We Aren't Greece. But We Could Be Japan if Flawed Logic Persists.

Mar 28, 2011Marshall Auerback

We are the only ones who stand in the way of an economy recovery that puts Americans back to work.

Influential journalists are making persuasive cases that austerity is the wrong approach in fragile economies. That's good news. But discussions still get muddled in ways that can have perverse effects.

We are the only ones who stand in the way of an economy recovery that puts Americans back to work.

Influential journalists are making persuasive cases that austerity is the wrong approach in fragile economies. That's good news. But discussions still get muddled in ways that can have perverse effects.

Take the case of Japan. Last week Bill Mitchell wrote an excellent blog post discussing Martin Wolf's article on Japan's fiscal position following the earthquake. Wolf suggested that the "national insolvency" threat allegedly posed by the earthquake was vastly overstated. He argued that the sums involved were too small to matter. Mitchell agreed, but went further, challenging Wolf's implicit suggestion that the Japanese government faced a solvency risk of any kind:

The reality is that the Japanese government has no solvency risk at all in relation to its net spending position and the debt issuance that matches it (nearly). It is grossly misleading to leave the impression that it is just because the reconstruction sums are small that there is no insolvency risk.

As Mitchell put it, Wolf's assessment was so close to comprehension, and yet so far.

I had a similar sensation reading Paul Krugman's latest challenge to the prevailing fiscal austerity mania now gripping most of today's leading policy makers in the global economy. Krugman rightly exposes the central flaw inherent in the deficit reduction hysteria:

Why not slash deficits immediately? Because tax increases and cuts in government spending would depress economies further, worsening unemployment. And cutting spending in a deeply depressed economy is largely self-defeating even in purely fiscal terms: any savings achieved at the front end are partly offset by lower revenue, as the economy shrinks.

The article moves along swimmingly until Professor Krugman invokes the dreaded example of Greece:

But couldn't America still end up like Greece? Yes, of course. If investors decide that we're a banana republic whose politicians can't or won't come to grips with long-term problems, they will indeed stop buying our debt. But that's not a prospect that hinges, one way or another, on whether we punish ourselves with short-run spending cuts.

No, no, no! There is no debt crisis in sovereign nations such as the U.S., Japan, the U.K., or Canada. Barring a decision by Congress to give up the dollar and adopt, say, the Mexican peso, we can never end up like Greece. Nor will Japan, which does not need to "dip into its rainy day fund," as Carmen and Vince Reinhart wrongly suggested last week. To clarify, the nations of the European Monetary Union have given up their monetary sovereignty by giving up their national currencies and adopting a supranational one, the euro. By divorcing fiscal and monetary authorities, they have relinquished their public sector's capacity to provide high levels of employment and output. Non-sovereign countries are limited in their ability to spend by taxation and bond revenues, and this applies perfectly well to Greece, Portugal, and even countries like Germany, which continues to champion the cause of fiscal austerity under the respectable sounding guise of "sound finances."

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This distinction is key, but it gets lost in our economic debates. Happily, Dean Baker gets it, but for the most part our inability (whether through misunderstanding or ideology) to distinguish between issuers and users of currency continues to provoke perverse policy responses, notably in the countries that remain sovereign in regard to their monetary/fiscal operations, such as the U.S. As my friend Warren Mosler always likes to say, "Because we believe we can be the next Greece, we continue to work to turn ourselves into the next Japan."

The only public debt problems that have emerged in the current crisis have been in non-sovereign countries. Even then, with appropriate "fiscal support," those crises were managed largely through the expedient of the ECB's ongoing purchases of PIIGS' debt in the secondary bond markets -- which amounts to a fiscal act within a flawed monetary system.

But blurring the distinction between sovereign and non-sovereign nations is the starting gate for this muddled discussion that persists when we invoke Greece as an example of what we could become.

Those of us who make the key distinction between a non-sovereign country like Greece and a sovereign one like the U.S. accept that the prevailing concern about Portugal, Ireland, Italy, Greece and Spain (PIIGS) and even other Euro nations is justified. But using PIIGS countries as analogues to the U.S. is a result of the failure of deficit critics to understand the differences between the monetary arrangements of sovereign and non-sovereign nations. Greece is a user of the euro. It is not an issuer. In that respect, it is more like California or even New York City, which are users of the U.S. federal government's dollar.

The hysteria, which Paul Krugman rightly decries, comes from a flawed understanding of how the monetary system works. It also partly explains why even in sovereign monetary/fiscal systems, conservatives continue to impose arbitrary constraints on our government's ability to provide policies that generate full employment. Which is precisely what we need right now.

Sovereign governments have been led to believe that they need to issue bonds and collect taxes to finance government spending and that good policies should be judged by their ability to enforce fiscal austerity. The guardians of the status quo know that the fear of rising public debt can be politically manipulated and demonized, and they do this to put a brake on government spending.

But there is no operational necessity to issue debt in a fiat monetary system. In fact, in the case of sovereign nations, it is a logical impossibility for households and nonbank firms to finance the budget deficit by paying taxes and buying government bonds. The private sector cannot create money (and bank-created money is not a net financial asset for the private sector, as the private deposit holders cancel out the private borrowers). The domestic private sector has to first earn the money by net selling goods and services (to the federal government) and net selling assets (to the central bank) before it is in a position to pay taxes or buy government bonds.

Mainstream economics has guided policymakers into imposing artificial constraints on fiscal policy and government finances, such as issuing bonds when running deficits, debt ceilings, forbidding the central bank from directly buying treasury debt, allowing the markets to set interest rates on government bonds, etc. This is a huge conceptual flaw that is currently paralyzing the Governor of the Bank of Japan, even as his country reels from its greatest disaster since World War II. It is also destroying the U.K. economy, as both Krugman and John Cassidy have recently highlighted.

All these constraints, sadly, are self-imposed and voluntary. As my colleague Randy Wray has put it, it is as if someone would tie his/her feet together and then complain about the inability to walk. It may seem petty to criticize otherwise strong critiques of the current thrust of self-styled deficit hawks. But we have to be on guard against conceptual confusion that can hamper our ability to act decisively to do what it is certainly in our power to do: namely to stop choking our economy and put Americans back to work.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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The Economic Policy Behind Intervention in Libya Chases Its Own Tail

Mar 23, 2011Marshall Auerback

Any intentions of boosting the economy will be obliterated by our spending on military actions.

Any intentions of boosting the economy will be obliterated by our spending on military actions.

