'We Are Bastards of Communism'

Defending Democracy in Eastern Europe

Adam Michnik is editor-in-chief of Poland's leading daily and its most prominent former dissident. In a SPIEGEL interview, he talks about the threat of authoritarian regimes in Eastern Europe, the decline of the region's political culture and feelings of being treated like second-class citizens in Europe.

by Spiegel

We are sitting in a room on the sixth floor of the building occupied by the leftist-liberal Warsaw newspaper Gazeta Wyborcza. There are stacks of newspapers and books everywhere, and on the walls are certificates from American and German universities next to photos of Adam Michnik with statesmen from around the world. Michnik is sitting at the table smoking an electric cigarette. He is the editor-in-chief of Gazeta Wyborcza, Poland's most important nationwide daily newspaper, which started being published in 1989 as the first legal newspaper of the Solidarnosc (Solidarity) trade union. Michnik, 66, is the country's most prominent former dissident. He was sent to prison several times for his political convictions, starting at the age of 19. He wrote for underground newspapers and supported the independent Solidarity trade union. When the communist regime declared martial law in 1981, Michnik was detained. In the spring of 1989, he took part in the Round Table talks, as an adviser to Solidarity leader Lech Walesa, and negotiated the first free elections. Since then, he has focused his attention on the upheavals in Eastern Europe. For Michnik, the demonstrations in Bulgaria against the corrupt political class, the authoritarian tendencies in Hungary and nascent nationalism are all the delayed consequences of 40 years of oppression and patronization under communism. Michnik has a special relationship with SPIEGEL. When he was allowed to go to Paris in the 1970s to visit Jean-Paul Sartre, he called the SPIEGEL offices in Hamburg from Paris. He wanted to know whether its editors would like to print an essay he had written, which they did. "It was the first article I was able to publish in a truly important Western publication," Michnik says. "It sent a message to Poland's rulers that they could not sideline me with force."

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SPIEGEL: Mr. Michnik, for more than six weeks now, thousands of people have taken to the streets in Bulgaria to demonstrate against their country's rotten political system. More than 20 years after Eastern Europe's democratic awakening, political conflicts are still characterized by turf wars and hatred. Why?

Michnik: We lack a political culture, a culture of compromise. We in Poland, as well as the Hungarians, have never learned this sort of thing. Although there is a strong desire for freedom in the countries of Eastern Europe, there is no democratic tradition, so that the risk of anarchy and chaos continues to exist. Demagoguery and populism are rampant. We are the illegitimate children, the bastards of communism. It shaped our mentality.

SPIEGEL: Hungarian Prime Minister Viktor Orbán, who is very radical in his approach to the press and the opposition, is not without his admirers in Eastern Europe. The same holds true in your country with conservative nationalist opposition leader Jaroslaw Kaczynski. Is the authoritarian brand of politician characteristic of the East?

Michnik: We still have politicians who strive for a different type of country: Kaczynski as well as Orbán in Hungary. They want a gradual coup. If Orbán stayed in power in Hungary or if Kaczynski were to win an election in our country, it would be dangerous. Both men have an authoritarian idea of government; democracy is merely a façade.

SPIEGEL: Orbán says that a "centralist majority democracy" is needed so that clear decisions can be made, by decree, if necessary. Otherwise, he says, dangers like the economic crisis cannot be averted.

Michnik: Hitler said the same thing when he issued special decrees and emergency regulations. It's the road to hell. To be honest, Hungary is the country where I would have least expected this to happen, but it was the first to cut a hole into the Iron Curtain. In Romania and Bulgaria, perhaps, but not in Hungary. What is happening there now stems from a disappointment in the Social Democrats, who were in power before and drove the country into economic ruin. Fortunately, Poland quickly implemented the most important reforms needed to make the transition to a market economy at the beginning of the 1990s. It was different in Hungary. That's why the population is now disappointed and is calling everything into question, even the things it once dreamed of achieving.

SPIEGEL: Do people suddenly no longer care that someone is removing judges or editors-in-chief who are not toeing the party line? Have they forgotten what it was like under the communists?

Michnik: A part of society in our countries would still prefer an authoritarian regime today. These are people with the mentality of Homo sovieticus. But they also exist in France -- just think of Le Pen -- and even in Finland and Sweden.

SPIEGEL: Orbán is trying to direct his country into a "system of national cooperation without compromises." What does he mean by that?

Michnik: British historian Norman Davies called this form of democracy a "government of cannibals." Democratic elections are held, but then the victorious party devours the losers. The gradual coup consists in getting rid of or taking over democratic institutions. These people believe that they are the only ones in possession of the truth. At some point, parties no longer mean anything, and the system is based, once again, on a monologue of power. The democratic institutions in the West are more deeply embedded in the West than in Eastern Europe. Democracy can defend itself there. Everything is still fragile in our countries, even two decades after the end of communism.

SPIEGEL: Orbán, Kaczynski and others talk about wanting to finally finish the revolution of 1989 and settle scores with the communists. Do former communist officials still pose a threat today?

Michnik: I think it was a good thing that Poland chose the path of reconciliation and not the path of revenge. Nevertheless, I'm still treated with hostility. I was a supporter of (former German Chancellor Konrad) Adenauer. He too had several options after the war: to send the people around him who had supported Hitler to prison or to turn them into democrats. He chose the second path. We also wanted our new Poland to be a Poland for everyone. The other path would have meant the opposition assuming power immediately in 1989 and not sharing it with the old regime. We would have had to hang the communists from the streetlights, and a small, elite group would have been in charge. That would have been anti-communism with a Bolshevik face.

