The Biggest Bubble in Human History?

What kind of liquor do they drink?

by Bill Bonner

Dow up 125 points yesterday, to a new all-time record.

Why? What's behind it? The economy is not so hot. Why the red-hot stock market?

China is back in the news. A new report from CBS's "60 Minutes" documents the extent of the ghost cities in China – miles and miles of empty highway, office towers, apartments and malls. Analysts are talking about the biggest real estate bubble in history!

Is China a bubble? We don't know.

Does it matter? Well... yes... maybe. If China melts down or blows up the demand for oil and other resources goes down. The Chinese have pumped vast sums of money into development projects. That money helped to keep people on the job... and also kept the ships full of stuff, going back and forth across the world's oceans.

Trouble in China is trouble everywhere – particularly in Australia (which has been selling itself by the ton to the Chinese) and in Europe (which sells its precious, high-touch products by the boatload). Drive around Beijing and you see German autos, Italian shoes, Swiss watches and French perfumes.

But why worry? The Chinese can print money too! When China does something, it tends to do it to excess. That's why there are so many empty buildings in the Middle Kingdom and why it might have created the biggest real estate bubble in history.

China overdoes it when it comes to central bank stimulus measures too. Arguably, no central bank has done more than the People's Bank of China when it comes to pumping up the economy.

M2 money supply in China is roughly twice GDP. In developed economies the ratio between M2 and GDP is usually below one. In emerging market countries, M2 is usually 1 to 1.5 times GPD.

That's why bad news for China... like bad news for the U.S. economy... could be good news for the stocks. The Chinese feds will pump more money. Stocks will go up!

The New York Times reports:

The Dow Jones industrial average, which measures the performance of 30 blue-chip companies, closed with a gain of more than 125 points Tuesday, surpassing its previous record close of 14,164.53, which it achieved nearly five and a half years ago, as well as its record intraday high, set around the same time, of 14,198.10.

Of course, a few things have happened since October 2007. The housing market collapsed, the financial system went into meltdown, the European Union started to fray and politicians dragged the United States through an on-off-on-again fiscal imbroglio.

The Conservative Case Against More Prisons

Higher incarceration rates aren't making us safer—and there are better, smaller-government alternatives

By VIKRANT P. REDDY AND MARC A. LEVIN

Since the 1980s, the United States has built prisons at a furious pace, and America now has the highest incarceration rate in the developed world. 716 out of every 100,000 Americans are behind bars. By comparison, in England and Wales, only 149 out of every 100,000 people are incarcerated. In Australia—famously founded as a prison colony—the number is 130. In Canada, the number is 114.

Prisons, of course, are necessary. In The Scarlet Letter, Nathaniel Hawthorne observed that “The founders of a new colony, whatever Utopia of human virtue and happiness they might originally project, have invariably recognized it among their earliest practical necessities to allot a portion of the virgin soil… as the site of a prison.” As long as there are people, there will be conflict and crime, and there will be prisons. Prisons, however, are not a source of pride. An unusually high number of prison cells signals a society with too much crime, too much punishment, or both.

There are other ways to hold offenders—particularly nonviolent ones—accountable. These alternatives when properly implemented can lead to greater public safety and increase the likelihood that victims of crime will receive restitution. The alternatives are also less costly. Prisons are expensive (in some states, the cost of incarcerating an inmate for one year approaches $60,000), and just as policymakers should scrutinize government expenditures on social programs and demand accountability, they should do the same when it comes to prison spending. None of this means making excuses for criminal behavior; it simply means “thinking outside the cell” when it comes to punishment and accountability.

This argument is increasingly made by prominent conservatives. Bill Bennett, Jeb Bush, Newt Gingrich, Ed Meese, and Grover Norquist have all signed the Statement of Principles of Right On Crime, a campaign that advocates a position on criminal justice that is more rooted in limited-government principles. They are joined as signatories by the conservative criminologist John Dilulio and by George Kelling, who helped usher in New York City’s successful data-driven policing efforts under Mayor Rudolph Giuliani. Some groups, like Prison Fellowship Ministries, approach the issue from a socially conservative perspective. Others, like the American Legislative Exchange Council and the State Policy Network, have fiscal concerns top of mind. Regardless, a sea change is underway in sentencing and corrections policy, and conservatives are leading it.

An Enemy of the State

Mark Leier, Bakunin: A Biography

By KIRKPATRICK SALE

Mark Leier sets out to rescue not only Mikhail Bakunin, the great anarchist thinker, but the whole anarchist tradition, which he argues is a pertinent political force today: “The current interest in anarchism,” he writes, “is not misplaced or irrelevant.” He certainly accomplishes the former and does much to dispel the multiple canards that have surrounded this man, many of them fabricated by Marx and the Marxists, but I don’t think he makes much of a case for the latter.