As my friend Chuck Spinney has noted in an exchange of emails, President Obama's actions in Libya show that he has caved in to the "humanitarian interventionists" in his administration, as well as British/French/American post-colonial and oil interests. The result: yet another war with a Muslim country that has done nothing to us. Additionally, the fact that we are doing nothing to staunch the Saudi/Bahraini/Yemeni crackdowns smacks of hypocrisy and will hurt us even more on the Arab streets.

We seem to have developed a very basic rule of thumb when it comes to these wars of choice: if an insurgency threatens oil supplies directly or indirectly, we move. If it doesn't, we don't. Hence Syria can kill thousands of insurgents (as they did in the early 1980s) and we do nothing. Yemen doesn't have oil facilities; so we do nothing. In Bahrain we have a huge base and unrest has repercussions for the Shiite part of Saudi Arabia where the oil is. We move via the Saudis. In Libya there is oil. Again, we moved.

Gasoline today is where it was in 2008 when both WTI and brent crude oil were at $126 a barrel. Oil prices are at a level that can now impact demand. And not just by squeezing real incomes, but by depressing the sentiment of US consumers who are still lacking confidence from persistently high unemployment, threats of more downsizing, and falling house prices. The FHFA home price index for January with revisions just fell another full percentage point.

In short, we are out of policy levers to help the economy, especially now that we've unilaterally taken the fiscal policy option off the table. All of a sudden War #3 makes sense: We're in Libya to make sure that the oil keeps flowing, because a high oil price depresses what's left of consumer demand. In the meantime, as this nugget from The Hill illustrates, we've quickly blown through the budget "savings" proposed by the GOP, as we're spending about $100 million a day in Libya. And oil prices have continued to rise as a consequence of perceived dangers to oil production facilities brought about by the escalation of this conflict.

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Naturally, the GOP will look for more savings and the focus will invariably shift to "entitlement reform" led by "responsible, bipartisan" Senators, usually Democrats, such as my state's own Michael Bennet. He is being applauded by the mainstream media for his "statesmanlike" actions in his efforts to negotiate a budget package that includes possible changes in taxes, discretionary spending and entitlements such as Medicare and Social Security.

In the meantime, defense is surely off the chopping block. We're using our most sophisticated tomahawk weaponry in this conflict. The new tomahawk apparently is a very sophisticated piece of equipment. It stops over the target; it has an "eye" where it can look the target over,  communicate with the command, and then go after the target. Now the courtiers in the Pentagon can go back to their Congressmen and use this as a sign that the American people are getting value for the money in their defense budget. "Look at how sophisticated this stuff is," they can say. "Look how it's enhancing our ability to win this war while minimizing American casualties. If you implement stringent defense cutbacks, this is precisely the sort of program that will be endangered." A total crock, but it will work, as it always does.

So you can forget about defense cuts. This convenient little episode of military gymnastics has taken the defense budget off the chopping block -- which is yet more proof that the progressives will never make any progress unless they muster the courage to take on the Military-Industrial-Congressional Complex.

So what's on the horizon? More cuts in other areas of the budget for sure. The resultant fiscal contraction, if implemented, will put a halt to any incipient recovery, which the war is ostensibly designed to sustain by helping to reduce oil prices.

Do you ever get the feeling that American policy represents nothing more than a dog chasing its tail?

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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Obama's Delay in the Libya Intervention Took a Page from FDR

Mar 22, 2011David B. Woolner

Obama's insistence on international support may be his most Rooseveltian action yet.

As the crisis in Libya has unfolded, a number of commentators have criticized the Obama administration for the time it took to act. It has also been reprimanded for not taking the lead among the international community and for insisting, as the crisis intensified, that it would not act without the sanction of the United Nations Security Council.

Obama's insistence on international support may be his most Rooseveltian action yet.

As the crisis in Libya has unfolded, a number of commentators have criticized the Obama administration for the time it took to act. It has also been reprimanded for not taking the lead among the international community and for insisting, as the crisis intensified, that it would not act without the sanction of the United Nations Security Council.

Given the harrowing scenes broadcast from cities such as Zawiya, some of this frustration is understandable. But the process by which the administration arrived at the decision to intervene is significant, for it marks perhaps the strongest indication to date that President Obama wishes to return the United States to a more Rooseveltian foreign policy.

As an admirer of both Woodrow Wilson (for whom FDR served as Assistant Secretary of the Navy) and Theodore Roosevelt, FDR entered the White House with a unique perspective on global affairs. While he appreciated and maintained a deep respect for Wilson's idealistic calls for collective security and multilateral cooperation, he also understood -- from his distant cousin TR -- the important role and responsibility that the world's leading powers had for maintaining the peace.

Frustrated by America's neutrality laws and by the fact that the United States was not a member of the League of Nations during the inter-war years, there was little FDR could do in the 1930s except watch with alarm as the League failed to keep the peace in Asia, Europe and Africa. But this experience also proved significant, for once the United States entered the Second World War FDR became determined to establish a new world organization that would in effect combine the idealism of Wilson with the hard-hitting realism of TR.

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FDR did so by organizing the new international body around a concept he called the "four" -- later five -- "policemen." Originally made up of Great Britain, the United States, China and the U.S.S.R. (with France added near the end of the war), FDR sought to counter the ineffectiveness of the League by creating a stronger executive body. It was made up of these five powers plus a small number of other states, and would have the power -- and the means -- to act to keep the peace. His thinking along these lines can be traced as far back as January 1, 1942 when, in the wake of Pearl Harbor, some 26 governments signed a document called the "Declaration of United Nations" in Washington, D.C. Pledging to adhere to the Atlantic Charter and to the conviction that "complete victory" over their enemies was "essential" in the defense of "life, liberty, independence and religious freedom," the list of signatory states was led by the United States, Britain, the U.S.S.R. and China, followed by the other 22 nations in alphabetical order. Hence FDR's wartime alliance, commonly referred to as the "United Nations," granted pride of place to the four powers he felt were essential to the maintenance of world peace.

On matters involving the social and economic well-being of the world community, FDR assumed that a more broadly based deliberative body composed of all member states would hold sway. In essence, then, FDR separated matters of security from other non-security issues, arguing that a small executive body that could act quickly (and was supported by armed forces provided by the member states) must be placed at the head of any new "United Nations Organization" to insure that the policing function of the organization was efficient and effective.