SPIEGEL: Many say that the old boys' networks have become re-established. In Bulgaria, several thousand people, including many members of a new, urban middle class, are currently demonstrating against their country's political class.

Michnik: Yes, but there were also free elections in Bulgaria, where the opposition has just won. In a democracy, the government is a reflection of society because people are elected. Sometimes the type of person from the old machine, who is everything but an appealing figure, happens to win an election. But democracy applies to everyone, not just the noble and the clever.

The Pain in Spain Still Going Strong

IMF "Baseline Scenario" Projects Spain Unemployment Will Remain Above 25% for 5 Years with Little Growth

By Mike "Mish" Shedlock

I am normally critical of IMF forecasts, but their baseline unemployment projection for Spain of 25% or more with no more than .6% annual growth through 2017 seems reasonable. The pessimistic scenario is a toxic deleveraging downward spiral that continues right now.
The optimistic scenario assumes 2% growth, but that scenario does not start until 2018, and only if labor reforms in Spain and Europe take place.
Via Google translate from El Economista, please consider IMF estimates that Spain will grow by an average of 0.6% over the next five years 

 The team led by James Daniel, Chief of Mission of the International Monetary Fund (IMF) to Spain, estimates unemployment, which will remain above 25% over the next five years.

Ignoring the 1.6% downturn that the IMF expects the country to suffer this year, the average growth for the Spanish economy between 2014 and 2018 will be 0.6%. GDP growth will remain below 1% until 2017 and thereafter only begin to expand beyond these levels.

In 2018, the optimistic scenario in which reforms (both from Spain and Europe) are accelerated and gain ground would result in an acceleration of growth of 2% in 2018 and a significant increase in employment.

The pessimistic scenario starts immediately if deleveraging pressures and financial difficulties intensify. This scenario would create a toxic spiral between macro and financial context and would leave the public and private debt at high levels in the future, the country would not grow until 2017, and unemployment would remain above 27%.

No End in Sight to Italy's Economic Decline

Basta 'La Casta'

By Hans-Jürgen Schlamp

The Italian economy may be the third largest in the euro zone, but it is also plagued by inefficiency and continues to shrink. The country's political leadership has proven unable to implement badly needed reforms and the future looks grim.

The euphoria was evident. "We've done it!" Italian Prime Minister Enrico Letta tweeted earlier this month after the European Commission had provided his country with new financial leeway.

Letta had managed to convince Brussels that Italy would remain below the European Union's budget deficit limit of 3 percent of gross domestic product, if only by a hair, at a forecast 2.9 percent. The premier insisted that his country finally had the latitude to stimulate growth and promote new jobs, and that his administration had achieved "perhaps the most important result" of all time. That was at the beginning of July. Since then, politicians and lobbyists have been energetically arguing over how to take advantage of the new opportunity.

Former Prime Minister Silvio Berlusconi wants to abolish the property tax on first homes, which would cost €4 billion. And if the government were to refrain from a planned increase in the value-added tax, as has also been called for, it would forfeit an additional €2 billion ($2.6 billion) in revenues. Letta and the left, for their part, would like to invest €1.5 billion to create new jobs for young unemployed Italians.

The debate, and Letta's optimism, has temporarily obscured the difficult situation in which Italy finds itself. All the ideas under discussion for stimulating the country's economy will cost money -- and will require Rome to take on additional debt. Indeed, Standart & Poor's recently showed its lack of faith in the country when it downgraded Italian debt by a notch two weeks ago, a move which infuriated Italians.

The truth is that Italy, despite being the third-largest economy in the euro zone after Germany and France, finds itself in dire straits, having been in decline for years. Its GDP has dropped by 7 percent since 2007. The last few years, says Gianni Toniolo, an economics professor in Rome, represent "the worst crisis in (the country's) history," even more devastating that the period between 1929 and 1934.

Black Self-Sabotage

The tragedy of black predators preying on blacks

By Walter E. Williams

If we put ourselves into the shoes of racists who seek to sabotage black upward mobility, we couldn't develop a more effective agenda than that followed by civil rights organizations, black politicians, academics, liberals and the news media. Let's look at it.

First, weaken the black family, but don't blame it on individual choices. You have to preach that today's weak black family is a legacy of slavery, Jim Crow and racism. The truth is that black female-headed households were just 18 percent of households in 1950, as opposed to about 68 percent today. In fact, from 1890 to 1940, the black marriage rate was slightly higher than that of whites. Even during slavery, when marriage was forbidden for blacks, most black children lived in biological two-parent families. In New York City, in 1925, 85 percent of black households were two-parent households. A study of 1880 family structure in Philadelphia shows that three-quarters of black families were two-parent households.

During the 1960s, devastating nonsense emerged, exemplified by a Johns Hopkins University sociology professor who argued, "It has yet to be shown that the absence of a father was directly responsible for any of the supposed deficiencies of broken homes." The real issue, he went on to say, "is not the lack of male presence but the lack of male income." That suggests marriage and fatherhood can be replaced by a welfare check.

The poverty rate among blacks is 36 percent. Most black poverty is found in female-headed households. The poverty rate among black married couples has been in single digits since 1994 and is about 8 percent today. The black illegitimacy rate is 75 percent, and in some cities, it's 90 percent. But if that's a legacy of slavery, it must have skipped several generations, because in the 1940s, unwed births hovered around 14 percent.