Bakunin, aptly called “the hairy Russian giant,” was born to a noble family of only modest means in a village north of Moscow in 1814. As the firstborn male, he was destined for a military career and at 15 was sent to a rigid, anti-Western military school, where he chafed at the arbitrary discipline and the narrow curriculum—much less encompassing than the homeschooling he had experienced before. He gradually learned to resist the system in minor ways and soon lost all interest in formal studies, reading instead in philosophy, history, and languages (none of which were in the official curriculum), getting himself expelled from school in 1834 for poor grades and assigned to barracks on the Polish frontier. He liked that no better, went AWOL after a year, and eventually, in 1836, landed in Moscow, gravitating to a circle of students and intellectuals, most of whom were sharply critical of the repressive tsarist regime.

Bakunin spent the next four years, supported apparently by loans that he couldn’t repay and occasional handouts from his family, voraciously reading—English and French Romantics and German philosophers, in particular—and writing for little Russian magazines. This provided the basis for his later theories, but he was not yet an anarchist and like many of his circle saw his task as developing a critique of the tsarist state—though not too openly or the police would be on him. When he left Russia to go to study at the University of Berlin in 1840, pursuing his deep interest in Hegel in particular, he was a highly regarded writer, “in the vanguard,” Leier says, “of progressive Russian thinkers.”

Western Europe around this time was surging with ideas about freedom and justice and political reform that would lead to the 1848 revolutions, and Bakunin’s thoughts took a new turn. He became a convinced atheist and began to think about ways of obtaining liberty in a new kind of state (“Liberty today stands at the head of the agenda of history”). By 1842, he was arguing that “the passion for destruction is at the same time a creative passion,” by which he did not advocate violence and terror, as he is sometimes accused of, but only meant that if there was going to be movement toward democracy and freedom, the reactionary state had to be done away with. He was developing a revolutionary position, arguing that it was impossible to reform the state: what’s needed “is not only a particular constitutional or politico-economic change, but a total transformation of that world condition.”

Publishing this kind of material did not sit well with the German government, and the paper he published it in was shut down, leading Bakunin to flee to Switzerland. But the Swiss government told the Russians that he was there and hanging around in revolutionary circles, so the Russian ambassador ordered him to return home. When he refused, the tsarist regime ordered him stripped of his noble rank and sentenced him to hard labor in Siberia, whereupon he fled again, to Paris, in 1844.

It was a lively, political city at that time—George Sand, Marx, Louis Blanc, Proudhon were all there—and Bakunin fit in with the growing passion for revolution, giving speeches, writing articles, making a name. But as an anarchist, not a socialist: socialists were “more or less authoritarians” who wanted “to organize the future according to their own ideas” whereas he was for liberty and against authority.

11 Years Later, Senate Wakes Up to War on Terror’s ‘Battlefield America’

Is perpetual war OK with everybody?

BY SPENCER ACKERMAN

Sen. Rand Paul’s filibuster will inevitably fail at its immediate objective: derailing John Brennan’s nomination to run the CIA. But as it stretches into its sixth hour, it’s already accomplished something far more significant: raising political alarm over the extraordinary breadth of the legal claims that undergird the boundless, 11-plus-year “war on terrorism.”

The Kentucky Republican’s delaying tactic started over one rather narrow slice of that war: the Obama administration’s equivocation on whether it believes it has the legal authority to order a drone strike on an American citizen, in the United States. Paul recognized outright that he would ultimately lose his fight to block Brennan, the White House counterterrorism chief and architect of much of the administration’s targeted-killing efforts.

But as his time on the Senate floor went on, Paul went much further. He called into question aspects of the war on terrorism that a typically bellicose Congress rarely questions, and most often defends, often demagogically so. More astonishingly, Paul’s filibuster became such a spectacle that he gothawkish senators to join him.

“When people talk about a ‘battlefield America’,” Paul said, around hour four, Americans should “realize they’re telling you your Bill of Rights don’t apply.” That is a consequence of the September 2001 Authorization to Use Military Force that did not bound a war against al-Qaida to specific areas of the planet. “We can’t have perpetual war. We can’t have a war with no temporal limits,” Paul said.

This is actually something of a radical proposition. When House Republicans attempted to revisit the far-reaching authorization in 2011, chief Pentagon attorney Jeh Johnson conveyed the Obama administration’s objections. Of course, many, many Republicans have been content with what the Bush administration used to call a “Long War” with no foreseeable or obvious end. And shortly before leaving office in December, Johnson himself objected to a perpetual war, but did so gingerly, and only after arguing that the government had the power to hold detainees from that war even after that war someday ends.

French unemployment rises again to highest since 1999

France may be joining the wrong side of the euro zone team

By Ingrid Melander and Vicky Buffery

France's jobless rate hit its highest level in more than 13 years in the last quarter of 2012, underscoring the challenge the government faces over its pledge to reverse the upward trend by year-end.

Thursday's official data prompted a renewed government plea for action at European level to spur growth as the euro zone's No. 2 economy shows increasing signs of languishing behind a more resilient Germany.