Today's United Nations -- with a Security Council made up of five permanent and ten rotating members, and a General Assembly made up of all member states -- reflects this vision. So too do the many other multilateral institutions -- the IMF, World Bank, NATO and WTO -- that were created during and after the war. It is important to remember that these institutions were largely created under American direction in the firm belief that they would advance American -- and world -- interests. As such, President Obama's decision to adopt a multilateral approach to the crisis in Libya and to pursue a Security Council resolution in support of military action does not represent a diminution of American sovereignty or an abandonment of American leadership. What it does represent is a move away from the unilateralism that characterized America's foreign policy in the previous administration (and in the 1930s) and an embrace of the more traditional post-war multilateral expression of American power perhaps best exemplified by George HW Bush in the first Gulf War and by Harry S. Truman at the onset of the Korean War. In both cases, each president placed a great deal of emphasis on the need to obtain a Security Council Resolution and in building a coalition of powers -- which in Bush 41's case included Egypt, Syria, Morocco, Qatar, Oman, the United Arab Emirates and Saudi Arabia, among others -- before committing US forces to combat.

All this is not to say that there are not times when the United States can and must act militarily on its own authority. But the conditions and regional sensitivity surrounding the crisis in Libya make it imperative that we act in concert with other states in the region and with the endorsement of the international community as sanctioned by the United Nations Security Council. Doing so can be frustrating, but in the long-run we will be far better off having taken the time to gain the support of the world community in our efforts to help the people of Libya free themselves from the oppressive grip of one of the world's most brutal dictators.

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.

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Intervention in Libya: Neo-cons 1, Civilized World 0

Mar 21, 2011Marshall Auerback

While we go into Libya with oil on the brain, the social safety net that needs protecting at home will end up even more unraveled.

While we go into Libya with oil on the brain, the social safety net that needs protecting at home will end up even more unraveled.

There is no question that rising oil prices are a potential short-term problem for a global economy that is still characterized by high levels of private sector debt. In fact, the rise has probably largely canceled out the benefits of the tax cuts introduced by President Obama in the lame duck session of Congress last year. This is a problem. Some argue that wars do tend to have stimulative effects if they are big enough and destructive enough, but this is no reason to enter into one. In fact, I can't imagine a less moral justification for bombing a sovereign nation that hasn't attacked us, i.e. so that Exxon and Chevron don't have to surrender to Total. But this idea may indeed be part of what is driving policy in War #3. And now the Arab League is backing off their previous support, perhaps sensing what the West's true aims could be.

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The moral of the story? Never compete in rug sales with real rug salesmen. As Pepe Escobar noted today:

Libya is the largest oil economy in Africa, ahead of Nigeria and Algeria. It holds at least 46.5 billion barrels of proven oil reserves (10 times those of Egypt). That's 3.5% of the global total. Libya produces between 1.4 and 1.7 million barrels of oil a day, but wants to reach 3 million barrels. Its oil is extremely prized, especially with an ultra-low cost of production of roughly $1.00 a barrel.

When Gaddafi threatened Western oil majors, he meant the show would soon be over for France's Total, Italy's ENI, British Petroleum (BP), Spanish Repsol, ExxonMobil, Chevron, Occidental Petroleum, Hess and Conoco Phillips -- though not for the China National Petroleum Corp (CNPC). China ranks Libya as essential for its energy security. China gets 11% of Libya's oil exports. CNPC has quietly repatriated no less than 30,000 Chinese workers (compared to 40 working for BP).

So it makes sense to view the intervention in Libya through the prism of "the Great Game" of oil politics. In any event, the Pentagon gets to continue to redefine its role as our new global energy security protection tsar, thereby justifying further wasteful billions deployed in the interests of Versailles on the Potomac, as we won't cede the Libyan oil fields to Total. Consequently, defense cuts are now likely off the table. Neo-cons 1, civilized world 0.

Of course, the deficit hawks will continue to insist that we can't "afford" to keep spending like this, so the next step is to cut back on Medicare and Social Security. If that happens, it will be a far bigger threat to the global economy, along with the euro zone's ill-conceived emphasis on continued fiscal austerity.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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Lesson from Japan: We Don’t Need Nuclear Power to Solve the Climate Crisis

Mar 16, 2011Jon Rynn

nuclear-power-stackAnyone watching the aftermath of the earthquake in Japan can see: the human and ecological costs of nuclear power far outweigh those of any renewable energy.

nuclear-power-stackAnyone watching the aftermath of the earthquake in Japan can see: the human and ecological costs of nuclear power far outweigh those of any renewable energy.

On March 14th, the NYTimes stated that "This page has endorsed nuclear power as one tool to head off global warming. We suspect that, when all the evidence is in from Japan, it will remain a valuable tool." I want to argue that, to the contrary, the lesson to be learned from the catastrophe in Japan is that nuclear power is not even part of a sustainable solution to global warming. The whole idea behind preventing global warming is to protect the Earth’s ecosystems, collectively known as the biosphere. You can’t save the biosphere if it’s irradiated. The same problem rears its ugly head with most biofuels, certainly with corn ethanol; it won’t matter if the climate isn’t changing if the planet has been turned into one big desert because the soils and fresh water have been destroyed.

Speaking of water, the reactors that are melting down were supposed to be of a superior design, “light water” reactors, the “light” making it sound easier on the environment. But it turned out that unless you use (and abuse) prodigious amounts of circulating water, the whole system implodes. When the effects of global warming kick in and sea levels rise and erratic rainfall leads to unforeseen downpours or extended droughts, more sequences of rare events will lead to more nuclear power disasters.

Why is it worth potentially losing a region of a country, or even a whole country, just to generate electricity? What happens if a cloud of radiation heads for Tokyo, or moves into Korea? Why do we even have to worry about this?

I am not advocating the immediate closure of all nuclear power plants. All of the plants on or near earthquake faults, or on a coastline, should probably be considered for early retirement. I am advocating that no more nuclear power plants should be built.

Besides the painful facts of ongoing meltdowns, nuclear power plants don’t need to be built because truly renewable, or perhaps more descriptively, fuelless electricity technologies, like wind, are far superior to nuclear energy. The key to a sustainable energy supply is that there be no fuels. The fuels we currently use are oil, coal, gas, plant matter, and… uranium. The key characteristic about fuels is that we obtain energy from them by burning them, making them explode, letting them radiate -- that is, they create great amounts of heat.

Now, burning a fuel is very attractive because you can obtain large amounts of energy. It’s easy to concentrate. The problem is that burning something is inherently dirty and wasteful. Electric power plants that use fuel waste about two-thirds of their energy, heat that simply dissipates into the environment. Think about that -- the allegedly high-tech world of fossil fuels and nuclear power is wasting way over half of its fuel. The third problem with fuels is that they run out, as oil is starting to do.

Coal plants are very destructive to human health, certainly more on a day-by-day basis than nuclear plants, because of the mercury and other pollutants that go up the smokestack. And then, of course, there is the carbon dioxide. About 60 percent of global greenhouse gas emissions come from fossil fuels. The nuclear power industry also creates carbon emissions, because of all the mining, transportation, and construction surrounding its use. But it emits less carbon than do fossil fuels. The problem, clearly, is that every decade or so a significant part of the Earth’s surface is threatened with irradiation. Again, not a solution.