Along with the decline of the black family comes anti-social behavior, manifested by high crime rates. Each year, roughly 7,000 blacks are murdered. Ninety-four percent of the time, the murderer is another black person. According to the Bureau of Justice Statistics, between 1976 and 2011, there were 279,384 black murder victims. Using the 94 percent figure means that 262,621 were murdered by other blacks. Though blacks are 13 percent of the nation's population, they account for more than 50 percent of homicide victims. Nationally, the black homicide victimization rate is six times that of whites, and in some cities, it's 22 times that of whites. I'd like for the president, the civil rights establishment, white liberals and the news media, who spent massive resources protesting the George Zimmerman trial's verdict, to tell the nation whether they believe that the major murder problem blacks face is murder by whites. There are no such protests against the thousands of black murders.

There's an organization called NeighborhoodScout. Using 2011 population data from the U.S. Census Bureau, 2011 crime statistics from the FBI and information from 17,000 local law enforcement agencies in the country, it came up with a report titled "Top 25 Most Dangerous Neighborhoods in America." (http://tinyurl.com/cdqrev4) They include neighborhoods in Detroit, Chicago, Houston, St. Louis and other major cities. What's common to all 25 neighborhoods is that their makeup is described as "Black" or "Mostly Black." The high crime rates have several outcomes that are not in the best interests of the overwhelmingly law-abiding people in these neighborhoods. There can't be much economic development. Property has a lower value, but worst of all, people can't live with the kind of personal security that most Americans enjoy.

Disgustingly, black politicians, civil rights leaders, liberals and the president are talking nonsense about "having a conversation about race." That's beyond useless. Tell me how a conversation with white people is going to stop black predators from preying on blacks. How is such a conversation going to eliminate the 75 percent illegitimacy rate? What will such a conversation do about the breakdown of the black family (though "breakdown" is not the correct word, as the family doesn't form in the first place)? Only black people can solve our problems. 

Our man in Moscow

He did it his way 

By Pepe Escobar 

So what is the "extremely disappointed" Obama administration, the Orwellian/Panopticon complex and the discredited US Congress to do? Send a Navy Seal Team 6 to snatch him or to target assassinate him - turning Moscow into Abbottabad 2.0? Drone him? Poison his borscht? Shower his new house with depleted uranium? Install a no-fly zone over Russia? 

Edward Snowden, under his new legal status in Russia, simply cannot be handed over to Bradley Manning's lynch mob. Legally, Washington is now as powerless as a tribal Pashtun girl facing an incoming Hellfire missile. A President of the United States (POTUS) so proud of his constitutional law pedigree - recent serial trampling of the US constitution notwithstanding, not to mention international law - seems not to have understood the message. 

Barack Obama virtually screamed his lungs out telling Russian President Vladimir Putin he had to hand him Snowden "under international law". Putin repeatedly said this was not going to happen.

Obama even phoned Putin. Nothing. Washington even forced European poodles to down Bolivian President Evo Morales's plane. Worse. Moscow kept following the letter of Russian law and eventually granted temporary asylum to Snowden. 

The Edward Snowden saga has turned the Pentagon's Full Spectrum Dominance doctrine on its Hydra-head. Not only because of the humbling of the whole US security state apparatus, but also for exploding the myth of Full Spectrum Dominance by POTUS. 

Obama revealed himself once again as a mediocre politician and an incompetent negotiator. Putin devoured him as a succulent serving of eggs benedict. Glenn Greenwald will be inflicting death by a thousand leaks - because he is in charge of Snowden's digital treasure chest. And Snowden took a taxi and left the airport - on his own terms. 

Layers and layers of nuances have been captured in this fascinating discussion at Yves Smith's blog - something impossible to find across Western corporate media. For POTUS, all that's left is to probably boycott a bilateral meeting with Putin next month, on the sidelines of the G20 summit in St Petersburg. Pathetic does not even begin to explain it. 

Hayek’s Gloomy Prognosis for Egypt

The military “fox” is “guarding the hen house.”

By Paul Gregory

F.A. Hayek’s most important insight is that we cannot have political freedom without economic freedom. Hayek’s inexorable Road to Serfdom, from which it is difficult if not impossible to return, describes a number of today’s troubled countries, and it likely portends the future of post-Mubarak Egypt. Those caught up in the euphoria of democratic street demonstrations must confront the reality that the long-run outcome is likely to be bad.

Take Russia and Iran as possible role models for Egypt. Despite their huge differences (a KGB state versus an Islamic theocracy), they share a common and sinister pattern: A revolution occurs (the collapse of the Soviet Union, the Iranian revolution); a nominal democracy is established; the democracy is hijacked by the ruling elite; the ruling elite (Kremlin-favored oligarchs, the Revolutionary Guard) gains control of the commanding heights of the economy; the ruling elite viciously blocks democracy and liberalization as mortal threats to their vested interests. Anyone who stands in their way is dealt with harshly as corrupt or traitorous.

Egypt is poised to follow this same path. Its private economy is weak. Some thirty five percent of Egyptians work for the state. Ninety percent of cotton spinning and sixty percent of fabric manufacture is in the hands of the state. The poor Egyptian public receives its food through state ration coupons as it did 3,000 years ago. Only ten percent of property rights are secure. 

