Saturday, May 29, 2010

Arizona vs. Obama

President Obama has vigorously stated his opposition to Arizona’s recently enacted immigration law.  His stated concern, shared by many, is that persons of Hispanic origin are most likely to be singled out for proof of legal residence in the state. Given that the nearly half-million estimated illegal immigrants in Arizona are of Hispanic origin (Spanish-speakers from Mexico and Latin America), this supposition is plausible. Concern about “ethnic profiling” overrides enforcement of immigration law for those opposing Arizona’s law.

Obama’s critics accuse him of using Arizona as a political ploy to shore up his base with Hispanic voters. John McCain, previously a supporter of comprehensive reform that included a path to citizenship (and voting) for illegal immigrants already in the U.S., has harshened his stance on immigration. In a tough Republican primary campaign with former House of Representative member J.D. Hayworth, McCain is demanding that Obama send troops to secure the border.

Supporters of the Arizona law point to several murders illegals have committed against Arizona residents, a rise in kidnaping, straining public services, drug smuggling, and so on.

Let’s try a thought experiment. Suppose the bulk of illegal immigrants crossed over from Canada, not Mexico. Suppose they were smuggling drugs, murdering American residents, working in fields and factories for cheap wages, using public hospitals and schools without paying the full cost of these services, and trashing the environment as they made their way through open country to the nearest city.

Now, for the final piece of the puzzle, suppose some were members of a white right-wing militia that was based in Canada but extending its reaches throughout the Northern United States. How long do you believe it would take for President Obama to dispatch whatever number of troops was required to secure the border?

Friday, May 28, 2010

Will Tax Increases Derail the U.S. Economic Recovery?

With great trepidation, fear of being tarred and feathered, burned at the stake, thrown under the bus, or tied on the rails in front of a high-speed locomotive, the concern over tax increases derailing the U.S. economic recovery may, just may, be too narrow a view of economic policy.

The debate on tax increases, always hot, is heating up. Supply-siders warn that raising tax rates during an economic slowdown, especially on capital income, is just plain dumb. They argue that higher tax rates will reduce the supply of new capital, discourage small business formation, retard job creation, all the while failing to achieve the projected revenue in pursuit of deficit reduction.

On January 1, 2011, barring an extension of all the Bush tax cuts, the top marginal rate on households is scheduled to rise from 35% to 39.6%. Rates of tax on dividends, interest, and capital gains will also increase.

Among the most contested changes is a proposed rise in the capital gains rate of 15% on “carried interest,” to a split of 75% of the top marginal rate and 25% at the full marginal rate in 2013. As both of these will be increasing, the total tax rate on carried interest will reach 38.5%. Proposals and amendments to extend or amend other taxes and/or impose new taxes to “pay” for some of the extensions are directed disproportionately at upper income households.

Supply-siders say if you tax something you will get less of it. Critics of supply-siders say that the increase in the top marginal rate from 31% to 39.6% in 2003 went hand-in-hand with a rising stock market, strong job creation, and large budget surpluses in Clinton’s second term. Facts are facts. The Clinton years provide evidence to the contrary. How does a voter choose between the two points of view?

Strictly speaking, the supply side claim assumes ceteris paribus in all other economic factors that affect economic activity and fiscal conditions. Other factors can have as large as, or an ever larger, impact on economic activity and budget deficits. Among these are productivity, monetary policy, debt, regulation, global business conditions, labor markets, resource prices, natural disasters, external shocks (e.g., September 11), and war. Events or policies that reduce the cost of business or consumption amount to a (implicit) tax cut; conversely events or policies that raise the cost of business or consumption amount to a (implicit) tax increase. Changes in economic factors can offset the benefits of tax rate reduction or the harm of tax rate increases.

An ideal mix would be low rates of tax (especially the Hall-Rabushka flat tax), stable non-inflationary monetary policy (John Taylor), sustained productivity growth, absence of war, low energy prices, and so on. That synchronization rarely occurs. In a world of debt-ridden households and governments, restoring fiscal sensibility is a high priority. This may necessitate a combination of spending cuts, always hard to achieve, and tax increases, despite their potentially negative consequences, that flies in the face of supply-side doctrine.

Charles Dickens put it bluntly: Earn 20 shillings, spend 19 shillings 6 pence, result happiness. Earn 20 shillings, spend 20 shillings 6 pence, result human misery. Perhaps David Copperfield should be required reading of all government officials.

Thursday, May 27, 2010

China Moves the Market

China’s official foreign exchange reserves total about $2.5 trillion, and continue to rise each month. How China invests these funds has a large impact on the value of financial assets.

On April 4, 2010, total market capitalization of U.S. stock markets stood at $12.3 trillion. For the purpose of this discussion, assume this number more or less reflects total market capitalization in late May. On May 26, 2010, the DJIA and other major market indices fell in the last two hours of the trading day in response to stories that China, concerned about financial problems in Europe, was considering selling some of its portfolio of euro-denominated public debt (or slowing or ceasing its purchases of new euro debt). The DJIA dropped sharply, from 10,170 to 9,974, a decline of 1.93%. Thirty percent of U.S. exports go to Europe. Further decline in the euro vs. the dollar would reduce the dollar value of U.S. repatriated euro earnings.

Taking that fall of nearly 2% as an approximate indicator for the decline in U.S. equity market capitalization, the story that China would reevaluate its purchases of euro debt chopped $237 billion off the equity values on U.S. exchanges. Chinese denials of the story restored this loss in the first hour of trading on March 27.

Fast forward one, three, five, or ten years. Assume China continues to add to its holdings of U.S. federal debt. Long-term projections indicate that the U.S. federal government will borrow a trillion dollars each year over the next decade. Budget planners must suppose that China will buy some, perhaps a significant, part of this new debt. Now imagine what would happen to U.S. equities and interest rates, and its impact on the U.S. economy, should China hint that it might stop buying new debt or, worse still, sell some of its U.S. treasuries.

Tuesday, May 25, 2010

Another Tax Simplification Commission?

How many tax simplification commissions does it take to recommend tax simplification if a tax simplification commission could simplify taxes?