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Wind, solar, geothermal, and hydro (water) energy of various sorts have no fuel. They convert a source of energy into electricity, using machinery. The source of energy is basically unlimited. There is no pollution or carbon dioxide (although classic hydropower, in the form of dams, can wreak havoc on ecosystems and emit carbon dioxide when organic matter putrefies in their artificial lakes). Although renewable energy technologies also waste most of the energy going through them, this waste is not in the form of heat.

Heat waste is what is destroying the nuclear power plants at Fukishima, and this phenomenon is the result of an overly complex system. Charles Perrow wrote a book called “Normal Accidents: Living with High-Risk Technologies” way back in 1984. Recently, there has been a good deal of interesting work on the idea of resiliency, that is, the capacity of a system, whether an ecosystem or a society, to withstand mistakes or problems or failures (for example, see the book “The Upside of Down” by Thomas Homer-Dixon). Resilient systems don’t produce as much as nonresilient, or brittle, systems, at least in the short term -- but in the long-term, resilient systems are much more effective and useful because they don’t collapse. And when something collapses, like a nuclear reactor, at best it stops being useful and at worst it becomes extremely destructive.

Brittle systems can look more productive in the short-run, because often they are using themselves up and destroying their surrounding ecosystems in the process. Another way to look at it is that they are capital-destroying. For instance, agriculture can achieve fantastic levels of output for a while, but it can destroy the soil and water on which it depends, as shown by David Montgomery in his book “Dirt: The Erosion of Civilizations”.

In the case of nuclear power, in the long-term, there is probably nothing more expensive, because the nuclear waste -- such as the “spent fuel rods” that at the time of this writing are burning and spewing radioactive gas -- has to be taken care of for hundreds or even thousands of years. And then there is the occasional country or region that is destroyed. And uranium mining does the same thing, at a smaller scale. That is, if the costs of nuclear power are averaged over a few thousand years, it will turn out to be the most expensive energy ever produced.

You may see erudite and sophisticated debates about whether wind, nuclear, or coal are more expensive in terms of kilowatts of electricity or kilowatt hours. But these costs can never include the cost of a collapse of a country, region, or entire civilization.

The ultimate irony of nuclear power may be that it is totally dependent on government intervention in the economy, and yet conservative Republicans are its greatest boosters. Because it can destroy whole regions, only the government has the capacity to clean up the mess, not private insurance companies. When it comes to energy, Republicans are hardcore socialists. They advocate for subsidies for fossil fuel companies, for the use of the military to protect oil trading lanes and oil deposits, for insurance for nuclear power, and for research and development for all of them.

Governments have always been behind nuclear power, and by now the industry has become thoroughly entangled with huge private firms like General Electric and Tokyo Electric Power. The political economic inertia, built up over 60 years, is on autopilot -- or maybe the cooling system has malfunctioned, whichever technical metaphor you prefer. Utilities bandwagon with a “sure” thing, something that has been done dozens or hundreds of times before, like coal plants or light-water reactors. But wind installations are expanding exponentially. Even the short-term costs of wind and large solar farms is approaching coal in the short-term, and the costs of nuclear plants are expanding at the same rate, kept alive by subsidies from socialists like the Republican Party.

Let us hope that Fukishima’s greatest damage is to the nuclear power industry, and not to Japan and the surrounding regions. And let us hope that nuclear energy is never, ever again, included in a list of clean energies. Nuclear power is over -- long live renewable energy!

Jon Rynn is the author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science and is a Visiting Scholar at the CUNY Institute for Urban Systems.

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Houses Most Overvalued in Australia and Hong Kong, Most Undervalued in Japan

Mar 15, 2011Edward Harrison

house-in-hands-150Perhaps a tiny bit of good news for Japan as it heads down the road of rebuilding after a massive tragedy: the next housing bubble is building elsewhere.

house-in-hands-150Perhaps a tiny bit of good news for Japan as it heads down the road of rebuilding after a massive tragedy: the next housing bubble is building elsewhere.

A few weeks ago, The Economist put out its quarterly gauge of house price values. Australia just beat out Hong Kong as the most overpriced market in the developed world, with an overvaluation of 56%. Japan was by far the most undervalued market, with an undervaluation of 35%. The only other housing markets that were undervalued, according to The Economist, were Germany (12%) and the U.S. (7%). (This was well before the earthquake and tsunami in Japan, so it is hard to say what impact those events will have on house prices.)

This same report was a good one to look at regarding the housing bubble as it was popping. In June of 2005, The Economist published an article called "In come the waves" that was quite prescient:

Never before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000. What if the housing boom now turns to bust?

According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stock market bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stock market bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.

-as quoted at Credit Writedowns, June 2008 in Naysayers, the housing bubble was obvious (with Economist 2005 chart for comparison)

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What is The Economist saying now? It's pointing to Hong Kong first and foremost:

[W]hatever those 31,000 agents say, Hong Kong homes are not a good deal, according to our latest global house-price index (see chart). In theory, the price of a home should reflect the value of the services it provides. People who choose to rent their homes buy those services on a monthly basis. Home prices should therefore reflect the rents that tenants pay. Our index calculates the ratio of prices to rents in 20 economies. In Hong Kong, that ratio is now almost 54% above its long-run average -- and it is still rising.

People in Hong Kong often blame buyers from mainland China for pushing up prices. Ironically, mainlanders often blame buyers from Hong Kong for their own property frenzy. At a recent conference at Tsinghua University in Beijing, students complained that their parents had scrimped and saved to send them to university in the city, but now upon graduation they could barely afford to live there.

Prices in China are not that high relative to rents: our index suggests that homes are overvalued by less than 13%. But this is based on the government's 70-cities index, which showed prices rising by only 6.4% in the year to December. That figure seemed implausibly low to many of China's stretched homebuyers, and the Chinese government appears to share their scepticism.

Of the bubble markets where the bubble has popped, the U.S. seems to have corrected the most. Notice that Spain still has massively overvalued house prices according to this measure. Ireland and Britain is also well above the median. Here's the chart:

economist-house-prices-graph

Edward Harrison blogs at Credit Writedowns, where this piece originally appeared.

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What Does the Earthquake Mean to Japan's Fiscal Future?

Mar 14, 2011Marshall Auerback

Let's not add insult to catastrophic injury. Japan must reconstruct its country and has the funds to do so.