Egypt is currently a democracy in name only; the goal of its idealistic young “tweeter-generation” demonstrators is to make it a real democracy with real elections. Egypt has thrown out Mubarak and will surely punish the corruption of Mubarak, his family, and associates. The country is ruled by the military, who will oversee the transition to something that will be called “democracy” no matter what the outcome.

Herein lies the rub: Egypt’s commanding heights were under the shared control of Mubarak and associates and the military. His removal places a vast amount of Egyptian wealth up for grabs. Mubarak’s share may go to “society” or it may be gobbled up by the military, giving the military even more incentive to avoid the voter scrutiny and transparency of true democracy. 

A Coup is a Coup is a Coup

Behold the start of another long Egyptian night

By TUNKU VARADARAJAN

You know a country is benighted when no less a figure than Tony Blair, the world’s official envoy for the Middle East (whatever that means), turns apologist for a coup d’état, stating blithely that the army had no choice but to unseat the elected president.  You know a country is benighted when pundits in the West engage in verbal calisthenics to call its coup by any name but that of “coup” because it is seen to reflect an irrepressible popular will—and, as such, transcends all the inconvenient grubbiness of the c-word.
So let us agree outright that what happened in Egypt—the booting from office of President Mohammad Morsi—was a coup. However noble the sheen put upon it, a coup is a coup is a coup. (As Popeye the Sailor once put it: “I yam what I yam, and that’s all what I yam.” Plain words; plain meaning; plain truth.)

In calling the coup by its proper name, we make it harder to duck, or glide by, the axiom with which we’ve all been raised: an elected government can lose power legitimately only through an election. And when the elected government in question is the first democratic government in 5,000 years of Egyptian civilization, and that government is permitted to last a mere 12 months in office before its neck is wrung by men in uniform, we must be particularly careful about saying that what happened is A Good Thing.

Egypt had been democratic for one-five-thousandth of its history when the coup occurred, and those who would say that the coup was a fitting conclusion to President Morsi’s administration resort to arguments that revolve around the unfitness for democracy of Egypt’s Muslim Brotherhood—by which they mean, of course, the unfitness for democracy of Egypt itself, for those who voted for the Brotherhood in their millions will do so again if permitted. That is at the root of all Western angst over democracy in the Middle East: give the vote to Muslims who haven’t had the vote before, who haven’t had the vote—as David Brooks might put it—in their “intellectual DNA,” and they will vote for the parties that the West likes least.

What happens in Cairo never stays in that great city

The Regional Ramifications of Morsi’s Removal from Power

By ITAMAR RABINOVICH

Morsi’s removal from power and the exacerbation of the conflict over Egypt’s identity and political future add yet another compounding element to the murky arena of Middle Eastern regional politics. During the first decades of the post colonial Middle East there was a pattern to its regional politics. Turkey and Iran, the successor states to the former Muslim empires, played for different reasons only a marginal role in the region’s politics. The Arab-Israeli conflict was a cardinal issue, but given the Arab consensus not a polarizing one. The nascent Arab state system was governed by the rivalry between the two Hashemite kingdoms and the Saudi and Egyptian royal houses. Arab politics was then transformed by the hegemony of radical pan-Arab nationalism and Abdul Gamal Nasser’s messianic leadership and Egypt’s hegemony. A clear pattern emerged as the Arab cold war (to borrow Malcolm Kerr’s terminology) was fitted into the Cold War. In the 1970′s this pattern and clarity were broken by a whole series of developments: Nasser’s decline and death, pan Arabism’s decline and the rise of political Islam, Syria’s emergence as a regional power, the accumulation of wealth and political influence in the Gulf and the introduction of an Arab-Israeli peace process. Subsequent developments–the Iranian Revolution in 1979 and the end of the Cold War–led to further fragmentation.

In the first decade of the current century those looking for patterns and governing principles would point to the conflict between Iran and its allies and clients (Syria, the new regime in Iraq, Hizballah and the radical Palestinian organizations) and its rivals, the pro Western conservative Arab states headed by Mubarak’s Egypt. But a more fruitful approach would point to the novel elements: Iran’s much more aggressive quest for regional hegemony (facilitated by Saddam’s disappearance from the scene), Turkey’s return to the Middle East as a powerful Islamist actor, a more prominent role for Islam and Islamic groups in the region’s politics, and the new importance of soft power exemplified by Qatar’s use of money and satellite television to acquire a degree of influence disproportionate to its size and power.

Egypt’s liberals are not flawed democrats. They are illiberal to begin with.

Pity Egypt, It Has No Liberals

By SAMUEL TADROS

What happened to Egypt’s liberals? Jackson Diehl’s question in the Washington Post is not a new one. In the aftermath of the Egyptian revolution and as Islamists swept every electoral competition, the question was being sincerely posed. Where have all those young champions of freedom that filled Tahrir square and captivated the world disappeared? Today a deep sense of disappointment accompanies the question. The commitment to principles by those once hailed as the founding fathers and mothers of Arab democracy evaporated at the first real test.

Mohamed Morsi’s election was not Egypt’s first experiment with democracy. In the aftermath of the 1919 revolution and after a stormy constitutional process, Egypt’s first democratic parliamentary elections were held in 1924. The elections pitted Egypt’s greatest liberal thinkers and its political elite gathered in the Liberal Constitutionalist Party against a man that five years earlier had been one of their own; Saad Zaghloul and his Wafd Party. The masses chanted “if Saad nominated a stone we would elect it” and they gave the Wafd 90 percent of the seats leaving the liberals to lick their wounds and draw lessons from their humiliating defeat.