The newly-installed Conservative-Liberal Democrat Coalition in the United Kingdom has announced the establishment of an Independent Office of Budget Responsibility in order to depoliticize estimates of revenue, expenditure, and deficits. The coalition will also create a new Office of Tax Simplification to suggest tax reform measures.

Most Americans are familiar with tax reform commissions. These are standard fare in most presidential administrations. Some serve up good ideas, only a few of which are put into law. Tax reform and simplification commissions are usually a way for presidential administrations to avoid dealing with the difficult task of taking away tax benefits to achieve real reform, i.e., base broadening and lower rates.

The United Kingdom has joined this exercise. It, too, engages in the “kick the can down the road” principle of postponing meaningful tax simplification by assigning the task to a powerless office.

In October 2005, when the Conservative Party was in opposition, the Shadow Chancellor of the Exchequer established a Tax Reform Commission under the chairmanship of the Rt. Hon. Lord Forsyth. Its stated goal was to “provide recommendations to improve the economic efficiency, transparency, simplicity and fairness of the current tax system.” In February 2006 I gave evidence (testified) before the commission in the House of Lords, setting forth my views on how a flat tax would help achieve the shadow chancellor’s objectives. The commission issued a report to clean up of the tax system by broadening the base and lowering rates, a standard recipe for reform.

Given the coalitions’s pledge to reduce taxes on lower and middle income families, to raise capital gains tax to the same rate as ordinary income, and to maintain for at least the next year the 50 percent rate on high incomes, it will be difficult, indeed ever harder, for the new Office of Tax Simplification to improve on the 2005-06 Tax Reform Commission.

Monday, May 24, 2010

Think Tank Thoughts, Part 2

In a previous post I commented on the explosive growth in think tanks during the past quarter-century, which has been mirrored in the dramatic rise of Cable tv, talk radio, the Internet, the blogosphere, Facebook, Twitter, podcasts, and YouTube. This multimedia transmits a blizzard of information on public policy issues. The noise-to-signal ratio is so loud that policy makers and the public find it increasingly hard to distinguish quality from quantity, especially when equally prestigious experts are lined up on opposite sides of an issue. A great idea that might have risen to the surface in 1980 now gets drowned in hundreds of iterations on ideas (some good, many bad). How does a reputable think tank influence policy in this rapidly changing world?

Economist John Raisian, in an interview with The Stanford Daily, recently reflected on his more than 20 years as director of the Hoover Institution. (Disclosure: I have been affiliated with Hoover for 40 years, first as a visiting fellow, next as a grantee, and third as a resident fellow since 1976.)

Raisian described the objective of the institution “is to attract the best core talent.” But, he noted, there is no uniformity of opinion on ideas and issues. [My comments:  On the basis of scholarly work, some fellows have criticized President Obama and the Federal Reserve Board, while others are serving in or advising the Obama administration. Similarly, some supported while others opposed some of President George H.W. Bush’s foreign and domestic policy decisions. Two Hoover lawyer fellows support Elena Kagan’s nomination to the Supreme Court, even though she is widely perceived as left-of-center. Hoover fellows donated more money to Obama’s presidential campaign than to McCain’s.]

Raisian said that the label of Hoover as a ‘conservative’ institution is not so much as it applies to politics or ideology, “although it would be hard for me to argue that we weren’t” [my comment: from its past links with the Reagan and two Bush administrations]. “But conservative in the sense that any scholarly organization is naturally conservative—we’re in a bubble, we’re used to doing it our way [Frank Sinatra?], we just do it the way we know how to do it.”

Raisian stated that in his early years with Hoover he believed that its research would be well received and readily implemented in Washington, but “That was naive, honestly.” “If you’re lucky, 20 percent of the time you’re looking at the analysis of the situation and 80 percent...at the politics of the situation...This can be discouraging for those of us that are scholars because in the end, raw politics is going to determine the outcome.”

The challenge for Hoover and other quality think tanks, then, is to raise the 20 percent research component in public policy outcomes and reduce the 80 percent raw politics. I will try to address this challenge in upcoming posts.


Sunday, May 23, 2010

Where Have You Gone Wall Street Journal?

New York Times columnist Tom Friedman, in the latter segment of the round table discussion on Meet the Press (May 23, 2010), criticized President Obama for failing to push a comprehensive medium- and long-term energy plan. Its objectives would be to wean the U.S. from its oil addiction, ship fewer dollars to oil producing countries thereby helping to maintain a strong dollar, and develop green and renewable technologies. This would be, in his words, a multiple win strategy.

Wall Street Journal editor Paul Gigot followed: “If you want to reduce oil, you can do it pretty--you can start to do it very quickly. You can put a $3 or $4 tax on gasoline.”

Friedman: “Well...”

Gigot: "I know you’re for that."

Friedman: “Yeah”

Gigot: "I, I, the president is not."

Friedman: “I know.”

Gigot: “There’s no politician I know who is. But that’s the answer [emphasis mine].

Pity the late Paul Tsongas (1941-1997), who must have turned over in his grave. Tsongas ran for the Democrat party presidential nomination in 1992, losing to Clinton. His proposal to increase gasoline taxes by fifty cents a gallon to reduce the federal budget deficit led critics to call him Paul Tax-on-gas, which hurt his campaign.

To repeat, Gigot said “that’s the answer,” “a $3 or $4 tax on gasoline.”

Perhaps Gigot only meant that Friedman’s goals could be quickly achieved with such a tax, but that was not clear from watching Meet the Press, replaying that exchange on Meet the Press’s web site, or reading the transcript. As an economic answer to reducing oil imports and developing energy alternatives that are cost competitive with gasoline, Gigot is correct.

Interesting?

Internet Lynch Mob

Bloggers of the World Unite.  You have nothing to lose but your chains.

Tom Friedman of the New York Times, speaking on Meet the Press (May 23, 2010), blamed Cable TV and "internet lynch mobs" for Utah Senator Bob Bennett's defeat at the state Republican convention.