There is no doubt that this terrible earthquake is worse than the Kobe tragedy of 1995. Kobe was a 7.4 on the Richter scale, but the quake that hit Sendai was 8.9 -- many hundreds of times more powerful. And then there was the tsunami. The devastation is so great that no one knows how catastrophic it is likely to be in the end. But the worst of it lies ahead.

Let's not add insult to catastrophic injury. Japan must reconstruct its country and has the funds to do so.

There is no doubt that this terrible earthquake is worse than the Kobe tragedy of 1995. Kobe was a 7.4 on the Richter scale, but the quake that hit Sendai was 8.9 -- many hundreds of times more powerful. And then there was the tsunami. The devastation is so great that no one knows how catastrophic it is likely to be in the end. But the worst of it lies ahead.

Consider: In the case of an 8.9 quake, the odds are there will be one aftershock of more than eight on the scale and 10 of more than seven. So far we have only had one that has been more than a seven. Meanwhile, aftershocks are moving toward Tokyo. The quakes so far have weakened buildings far, far from Sendai, including in Tokyo, making them vulnerable to more shocks. In effect, there may be several Kobes ahead that will be hitting installations that are already now prone to collapse or malfunction.

Japan's Prime Minister, Naoto Kan, called this the greatest tragedy since World War II. People are slowly beginning to imagine how the country will cope going forward, but it didn't take the blink of an eye for the fiscal deficit hawks to descend in force. They suggest that Japan can ill-afford another big round of government expenditures, given what they call its looming "national insolvency." How must it feel to people in shock to hear the news bulletins telling them that their government is broke and unable to help the population? Particularly when it isn't true.

Media folks like to cite Japan as Exhibit A for the failure of aggressive fiscal policy. But this was not always the case. Prior to the end of the bubble era, Japan "chose" a low employment path -- essentially holding the employment ratio constant -- with high aggregate demand, which generated rapid growth in productivity. Policy makers maintained demand at a high level through a combination of very large government deficits, high investment demand, and generally a high flow of net exports after 1980. However, toward the end of the 1980s, the government deficit rapidly fell and the budget moved to balance in 1990. When the U.S. "double-dipped" in the early 1990s recession, and as other Asian countries began to effectively compete with Japan for world markets, foreign markets demanded fewer Japanese products. Then came the Asian financial crisis, followed shortly afterward by the bursting of the high tech bubble in the US. Together, these negative influences lowered aggregate demand and contributed to a deep and prolonged recession. The country's "stop-start" fiscal policy, undertaken from the mid-1990s until around 2003, didn't help. Japan suffered from repeated and misguided attempts to elevate budget reduction above employment and growth policies. As recently as last year, this fiscal stance remained firmly entrenched in Tokyo. During the Upper House elections, Japan's Prime Minister, Naoto Kan, publicly mooted doubling the country's consumption tax from 5% to 10% in order to "fund" the public deficits.

You have to credit the deficit hawks with consistency. But as Ralph Waldo Emerson noted, "A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines." This kind of consistency is now embraced by small-minded politicians who continue to peddle a falsehood when over 10,000 people are now presumed dead.

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Let's be clear: Japan does not face a fiscal crisis in the sense of going broke. Japan has a sovereign currency, and therefore its government has always had the capacity to purchase anything and everything for sale in yen. But the country's fiscal situation has been weakened by the inconsistent "stop/start" policies that have been adopted over decades, which in turn have led to sluggish economic growth, creating the huge budget deficits that the fiscal hawks now regularly decry. When you have a collapse in private spending, then public spending has to increase both in absolute terms and as a proportion of GDP to make up for that if you want output growth and incomes to be stable.

Even allowing for Tokyo's inconsistent application of fiscal policy over the past two decades, it is worth noting that had the Japanese government continued its planned deficit reduction in 1997 and not provided further budgetary stimulus by 2003 (when the Ministry of Finance finally abandoned its futile "fiscal consolidation"), the situation would have been significantly worse than what it already is. To acknowledge that persistent budget deficits do not cause interest rates to rise and do not cause hyperinflation does not imply that the policy options embraced by the government have all been good. But simply stated, things would have been much worse in their absence (with much higher corresponding budget deficits).

Globally, today's deficit reduction fetishists suffer from collective amnesia: they have already forgotten that fiscal policy has saved the world from a Great Depression. The policy response adopted in 2009, although insufficient (to judge from the presence of still high levels of unemployment), put a floor on global aggregate spending power and virtually demolished everything you'll read in modern mainstream macroeconomic textbooks about the efficacy of fiscal versus monetary policy. Yet some three years after the great financial crisis of 2008, and now within hours of the worst human tragedy to befall the Japanese people in decades, we have completely lost track of what's happened. And so we are basically setting ourselves up again for the next crash.

In the specific case of Japan, the social situation in the wake of this catastrophe will become untenable unless the government provides further fiscal support. Naturally, people will debate about how they might do that given that you can only build so many highways or bridges. But today the case for rebuilding basic infrastructure after one of the biggest earthquakes of the last century is a policy no-brainer. And even after the obvious reconstruction tasks facing Japan, an aging society brings greater demand for personal care services, and that is one labor-intensive growth area that should still be targeted by the government.

Perhaps the deficit hawks hate government spending so much that they are prepared to tolerate the mass unemployment and massive wealth losses that would accompany a zero discretionary fiscal response. Are they also suggesting that we should risk a nuclear meltdown as well in pursuit of this principle, given the damage to the country's nuclear reactors? That would be truly cheating future generations, because the costs of not intervening with fiscal policy in this kind of circumstance would bequeath a disastrous environmental legacy to Japan that would last for decades, possibly centuries, as any resident of Hiroshima or Nagasaki could easily attest. Beyond that apocalyptic point, when you lose your home because you can no longer pay the mortgage after losing your job, the wealth impact is huge and long-lasting.

An earthquake of this magnitude is something one would never wish on any country. Given the reservoir of social capital that has sustained Japan through two very difficult decades, the country is probably better equipped than most to deal with this terrible situation. And if it finally moves Tokyo's policymakers beyond their misguided deficit reduction obsession, then the resultant policy response will represent the most honorable way of respecting the memory of those 10,000 or more who lost their lives, to say nothing of the millions who are now suffering from the tragedy. To retreat into stale arguments about how the government can't "afford" to help at a time like this not only reveals economic illiteracy, but also the moral bankruptcy at the heart of the neo-liberal agenda now driving today's policy makers globally.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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What Eric Cantor Doesn’t Get About Social Security

Mar 2, 2011Caitlin Howarth

social-security-200Young people across the globe are worried about how their parents will retire and how they'll find jobs -- not reining in government.

social-security-200Young people across the globe are worried about how their parents will retire and how they'll find jobs -- not reining in government.