It did not take long for the former champions of democracy to argue that Egyptians were not ready for it. How else could they explain how Wafdist candidates from undistinguished backgrounds could defeat the great landlords and thinkers of the land? With no potential for winning a free election on their own, they abandoned their slogans and tied their fortune to that of more powerful players; the King and the British. They committed every sin in their pursuit of destroying the Wafd. They plotted against it when it was in power and suppressed it when it was in opposition.

Sympathy Deformed

Socialism and poverty

By Theodore Dalrymple

To sympathize with those who are less fortunate is honorable and decent. A man able to commiserate only with himself would surely be neither admirable nor attractive. But every virtue can become deformed by excess, insincerity, or loose thinking into an opposing vice. Sympathy, when excessive, moves toward sentimental condescension and eventually disdain; when insincere, it becomes unctuously hypocritical; and when associated with loose thinking, it is a bad guide to policy and frequently has disastrous results. It is possible, of course, to combine all three errors.

No subject provokes the deformations of sympathy more than poverty. I recalled this recently when asked to speak on a panel about child poverty in Britain in the wake of the economic and financial crisis. I said that the crisis had not affected the problem of child poverty in any fundamental way. Britain remained what it had long been--one of the worst countries in the Western world in which to grow up. This was not the consequence of poverty in any raw economic sense; it resulted from the various kinds of squalor--moral, familial, psychological, social, educational, and cultural--that were particularly prevalent in the country (see "Childhood's End," Summer 2008).

My remarks were poorly received by the audience, which consisted of professional alleviators of the effects of social pathology, such as social workers and child psychologists. One fellow panelist was the chief of a charity devoted to the abolition of child poverty (whose largest source of funds, like that of most important charities in Britain's increasingly corporatist society, was the government). She dismissed my comments as nonsense. For her, poverty was simply the "maldistribution of resources"; we could thus distribute it away. And in her own terms, she was right, for her charity stipulated that one was poor if one had an income of less than 60 percent of the median national income.

This definition, of course, has odd logical consequences: for example, that in a society of billionaires, multimillionaires would be poor. A society in which every single person grew richer could also be one in which poverty became more widespread than before; and one in which everybody grew poorer might be one in which there was less poverty than before. More important, however, is that the redistributionist way of thinking denies agency to the poor. By destroying people's self-reliance, it encourages dependency and corruption--not only in Britain, but everywhere in the world where it is held.

I first started thinking about poverty when I worked as a doctor during the early eighties in the Gilbert Islands, a group of low coral atolls in an immensity of the Central Pacific. Much of the population still lived outside the money economy, and the per-capita GDP was therefore extremely low. It did not seem to me, however, that the people were very poor. Their traditional way of life afforded them what anthropologists call a generous subsistence; their coconuts, fish, and taros gave them an adequate--and, in some respects, elegant--living. They lived in an almost invariant climate, with the temperature rarely departing more than a few degrees from 85. Their problems were illness and boredom, which left them avid for new possibilities when they came into contact with the outside world.

Life in the islands taught me a lively disrespect for per-capita GDP as an accurate measure of poverty. I read recently in a prominent liberal newspaper that "the majority of Nigerians live on less than $1 a day." This statement is clearly designed less to convey an economic truth than to provoke sympathy, evoke guilt, and drum up support for foreign aid in the West, where an income of less than $1 a day would not keep body and soul together for long; whereas it is frequently said that one of Nigeria's problems is the rapid increase in its population.

As it happens, an island next door (in Pacific terms) to the Gilbert Islands was home to an experiment in the sudden, unearned attainment of wealth. Nauru, a speck in the ocean just ten miles around, for a time became the richest place on earth. The source of its sudden riches was phosphate rock. Australia had long administered the island, and the British Phosphate Commission had mined the phosphate on behalf of Australia, Britain, and New Zealand; but when Nauru became independent in 1968, the 4,000 or so Nauruans gained control of the phosphate, which made them wealthy. The money came as a gift. Most Nauruans made no contribution to the extraction of the rock, beyond selling their land. The expertise, the management, the labor, and the transportation arrived from outside. Within just a few years, the Nauruans went from active subsistence to being rentiers.

The outcome was instructive. The Nauruans became bored and listless. One of their chief joys became eating to excess. On average, they consumed 7,000 calories per day, mainly rice and canned beef, and they drank Fanta and Chateau d'Yquem by the caseload. They became the fattest people on earth, and, genetically predisposed already to the illness, 50 percent of them became diabetic. It was my experience of Nauru that first suggested to me the possibility that abruptly distributing wealth has psychological effects as well as economic ones.

Four Reasons Mexico Is Becoming a Global Manufacturing Power

Manufacturing wages, adjusted for Mexico’s superior worker productivity, are likely to be 30 percent lower than in China by 2015

By Peter Coy

Mexico is beginning to beat China as a manufacturing base for many companies despite its higher crime rate, according to a new report from Boston Consulting Group. Mexico’s gain is a plus for the U.S. because Mexican factories use four times as many American-made components as Chinese factories do, says the consulting firm. Here are Mexico’s four key advantages:

1. Manufacturing wages, adjusted for Mexico’s superior worker productivity, are likely to be 30 percent lower than in China by 2015. China’s wages have soared. They were about one-quarter as high as Mexico’s in 2000 but are catching up rapidly and will be slightly higher by 2015. And labor productivity remains higher in Mexico, even though the gap is narrowing. The crossover point was 2012, when unit labor costs in China (i.e., wages adjusted for productivity) grew to equal those in Mexico. By 2015, Mexico will be around 29 percent less expensive.