The rise to 10.6 percent is the sixth consecutive quarterly increase in the jobless rate in the French economy, which contracted 0.3 percent in the final three months of 2012.

It brings unemployment to its highest since the second quarter of 1999 and is the latest bad news for a government that has admitted it will fall far short of growth and public deficit targets this year. Other data published on Thursday showed a widening trade deficit.

"It is an uncomfortable truth for (President) François Hollande and another sign that France may be joining the wrong side of the euro zone team," said Julien Manceaux, economist at ING Financial Markets, forecasting that unemployment would climb as high as 11.5 percent this year.

The European Commission sees French unemployment hitting 10.7 percent this year, nearly twice the level of Germany's 5.7 percent and not much better than Italy's 11.6 percent, but still far less than in Spain and Greece.

Hollande took power last May promising to halt a relentless rise in unemployment which has left one in four youths out of work and vowing to restore France's industrial competitiveness.

The president's approval ratings have slumped to around 30 percent since then as his government battles against a tide of factory closures. After backtracking last month on growth and deficit targets, he conceded the unemployment goal would now be harder to reach.

France's trade deficit widened to 5.9 billion euros in January from 5.4 billion in December, with a large chunk of the worsening data due to a drop in the sale of Airbus aircraft from 26 in December to 18, other data showed on Thursday.

BOOSTING GROWTH?

Industry Minister Arnaud Montebourg said worsening unemployment and bleak fourth-quarter GDP data across the euro zone, including in the bloc's powerhouse Germany, should push the European Union to take steps to boost growth.

"Europe and the euro zone are sinking. This is why the government is fighting, with the European Commission, for growth measures to be taken," he told France Info radio.

The Socialist government has already taken steps to boost competitiveness with measures to ease labour costs and a deal signed with mainstream unions in January to make hiring and firing laws more flexible to help companies weather downturns.

Hard-left unions oppose the agreement, saying it threatens job security, and led several thousand marchers in street protests in towns across France on Tuesday.

On Thursday, workers at tyremaker Goodyear, rallied in a Paris suburb against job cuts at a plant in the northern French city of Amiens, clashing with policemen, hurling paintballs and tyres.

The fourth-quarter headline unemployment figure, based on measurement criteria of the International Labour Organisation, was up 0.3 percentage points from the third quarter.

The total number of unemployed in mainland France was 2.9 million in the fourth quarter, national statistics office INSEE said. Just over a quarter of 15-24 year-olds were unemployed.

According to monthly figures issued last week by the labour ministry, which are not calculated according to ILO measures, mainland jobless totalled 3.17 million in January, the highest since July 1997 and close to the all-time high of 3.196 million.

Despite the bleak economic data, yields on long-term, fixed-rate French bonds largely fell at an auction on Thursday, underscoring the resilience of the country's bond market amidst renewed concerns over euro zone partners Italy and Cyprus. 

Sharing is not really caring

Eric Holder: Some Banks Are So Large That It Is Difficult For Us To Prosecute Them

While it is widely assumed that the too-big-to-fail banks in the US (and elsewhere) are beyond the criminal justice system - based on simple empirical fact - when the Attorney General of the United States openly admits to the fact that he is "concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them," since, "it will have a negative impact on the national economy, perhaps even the world economy," one has to stare open-mouthed at the state of our union. It appears, just as the proletariat assumed, that too-big-to-fail banks are indeed too-big-to-jail.

GRASSLEY: On the issue of bank prosecution, I'm concerned that we have a mentality of too-big-to-jail in the financial sector of spreading from fraud cases to terrorist financing and money laundering cases -- and I cite HSBC. So I think we're on a slippery slope. 

HOLDER: The concern that you have raised is one that I, frankly, share. And I'm not talking about HSBC now. That (inaudible) be appropriate.

But I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. And I think that is a function of the fact that some of these institutions have become too large.

Again, I'm not talking about HSBC. This is just a -- a more general comment. I think it has an inhibiting influence -- impact on our ability to bring resolutions that I think would be more appropriate. And I think that is something that we -- you all need to -- need to consider. So the concern that you raised is actually one that I share. 

Looking for marriage in all the wrong places

The state, and above all a state that seeks self-limitation, needs the family to flourish

By Spengler 

Two mutually incompatible arguments are advanced to defend gay marriage. The first states that marriage is a good thing provided by the state, such that gay people have the same right to it as anyone else. The second states that marriage is a bad thing, and that bringing gay people into the institution of marriage will destroy it from the inside. 

Michelangelo Signorile, a prominent gay activist, urges people in same-sex relationships to "demand the right to marry not as a way of adhering to society's moral codes but rather to debunk a myth and radically alter an archaic institution". They should "fight for same-sex marriage and its benefits and then, once granted, redefine the institution of marriage completely, because the most subversive action lesbians and gay men can undertake ... is to transform the notion of 'family' entirely". 

