit on the sidelines as the country descends into chaos. Neither option is palatable for the generals, since picking a side and intervening in political squabbles could cause a deep rift within the military itself.

Secularists allege that the Islamists who dominated the constituent assembly pushed through a constitution that does not respect liberal values. Their fears were only further stoked by Morsi's decree that put his edicts above the reach of the courts. In their thinking, only popular protests could save the country from a return to Mubarakism. The Islamists, meanwhile, see themselves as the guardians of the democratic transition. From their point of view, the secularists are mobilizing the institutions of the Mubarak state, particularly the courts, in an attempt to undo the results of democratic elections that the Islamists won. According to this narrative, secularists used politicized courts to engineer the dissolution of the parliament and the first constituent assembly. Morsi, then, was quite justified in trying to protect the second constituent assembly by placing it out of reach of the judiciary.

Government, Geography, and Growth

The True Drivers of Economic Development

By Jeffrey D. Sachs

According to the economist Daron Acemoglu and the political scientist James Robinson, economic development hinges on a single factor: a country's political institutions. More specifically, as they explain in their new book, Why Nations Fail, it depends on the existence of "inclusive" political institutions, defined as pluralistic systems that protect individual rights. These, in turn, give rise to inclusive economic institutions, which secure private property and encourage entrepreneurship. The long-term result is higher incomes and improved human welfare.

What Acemoglu and Robinson call "extractive" political institutions, in contrast, place power in the hands of a few and beget extractive economic institutions, which feature unfair regulations and high barriers to entry into markets. Designed to enrich a small elite, these institutions inhibit economic progress for everyone else. The broad hypothesis of Why Nations Fail is that governments that protect property rights and represent their people preside over economic development, whereas those that do not suffer from economies that stagnate or decline. Although "most social scientists shun monocausal, simple, and broadly applicable theories," Acemoglu and Robinson write, they themselves have chosen just such a "simple theory and used it to explain the main contours of economic and political development around the world since the Neolithic Revolution."

Their causal logic runs something like this: economic development depends on new inventions (such as the steam engine, which helped kick-start the Industrial Revolution), and inventions need to be researched, developed, and widely distributed. Those activities happen only when inventors can expect to reap the economic benefits of their work. The profit motive also drives diffusion, as companies compete to spread the benefit of an invention to a wider population. The biggest obstacle to this process is vested interests, such as despotic rulers, who fear that a prosperous middle class could undermine their power, or owners of existing technologies, who want to stay in business. Often, these two groups belong to the same clique.

Killing the goose with the golden egg

Depardieu 'Shrugged'

by Emmanuel Martin

Last week the big story in French headlines has been the tax exile of Gerard Depardieu in Nechin, Belgium, half a mile from the French border. French PM Jean-Marc Ayrault called the French movie star’s behavior “minable” (pathetic). A socialist MP, Yann Galut, even suggested that M. Depardieu loses his French nationality. In an open letter in the Journal Du Dimanche on December 16, Depardieu, who famously starred as Obélix, the big Gallic fellow of Astérix, carrying menhirs on his back – and sometimes throwing them at the Romans, replies. With a taste of Ayn Rand’s famous character John Galt. Gerard shrugged.

Depardieu begins by saying that what is pathetic is to call his behavior pathetic. Although he does not want to justify the many reasons of his choice, he makes it clear that he leaves after paying 85% of taxes on his income this year and € 145 million through his entire life; He leaves because the French PM thinks that “success, creation and talent, in fact difference, must be punished”. He then reminds Jean-Marc Ayrault that he set up companies that employ 80 people. Depardieu says he is ready to give up his French passport and his “Social Security” (the French public health care system, which he claims he never used).

This letter is important.

First because thanks to a top actor, the categories of incentives and unintended (though highly expectable) consequences will probably enter the “consciousness area” of a statist French political class (right and left alike). Imposing a 75% income tax above €1 million does have consequences on the incentives of the rich and creative people. Mr Hollande and his team might call it “just” because, as the French President once famously said, he doesn’t “like the rich”, the fact is that one does not promote economic progress by hitting the creative and successful minds. Those are obsolete collectivist policies based on envy and scapegoating: they are only effective at creating division and killing the goose with the golden egg, that is, generate more poverty. Not exactly “just” in the end.

Despite Tax Increase, California State's Revenues in Freefall

Voting with their feet

by CHRISS W. STREET

California State Controller John Chiang has announced that total state revenue for the month of November 2012 fell $806.8 million, or 10.8%, below budget. 

Democrats thought they could hammer “the rich” by convincing voters to pass Proposition 30 to create the highest state income tax in the nation. But it now appears that high income earners have already “voted with their feet” by moving themselves and their businesses out of state, resulting in over $1 billion shortfall in corporate and income taxes last month and the beginning of a new financial crisis.   

Passage of Proposition 30 set off euphoria and expectations of higher spending for public employees. The California Teachers’ Association (CTA) trumpeted: "California students and working families won a clear victory today as voters clearly demonstrated their willingness to invest in our public schools and colleges and also rejected a deceptive ballot measure aimed at silencing educators, other workers and their unions.” 

State bureaucrats immediately ramped up deficit spending far beyond the state's $6 billion annual tax increase, with the Departments of Health Services and Developmental Servicesincreasing this month’s spending by over $1 billion versus last year. The lower tax collection and higher spending drove the State’s deficit after the tax increase to $2.7 billion for the first 5 months of this fiscal year. State Controller John Chiang reported:

November's disappointing revenues stand in stark contrast to recent news that California is leading the nation in job growth, has significantly improved its cash liquidity to pay bills, and even long-distressed home values are starting to inch upward... This serves as a sobering reminder that, while the economy is expanding, it is doing so at a slow and uneven pace that will require the State to exercise care and discipline in how its fiscal affairs are managed in the coming year.

The improved “cash liquidity” Chiang referred to turns out to be $24.9 billion of debt.

Are Interests More Powerful than Ideas?

It is not enough to win the battle for ideas among intellectuals

by Mario Rizzo

There is an interesting interview with Ed Feulner, the outgoing president of the Heritage Foundation, in the weekend (Dec. 8-9) Wall Street Journal. The interview got me thinking about the progress made in the pro-economic-liberty cause, not only over the years of Heritage, but since, say, 1960. I choose this year deliberately because it was the year I became aware, as an almost-teenager, of the interconnection between politics (Nixon-Kennedy) and the economy (inflation and  unemployment).  I soon afterwards read Henry Hazlitt’s Economics in One Lesson.

What has changed since 1960 with regard to economic liberty? From an intellectual perspective, so many more people are aware of Ludwig von Mises, Friedrich Hayek and non-Keynesian economic thought. Milton Friedman spread his ideas about market-oriented economic policy. Thanks originally to James Buchanan and Gordon Tullock, we know again about public choice and rent seeking. (Somehow intellectuals had forgotten the lessons taught by James Madison and others.) Most economists are, at long last, convinced that Mises and Hayek were broadly correct about socialist calculation.

And yet government is more involved in more aspects of the economy, by far, than in 1960.

Oh yes, I am aware of the argument (cited by Feulner) that the “pie” has grown larger so although the state’s take is greater we have more absolutely left over. First, the appropriate measure is not taxation – but spending. (As Friedman taught us.) Second, but even by the pie measure federal spending is now about 25% of GDP and total government spending is about 40% of GDP. This is far higher than in 1960. Third, there are also many more interventions – regulations – beyond taxation. Fourth, I do not count my freedom in terms of my command over material goods.