2. Mexico has more free-trade agreements than any other country. The North American Free Trade Agreement gives Mexican goods easy access to the world’s largest market, the U.S., as well as to Canada. But that’s not all. Mexico has free-trade agreements covering 44 countries. That’s more than the U.S. (20 partners) and China (18) combined.

As Communist Cuba Reforms, Capitalism Slowly Takes Hold of Its Real Estate Market

"You can have anything you want in Cuba if you have money"

By Girish Gupta

Ray leads his clients through the crumbling, faded streets of central Havana, just off the city’s Malecón where you can taste salt in the air coming off the Florida Straits. The 65-year-old walks with purpose, though he asks foreigners to keep a few paces behind him and talk among themselves lest police hassle him. “This next one is lovely,” he says slyly turning to his clients. “It has a view of the sea from the balcony and you have all the shops nearby.” In the three-bedroom, third-floor apartment, Ray shows off a “big bathroom” which has barely enough space to walk around. Typical of many Cuban homes, its furniture and electrical equipment — such as a large transistor radio — would fit nicely into a museum. The entire place will cost $30,000, though, Ray advises, it “needs work.”

Ray’s spiel is as practiced as estate agents the world over. But in Cuba, there’s one difference: his work is illegal. For it, he will receive 10 percent of the sale price and perhaps a tip from the buyers, he suggests with a smile in the living room he is showing off.

In November 2011, the buying and selling of property on this Communist island became legal, in one of many cautious reforms enacted by the government of President Raúl Castro to open up the country’s economy. Ray’s commission makes him a broker and puts him on the wrong side of the law. “I do this because I make money,” says Ray. Just as in nearby Venezuela, capitalism is at its most naked in countries governed by hard-left economies. Ray, like many Cubans, has found a way around the average wage of some $20 a month here. “Cubans are nothing but resilient and will always find a way to monetize things,” says Ann Louise Bardach, a long-time Cuba analyst and author of Without Fidel: A Death Foretold in Miami, Havana and Washington.

The Whole World Is Getting Richer, and That's Good News

Nearly all the planet has got a lot richer

by Charles Kenny

This month the most accurate source for global data on the size of the world’s economies got a makeover. As a result, we have measures of economic growth and relative income across countries that are better than ever. These numbers suggest something surprising: a world of ubiquitously increasing wealth, where predictions of Malthusian traps and permanent poverty look increasingly archaic.

The Penn World Tables, created by Alan Heston, Robert Summers, and Bettina Aten at the University of Pennsylvania, were the first serious attempt to properly measure relative economic size around the planet. The researchers tracked the value of goods a country consumed, invested in, and traded using numbers that could be compared around the world and over decades.

This is a deceptively simple question. First, it requires comparing how much the same thing costs in different countries. That’s reasonably straightforward when it comes to such standard products as an iPad or an apple (the fruit). It is a lot more complex when it comes to services such as a restaurant meal, a taxi ride, or tailoring. In poorer countries, labor costs less, so the same level of service costs less, too—and your dollar (or rupee) goes further.

Second, it requires comparing what people are buying. The household subsisting on $2 a head in rural India doesn’t purchase the same products as a family living on 10 times or more in the U.S. The Penn Tables have to make an approximation of relative income based on the average of what people buy across countries. Finally, the new measure involves comparing across time. That takes valuing the goods available at different dates against each other—a 2010 Ford Escape against a 1980s Ford Escort, as it might be. Once again, people don’t buy the same stuff over time. The average American buys fewer spats and bustles than he or she used to but a lot more consumer electronics. The Penn Tables try to account for that change, too.

Any time economists compare incomes in different countries and years, they are making a raft of assumptions and calculations around these three issues—there is no one right answer on how to do it. But the Penn World Tables is the best effort we have, and the new version makes it better. In particular, it uses data on prices back through history in a way that makes incomes over time far more comparable across countries.

It is no surprise that the revisions and updates have shifted economy sizes. According to the Penn World Tables, China’s expenditure-side GDP was $10.1 trillion in 2010. Under the old methodology, it was between $9.3 trillion and $9.8 trillion; the latest World Bank 2010 GDP estimate for China is $9.1 trillion. U.S. GDP was $13.1 trillion in 2010, according to the Penn World Tables.

The good news for America-firsters: According to the new estimates, China’s economy was still smaller than the U.S.’s in 2010. The bad news: China was somewhere between $300 billion and $1 trillion closer to overtaking the U.S. than we thought. The worse news: If the growth rates of 2000-10 reported by the Penn Tables continue until 2020 for each country, China’s GDP will be $23 trillion compared with the U.S.’s $15 trillion. If China’s economy isn’t already the largest today, it is probably a matter of months, not years, before it rises to the top.

Breaking Bad's Management Lessons

Resentment rarely leads to wise business decisions

By Ben Wasserstein

“Do you know what would happen if I suddenly decided to stop going into work?” Walter White hisses to his wife at the midpoint of the most-quoted monologue in AMC’s (AMCX) Breaking Bad. “A business big enough that it could be listed on the Nasdaq goes belly up. Disappears!”