Signorile is quoted in a new book by the distinguished legal philosopher Robert P George and two of his students. They contend that marriage is an institution quite different from the domestic arrangement that advocates of gay marriage have in mind. Gay marriage as such isn't the issue, argue the authors: it an attempt to do away with the traditional view of marriage as a comprehensive union, and replace it with a view marriage as an especially intense sort of emotional bond. 

Signorile might be tardy in his plan to "redefine the institution of marriage". Hedonistic heterosexuals have been hacking away at the traditional concept of marriage for years. Whether gay marriage becomes law or not, the institution of marriage in the United States may erode so quickly that it will cease to perform its social function, that is, rearing a new generation of Americans. 

PayPal’s Private Governance

Government bureaucracy has fewer incentives to be responsive to the needs of market participants

by EDWARD STRINGHAM

The nine most terrifying words in the English language are, "I'm from the government and I'm here to help."                                             – Ronald Reagan

Markets have a long history of generating rules and enforcement mechanisms from within (endogenously) rather than requiring market participants to wait for the State. Instead of attributing the success of markets to government bureaucrats and elected officials, we should instead thank PayPal founders like Peter Thiel, Max Levchin, and other providers of private governance who help make markets work.  

PayPal was founded in 1999 to facilitate payments between any two parties with an email address. No costly credit card accounts or merchant terminals were needed. What PayPal did not foresee was the degree of fraud it would be subjected to. Fraudsters from all over the world would hack into accounts and transfer small amounts of money out of each one. By 2001 PayPal had gross revenue of $14 million per year, but was losing $10 million per month to fraudsters. At first the company went to the government to stop the fraud and recover the money. But in short order PayPal realized that relying on the government to solve its problems was hopeless. 

Instead, PayPal gave the FBI evidence, but noticed that the government was not exactly up to date on the latest technology and would ask the company questions like, “What’s a banner ad?,” according to one PayPal executive who spoke with me. The government had little ability to identify who the anonymous fraudsters were, and when PayPal identified them there was a “dispute between the FBI office in San Jose and San Francisco over which of them had jurisdiction over Kazakhstan.” The government simply lacked the expertise to do anything to protect this new kind of market. And one can only wonder what perverse incentives lead the FBI to quibble about jurisdictions before actually solving the case.

An Infinite Amount of Money

In the long run you'll be all dead

By John Mauldin 

The three major blocs of the developed world are careening toward a debt-fueled denouement that will play out over years rather than in a single moment. And contrary to some opinion, there is no certain ending. There are multiple paths still available to Europe and especially the US, though admittedly none of them are bright and carefree. There are very few paths available to Japan, as they have skipped too far down the yellow brick road of debt. None of Japan’s remaining paths have good endings. In the US, even as numerous voices declaim on the crisis that awaits if we don’t act, there is seemingly no collective will to actually do anything as yet. Perhaps it will take… a crisis. In Europe, the peripheral countries can already be said to be in crisis.

This week we will look at the mindset that ignores warning signs, and reflect on a hard-to-believe comment from Mayor Bloomberg of New York. It is a teaching moment that does not bode well for my hopeful outcome in the US. Meanwhile in Europe, the risks have been heightened with the recent vote in Italy. We must remember that Italy is the world’s third-largest issuer of bonds – its problems matter on the world stage. While it may all be molto divertente for those of us sitting on the sidelines, the potential consequences

An Infinite Amount of Money
I am often asked, “How can anyone not see the problems of growing debt in the US? Why can’t we get a consensus to change?”

Part of the problem is that too many in power just don’t see the impending crisis that you and I see, or at least they don’t see the need to act now. That is changing – or so I thought until I read a most inexplicable statement by the billionaire entrepreneur mayor of NYC, Michael Bloomberg. This is the sort of thing that causes me to despair. Here we have a supposedly (well, relatively) fiscally conservative politician, someone who is no stranger to financial circles, giving us these off-the-cuff remarks last week, commenting on whether sequestration will affect the NYC budget:

“It depends on how long,” Mr. Bloomberg said on his weekly WOR radio show with John Gambling. “If it lasts a few weeks, no. If it [lasts longer], yeah. We get 10 or 12 percent of our budget from the federal government, not all of that is going to be cut back, but there would be effects – not good effects. But in the context of, ‘Is anything going to change tomorrow? Are we going to run out of money tomorrow?’ I’m sure I’ll get that question at the [next] press conference. No.”

Furthermore, while saying the federal deficit does indeed need to be curtailed, Mr. Bloomberg argued the United States could owe “an infinite amount of money”and there is no specific amount that would cause the country to default.

The Institutions-Intensive Economy

Describing our contemporary economic world

By Arnold Kling

Today, a modern market economy with its ever-finer division of labor depends on a constantly expanding network of trade. It requires an intricate web of social institutions to coordinate the working of markets and firms across various boundaries. At a time when the modern economy is becoming increasingly institutions-intensive, the reduction of economics to price theory is troubling enough. It is suicidal for the field to slide into a hard science of choice, ignoring the influences of society, history, culture, and politics on the working of the economy.1

Ronald Coase, the world's oldest active economist, here aptly describes the economy in the age of the Internet, giving us the expression "institutions-intensive." His famous contributions to the theory of how bargaining might address externalities and how the boundaries of the firm depend on relative institutional effectiveness turn out to be preludes to the sort of economic analysis that is needed today.

Over the course of Coase's lifetime, the locus of economic activity has been shifting, from the farm to the factory floor to the office and even to "the cloud." With each step, the concept of property has become more difficult to define, the economic entities have become more difficult to locate in time and place, the proportion of wealth that is intangible has risen, and earnings have become increasingly contingent on social constructs rather than on individual attributes.

According to Bureau of Labor Statistics data, in every year between 1939 and 1956, the proportion of total employees in the nonfarm sector classified as "manufacturing production and nonsupervisory workers" was over twenty-five percent. This figure has been falling steadily, until in the last four years it has averaged just six percent.

The plunge in manufacturing production work is indicative of the declining share of economic activity that is measurable. One hundred years ago, the output of an individual farm worker was quantifiable. In principle, farm workers could be paid on the basis of specific, tangible accomplishments—pounds of apples picked, bushels of wheat harvested, etc. The same holds for pre-industrial manufacturing, where it was possible to pay for piece work.

Inside a large 20th century factory, the output of the individual worker was not as readily measured. Total output was still quantifiable, but one could not attribute a ton of steel or a shipment of refrigerators to an individual worker. Factory workers are paid to be in a particular place at a particular time. They clock in, clock out, and get paid by the hour.

In the decades following World War II, as the share of employment on the factory floor declined, what increased was clerical work. Secretaries, sales clerks, and telephone operators, like factory workers, are paid to be in a particular place at a particular time. They might receive a biweekly salary, but they are expected to work set hours.

With the advent of the Internet, work is no longer necessarily fixed in time and space. Someone can answer email on a smart phone at any time, in any location. A friend of mine in sales and support for an educational software company is typical. Because his clients span the globe, he can be called at any time of day or night. Neither they nor his boss know where he is when he picks up the phone. Usually, he is in his basement office, but sometimes he is out of town at a conference or on a family vacation. As more workers hold jobs whose contours are shaped by the Internet, the once well-defined concept of "hours worked" becomes much less precise.

The rehabilitation game

How our political class set criminals free and then cover up the consequences

By Theodore Dalrymple 

‘They pretend to pay us and we pretend to work,’ said the Soviet worker in the good old days; the British criminal could nowadays say with equal reason, ‘They pretend to punish us and we pretend to reform.’

Recent statistics show that two thirds of young criminals ordered to wear electronic tags break their court orders almost with impunity. Nothing could better reveal the hall of mirrors that the British criminal justice system long ago became than the response of Keith Vaz, the chairman of the House of Commons all-party Home Affairs Committee, to very similar news last year. ‘The public,’ he said, ‘must be convinced that community sentences are an effective form of punishment.’

In other words, the problem is not how to make community sentences work, but how to create the misleading public impression that they do. This has for decades been the ruling imperative of that great friend to the British criminal, the Home Office (and now the Ministry of Justice). It struggles might and main not to reduce criminality but to reduce the public’s supposedly neurotic fear of crime, and it does so by sowing confusion — confusion with a roseate glow.

Forked-tonguery remains the order of the day among the British political class. Who does not remember Mr Blair’s ‘Tough on crime, tough on the causes of crime’? In an interview with the Daily Telegraph this month, the Justice Secretary, Chris Grayling, said that he would like to see longer prison sentences for hardened criminals while also arguing for the use of more electronic tagging, only a matter of five days before he announced the closure of seven prisons as a cost-cutting measure and only a few more days before figures showing the uselessness of electronic tagging were issued from his own department. I’ve known burglars more honest and straightforward than British politicians: who, incidentally, are overwhelmingly the largest single cause of crime in this country.

Let me give a small example of the obfuscatory official methods used to confuse the public. For quite a long time the Home Office recorded the two-year reconviction rate of people given community sentences. Suddenly, and without warning or explanation, it started to publish the three-month ‘reoffending’ rate. Why the change?

First, criminologists say it made genuine comparison almost impossible: were things getting better, worse, or remaining the same? Nevertheless, the impression of improvement was created because the reoffending figure for the shorter period was, naturally enough, lower (10 per cent) than for the longer period (50-plus per cent). Ten per cent doesn’t sound quite so bad.

Second, and more sinister, the new terminology — reoffending rather than reconviction rate — was in effect a deliberate lie. The two rates would be the same if, and only if, the police solved every recorded crime, instead of 28 per cent of such crimes (and a much lower rate of all crimes, since not all are recorded).