Last Thursday night I had the dubious privilege of seeing House Majority Leader Eric Cantor address students at the Harvard Kennedy School for a forum hosted by the Institute of Politics. In a fifteen minute speech focusing on the budget cuts and austerity measures working their way through Congress, Representative Cantor managed to demonstrate how thoroughly he didn't understand his young audience:

"Not long ago, in streets of both Greece and France, we saw young people protesting against the government's decision to rein in retirement benefits -- even though they were years away from receiving them. Translation: very early in their lives, these individuals were conditioned to rely and depend on the government for their livelihood, for their future."

Simply put, the gentleman from Virginia just doesn't get it. What the world saw in Greece and France -- and what we continue to see in Egypt, Tunisia, and Syria -- is not the socialist zombie apocalypse, but rather a well-organized, well-informed protest against gross economic injustice and systematic undermining of the middle class.

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Young people the world over, including those in the US, know exactly why their parents and grandparents need the security of the pensions they spent lifetimes working for. Not so long ago, growing old meant growing poor -- and even today, Census data show that Social Security benefits are still insufficient to prevent 1 in 6 elderly persons from falling into poverty, particularly elderly women who disproportionately rely on Social Security and supplemental programs like Meals on Wheels to help them meet basic needs. (For comparison, Social Security used to reduce elderly poverty from 1 in 2 to 1 in 8, according to 1999 figures.) And in today's economy, with baby boomers pushing up against weakened 401(k)s and faltering home prices, these gloomy statistics are more personal than ever.

What does this mean for young people in Greece, besides not wanting to see their parents' last years be their worst ones? What does it mean for 20-somethings in France who move back home to help parents pay the bills? What does it mean for college graduates in America who, after incurring their loans and earning their degrees, scramble for the chance at a mere unpaid internship?

What Eric Cantor doesn't get is that we are all in this together. What Congress doesn't get is that when the older generation cannot retire, the younger generation gets shut out of the labor market. What austerity fans toasting to government hiring freezes don't get is that those jobs were supposed to receive the biggest wave of civically engaged, community-committed young workers since the end of World War II.

Maybe it was easy to mistake his audience that night -- after all, this is the campus that spawned Facebook and its 20-something billionaires. But the students packed into the Kennedy School that night weren't the ones who will build the next great social network. They were the students who will boldly experiment with education and science, fixing health care and strengthening our national security. They view their task not as a game, but as a duty owed to one another.

They are a generation that depends not on government, but asks government to depend on them. Rep. Cantor should follow their example.

Caitlin Howarth is a former national policy director at the Roosevelt Institute Campus Network. She is currently pursuing a masters in public policy at the Harvard Kennedy School.

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The Original Tea Party Battled Global Mega-corporations

Feb 28, 2011Joe Costello

tea-party-150A truly populist movement would take on the abusive power of corporations, as our forebears challenged the East India Company. Today's Tea Party falls short.

tea-party-150A truly populist movement would take on the abusive power of corporations, as our forebears challenged the East India Company. Today's Tea Party falls short. **Check out New Deal 2.0 series "Founding Finance", which highlights early Americans who stood up to financial elites.

Don't believe illusion
Too much is for real
Stop your cheap comment
We know what we feel
-- Pretty Vacant

I'll start by saying I have little idea of what the Tea Party is. I certainly know the New York Times doesn't know what it is, or for that matter most of the political class. I know components of it, such as the Koch brothers or the various elements of the Republican and conservative political class who quickly glommed onto it, helping elect a Republican majority to Congress. But I would suggest at one point, and maybe only briefly, a legitimate vocalizing and activating of Americans occurred. Citizens were concerned about the direction of our country.

So I watched with interest the other day when CSPAN televised a Tea Party "Town Hall" from DC, which one can already see is problematic. I scratched my head when I saw the participants. Some may legitimately be considered "of" the movement, such as Rand Paul, Mike Lee who took out the Republican incumbent in Utah, and Alan West of Florida. But there was also five-term incumbent Steve King from Iowa, three-term incumbent Michele Bachmann from Minnesota, and adding a sublime degree of the incredulous to the whole affair, three-decade Utah incumbent Orrin Hatch.

However you want to define the Tea Party, if you do it with Orrin Hatch you're saying it has no meaning. No doubt after watching his fellow Utah senator go down in a blaze of defeat, Orrin's got one thing on his mind. You have to give it to anyone who has the audacity after serving three and half decades in the US Senate to start his speech stating, "We live in perilous times" and "We've run this country into the ground." And you want to be reelected senator? Phew!

The rest of the Tea Partiers were fairly short on specifics and long on rhetoric. There was a lot of references to America's founding and its "founding documents," all said with an overall sense that the federal government has extended the boundaries set for it. It's a point that is difficult to argue with, but what exactly it means needs extensive discussion.

Mike Lee of Utah tied the movement of today to its historical antecedent stating:

The Tea Party movement started not February 2009, it started in 1773 when a group of Americans decided they were overtaxed and over regulated, by a distant government not based in Washington DC, but London, and that government was oppressive to the people, slow to their concerns and people decided to take action.

A simple enough historical description and an accurate expression of how many, if not at times most, Americans feel about Washington DC today. But Mr. Lee's tying the present into the past Tea Party made something click. This present Tea Party voiced important and legitimate concerns about the bank bailouts and the power of corporations in America. As Dick Armey, another Republican political class member glomming onto the movement, told John Stewart, "TARP! TARP! TARP!" was a rallying crying across the country for the nascent movement. Yet both in the corporate media's coverage and the rhetoric of the movement's self-proclaimed representatives, I hear little about this concern.

That wasn't the case for our revolutionary forebears. The past's Tea Party understood implicitly the tea they were throwing into the Boston Harbor that night belonged to the East India Company, not the crown. In Nick Robins' excellent history of the East India Company, "The Corporation That Changed the World", he writes how the American colonial press was filled with vitriol against the East India Company, which the English crown had given monopoly control of the tea trade.

Robins writes:

From October onwards, newspapers and handbills provided the citizens of the 13 colonies with a barrage of analysis and polemic. The Boston Evening Post of 18 October 1773, for example, contained a powerful article from 'Reclusus' exposing the folly of Lord North's plan. "Though the first Teas may be sold at a low rate to make a popular entry" he acknowledged, "yet when this mode of receiving tea is well established, they, as all other Monopolists do, will mediate a greater profit on their goods, and set them at what price they please."

Lord North's plan was an attempt by the crown to lesson the unpopular taxes, but was meant with more opposition than the original Stamp Act of eight years before. Robins adds another railing and accurate colonist's critique against the "Company":

Writing in The Alarm newsletter, 'Rusitcus' underlined how 'their conduct in Asia for some years past, has given simple proof, how little they regard the laws of nations, the rights, liberties, or lives of men'. 'They have levied War, for the sake of gain,' adding: 'fifteen hundred thousands, it is said, perished by famine in one year, not because the earth denied its fruits, but this company and their servants engulfed all the necessities of life, and set them at so high a rate that the poor could not purchase them.'

As Robins points out, the colonials actions against the Company preceding the Tea Party had been so highly effective that "Legal imports of the Company's tea plummeted from a record 869,000 lb in 1768 to just 108,000 lb in 1770."

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It's an interesting fact that the American colonists' important and vivid critiques and opposition to the power of the East India Company have mostly been lost to history, as in fact has the history of the Company itself. Both are relevant to our age and to anyone concerned with the questions of freedom, liberty, and democracy. The East India Company set the precedent and became the model for the global mega-corporation of our age in both its productivity and in corruption, and its completely anti-democratic structures and behaviors. The East India Company existed for over two and half centuries. In that time, with and without the help of the English government, the Company gained monopoly control over Asian trade, conquered and impoverished vast chunks of India, causing the largest famine of India's history, and fought two wars with China to keep the illegal and despicable opium trade open, enslaving millions of Chinese people.

The East India Company was so notorious in its day that it gained the opposition of Adam Smith, Edmund Burke, and Karl Marx -- not exactly an historical coalition that would spring quickly to anyone's mind. Edmund Burke, one of the patron saints of American conservatism, would lead the charge in the English parliament for six years in a case to prosecute the head of the Company. Burke and his partner Richard Brinsley Sheridan

Compared Hastings [the Company's chairman] to the 'writhing obliquity of the serpent' and damned him for a character that was all 'shuffling, ambiguous, dark, insidious, and little'. And as for the Company, it combined 'the meanness of a pedlar and the profligacy of pirates... wielding a truncheon with one hand, and picking a pocket with the other.'

Meanwhile Adam Smith, the tremendously misinterpreted and wrongly deified advocate of "free markets," wrote of the Company (my bold):

The result of this anti-competitive behavior was to raise profits above the natural level, amounting to [Smith writes] 'an absurd tax upon the rest of their fellow citizens.' Cartels are thus an ever present danger in a market economy and in Smith's immortal words, 'people of the same trade seldom meet together, but the conversation ends in conspiracy against the public or in some contrivance to raise prices.'

An absurd tax on the rest of us! What can better describe the control of the American economy by the descendants of the East India Company, our own era's global mega-corporations? As Robins states about our present economy, "Over 60 percent of international commerce now takes place within corporations rather than in the open marketplace, making it idle to talk of free markets."

Sounding as relevant today as two centuries ago, Robins adds of the company's operations:

It was the speculative behavior of corporate insiders and short-term investors that emerged as the most powerful factor in the Company's spectacular fall from grace in the middle of the 18th century. Financial engineering, flimsy managerial controls and inadequate regulation all played their part... the same passion for aggressive acquisitions, the same obsession with executive perks for corporate insiders, and the same focus on executive self-preservation as ordinary shareholders started to suffer the consequences of excess.

And what did this financial engineering, inadequate regulation, and corporate insiderism lead to? Repeated bailouts by the government, the largest at the end of the 18th century. Robins writes:

To avoid a run on the stock, [Prime Minister] Pitt pushed through legislation extending the Company's ability to raise debt, and so pay its regular dividend at 8 percent. Of course, this measure made little financial sense as the Company was paying dividends out of debt. But it helped to stabilize the situation.

Sound familiar?

The East India Company, like all corporations following it, was chartered by the English government, which was a monarchy, and thus the Company had plenty of monarchical characteristics. Our modern US mega-corporations are all also chartered by government, though with what at this point can only be called a quirk of history, they are all chartered through our state governments. With this chartering through the states, it was hoped corporations might be more functionally democratic.

The birth of the modern corporation and the American republic were roughly contemporaneous. The early republic, outside its dealings with the East India Company, had some understanding of these new entities, but a half-century later understood much more. The grandsons of John Adams, the republic's second president, wrote:

And yet already our great corporations are fast emancipating themselves from the State, or rather subjecting the State to their own control, while individual capitalists, who long ago abandoned the attempt to compete with them, will next seek to control them. In this dangerous path of centralization Vanderbilt has taken the latest step in advance. He has combined the natural power of the individual with the factitious power of the corporation. The famous "L'Etat, c'est moi" of Louis XIV represents Vanderbilt's position in regard to his railroads. Unconsciously he has introduced Caesarism into corporate life. He has, however, but pointed out the way which others will tread. The individual will hereafter be engrafted on the corporation, democracy running its course, and resulting in imperialism; and Vanderbilt is but the precursor of a class of men who will wield within the State a power created by the State, but too great for its control. He is the founder of a dynasty.

However, it wasn't Vanderbilt who introduced Caesarism into corporate life, it was there in the corporate structure from its monarchical inception with the East India Company. We live in a time with not one corporation (and while quite powerful the Company still had a relatively small grip on the overall British economy), but an economy that is completely dominated by several hundred massive corporate structures that are riddled with corruption, insiderism and speculation, to such a degree that their "absurd tax" on the rest of us dwarfs the taxes of DC.

Yet there is no American politics against "oppressive" corporate power. Both parties are completely in the pockets of the corporate oligarchy and if there were or are concerns expressed by the present Tea Party, they've been completely censored by the corporate media and the more loathsomely decadent Republican political class.

At the beginning of the 21st century, we must, like this republic's founding generation, step up to talk about and take action concerning our corrupted and dysfunctional political system. It must include all aspects of power, and that includes the enormous power of the modern global mega-corporation. We would do well to follow their example -- the America tradition -- that the first step to dealing with unaccountable power is to break it up. That is the tradition set by the colonial Tea Party; it is a necessity of self-government. Our present Tea Partiers might find it useful to go back and read more of America's "founding documents," all the newspapers, letters, and pamphlets written in the years leading to the revolution. They would find that the founders, not just those in the pantheon but the thousands scattered up and down the eastern seaboard, had as much concern about the unaccountable power of the nascent corporation as they did of their ancient King.

Joe Costello was communications director for Jerry Brown’s 1992 presidential campaign and was a senior adviser for Howard Dean’s effort in 2004.

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U.S. Middle East Policy: Another View of the Compass

Feb 25, 2011Daniel Berger

egypt-flag-wall-150A real understanding of the Administration's strategy to bring democracy and stability to the Middle East.

egypt-flag-wall-150A real understanding of the Administration's strategy to bring democracy and stability to the Middle East.

This responds to Naill Ferguson's misconceived diatribe against the Obama Administration's reaction to the overthrow of Hosni Mubarak in Newsweek. In it, Ferguson presents three critiques of the Administration's actions: that it was misinformed and unprepared, that it acted in a contradictory manner, and -- most damming -- that it has no overall geo-strategic plan either for the Middle East or elsewhere.

Ferguson's overall critique concerning the Middle East is fundamentally misdirected and, to the extent that it has any validity, really relates to the effects of 40 years of dubious U.S. foreign policy decisions, for which Obama can hardly be held responsible. During this period (including during the entire Cold War), the U.S. actively supported a long line of Middle East autocrats, almost always to the detriment of the Arab populaces and societies over which they ruled. Many have said recently that in this approach the U.S. favored "stability" over other considerations. It, of course, did not. What it favored was the ability to make deals with existing governing elites in the Middle East region to promote U.S. interests including fighting our enemies, securing our principal energy supply, and protecting Israel.

In retrospect, the U.S. roughly achieved these aims -- but for what now appears to be only on a temporary basis. And it did so seemingly at the expense of both long-term stability and the protection of its interest in (so far) the two largest and geo-significant countries in the region: Iran and Egypt. Ferguson assumes the prospects of future cooperation with these countries will be bleak.

It should be left to historians to decide whether this was a reasonable trade-off. Suffice to say, at least for the Cold War period, the U.S. had a real geo-strategic adversary, the Soviet Union, whose existence could arguably justify our unconditional support of the various Middle East dictators on our payroll. Since the fall of communism, however, no comparable excuse has existed.

That the U.S., in retrospect, should at some point have pursued other policies rather than helping to entrench the Middle East governing status quo long before Obama appeared on the scene is, of course, not Obama's fault. Indeed, the U.S. had many years -- decades -- and many, many opportunities to solve the basic policy challenges in the region in the post-World War II era. The fact that it was able to accomplish lasting success in only one of its core missions represents a profound judgment against U.S. policy making and execution in this region -- particularly over the last 20 years.

Nor is the Obama Administration's decision to support democratization in Egypt and hope it will produce a regime that will cooperate with us indicative of faulty policy formation, indecision, or lack of planning. It is a necessity. Indeed, in light of the history of U.S. involvement in the Middle East, what realistic alternative do we have? What grand design does Ferguson have in mind?

Furthermore, Ferguson's suggestion either that different rhetoric or more resolve from Obama could have saved Mubarak represents a fundamental misunderstanding -- bordering on delusion -- of the reality of power in Egypt and the Middle East. The issue is not about U.S. resolve, but rather about the lack of legitimacy of Mubarak and other corrupt, stagnant regimes in the region.

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Instead of trying to shift responsibility from others with whom it really resides, we might want to reflect on policies that would enhance, rather than detract from, the possibilities for successful democratization -- and which should have been followed earlier. First and foremost is to reject Ferguson's conclusion that the principal danger now in Egypt is an Islamic fundamentalist takeover. This outcome would represent the end result of what is referred to as the "Iranian" model of Middle East political change and is the outcome forecast to occur by Ferguson's recent host, the Israeli government. To the contrary, the biggest danger both to and of democratization in the region and Egypt in particular is a continuation of economic conditions that consign 40% of Egypt's population to unemployment and permanent poverty. Without some meaningful improvement in economic conditions for the Arab masses, democratization is doomed and will lead to what Ferguson fears -- or worse.

So in addition to supporting a transition to democratic process in Egypt (and since when is an interim government to be followed by elections sound policy in Iraq but not in Egypt?), the U.S. needs to support policies that permit renewed rapid economic growth in Egypt and the region, improved work place conditions, and (God forbid) a fairer distribution of wealth. Supporting some type of social justice agenda like this would be the single most important step that the U.S. could take to ensure the successful emergence of secular, representative democracy in Egypt and in the region and to blunt religious autocracy and extremism. It goes without saying that strong secular democracies would also represent desirable geo-political counter-weights to Iran. (That, and finally presiding over a fair and just settlement of the Arab-Israeli conflict by persuading Israel to trade land for peace, would be the most needed steps the U.S. could now take to achieve its objectives and protect its interests.) In his Cairo speech (indeed, in the very language cited by Ferguson), Obama explicitly recognized these social justice concerns as a bulwark against extremism. Thus, contrary to Ferguson's contention, Obama arguably has accurately analyzed a number of the fundamental dilemmas in the region.

Markets, the world economic system, shared economic growth: Duh, sounds like a no-brainer. It is mystifying why a commentator of Ferguson's stature and one of the most public proselytizers of globalization would not give Obama some credit -- instead of dismissing his remarks as hopelessly naive.

Finally, Ferguson completely omits another fundamental U.S. policy blunder in the Middle East and one which it also had decades to solve: energy dependence on an unstable area. Thirty-five years ago, Jimmy Carter (for whom Ferguson exhibits contempt) proposed and got enacted by the Congress a comprehensive energy policy, including the development of alternative fuels and increased energy efficiency and conservation. If we had followed through on even a portion of it, it would have made the U.S. completely independent of foreign oil production today. Leaving aside the economic benefits that would have accrued in terms of innovation and first-mover advantage in the energy industry (which would have positioned us to dominate long before the emergence of China as an economic competitor) and the advantages which we would have realized from energy independence in dealing with the problem of global climate change, ending Middle East oil dependency would have dramatically altered for the better the geo-political equation there. Now that would have been a real grand stratagem of the type Ferguson called for (and still could be). Again, Obama was not to blame for dismantling Carter's credible and sound plan to end dependence on Middle Eastern oil. Rather, Reagan and the Republican "revolution" of the last 30 years were responsible for that disaster. Nor is he standing in the way of alternative energy development, even if belated but still necessary, to end dependence on foreign oil.

Ferguson would have done a greater service to readers of Newsweek by discussing these and other fundamental flaws in U.S. foreign policy in the Middle East, rather than assailing Obama with the usual litany of neo-conservative fixations: radical Islam, Iran, revanchist Russia and the Chinese "threat." Only if we come to terms with the history of our Middle East policymaking and its effects can we understand Obama's reaction to Mubarak's fall, what needs to be done now, and the sufficiency of his response -- all matters on which Ferguson was silent.

Daniel Berger is an attorney in the field of complex litigation, including securities and anti-trust litigation, and has a broad-based knowledge concerning the structure and functioning of the US economy and US financial markets. He practices in Philadelphia.

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