A stock exchange reference might seem out of place on a show about an Albuquerque meth king, but Breaking Bad, which begins airing its final eight episodes on Aug. 11, has always focused on the financial rewards of breaking the law. Over the course of the series, Walt (played by Bryan Cranston), an overqualified, milquetoast chemistry teacher who began cooking meth to pay for lung cancer treatments, has built his drug operation into an international powerhouse. And through Walt’s increasingly unhinged management style, Breaking Bad creator and executive producer Vince Gilligan has offered a riveting critique of professional leadership.

Walt’s success is attributable, for the most part, to the superiority of his product. His “blue meth” is the best on the market, 99.1 percent pure, and he’s able to command higher prices than his competitors. Still, in order to rise he’s had to commit multiple murders, including a vehicular homicide and the assassination of his boss with a wheelchair bomb—not the standard corporate trajectory. As a strategist, though, Walt has often proceeded by the book. At his operation’s make-or-break moment, when his partners want to quit and sell the business out from under him, he makes an empire-saving pivot that would win plaudits from Michael Porter, the Harvard Business School professor who gave us the classic “five forces” template for analyzing competition.

We Can't Save Capitalism Unless We Denounce Its False Prophets

Being pro-business is not the same as being pro-market

By Bill Frezza

A debate is raging among free market advocates regarding the proper posture to take with respect to Too Big to Fail (TBTF) banks. This has become an increasingly important issue as the financial sector has grown to take up an unprecedented share of our economy. While cleaving to tried-and-true libertarian defenses of finance as vital to the economy, some of us fear that the machinations of the crony capitalists running the TBTF banks—in cahoots with their allies in the Treasury Department and the Federal Reserve—will result in not only another global financial collapse, but a populist anti-capitalist backlash that could destroy what’s left of our free enterprise system.

But before we can tackle this problem, we must figure out what is really going on. In all public policy debates, perceptions matter, and public perceptions are often driven by the leading narratives that gain cultural acceptance. Let’s look at what these are.

The prevailing narrative on the left is that we are locked in a two-sided conflict pitting greedy capitalists against the working man. Within this narrative noble legislators and wise regulators must accumulate power unto themselves in order to: 1) rein in the capitalists’ depredations; 2) balance the playing field to offset “market failures;” and 3) “invest in the future” to compensate for the shortsightedness of profit-seeking investors. Success requires waging a permanent campaign against corrupt political opponents doing the dirty work of the wicked 1 percent—who if left to their own devices would accumulate all the wealth leaving the 99 percent destitute.

The prevailing narrative on the right is that we are locked in a two-sided conflict pitting American business against ham-handed legislators and clueless regulators whose well-intentioned but misguided laws, regulations, taxes, and mandates threaten to kill the goose that lays the golden eggs. Within this narrative, free market advocates must fight every attempt by tree-hugging Luddites and their socialist fellow travelers to interfere in the free flow of information, goods, and services that are responsible for driving innovation and creating all the wealth the left is trying to redistribute. Failure will leave the working man unemployed, American businesses crippled, and the global economy in perpetual recession.

Both of these narratives are oversimplifications, and both contain elements of truth. How can that be? Because they both miss the key point that the battle we are in is actually a three-sided struggle. Why is this important to realize? Because attempts to defend capitalism strictly within the bounds of a two-sided dialectic can only accelerate the emergence of a populist regime that fuses the centralized economic controls of fascism with the income redistribution of socialism. We are already more than halfway there with today’s “mixed economy”—a pale shadow of the laissez faire system that serves as the libertarian ideal.

So, who are the three constituencies battling over America’s economic soul?

White House Losing Its Grip on the Middle East?

Failure in the Middle East has the potential to wreck the President’s foreign policy world wide

By WALTER RUSSELL MEAD

Secretary of State John Kerry went uncomfortably off-message yesterday in Pakistan, voicing a surprising level of support for Egypt’s military to journalists in Islamabad:

“In effect, they were restoring democracy,” Mr. Kerry said of Egypt’s military to Pakistan’s Geo News during a South Asia tour on Thursday. “The military did not take over, to the best of our judgment—so far, so far—to run the country. There’s a civilian government.”

Obama administration officials tried to walk back the remarks—”He didn’t stick to the script,” an unnamed source growled to the WSJ—but it was too late. The media pounced, the remarks were quickly torn apart on Twitter, and Team Obama is again struggling to regain its balance on Egypt, trying not to call what happened a coup while hoping that the military doesn’t get too much more blood on its hands in restoring order to Cairo and Alexandria.

Let’s get the obvious parts out of the way: No, the Egyptian military is not restoring democracy in Egypt. You can’t “restore” something that never existed, and it takes a lot more than a couple of elections to make a democracy. Democracy requires a host of institutions, tacit agreements, and social norms most of which don’t exist in Egypt. It also depends on a certain basic level of economic progress and prosperity, also not exactly likely to sprout up on the banks of the Nile anytime soon.

The army wasn’t trying to build democracy, either; it was restoring order and protecting the deep state, more or less in accordance with the will of a large number of middle class and urban Egyptians. That’s the beginning and end of it. Americans desperately want somebody to be the pro-democracy good guys. But right now at least, democracy doesn’t seem to be on the menu at the Egypt café.

We don’t want to be too hard on Secretary Kerry. Foreign policy is never easy to do in real time, and the world is in a good deal of disarray at this very moment. But his remarks do point to a deeper problem with the Obama administration’s foreign policy approach—a problem that’s finally starting to bite.