No One Knows How to Make a Can of Coke

The number of individual nations that could produce a can of Coke is zero

by CHUCK GRIMMETT

Over at Medium, tech pioneer Kevin Ashton unknowingly wrote a tribute to Leonard Read’s classic, I, Pencil.

What Coke Contains begins,

The Vons grocery store two miles from my home in Los Angeles, California sells 12 cans of Coca-Cola for $6.59 — 54 cents each. The tool chain that created this simple product is incomprehensibly complex.

From there Ashton gives a fascinating overview of what it takes to make a can of Coke, in the same style Leonard Read used for the pencil in 1958. I contacted Ashton after a friend shared his piece with me, and it turns out that he didn’t know about I, Pencil beforehand.

He closes with a wonderful hat tip to decentralized knowledge, spontaneous order, and the price system:

The number of individuals who know how to make a can of Coke is zero. The number of individual nations that could produce a can of Coke is zero. This famously American product is not American at all. Invention and creation is something we are all in together. Modern tool chains are so long and complex that they bind us into one people and one planet. They are not only chains of tools, they are also chains of minds: local and foreign, ancient and modern, living and dead — the result of disparate invention and intelligence distributed over time and space. Coca-Cola did not teach the world to sing, no matter what its commercials suggest, yet every can of Coke contains humanity’s choir.

It is great to see these ideas being explored independently. If you haven’t read it yet, here it is:

What Coke Contains

The Vons grocery store two miles from my home in Los Angeles, California sells 12 cans of Coca-Cola for $6.59 — 54 cents each. The tool chain that created this simple product is incomprehensibly complex.

Each can originated in a small town of 4,000 people on the Murray River in Western Australia called Pinjarra. Pinjarra is the site of the world’s largest bauxite mine. Bauxite is surface mined — basically scraped and dug from the top of the ground. The bauxite is crushed and washed with hot sodium hydroxide, which separates it into aluminum hydroxide and waste material called red mud. The aluminum hydroxide is cooled, then heated to over a thousand degrees celsius in a kiln, where it becomes aluminum oxide, or alumina. The alumina is dissolved in a molten substance called cryolite, which is a rare mineral from Greenland, and turned into pure aluminum using electricity in a process called electrolysis. The pure aluminum sinks to the bottom of the molten cryolite, is drained off and placed in a mold. It cools into the shape of a long cylindrical bar. The bar is transported west again, to the Port of Bunbury, and loaded onto a container ship bound for — in the case of Coke for sale in Los Angeles — Long Beach.

Free Trade?

Anything But...

By Pedro Schwartz

In his State of the Union address, President Obama revived a long mooted idea: a Transatlantic Trade and Investment Partnership (TAFTA). The aim of this initiative is to abolish or drastically reduce barriers to trade in goods and services between the United States and the European Union and turn the North Atlantic into a huge single market. The prize is alluring, but the hurdles are high. The Partnership will not be easy to set up, given the complicated regulatory barriers that fence off trade and services and the use that numerous and powerful interest groups make of them. Also, TAFTA may be against international law. The essence of the Treaty establishing the Word Trade Organisation (WTO) is the "most favored nation" principle, so that any advantages granted by the parties in a trade zone stopping short of a full customs union must be extended to all countries having a previous agreement with them. True, this rule is more honored in its breach than in its observance. Witness what Jagdish Bhagwati has called the 'spaghetti bowl' of bilateral trade agreements, shamelessly adopted by advanced countries in thrall of special interests.1 The parlous state of the Doha Round, whose aim is to extend the benefits of trade by an agreed application of the most favored nation rule, is another evidence of general prevarication.

But there is another, more serious obstacle to making a North Atlantic Partnership area a success; TAFTA may go against the laws of economics. Jacob Viner warned that mutually trading concessions within a free market agreement may be trade-diverting rather than trade-creating, and hence to some degree self-defeating. Defenders of free trade zones such as the European Common Market and TAFTA argue that the larger the area, the smaller the negative trade diverting effects on its members—but what about those left out in the cold? Mexico and Canada, who share a trilateral trade agreement with the United States and have signed bilateral agreements with the European Union, have no other way out but to join unconditionally, if they are accepted. They must be content to feed on reheated spaghetti.

The gains from TAFTA

Even before any Partnership, the U.S. economic relationship with the EU is the largest and most complex in the world. According to the Office of the United States Trade Representative, it generates flows of goods and services of some $2.7 billion a day.2 Transatlantic investment is responsible for roughly 6.8 million jobs. A total of 15 million American and European jobs are directly or indirectly linked to transatlantic commercial activity. The stock of U.S. foreign direct investment (FDI) in the EU totaled $2.1 trillion in 2011, and the stock of European FDI in the United States amounted to $1.6 trillion. These figures may be put in perspective by comparing them with the GDP of the areas concerned, to wit, some $15 trillion each.

E Pluribus Duo

America is fast becoming two nations—one English-speaking and one Spanish-speaking

by HEATHER MAC DONALD

Last week, Senator Marco Rubio gave the Republican response to President Obama’s State of the Union speech in Spanish as well as English, the first spokesman for an opposition party to do so. (In the past, the Spanish response was delivered by a specially designated speaker.) Is this a milestone worth pondering? Correct thought on both Right and Left would say: “Absolutely not; it is bigoted even to mention the growing reach of Spanish, a phenomenon which should be of no concern to anyone.” (The English-speaking audience was likely unaware of Rubio’s Spanish speech, which he had prerecorded and which ran simultaneously on Spanish-language networks. It might have been interesting to see the reaction had he delivered the two versions live and in sequence on the major networks.)

Elite indifference to the spread of Spanish may well be justified, but it would be useful if its rationale were fully articulated. It’s not hard to guess why the Left would celebrate Spanish’s increasing prevalence: it dovetails with the project of replacing a common American culture with multiculturalism. It’s much less obvious why some conservatives apparently believe that we should be serene about the matter. Two conceivable justifications come to mind—though neither is persuasive.

First, they might say, the use of Spanish in the public realm is just a temporary phase that will wane as assimilation marches inevitably forward. It would be nice to see some hints that this is happening. Instead, the trend appears to be overwhelmingly in the opposite direction. Daily experience suggests that the following phenomena are only increasing: “oprima numero dos” options in customer-service calls; Spanish signage in transportation hubs; Spanish packaging on consumer items; billboards and subway posters in Spanish; Spanish-language versions of newspapers; and Spanish-language affiliates of cable networks. Does anyone think that in the future fewerpoliticians will deliver their remarks in Spanish? The ability to speak Spanish is a “major advantage” for “potential presidential rivals in 2016,” observes the National Journal.

The Robber Barons

Neither Robbers nor Barons

By David R. Henderson

One of the most prevalent myths about economic freedom is that it inevitably leads to monopolies. Ask people why they believe that, and the odds are high that they will point to the "trusts" of the late 19th century that gained large market shares in their particular industries. These trusts are Exhibit A for most people who hold this view. Ask them for specific names of the villains who ran these trusts, and they are likely to point to such people as Cornelius Vanderbilt and John D. Rockefeller. They even have a label for Vanderbilt, Rockefeller, and others: robber barons.

But a careful reading of the economic research on the "robber barons" leads to a diametrically opposite conclusion: the so-called robber barons were neither robbers nor barons. They didn't rob. Instead, they got their money the old-fashioned way: they earned it. Nor were they barons. The word "baron" is a title of nobility, one typically granted by a king or established by force. But Vanderbilt, Rockefeller, and many of the others referred to as robber barons started their businesses from scratch and were granted no special privileges. Moreover, not only did they earntheir money and not only were they not granted privileges, but they also helped consumers and, in one famous case, destroyed a monopoly.

Consider the case of Cornelius ("Commodore") Vanderbilt. Even the excellent recent book Why Nations Fail, by MIT economics professor Daron Acemoglu and Harvard political scientist and economist James A. Robinson, gets the Vanderbilt story wrong. And not just wrong, but spectacularly wrong. They claim that Vanderbilt was "one of the most notorious" robber barons who "aimed at consolidating monopolies and preventing any potential competitor from entering the market or doing business on an equal footing."

In fact, it was Vanderbilt's competitor, Aaron Ogden, who persuaded the New York state legislature to grant Ogden a legally enforced monopoly on ferry travel between New Jersey and New York. And Vanderbilt was one of the main people who challenged that monopoly. At the tender age of 23, Vanderbilt had become the business manager for a ferry entrepreneur named Thomas Gibbons. Gibbons' goal was to compete with Aaron Ogden by charging low fares. In doing so, they were purposely breaking the law—and helping their passengers save money. In the case Gibbons v. Ogden, the U.S. Supreme Court ruled that, indeed, the New York state government could not legally grant a monopoly on interstate commerce.1 In short, Cornelius Vanderbilt was not a monopoly maker in this case, but a monopoly breaker.

How the White House Let Diplomacy Fail in Afghanistan : The Inside Story of

My time in the Obama administration turned out to be a deeply disillusioning experience

BY VALI NASR 

It was close to midnight on Jan. 20, 2009, and I was about to go to sleep when my iPhone beeped. There was a new text message. It was from Richard Holbrooke. It said, "Are you up, can you talk?" When I called, he told me that Barack Obama had asked him to serve as envoy for Afghanistan and Pakistan. He would work out of the State Department, and he wanted me to join his team. "No one knows this yet. Don't tell anyone. Well, maybe your wife." (The Washington Post reported his appointment the next day.)

I first met Holbrooke, the legendary diplomat best known for making peace in the Balkans and breaking plenty of china along the way, at a 2006 conference in Aspen, Colorado. We sat together at one of the dinners and talked about Iran and Pakistan. Holbrooke ignored the keynote speech, the entertainment that followed, and the food that flowed in between to bombard me with questions. We had many more conversations over the next three years, and after I joined him on Hillary Clinton's presidential campaign in 2007, we spoke frequently by phone.

Now, making his sales pitch, Holbrooke told me that government is the sum of its people. "If you want to change things, you have to get involved. If you want your voice to be heard, then get inside." He knew I preferred to work on the Middle East and in particular Iran. But he had different ideas. "This [Afghanistan and Pakistan] matters more. This is what the president is focused on. This is where you want to be."

He was persuasive, and I knew that we were at a fork in the road. Regardless of what promises candidate Obama made on his way to the White House, Afghanistan now held the future -- his and America's -- in the balance. And it would be a huge challenge. When Obama took office, the war in Afghanistan was already in its eighth year. By then, the fighting had morphed into a full-blown insurgency, and the Taliban juggernaut looked unstoppable. They had adopted a flexible, decentralized military structure and even a national political organization, with shadow governors and district leaders for nearly every Afghan province. America was losing, and the enemy knew it. It was a disaster in the making.

But Holbrooke, who would have been secretary of state had Clinton won the presidency but had been vetoed by Obama to be her deputy when she accepted the State Department job instead, now insisted to me that he relished the chance to take on what he dubbed the "AfPak" portfolio. "Nothing is confirmed, but it is pretty much a done deal," he told me. "If you get any other offers, let me know right away." Then he laughed and said, "If you work for anyone else, I will break your knees. This is going to be fun. We are going to do some good. Now get some sleep."

Two months later, I was at my desk at SRAP, as the office of the special representative for Afghanistan and Pakistan quickly became known. Those first few months were a period of creativity and hope. Holbrooke had carved out a little autonomous principality on the State Department's first floor, filling it with young diplomats, civil servants, and outside experts like me, straight to the job from a tenured post at Tufts University. Scholars, journalists, foreign dignitaries, members of Congress, and administration officials walked in daily to get their fill of how AfPak strategy was shaping up. Even Hollywood got in on SRAP. Angelina Jolie lent a hand to help refugees in Pakistan, and the usually low-key State Department cafeteria was abuzz when Holbrooke sat down for coffee with Natalie Portman to talk Afghanistan.

People started early and worked late into the night, and there was a constant flow of new ideas, like how to cut corruption and absenteeism among the Afghan police by using mobile banking and cell phones to pay salaries; how to use text messaging to raise money for refugees; or how to stop the Taliban from shutting down mobile-phone networks by putting cell towers on military bases. SRAP had more of the feel of an Internet start-up than a buttoned-up State Department office.

Holbrooke encouraged the creative chaos. "I want you to learn nothing from government," he told me. "This place is dead intellectually. It does not produce any ideas; it is all about turf battles and checking the box. Your job is to break through all this. Anyone gives you trouble, come to me." On his first visit to SRAP, Gen. David Petraeus, then Centcom commander, mused, "This is the flattest organization I have ever seen. I guess it works for you."

The New Swedish Model

Our economy will have to look much more like the Greeks’ before we’ll muster the will to follow the example of the Swedes

by SANDY IKEDA

Among policy nerds back in the day, “Swedish model” meant the brand of social democracy practiced in Sweden in the second half of the twentieth century. (Somebody would usually crack wise about Anita Ekberg whenever the phrase was uttered.) But for a very long time, whenever the problems of socialism were discussed, it was common to hear people say as a kind of shut-up argument: “Ah, but socialism works in Sweden; what about the Swedish model?”

Swedish social democracy created an extensive welfare state—including comprehensive health care, generous unemployment benefits, and marginal tax rates commonly in excess of 70 percent. But that followed years of relatively free-market policies in the early twentieth century, which generated impressive economic growth. Government intervention in Sweden didn’t really get going until the 1960s.

The Economist on “Northern Lights”

Interventionists in the United States could learn something from what’s going on now in Sweden (although I fear they won’t). According to a recent spread in The Economist magazine: 

Sweden has reduced public spending as a proportion of GDP from 67 percent in 1993 to 49% today. It could soon have a smaller state than Britain. It has also cut the top marginal tax rate by 27 percentage points since 1983, to 57%, and scrapped a mare’s nest of taxes on property, gifts, wealth and inheritance. This year it is cutting the corporate-tax rate from 26.3% to 22%.

Compare these rates with the U.S. tax rates, under the 2013 tax law, of 39.6 percent on incomes above $400,000 (filing single) and 35 percent on corporations.

But in some sense the current dramatic policy changes in Sweden are just a continuation, after an interruption of several years, of a dis-interventionist trend that began in the 1990s. The “new” Swedish model is not really that new. Indeed, Sweden has climbed to 30th out of 144 countries in economic freedom according to FreetheWorld.com, compared to the United States, which has fallen to 18th, just ahead of Germany (31st) and far outpacing France (47th) and China (107th).