Oh for the good old days when Tom Friedman and other prominent newspaper and magazine writers could dominate the news cycle with their political opnions.  Democratization of political opinion, especially in opposition to their views, is not a welcome addition to the discussion of ideas that may influence public opinion and delegates.  (Although the technology of the internet was widely praised by these sxame writers when  it enabled Barack Obama to defeat the Clinton machine and old Democrat party establishment.)

Small Business Credit Squeeze

Conventional wisdom holds that small business cannot get the credit it needs to stay afloat or expand. It is well documented that small business is the engine of growth and job creation in the economy. Reducing unemployment by creating new jobs will be hampered so long as tough credit conditions remain in place.

Meanwhile, the Federal Deposit Insurance Corporation (FDIC) says that one in ten U.S. banks are on their watch list for possible closure and restructuring. Most are community or regional banks that have doubtful commercial property loans on their books. These conditions make it risky to grant new loans to small businesses that may themselves be in danger of going under.

Yesterday, May 22, 2010, we received five credit card applications in the mail. A typical month totals 20-30, with credit lines ranging between $5,000 and $25,000, or more if we request a larger credit line. In a typical month we could readily secure $250,000 in credit lines with little difficulty. These offers are based on our credit scores, which imply credit worthiness.

Perhaps the small businesses that complain about the difficulty of getting credit are in declining communities or conditions in which they cannot present a viable business plan. Perhaps others are overextended and will fail anyway. No one to my knowledge has studied the books of a large representative sample of small businesses to determine their financial condition. Spokesmen and politicians representing small business rely largely on heartfelt anecdotal information, not systematic research.

Saturday, May 22, 2010

Cameron-Clegg Coalition: Detailed Program for Government

I previously blogged on a seven-page document released by the Conservative-Liberal Democrats coalition on May 12, 2010, stating the general policies that would guide their new government in the United Kingdom. On May 20 the two parties issued a more detailed program on 31 subjects covering every aspect of British social, economic, and political life.

The foreword written by David Cameron and Nick Clegg states that “the first duty of government is to safeguard national security...” In the short term, the most urgent problem facing the country is tackling the country’s record debts. In that regard, “The deficit reduction program takes precedence over any other measures in this agreement,...” The new chancellor of the exchequer, George Osborne, has scheduled the release of an emergency budget on June 22 stipulating how the government will reduce its deficit.  The bulk is to be through reduced spending rather than increased taxes.

A few highlights. The government will introduce a banking levy, investigate a possible separation between retail and investment banking, and create a free national financial advice service funded by a new social responsibility levy on the financial services sector. It will also ban excessive interest rates on credit cards.

Green is a theme running through the program in keeping with the proclamation that climate change is one of Britain’s gravest threats. The program promises greater emission reductions, creation of a green investment bank, a national tree planting campaign, criminalizing possession of illegal timber, and cancellation of the third runway at Heathrow Airport and new runways at London’s other two main airports of Gatwick and Stansted.

The government’s stated goal is for a strong progressive coalition inspired by the values of freedom, fairness, and responsibility. It pledges to take lower and middle income families into account in all its policies: tax reform, spending cuts, educational opportunity (for disadvantaged pupils), free nursery care for pre-school children, maintaining the national minimum wage, health care, introducing new dentistry services, access to talking therapies for mental health, allocating credit, freezing local council taxes, protecting consumers, promoting gender equality, and representation of all minorities in executive departments. The government will train a new generation of community organizers,...especially in deprived areas. (President Obama and ACORN will be pleased.)  The focus on low and middle income households gives the appearance of a coalition in which Clegg's LibDems, not Cameron's Conservatives, are the dominant member.

How Chancellor Osborne will square the government’s commitment to maintain and, in some areas, expand government programs, while it slashes away at the budget deficit, will make for interesting reading on June 22.

Friday, May 21, 2010

University Endowments Contributed to the Financial Crisis

No. This is not a condemnation of the advice given by economics and finance professors in elite universities. Rather, it is a critique of the high-return investment model in elite universities’ endowments.

The Tellus Institute recently released a report based on a study of six private New England colleges and universities, which included Harvard, Dartmouth, and MIT (and by implication other Ivies and Stanford). It concluded that the investment model in their endowments contributed to the U.S. financial crisis.

The famous Yale and Harvard model invested heavily in illiquid and risky assets such as private equity, venture capital, hedge funds, commodities, private real estate, and timberland. These investments had generated high returns, well above market averages, for a short period. However, the financial crisis of 2008-09 crushed the value of their endowments. Universities were forced to undertake layoffs, postpone building projects, impose salary and hiring freezes, cut benefits, cut student services, and make other budget reductions. To meet current expenses, endowments were forced to sell some of their liquid holdings into falling markets, magnifying falling prices. (Disclosure: Stanford offered faculty and senior fellows a temporary faculty retirement incentive program (FRIP) to reduce its operating budget, which I accepted. As the Hoover Institution’s endowment is merged into Stanford’s investment pool, it suffered a similar percentage loss).

The report noted an unhealthy link between trustees of endowments, some of whose firms had managed funds in the endowment during the past few years. These trustees may have encouraged high-yield alternatives, dismissing the risk associated with exotic, illiquid investments, that were normal in their private practices.

The report concluded that the alternative investment endowment model is broken (even though some endowment investment managers stand by the model on the basis that alternative investments are long-term allocations that over time should generate higher returns than market averages). It recommends that universities return to responsible institutional investment, consistent with their commitment to “sustainability.”

Wednesday, May 19, 2010

Lincoln was Wrong, and Other Thoughts

Lincoln was wrong. You can no longer fool even some of the people all the time. The people have wised up to the pronouncements of politicians, especially on matters of money.

Nor can you indefinitely borrow your way to prosperity. At some point debt becomes a millstone, an albatross, around a country’s debt. The centuries are replete with coin clipping, sweating, bleaching, and excessive borrowing, resulting in financial panics, recessions, depressions, and revolutions.

Lying to Congress in the conduct of its official business is a crime under U.S.C. §1001: US Code - Section 1001: Statements or entries generally. Since Members of Congress are representatives of the people, elected to do the business of the people, then Members of Congress who lie to the American people in the conduct of their business should be subject to the same penalty, fined and/or imprisoned for not more than five years. The law should be amended to insure symmetry of treatment.

Is there a think tank bubble? In August 2007 there were 5,035 think tanks in 169 countries. Of the total, 1,776 are in the U.S., of which nearly three-fifths were established in the past 25 years.

Policy research constitutes the majority of the output of U.S. think tanks. Leading subjects include social policy, domestic economy, regional studies, international studies, environment, education, and national security. Output consists largely of books and policy briefs, with web postings playing a growing role.

Sticking to U.S. think tanks, there aren’t 1,776 thoughts for think tanks to think. This means massive redundancy and varying points of view on any given thought. It also means increasing competition for a less rapidly growing supply of private funding for think tanks outside public universities. If think tanks were subject to market competition, one would expect to see substantial mergers and acquisition. Rather, proliferation continues, although at a slower rate in the past decade. The explosive growth in think tanks makes it increasingly difficult to disseminate good ideas, to broadcast a strong signal through an atmosphere of static.

Tuesday, May 18, 2010

Political Pugilism

The political silly season is upon us. Every day we are inundated with flyers, television commercials, and recorded phone messages, in which each candidate tells us why he (or she) is better than his (rotten) opponent. And, in every case, he promises to fight for you.

When he gets to Sacramento or Washington, D.C., who is he fighting against? His opponent is the opposite corner of the ring is a special interest group or a big corporation, to name just two. Funny thing, though, my wife and I are members of many of those special interest groups against which he is fighting: the elderly, homeowners, investors (in big corporations through our retirement funds), consumers of electricity and oil products, and so on. My local politician promises to fight for us by fighting against us.

I suspect he is fighting for himself, to advance his own career, but says what he thinks we want to hear. We’ll settle for just two things: (1) tell the truth, and (2) and don’t lobby politicians after you leave office.

Friday, May 14, 2010

China’s Elusive Crash

For months, in some instances for years, economists and other analysts have warned of the coming Great Crash in China. The causes include reckless bank lending, overinvestment in infrastructure, excessive domestic savings, dependence on exports, a fixed exchange rate, inflation (especially in property), rising income inequality, and so forth.

China seems oblivious to these warnings and refuses to crash. Instead, it grows at sustained high levels, doubling national output every 7-8 years, quadrupling in 14-15 years, and so on. How can this be when the West, especially Europe, struggles with financial and economic problems?

Members of Congress cannot walk and chew gum at the same time, a criticism first leveled at Gerald Ford by Lyndon Johnson. In marked contrast, Chinese officials can walk and chew gum at the same time, and make decisions to resolve dozens of problems that arise every day. No other set of economic policy makers has been as successful as the Chinese over such a long period of time. Chinese are willing to work 10 hours a day six days a week; Greeks want to work barely half that. Chinese students study around the clock; Greek students want to spend their time demonstrating. China can build hundreds of airports, thousands of miles of highways and high-speed railways, put on an Olympics, send a man in space, create hundreds of scientific research institutes, modernize its military, invest in Africa, and numerous other important achievements, all at the same time.

The reason that Western analysts get it wrong is that they are trapped in the theoretical matrix that is taught in Western universities and practiced by Western analysts. China’s decision makers are first and foremost pragmatists, relying on evidence and what works.

Thursday, May 13, 2010

C-Cubed: Cameron-Clegg-Coalition

David Cameron’s Conservatives and Nick Clegg’s Liberal Democrats have set forth a seven-page outline agreement on policies that will be fleshed out in the days ahead.

Deficit reduction is priority one. Agreement to cut £6 billion from non-frontline services in the current fiscal year, less than one percent of the estimated deficit, is only a token. Chancellor of the Exchequer George Osborne is to present an emergency budget within 50 days that specifies short- and long-term reduction plans. The document hints at the timing of reductions: “Credibility depends on its long-term deliverability, not just the depth of immediate cuts.” Translation? No large immediate cuts. Indeed, the agreement promises to increase real spending on the National Health Service, provide new funding for disadvantaged pupils, maintain Britain’s strategic deterrent, and heighten guarantees for public sector pensions. Agreed-upon tax measures amount to offsetting increases and decreases in taxation with little impact on the deficit. We will have to wait until early July to judge if the coalition’s commitment to deficit reduction is serious.

Political reform has the potential to profoundly change British politics. The document states that the House of Lords will become largely or wholly elected on the basis of proportional representation in accordance with each party’s share of the total vote. A single, long term is envisaged, which will turn over the new House of Lords (or Senate if renamed) every six or eight years depending on the chosen term. Current peers can remain in the Lords but no new peers will serve unless they are among the winning members in a party’s candidate list. When (and if, if the coalition collapses before 2011) the reform becomes law, it will end over 600 years of tradition. Appointment to a lordship will become purely titular with no political position in Parliament.

Reform of the House of Commons is less clear. The coalition has agreed to have a referendum on an alternative system of voting in place of the current first-past-the-post regime. Precise details on a new voting system are not specified in the agreement.

Wednesday, May 12, 2010

China’s Currency Quandary

U.S. government officials, backed by members of the business community and labor unions, have repeatedly called for China to revalue its currency, the yuan, against the dollar. The most recent revaluation began in mid-2005, as the yuan appreciated from US$1=8.28 until it reached US$1=6.83 in July 2008, where it has since remained.

Although the yuan has remained linked to the dollar, it has risen sharply against the euro. On December 3, 2009, €1.00 was worth $1.52. On May 11, 2010, it had depreciated to $1.27. Gains in the dollar against the euro has pulled China’s yuan up with it. Europe is China’s largest export market, accounting for 19.7 percent, about $236.3 billion, of China’s total exports in 2009. If China revalues its currency against the U.S. dollar, it would mean further appreciate of the yuan against the euro, thereby damaging its competitiveness in its largest export market.

When taking the euro-dollar exchange rate into consideration, it’s easy to understand China’s resistance to revaluing the yuan against the dollar.




Tuesday, May 11, 2010

Iraq, Once More

If a hundred Americans were killed in one day of terrorist attacks in several cities, the entire country would spend the next week and more focusing on what went wrong and how to prevent further attacks.

But such a day on May 11, 2010, in the life of Iraq, with a hundred dead and many injured, barely drew notice from the Main Stream Media. It was just another day of death, like so many others, in the long-standing U.S. effort to bring democracy to Iraq, an effort that has cost thousands of American lives and more than a trillion dollars. If the Iraqis cannot contain this level of violence with a hundred thousand U.S. troops in the country, how will they fare when that level is cut in half. The answer should be obvious.

Monday, May 10, 2010

Prospects for Stable Democracy in Iraq, Postscript

A potentially new transformation is gradually taking place in the United States. It has been revealed in the debate over extremely contentious immigration bills to deal with millions of undocumented immigrants, largely Spanish-speaking from Mexico and Latin America, and millions more who seek legal entry into the United States every year, largely for economic opportunity. Arizona’s passage of a law requiring individuals to carry proof of legal residence in the state has propelled the debate to the front burner.

It’s clear from the demographics that the vast majority of illegal immigrants in Arizona is Spanish-speaking Mexicans and Latin Americans. There are relatively few illegal aliens residing in Arizona from Asia, Africa, and Europe.

As Spanish-speakers grow in number and are perceived in unified group terms, the quest for the “ethnic” vote could play a larger role in American national politics. This would generate a greater degree of nationwide ethnicization of American politics than in previous generations, when ethnic differences tended to be localized to individual regions, states, or towns. Hispanics currently constitute about 16 percent of the U.S. population, projected to rise to 29-30 percent by 2050. Estimates are that African Americans will remain stable at 14-15 percent, Asians will grow from 5 to 9 percent, and non-Hispanics whites will decline from 66 percent to 46 percent.

Regardless of one’s views on the treatment and/or resolution of illegal immigrants, it is important that the United States does not awake one morning and find itself facing a political situation similar to those countries discussed in this series of posts.

Sunday, May 9, 2010

Prospects for Stable Democracy in Iraq: Concluding Thoughts

To the countries discussed in Parts III-VI can be added Trinidad and Tobago, Northern Ireland, Cyprus, Zanzibar, Zimbabwe, South Africa, Congo, Nigeria, Fiji, Surinam, Indonesia-East Timor, Chechnya-Russia, Morocco-West Sahara, Malaysia, Mauritius, Belgium, and other ethnically-based separatist movements.

Throughout much of their respective histories, the preceding conflict-ridden, multi-ethnic countries were held together by colonial or foreign rule.  Only a few managed peaceful separation or accommodation among the internal ethnic groups.

Confederation has been broadly established in Belgium in the form of regional assemblies and executives, and also in Bosnia.  Malaysia has managed to hold its multi-ethnic coalition together through entrenching Malay political rights in exchange for according the Chinese rights in education and economic opportunity.

The creation of homogeneous societies is exemplified in Yugoslavia’s dissolution and the Turkish invasion of Cyprus.

Amelioration of ethnic tensions is illustrated in the peaceful separation of Czechoslovakia into the Czech Republic and Slovakia in January 1993 when Czechs and Slovaks chose to establish separate homelands. Another is the devolution of a greater local autonomy to Scotland and Wales in the United Kingdom, institutionalized in the establishment of regionally elected assemblies. Spain has conceded an increasing degree of autonomy to several provinces, Catalonia, the Basque region, and Valencia, with approval for local languages. Some devolutions have gone more smoothly than others. The Basque region in Spain with its armed wing ETA, for example, is still a source of strain and conflict with the central government in Madrid.

Conflict and separation are far more prominent than peaceful, stable democracy in multi-ethnic countries.  For Iraq to hold together when most or all of the remaining U.S. troops have been withdrawn in 2011 will ttake heroic efforts of compromise and conciliation.  As seen in this series of posts, such an outcome would be a remarkable achievement.

Saturday, May 8, 2010

Prospects for Stable Democracy in Iraq, Part VI

Lebanon

Lebanese democracy has been extremely fragile since France granted independence in 1943. The country suffered a coup in 1949, an aborted attempt to change the constitution in 1952 to prolong the term of the incumbent president, a civil war in 1958 over another crisis of succession, and another civil war in the wake of the 1967 Arab-Israeli war.

In 1932, the Christian population exceeded the Muslim population by a ratio of six to five, which dictated the distribution of seats in parliament. Although no official census has been taken since 1932, it is estimated that the Christian population has declined to 39 percent, which has disrupted the agreement on the allocation of seats in Lebanon’s parliament. Muslims feel that the Christians are over represented and that they are under represented.

During the 1960s, Lebanon enjoyed a period of relative calm and prosperity. In the early 1970s, difficulties arose due to the presence of several hundred thousand Palestinians, many of whom arrived after the 1967 Arab-Israeli war, including Yasser Arafat and the Palestinian Liberation Organization. Their presence exacerbated Muslim-Christian differences.

Full-scale civil war broke out in April 1975, which lasted intermittently through 1991. A new president was elected in August 1982, but he was shortly assassinated. This was followed by a Lebanese Christian militia massacre of 800 Palestinian civilians. Two governments ruled side-by-side during 1985-89, Christians in East Beirut and Muslims in West Beirut. Altogether, an estimated 100,000 Lebanese were killed, and some 900,000 displaced from their homes during the long-running civil war.

Postwar reconstruction brought a modicum of stability, but Syrians, who were heavily involved in the internal political affairs of Lebanon, were charged with committing several assassinations of high Lebanese officials in order to retain their influence. Global pressure forced Syrian withdrawal in 2005 following another high-profile assassination of a prominent Lebanese leader. Stability remained under threat due to the presence of a large Hezbollah force, which crossed into Israel and provoked a war in 2006 that resulted in substantial Israeli reprisals causing significant damage to downtown Beirut. Lebanon remains a multi-ethnic country, a tinder box of opposing factions complicated by Syrian meddling.

Sudan

Sudan, which became independent in January 1956, has been wracked by ethnic conflict between the Arab Muslim north and the black African Christian south for most of its modern history, and, since 2003, the conflict between the northern Arabs and black African Muslims in the western Darfur region. These struggles have been reinforced with the discovery of major oil deposits in 1979 by Chevron in the south. Previous agreements granting autonomy to the south were abrogated in 1983 when General President Gaafar Muhammed Nimeiry abolished the southern region, declared Arabic (instead of English) the official language of the south, and transferred control over southern armed forces to the central government. He further announced that traditional Islamic punishments drawn from Shari’a (Islamic law) would be incorporated into the penal code. Nimeiry, while out of the country, was overthrown, replaced with General Suwar al-Duhab.

Sudan has been at war for more than three-quarters of its existence. Northerners have sought to unify the country along the lines of Arabism and Islam. The first coup occurred in 1958. Thereafter, successful coups took place in 1958, 1969, two failed coups in 1972, 1985, and a successful coup in 1989 (following the election of 1986 which established a civilian government). The north-south civil war finally came to an end in July 2002, with a final comprehensive peace agreement to be concluded by December 2004.

With the apparent resolution of the north-south conflict, a new conflict arose in Darfur in the western Sudan, which pit non-Arabized black African Muslims, largely farmers, against the northern Arabized Muslims. This conflict has raged into 2007, cost several hundred thousand lives, displaced hundreds of thousands more, and brought international condemnation to the Sudanese government.

A new constitution, which was ratified in July 2005, declared Sudan to be a democratic, multi-cultural, multi-ethnic, multi-religious, multi-lingual state. A population census is to be taken in 2007 in preparation for national elections. The comprehensive peace agreement that established the new government permits the holding of a referendum in 2011 that allows southerners to secede if they wish. The constitution has not settled the issue of Darfur. Time will tell if the 2011 referendum allowing southerners to secede proceeds on schedule.

Friday, May 7, 2010

Prospects for Stable Democracy in Iraq, Part V

Yugoslavia

Yugoslavia was created as a new state in 1918, composed of areas that had never been under a common unified government, and which for centuries had been under the domination of foreign powers. When the Communist Party came to power, it consisted of six distinct nations: Serbia, Croatia, Bosnia-Herzegovina (hereafter Bosnia), Slovenia, Montenegro, and Macedonia. Serbia, itself, was further segmented into Serbia proper and Muslim Kosovo.

Post-World War II elections were dominated by Tito’s Communist Party. However, the Communist Party was a collection of the various regional Communist parties rather than a centralized, unified party.

Upon Tito’s death in May 1980, which removed the country’s unifying force, ethnic tensions grew in Yugoslavia. Nationalism rose in all of the republics and provinces. Slovenia and Croatia agitated for looser ties and the Albanian majority in Kosovo sought the status of a republic. Serbia, for its part, sought to maintain control over the entire country.

Following the fall of communism throughout Eastern Europe, each of the republics held multi-party elections in 1990. Slovenia and Croatia elected governments that favored independence. For the moment, Montenegro joined with Serbia in favoring Yugoslav unity. Croatia took steps to strip Serbs of their rights in the republic.

On June 25, 1991, Slovenia and Croatia declared independence from Yugoslavia. The Yugoslav Army was ordered to restore national unity, but desisted, pulling out of Slovenia. In Croatia, however, a bloody war broke out in August 1991 between ethnic Serbs in a portion of the republic they inhabited and the new Croatian army and police force. Meanwhile, in September 1991, Macedonia declared its independence without resistance from the Yugoslav Army. United Nations forces moved into the region to monitor Macedonia’s northern border with Serbia.

In Bosnia in November 1991, Bosnian Serbs held a referendum which favored staying in a common state with Serbia. The following January the Bosnian Serb assembly proclaimed a separate republic of the Serb people of Bosnia and Herzegovina. The government of Bosnia declared the Serb referendum unconstitutional, but itself approved a referendum for Bosnian independence. In response, the Bosnian Serbs declared their independence as the Republika Srpska.

The war in Bosnia between Serbs, Croats, and Muslims followed shortly thereafter. In March 1994, the Muslims and Croats signed an agreement, which reduced the warring parties to two. The conflicted ended in 1995 with the so-called Dayton Agreement. Three years of ethnic strife destroyed the economy of Bosnia, caused the death of about 200,000 people, and displaced half the population. Bosnia was organized into two geographical units, the Republika Srpska and the Federation of Bosnia and Herzegovina (Bosniak-Croat Federation). Elections are held for executive and legislative offices in both the provincial government and the separate Serb and Bosniak-Croat entities. The presidency of the Bosnian republic rotates among the three members (Bosniak, Serb, Croat). A national legislature makes laws for the republic, with two thirds of the delegates in both the upper and lower houses selected from the Bosniak-Croat Federation and one third from the Republika Srpska. Separate parliaments, which exercise regional power, are elected in the Bosniak-Croat Federation and the Republika Srpska.

The unity of Serbia and Montenegro gradually weakened. By order of the Yugoslav Federal Parliament on August 4, 2003, Yugoslavia ceased to exist, with a federal government exercising only nominal powers. The two republics conducted their affairs as if they were independent, establishing customs along the traditional border crossings. On May 21, 2006, Montenegrins voted in favor of independence, just barely exceeding the 55 percent affirmative threshold set by the European Union for formal recognition as an independent country. On June 3, 2006, Montenegro declared its independence, with Serbia following suit two days later.

Ethnic tensions in Yugoslavia were resolved with its dissolution into six separate countries. One of them, Bosnia, further segregated into two political entities. Kosovo is effectually independent barring the upper tenth of its territory, largely inhabited by Serbs.

Thursday, May 6, 2010

Prospects for Stable Democracy in Iraq, Part IV

Burundi

Belgium granted independence to Burundi in 1962. The Tutsi king (Tutsi made up 15 percent and Hutus 85 percent of the population, similar to Rwanda) established a constitutional monarchy comprising equal numbers of Hutus and Tutsis. The 1965 assassination of the Hutu prime minister set in motion a series of Hutu revolts and subsequent government repression. In 1966 the Tutsi king was deposed by his son, who, in turn, was deposed in a military coup. Civil unrest continued through the 1960s.

An aborted Hutu rebellion in 1972 left 2,000-3,000 Tutsis dead, which triggered the flight of several hundred thousand people. A bloodless coup in 1976 put Tutsis back in charge. Its leader was overthrown the following year by a new hard line regime that instituted a ruling military commission. Increasing tensions led to a war between the army, the Hutu opposition, and Tutsi hardliners, leaving 150,000 dead and tens of thousands refugees flowing to neighboring countries. For more than three decades between 1962 and 1993, Burundi was governed by a series of military dictators, all from the Tutsi minority.

An attempt to establish a multiethnic government, with Burundi’s first Hutu president in 1993, failed. He was assassinated by factions in the Tutsi army. A civil war erupted during 1993-96, which left tens of thousands dead. Since 1983, an estimated 200,000 people were killed. A new government chosen in 1994 was removed two years later in another bloodless coup. Violence and unrest continued until the establishment of an accord in August 2000 by representatives of the leading Hutu and Tutsi political parties.

Although tensions and conflict continued, Burundi was able to establish a new government in 2001. Despite small-scale conflict that continued over the next two years, the government succeeded in promulgating a new constitution in February 2005 and former Hutu rebels won the national election held the following July . After four decades of coups and civil wars, the people of Burundi conducted a peaceful, orderly, free, and fair election. The politically dominant Tutsi population peacefully yielded to a Hutu government. This was a truly historic event, giving the majority population a duly elected government, after many years of conflict.

Rwanda

Ethnic tribal conflict in Rwanda produced one of the postwar world’s greatest human tragedies. In 1959, the majority Hutu, 85 percent of the population, overthrew the Tutsi (15 percent) monarchy. Two years later, the party of the Hutu Emancipation Movement won an overwhelming victory in a UN-supervised referendum. Belgium granted independence to Rwanda (and Burundi) in 1962. In the intervening three years, some 160,000 Tutsis fled to neighboring countries.

Rwanda experienced normal democratic government under Hutu control until 1973, when the Hutu military took power, dissolved the National Assembly, and abolished all political activity. The coup leader formed a political party, and held elections in late 1978, 1983, and 1988, with himself running as the sole candidate for president. In 1990, after more than a decade of one-party Hutu rule, the Hutu leader announced his intention to transform Rwanda into a multi-party, multi-ethnic democracy.

In October 1990, disgruntled Tutsi exiles organized the Rwandan Patriotic Front (RFP) and invaded Rwanda from their base in Uganda. The war dragged on for two years, until a cease fire took hold and political talks began. On April 6, 1994, an airplane carrying the presidents of Rwanda and Burundi was shot down and both men were killed. Tutsis were charged with the crime. Hutu militia groups began killing Tutsis and Hutu political moderates. Between April 6 and the beginning of July, 1984, an estimated 800,000 Tutsis and moderate Hutus were slaughtered. In response, the Tutsi-RPF resumed its invasion, defeated the Hutu Rwandan army, and took control of the country.

After successfully establishing itself in office, the new RPF government organized a coalition government of national unity. In 2003 it promulgated a new constitution that eliminated reference to ethnicity, stipulating that no party could hold more than half the seats in parliament to insure a balance of political power between Hutu and Tutsi. In elections held later that year, the Tutsi Paul Kagame, whose RPF ended the genocide, was chosen as president. His government set in motion the prosecution of thousands of those involved in the 1994 genocide. In 2007, some modicum of order and stability had return to Rwanda. If conditions hold, Rwanda has a chance to put decades of ethnic cleansing behind it for a more promising future.

Wednesday, May 5, 2010

Prospects for Stable Democracy in Iraq, Part III

Sri Lanka

The origins of ethnic conflict between the majority Sinhalese and minority Tamil populations arose shortly after independence. Sinhalese politicians pushed for and established Sinhala as the official language, which reduced employment opportunities for minority Tamils in the government. In 1972, a new constitution changed the country’s name from Ceylon to Sri Lanka, made protection of Buddhism a constitutional principle (Tamils are predominantly Hindu), and socialized the economy. Ethnic outbidding gave rise to ethnic conflict, the basis of Sri Lanka’s separatist war. Between 1972 and 1983, disgruntled Tamil youth began to form military groups funded by bank robberies. The leading group, the Liberation Tigers of Tamil Elam (LTTE), who seek an independent homeland in the North and East of the island, began assassinating policemen and local politicians. In 1983, the LTTE launched a full-scale attack on the Sri Lankan army. Since then, politics in Sri Lanka has been dominated by an ongoing civil war. Cease fires and peace agreements have been signed and promptly discarded. To quell the violence and try to resolve the conflict, India intervened, sending troops to Sri Lanka in the late 1980s. It pulled out in 1990 after losing 1,100 Indian soldiers and having spent over 20 billion rupees to no avail.

The civil war has claimed more than 68,000 lives and caused considerable harm to the population and the economy. A fresh eruption of hostilities killed over 4,000 people between November 2005 and mid-2007. Several leading Sinhalese politicians have been assassinated and attempts have been made on the president’s life. Peace overtures from the central government, which has been governed by one of two major Sinhalese-based parties, have been routinely rejected by the LTTE. The Sinhalese finally brought the war to a successful conclusion by an all-out assault on the Tamil region. Time will tell if peaceful conditions endure.

Guyana

Racial divisions structure Guyanese politics. From 1964 to 1985, Forbes Burnham, leader of the black People’s National Congress, ruled Guyana in an increasingly autocratic manner. International observers concluded that his party rigged several elections. Upon his death, Hugh Desmond Hoyle, his successor, became president. The first election internationally recognized as free and fair in 1992 resulted in the election of Cheddi Jagan (Jagan had previously served as premier during 1956-1964 prior to independence in 1966), the Indian head of the People’s Progressive Party, the first time an Indian held the top office. Upon Jagan’s death in 1997, he was succeeded by his wife Janet for two years, and then by Finance Minister Bharrat Jagdeo, who won reelection in 2006, the first non-violent election held in more than 20 years. For its part, the black PNC charged the Indian PPP with rigging the elections.

Race has been the dominant political influence in Guyana since the split of the multi-racial People’s Progressive Party in 1955. Political disturbances following elections, boycotts of parliament by the losing party, and suspensions of parliament have impeded orderly governance. Ethnic tensions between the two groups continue to this day, which are exacerbated by poor economic conditions and the lack of political will to overcome the racial divide.

Tuesday, May 4, 2010

Prospects for Stable Democracy in Iraq, Part II

The hallmark of the plural or multi-ethnic society, and the feature that distinguishes it from its pluralistic counterpart of ethnic diversity, is the practice of politics almost exclusively along ethnic lines. The elites of different groups that often worked together to secure independence, a condition stipulated by the colonial powers as a necessary condition for granting independence, derive their power from ethnically-based political, social, and economic associations in their communities.

With the departure of the colonial power, the elites strive to hold their multiethnic coalition together as long as possible. However, strains among the groups begin to surface in the competition for the scarce political and economic spoils of independence. Groups begin to turn against each other to secure their “fair” share of national resources. Ethnic politicians and their followers who are discarded from, or who were never included in, the governing multiethnic coalition, face incentives to “ethnicize” politics, to “fan the flames” of ethnic chauvinism in order to gain electoral office. We call this the politics of demand generation and the increasing salience of ethnicity.

The multiethnic coalition becomes strained by the increasing frequency of ethnic appeals. A process of “ethnic outbidding” racks the coalition. Each member of the coalition, fearing a loss of power to one of its partners or rivals, strives to establish itself as the dominant power. This process gives rise to electoral machinations and violence. Those in power manipulate voting rules to favor their own group. They give increased representation to rural or urban communities depending on where their supporters reside. They gerrymander voting districts. As the need to entrench themselves in power increases, they resort to more severe measures, including jailing opposition politicians, military intervention, forced emigration, violence, and intimidation. Democratic practices are severely restricted or eliminated. Democracy often gives way to military rule or one-party states based on force.

Monday, May 3, 2010

Prospects for Stable Democracy in Iraq, Part I

Since the U.S. invasion that overthrew the regime of Saddam Hussein in 2003, Iraq recently concluded its second national election in March 2010. After seven long years of occupation in which U.S. troop levels peaked at 160,000 in 2007, the United States is set to withdraw another 50,000 troops by the end of August 2010, which will reduce its presence to about 49,000. Iraqis will be in charge of their own security.

During the past seven years, the U.S. government has spent hundreds of billions of dollars on military activities and development programs. Military intervention was initially justified on the grounds of preventing Hussein from developing and using weapons of mass destruction. Since then, U.S. policy has sought to develop Iraq as a stable, multi-ethnic democracy of Shiites, Sunnis, Kurds, and other smaller groups. Iraq has adopted a new constitution, had two national elections, and established a multi-ethnic cabinet and parliament.

Given the historical animosities among the groups, in which the minority Sunni ruled over the majority Shia for centuries, the stability of the multi-ethnic coalition has been tenuous. The governing coalition has found it difficult to resolve such issues as sharing oil revenue, bringing low-level Baathists into the government, disarming ethnic militias, establishing an equitable, honest system of delivering public services, and building up unified military and police forces. It is too early to foretell the future of Iraq, but evidence from other multi-ethnic countries indicates that achieving and sustaining a harmonious, multi-ethnic democracy will not be easy. With luck and hard work, the country will develop into a stable democracy. Other outcomes include separation such as federation or confederation, with the most extreme outcome the division of Iraq into three countries.

The series of posts that follow review examples of multi-ethnic countries that collapsed into civil war, strife, and division. These posts are intended to illuminate possible outcomes in Iraq when most or all U.S. troops have been withdrawn. Details on the history and political development of each example can be found in Politics in Plural Societies, first published in 1972 and updated and reissued in 2007.

Sunday, May 2, 2010

An Unintended Consequence of Obamacare

Give Obamacare the benefit of the doubt. Assume that its emphasis on early diagnosis and treatment facilitates less costly procedures than waiting until a problem becomes more advanced and more costly to treat.

Assume further that pharmaceutical and biotech firms discover and commercialize life-saving drugs that reduce the incidence of death from cancer, heart, and other diseases.

Assume further that individuals reduce their intake of salt, trans-fats, and calories and exercise more, thus enhancing longevity.

If these assumptions materialize, the consequence will be an increase in the “healthy” elderly population, especially in the 90-and-over age group. Many of these elderly will become increasingly frail and need more and more personal assistance to carry on with daily living. The cost associated with maintaining this demographic group, either in their own homes or in assisted living, will be an additional strain on Social Security and Medicare. Perhaps the Trustees of the two funds can include some cost estimates of taking care of an ever-larger number of frail elderly in their long-term projections.

Saturday, May 1, 2010

Engaging China on Currency Reform and Other Policies

Over the next few months, President Obama and Treasury Secretary Geithner will be meeting several times with their Chinese counterparts. On the U.S. agenda is revaluation of China’s currency, cooperation in controlling the development and spread of nuclear weapons in Iran and North Korea, and reducing greenhouse gas emissions. In exchange, China wants the U.S. to keep out of its relations with Taiwan, cease U.S. support for Tibet’s Dalai Lama, and loosen restrictions on high-tech exports.

Congress and several business and labor groups want the U.S. to impose tariffs on Chinese goods and other sanctions if China does not respond to U.S. concerns. Others advise that China will become more compliant if the U.S. does not publicly pressure China to change its policies, and let China make the decisions at a time and place of its own choosing.

From the vantage of 47 years of periodic study of China, beginning with language training in Hong Kong in 1963, I’ve fashioned a two-line rhyme, four characters each (albeit in bad grammar), that to me explains much of China’s decisions in its relations with foreigners.

Ni yao ni shuo (You say what you want)
Wo yao wo zuo (I do what I want)