Jail bankers? Let’s start with the real villains–central bankers and their political masters

Big Government and Central Banks: The Real Criminals

By Steve Forbes

The British government has announced that it will be proposing legislation to have senior bankers face prison for “reckless” risk taking. This news item underscores two dangerous trends.

The first is the largely unremarked upon phenomenon of modern democratic governments criminalizing more and more activities. In the U.S., for example, numerous prosecutions have been successfully pursued against corporate managers for the activities of subordinates that the managers didn’t order or even know about. Isn’t it a basic tenet of law that you can’t be charged with a crime you didn’t commit?

A corollary to this is penalizing people for offenses they didn’t know they had committed. Yes, there has always been the axiom that ignorance of the law is no excuse. But that is for basic crimes like thievery, which you should know is illegal. In recent years, however, governments–especially regulators such as the EPA–have issued voluminous rules that can easily catch the unwary. The federal tax code is notorious for this. The frightening truth is that if the federal government wants to “get” you or your business, it can. There’s no way for law-abiding citizens not to get ensnared in the regulatory maw.

Noted social observer and author Charles Murray is writing a book on what he rightfully describes as the increasing lawlessness of the U.S. government. The blizzard of new rules, many of them vaguely worded, undermines the basic foundation of the rule of law: simplicity and predictability. Murray finds the phenomenon far more widespread than most people realize. The recent Inspector General’s report on extensive, deliberate IRS abuses is but the tip of the iceberg.

The Founders' Greatest Fears About Democracy Are Playing Out

Governments do not produce wealth, they only consume it

By Bill Frezza

Our Founders’ greatest fear that pure democracy would inevitably destroy itself is being played out in two distinct dramas, both headed toward the same ending.

Detroit’s bankruptcy bears witness to destruction by one-party rule. Decades of unchecked corruption and incompetent governance have come to a head, as the accumulated debts of a government willing to buy votes from the non-productive at the expense of the productive fall upon a dwindling populace too poor, dependent, or stubborn to flee.

Washington’s terminal gridlock bears witness to destruction by a dysfunctional, self-serving duopoly. Politicians representing two supposedly hostile parties fight over the frozen controls on a runaway train, even as they remain safely ensconced in gerrymandered districts. With massive entitlement spending growing on autopilot, the only thing forestalling federal bankruptcy is unlimited money printing—which will only make the day of reckoning all the more painful when it arrives.

Both tragedies are enabled by a global financial system that insists on feeding vast sums of capital into the maw of sovereign debtors under the false belief that such debts are “safe.” Yet, the only thing sustaining the belief that these debts will be repaid is the self-deluded notion that future taxpayers will make good on them—somehow.

Economics According to the EPA

The Dangerous Purveyors of Administrative Law

New EPA chief Gina McCarthy, appropriately dressed in red, plans to bequeath an unchanging climate to our descendants. Even if it costs an arm and a leg.

by Pater Tenebrarum

The climate is changing, as it has done for billions of years. Luckily, one might add, because if the climate had not changed, there would be no humans on planet Earth. Ever since Margaret Thatcher erroneously began to fund research into 'global warming' in order to muster scientific propaganda weaponry in her struggle against Arthur Scargill and his coal miners union, climate research has grown from a tiny, barely noticed scientific branch, into a major global gravy train funded unwittingly and quite involuntarily by tax payers. No other branch of science manages to generously feed so many researchers, bureaucrats, NGOs and other assorted hangers-on. The main prophets and chief bureaucrats involved travel from one conference to the next, giant retinues in tow, to think up new ways of appropriating even more funds and gaining more influence over the economy. The economic damage done by this perpetual circus has by now reached gargantuan proportions and is set to become far bigger if these people get their way.

Never mind that the original reason for the entire rigmarole, namely the fact that the planet's climate was warming ever so slightly between 1976 and 1998, no longer even exists: warming has stopped as of 1998 and is highly likely to go into reverse on account of the sunspot cycle having reached a minimum (admittedly the latter is just a hunch on our part, based on publicly available information. We don't claim to be climate scientists, we can only try to compare the various competing theories and try to interpret the known facts).

Sadly, Too Big to Fail Is Not Over

Too Big To Fail and Too Big To Succeed 

By SIMON JOHNSON

Writing in Politico earlier this week, former Senator Chris Dodd and former Representative Barney Frank contend that the Dodd-Frank financial reform legislation of 2010 ends forever the ability of the United States government to provide support to failing financial companies. “The Dodd-Frank Act is clear: Not only is there no legal authority to use public money to keep a failing entity in business, the law forbids it,” they write.

Mr. Dodd and Mr. Frank worked long and hard on financial reform in 2009-10, and there is much in their bill that is helpful, which is why regulators need to pick up the pace on completing and putting in place genuinely strong rules. But on the bigger picture – whether too-big-to-fail financial institutions still benefit from implicit government subsidies and a high probability of explicit bailouts — I respectfully disagree with them. I’m not alone — in response to recent questioning from Senator Elizabeth Warren, Democrat of Massachusetts, the Federal Reserve chairman, Ben S. Bernanke, confirmed that credit markets still believed the government stands behind big banks.

There are three issues: the powers of the Federal Reserve, the mandate of the Federal Deposit Insurance Corporation and the vulnerability of taxpayers when one or more large complex financial institutions fail. We have at least five such companies in the United States, all of which are intensely cross-border in their operations (in order of size, JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley).