The Gem on the Vltava

On a recent visit to Prague, long overdue among many travels within Europe, I learned that Smetana’s “The Moldau” is the unofficial musical anthem of the Czech Republic.  There is a lot of Prague’s history and civic personality caught up in that observation.  First, the music:  nowhere else, anywhere among the many places I’ve visited, is music so appreciated and so ubiquitous…on the streets, in the many squares filled with tourists from around the globe…and especially in the many baroque churches and oratories at night…at least a dozen offerings within a few steps…every night.
Moldau is the German name for the river which brought Prague to life many centuries ago, The Czechs call it the Vltava.  The Czech language is a complex Slavic tongue (the furthest West edge of the Slavic blanket of Eastern Europe) that was repressed during the long Hapsburg rule.  Only German could be taught in schools and spoken in official public discourse.  The ultra-Catholic Hapsburgs were no less intolerant of the strong underlying Protestant theme among the native Czechs.  The Peace of Westphalia’s cujus regio, ejus religio was in effect in Prague.  Finally, the place itself draws its name from the Czech word for “steps”, praha, wooden beams across a very shallow ford in the river that brought traders and settlers to this place at its beginning.

Once a major capital, in its own right and as a key center of the Empire, and home to the ancient Charles University (1342), Prague is now a UNESCO World Heritage site.  While this intends to capture its medieval, Renaissance, and Baroque architecture and human sense of scale in the older parts of the city, there is a sadness in the sacrifice this makes in stilting its ability to grow and evolve as the rest of the world moves well beyond those eras…like a precious gem whose beauty can never escape its setting.  Still a few art deco landmarks and even a daring Frank Gehry building are to be found.

Like a form of temporal bookends, the gleaming Vaclav Havel airport and the King Vaclav (Wenceslaus…of Christmas carol fame) statue mark the boundaries (in time and in geography) of what most visitors see.  The most famous strutures, Hradcany Castle (literally the castle on the hill, overlooking the main town) and the monument-festooned Charles Bridge, crossing the river, are overrun by tourists, but still well-worth the obligatory visits.  More serene, but in a chilling way, is the nearly abandoned Jewish Quarter, with two synagogues and an incredible, small cemetery, with many layers of gravestones stacked upon each other, marking thousands and thousands of graves of the Prague Jews who were not permitted burial grounds elsewhere.  The Nazi invaders exterminated the last of Prague’s Jews and those dead have no markers.  Only a few Jews have taken up residence since, but solemnly preserve remembrance of the places of their forebears.

As you leave the Jewish Quarter you emerge onto very fashionable Pariser St., where elegant shops and restaurants lead you to the central square of the old town.  If you look back, however, across the river, and up a gentle hill, you see a very large Metronome, in constant motion, occupying the site of a long since removed monument to Stalin.  One is thus reminded that yet another great historical event occurred at this place: the short-lived Prague Spring of 1968, twenty years too early to witness the final collapse of Communism (at least in Europe).  Where it had once been a crime to be without a job (no bourgeois rentiers allowed!), the Metronome sways in permanent mockery of a system where everyone “worked” but no real work was ever done.

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Millions of Tulips

Early spring in Istanbul brought many surprises, the most visually stunning being the blaze of masses of bright tulips…everywhere, in parks, on roadsides, at every freeway interchange, at every tourist destination.  There are several themes at work here…from the modernization and beautification that Istanbul has enjoyed in the 14 years since our first visit to the deliberate echoes of the annual festival of tulips presided over by the Ottoman Sultans.  The Turks had brought the tulip from its origins in Central Asia to the Mediterranean world and thence to the famous tulip fields of Holland.  To achieve the new tulipomania of Istanbul, vast numbers of bulbs had to be re-imported from The Netherlands.

Many attribute the recent economic developments in Turkey… and maybe Istanbul’s beautification… to the efforts of its Prime Minister, Reccep Tayip Erdogen, who had previously served as Istanbul’s mayor.  We arrived on the day of recent lower office elections, which Mr. Erdogan’s party won convincingly.  From the perspective of many in  the West, this  seems an uncomfortable confirmation of trends toward a stronger Islamic civic tone and away from the emphatically secular state that Kemal Attaturk bequeathed to Turkey a century ago.  I suspect that, most important long term, will be Turkey’s ability to continue to advance economically, bringing its large (72 million) and well educated population further into a leading position among largely Islamic countries.  But, even more is at stake, I think, in the hearts of Turkish voters.   As it has done since Mehmet conquered Constantinople in 1453, Turkey will continue to straddle Europe and Asia. And the city on the Bosporus may once again be among the most influential places on the earth, providing the pivot for East and West…as it has done for most of the past 2000 years.

A little tidbit for my tax policy interested friends:  we learned that there is little “tax-awareness” in Turkey.  All end consumer prices include VAT, but with no identification of how much it is; and all salaries and wages are quoted in post-tax terms.  If you are told that your compensation is to be, say, 4000 Turkish Lira a month, that’s what your net paycheck will show…4000TL.  While merchants and employers must, of course, be aware of the tax payments they forward on to the revenue authorities, the larger population can easily ignore what tax burden is being carried by the economy as a whole.  This of course diminishes the discipline on that tax burden that popular sentiment can provide.  Lessons here for the US, where half of all taxpayers pay no federal income tax?

In an interesting coincidence with Republic Day in India this January, election day in Turkey is alcohol free.  The FPSB Board’s dinner gathering that evening had to be held in a private suite and be served by room service.  Even the hotel’s public venues weren’t permitted to serve that day.  Further in response to strict Islam’s disdain for alcohol, none can be purchased after 10PM. and no advertising is permitted.

Another surprise to us was how reminiscent parts of Istanbul are of San Francisco.  Somehow, on our earlier trip, we have missed the similarities: water…and water craft of all descriptions… in several directions, many hills, grand bridges, and some palm trees looking a little out of place in the quite cool spring climate.

After a week of FPSB meetings, we did have one day to revisit some of the classic tourist sites.  My favorite was Aya Sofia (Hagia Sophia in Constantinople days), once the mother church of Eastern Christendom and then the chief mosque of the Ottoman Caliphate, now a museum, much cleaner and with a much tonier tourist entrance than on the first visit 14 years earlier.  With the benefit of our tour guide, Onur, I learned much more about the stupendous building itself and its interiors and its history than I had believed I already knew.   Onur also took us on our first real visit to Topkapi, the surprisingly modest and very pragmatic palace grounds of the Sultans (before they moved to Dolmabache,  built in emulation of the Versailles-inspired royal residences of Western Europe).  Commanding the tip of the old city’s peninsula, where the Sea of Marmara, the Golden Horn, and the Bosporus converge, Topkapi resembles a collection of tent-like structures, arranged in an apparent haphazard fashion…no grand avenues or symmetrical placements…much more like an encampment of nomads, reflecting the conquering Turks’ origins on the Asian steppes.  From the old:  an obligatory visit again to the Grand Bazaar…maybe the world’s first covered shopping mall, where, on the visit in 2000, we bought the carpet we now have in our Santa Barbara living room; this time we were determined not to purchase anything that couldn’t be easily added to carry-on luggage… to the new: a museum of contemporary Turkish art – all the works are by Turkish artists – in a set of repurposed warehouse buildings next to the Bosporus.

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New Delhi…a third visit

I’m going to stop counting visits to India since I’m now certain I’ll be back again, maybe several times, for business, culture, development work,  and of course just to experience more of this hugely fascinating country.  I haven’t yet seen the Taj Mahal, or taken a tiger safari, or been to the beaches of Kerala…  But I did get around enough this time to visit  Lodi Gardens on the Republic Day holiday (more on that special day, below) and spent time in both Hindu temples and the great Sikh shrine, Bangla Sahib.


My visit this January was primarily to participate in a Board meeting of The Asia Foundation in New Delhi.  I learned, first hand, about the gigantic challenges facing TAF’s small India staff as they try to foster several key goals:
  • South Asian regional cooperation, particularly regarding shared water resources and movement toward much more robust free inter-regional trade (cross border trade accounts for only 5% of India’s GDP!);
  • Fighting the deeply rooted culture of corruption, promoting a more open and accountable government at all levels; and
  • Enhancing women’s security and civil participation.

Their small resources requires effective partnership with other organizations, offering proven organizational capability and a credible promise of durable commitment.

India’s internal politics are very much in the current news as the center-left Congress party looks poised to lose upcoming national elections.  But, regardless of that outcome, a more interesting perspective that I learned was that India’s current parliamentary system is built on old census data, reflecting a 80/20 rural/urban population.  Current data suggest that urban populations are now approximately 37% and growing to 45% soon.  Combined with an average 7% GDP growth over the past 15 years, while the population has grown at only a 1.5% rate, this yielded a much larger, on average very much richer, and more demanding urban population, but with far from adequate urban infrastructure to cope with that growth and insufficient incentives to encourage private investment response.  The good news is that that growing and relatively wealthy urban population will no longer tolerate local municipal governments’ lack of accountability and will force reallocation of revenue from the national and state governments to the 3rd, municipal tier.

Women’s Empowerment

Among the most disheartening facts of the Indian cultural landscape is the frequency of violence against women and girls.  This has too many ramifications and symptoms to pursue in this little post, but I’ll share some things that have especially struck me.  First, this is a dynamic moment for change, due to the disgust that the vast majority of Indians feel in response to these problems and their shame from the worldwide publicity around recent incidences of gang rape.  We learned of a program called “Ring the (door) Bell!”  “Bell Bajao!”,  encouraging neighbors to exert strong peer pressure against abusive treatment.

Some of the problem stems from the demographic disproportions caused by female fetal abortion and female infanticide, to avoid dowry obligations at the outset; but also from early (very early) child marriages (though illegal, there are some 300,000/yr.) so that dowry requirements are still small.

Another area of hope is how rapidly even long entrenched cultural artifacts can change given how young the population is (70% under 35) and the ubiquity of social media information flow as well as well organized, direct outreach to men and, especially, boys.

South Asian Geopolitics

India’s regional foreign policy is burdened (somewhat like the US, globally) by its relative size and power.  It also faces real or perceived threats from two large neighbors, Pakistan and China.  It is looking for common ground with other Asian countries and Australia and New Zealand in counterweight to China’s exertion of power and influence.  In this it sees an opportunistic relationship of cordiality with the US.

A novel suggestion proposed was the development of a United States of South Asia, some sort of grand, federal union, with important economic and foreign relations authority lodged in a central government…whose capital would need to be somewhere other than in India.  Colombo, perhaps!?!

This development of rapport with other Asian countries was prominently on display at the great Republic Day celebration, where Japanese Prime Minister, Abe, was the Honored Guest for ceremonial  wreath laying and parade review.

Republic Day.

Republic Day is the annual celebration of the adoption of the Indian Constitution on January 26, 1950.  On one of only three “dry” days in the year (one of the others is Mahatma Gandhi’s birthday), millions of people turn out along Rajpath to watch the great military parade of dazzling troops, marching bands, tanks and rocket launchers, aerial fly-bys, and surprisingly quaint floats representing various regions/peoples/and customs of India.  Our TAF group was supposed to have reserved seated viewing, but as we approached our section, we were shrugged-off by guards and officials who explained that some others had simply commandeered them before we arrived.  Whether we were naively unaware of bribery opportunities or just the victims of more highly placed usurpers, we’ll never know, but we did get standing room, about 20 ranks deep, and the tallest of us actually saw much of the parade.  Sadly, I have no pictures, since we were warned not to bring smart phones or cameras (very perfunctory pat-downs did occur); but once in the enclosure, many locals produced their recording devices and flashed away unabashedly.

CFP Certification in India

I also had an opportunity to speak to a group of about 80 CFP practitioners and students in CFP education programs.  As everywhere in Asia, there is great eagerness in India to acquire sophisticated planning skills to match the enormous and growing need for financial guidance.   As literally hundreds of millions of people accumulate disposable financial resources and face more complex choices, there is huge thirst for clues to building successful and durable businesses to respond to the market opportunity.  I hope my comments that day, like my conversations with a number of firms during my last visit to Mumbai and Delhi and Bangalore in 2012 were intended to do, helped to satisfy a small part of the entrepreneurialism coursing through the fledgling planning profession in India.

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Beauty and Horror: A visit to Sri Lanka

The title was taken from a recent commentator on visiting Sri Lanka while the war between the dominant Sinhalese and the breakaway Tamil Tigers was still underway.  The war, the horror part, came to an end in 2009, as a result of a crushing defeat of the Tamils by forces loyal to the current President/Stongman, Mahinda Rajapaksa.  Some would say that it was much more than a defeat, but a slaughtering of several thousands of unarmed, already surrendered combatants.  In any event, even such horror was only a culmination of 30 years of destruction and civil unrest.  And, more horror, the great tsunami of December 2004 hit Sri Lanka nearly as hard as it did Thailand and Sumatra.  The whole country was exhausted and wishes all of that past.

Much reconciliation is strenuously underway and large sums are being spent to rebuild the north and east of the country (Tamil territory) and to ameliorate long-standing oppression of the Tamil minority. This reconciliation effort is drawing inspiration and technical support from South Africa’s famous “Truth and Reconciliation” experience.  To the mind of some in the West (particularly the US State Department), this effort is not yet adequate and much truth is still not revealed.  Our group of Asia Foundation Trustees was treated to an hour long “conversation” with the Sri Lankan Foreign Minister (he spoke for about 55 minutes of that hour) where he was eager to decry what his Government views as the disproportionately negative stance by the US and its impatience with Sri Lanka’s efforts to bring thing right.  “You abolished slavery 150 years ago…and look what problems you still have.  Our war ended only 5 years ago”.    In so many words…”Give us a break!”

Meanwhile, Rajapaksa and several brothers and his son run the country in a form of family despotism.  The government is formally a democracy and the regime could theoretically be ousted, but the majority Sinhalese are reasonably content.  More disturbing: dissent is suppressed, political opponents are assassinated, and religion (think rampaging Buddhist monks) is used to alienate minority Christians.  To many Western observers, the rule of law and civil rights seems greatly threatened; to most Sri Lankans, this is much better than war.   Their economy is, for the region, strong.  Per capita GDP is at $6200/yr, on the verge of the middle range of all countries.  Poverty and unemployment are low.  Some say that Sri Lanka’s 300,000-strong military (from a total population of only 20Million) is not only designed to support the Rajapaksa authority but as a full-employment tactic.   Literacy and access to quality health care is high.  In contrast to most places in India, for example, the streets are clean, there are no beggars, traffic moves in well-behaved fashion (people actually use turn signals and honking is rare!).

The modern world has caught up with Sri Lanka demographically as well: birthrates are less than at replacement levels. Whether this bodes well or ill for the country depends largely on what the giant players in the region (China and India) do to play Sri Lanka’s position to their respective advantage.  If, as the regime hopes, Sri Lanka becomes a Singaporean style, value-adding entrepot on the key Indian Ocean sea lanes, a small, highly educated, English speaking population can be a huge advantage.  Remaining a “colonial-style” economy, reliant on raw materials exports (tea, rubber, coconut oil and fibre) would leave little room for success in an increasingly competitive world. The Chinese are investing heavily in iconic infrastructure (the new highway from the airport to Colombo, major sports stadium, new ocean port, several world class resort hotels and casinos, repairing the ring railroad built by the British and largely destroyed by the tsunami).  India plays little visible role; but, immense and close, it’s hardly ignored.  The US plays a very subtle role, promoting good governance, free trade policy, and regional cooperation.  Not sure that’s a match for the swank new cricket grounds, Rajapaksa Stadium, built by Sri Lanka’s friends in China.

The Tamils and Sinhalese speak different languages; all highly educated persons speak English; and all signs are in 3 languages (Sinhalese first, then Tamil, then English…in the South; Tamil, then English, and only sometimes Sinhalese in the North and East).  The Buddhist Sinhalese were the first to arrive from India, many centuries ago, displacing completely whatever aboriginals peopled the island. Shrines to Buddha abound in Colombo.  The Hindu Tamils came later and populated the edge closest to India.  Their temples (now being reconstructed) grace Tamil towns, like Jaffna in the far north.

But, it’s only in recent times that the country has been in control of itself.  First the Portuguese, then the Dutch (“Zeilan”), and then the  British (“Ceylon”), each for about 150 years of colonial dominance and exploitation of spices (cinnamon) and tea (originally coffee, until the coffee plantations were wiped out by a blight).  The Europeans left some of their religion (many Christian churches in Colombo), massive colonial administrative structures (especially the British, at their 19th Century zenith), and highly sought after private schools,  And they left some of their names, or so at least the Portuguese, who apparently didn’t worry about intermarriage like their more uptight northern European cousins;  Da Souza, Pereira, De Silva, Fernandino are not uncommon.

I began with horror, let me end with beauty.  Island Sri Lanka is green, lush, surrounded by beaches, with a central highland of mist covered hills where, some say, the world’s finest teas grow and cinnamon bark is harvested to sweeten the lives of many millions everywhere in the world.

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The Affordable Care Act…Yet Again

The recent failures of the government’s “Obamacare” website, combined with the avalanche of existing policy cancellations prompts me to comment on the Affordable Care Act (ACA) once again.  Readers of these posts know that I comment on many other things, most of them pleasant.   But few present such a compelling combination of important need and bad policy response as this sad topic.

My initial post (March 3, 2010, while the debate in Congress was still underway) tried to walk a path through possible features of a legislative package that could have achieved bi-partisan support (as opposed to what we got…a law enacted without even one Republican vote) and have begun a process of re-orienting the mentality about insuring health care risks, instead of more deeply entrenching the current faulty mentality.  Let me continue, 3 and a half years later, with describing the important need and then go on to the better policy response we could still have.

Noble Aims; Bad Strategy.

Almost everyone would agree that American medicine (procedures, hospitals, personnel, and pharmaceuticals) is, in the aggregate, the best in the world and, though imperfectly, very well distributed across a very large and diverse population.  No other country anywhere close to the size of the United States does nearly so good a job providing best possible healthcare to so many people. This is not an accident.  It stems, I am convinced, from both a strong capitalist system of rewards for excellence and a very robust system of private insurance that can highly customize its offerings and pricing to the preferences, risks, and pocketbooks of independent consumers.

But, while that robust private insurance market is generally a very good thing, the risk calculus is so good that insurers can too easily choose to cover only relatively low risk consumers.  This was one of the key objectives of ACA: to force insurers to cover all comers, regardless of pre-existing conditions, with a minimum scope and  level of covered services.   One of ACA’s biggest mistakes is to make that “minimum level and scope” too high and too broad…much more than many highly rational consumers would in fact choose for themselves.  So, while forcing insurers and consumers to dosomething was probably an essential part of the law, ACA is forcing them to do the wrong thing.  More on that below.

The other major problem with the pre-ACA  health care insurance system is that  too many very young and currently very healthy people have opted out entirely, forcing the risk pool to be too heavily tilted toward relatively high risk consumers.  Those many “millions of uninsured people” that make for great political sound-bites are mostly young, healthy people that heretofore have made a currently rational decision not to be insured.  Getting them into the risk pool to reduce premium costs for everyone is the second key objective of ACA.  We should carefully ponder whether our society should impose this generational wealth shift from the young to the old (like similar wealth transfers involved in Social Security and Medicare), so let’s at least acknowledge that that is what’s going on here; we can debate the wisdom of doing so at some other time.  But, if that is what we believe we must do, we have to provide the appropriate motivation to do so.  Since the Supreme Court narrowly upheld ACA on the power of Congress to tax (again despite ACA’s proponents strenuously assuring the public…and maybe even deluding themselves…in 2010 that there was no such thing at work; see blog post of July 1, 2012), Congress should have done the taxing right.  As it is, many of the young and healthy will very rationally submit to a modest tax rather than pay substantially greater premiums.

Better Policy Choices.

The fundamental problem with ACA is that it continues an approach based on “first dollar” medical insurance.  Without large deductibles or co-pays in first dollar insurance programs, persons who are in fact medically needy or just so-inclined, are not subject to the normal cost-disciplines about the amount or the character of the services they seek.  That’s fine, so long as individuals are willing to pay for such luxurious insurance coverage.  But to have mandated first dollar insurance coverage – and for an expanded scope and level of “minimum coverage” – was a mistake, particularly since the tax imposed on those who refuse to buy it is far too small.  People are not stupid.  The millions of young, healthy persons who heretofore have left themselves uninsured are mostly going to continue to do so and pay a small tax rather than pay a much larger premium.  Without getting those many low risk people to participate in the pool, the pricing mechanism will force premiums much higher on the older, less healthy, more needy parts of the population.  The young/healthies are not going to just play along from a sense of social altruism.

So, if “first dollar” insurance doesn’t impose usage discipline, thus forcing usage …and costs…higher than they need to be and if we’re going to tax people sufficiently to make them join the pool to keep even those costs down, what’s better?    Mandating “last dollar” coverage for everyone…young, old, healthy, and ill…with no coverage exclusions or pre-existing conditions limitations…and taxing anyone who doesn’t buy such coverage in an amount that exceeds the premium charge.  Since such coverage would only apply to costs above a high threshold, it would be relatively cheap, especially with all those young/healthies in the pool who will almost never get to their ceilings.  The penalty tax wouldn’t have to be very big to get people to buy the insurance so they can avoid tax.

With that “last dollar” mandated health care insurance regime, our society cures at least one of the greatest ills that now plagues us…the fact that some people are forced to exhaust all their other assets or are even bankrupted by extreme cases of health care costs. Even more importantly, we can gradually shift everyone’s expectations about access to basic or pre-catastrophic health care to a more rationally priced system based on actual supply and demand.  We rely on self interest and individuals’ budget constraints  to ration virtually all other goods and services.  There is no fundamental difference here with health care.  The rich will always get more and better, as they do in everything else; and for those who can afford it or are willing to sacrifice other consumption, most people will be able to buy some version of pre-catastrophic coverage, if they want it.  Many people will, rationally, opt out or purchase only the thinnest coverage.  That may not be what the more paternalistic among us would prefer, but it is thoroughly consistent with the preferences for free consumer choice we generally hold sacred.

So, the problem in November 2013 is not in the debacle of the website nor with the President’s and the Democratic Congressional majorities’ failure to tell the whole truth to the American people when ACA was becoming law in 2010.  The problem was and is its having adopted the wrong strategy.  Forget about fixing the website; let’s fix the strategy!

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Lessons from Motown

In law school in Ann Arbor in the early ’70′s, I traveled frequently from the then center of my universe, Chicago, into an outer orbit of the city of Detroit. I learned that Ann Arbor was not just the home of the University of Michigan; parts of it also served as a very swank distant suburb of the motor city metropolis 40 miles away.  The newspaper, radio, broadcast television (no cable then) all emanated from Detroit.  Visiting friends or just getting away from the college town into the “big city” brought  me to Detroit many times.  But, even more than forty years ago, Detroit seemed to me(in part by comparison to Chicago) smallish, grimy, not very sophisticated, racially and economically segregated, still reeling, more than other cities, from the riot era of the ’60′s, without much architectural interest, and, despite Lake Huron (out of sight) to the north and Lake Erie (out of sight) to the south, without much natural beauty.

At that time, of course, I had no inkling of the impacts that gigantic changes in the auto industry, enormous white flight, and bad municipal government policy choices would have in the coming decades, but somehow, even then, I sensed that Detroit was well past its prime, with little basis for resurgence.  The recent bankruptcy filing seems almost an inevitable ignominy. One can hope that the beginning of pioneering regentrification  amid the wasteland of abandoned infrastructure truly takes hold.  The outcomes of the bankruptcy will probably help.

I have only a little to add to the many comments that this bankruptcy has spawned.  There will be important lessons for municipal bond issuers and investors.  The compromises that will likely make their way to the Supreme Court for resolution will, I suspect, be a healthy recalibration of municipal securities pricing and risk assessment and more alert differentiation between bonds serviced by specific revenues and those relying on general tax revenues.   Students of constitutional law will have much new material to fit into the constructs of federalism and notions of  “full faith and credit”.  And governments, elsewhere, may now have some greater cover for taking serious action to better manage their own finances…and, one hopes, greater incentive.

Detroit reflects an almost complete failure of the political solution.  Politicians were too much beholden to municipal worker unions, promising current and deferred compensation and benefits that were not ultimately affordable, but with no incentive to discipline the process.  Tax payers and rate payers had no effective voice in the transaction…and besides, the bill would come due far into the future; the votes are today.  So, a resolution by the bankruptcy court, setting the current accounts right and re-organizing pensions and retiree healthcare contracts, becomes the default choice, forcing some degree of pain on everyone involved.  Maybe, other cities and states, running huge current deficits and facing mountains of underfunded future obligations will take note, so the pain is perhaps less and the allocation of the pain is subject to some greater political  maneuvering while there’s still time.  One hopes that, in the aggregate, we’ve elected officials who, however painful it may be for them, would rather be in control of the result than be its victims.

While I’m skeptical, maybe there’s even a lesson here for the federalgovernment about taking control of deficits and unfunded or underfunded obligations.  Unlike cities and states, the federal government has the unique outlet of virtually limitless debt.  Why be disciplined?…we can always borrow more and then just print the money to pay back the lenders.  There are some respectable economic commentators who would leave the discussion at that.  So long as the US Dollar is the world’s reserve currency and so long as there is no significant inflation, there really is no limit to how much money the US can create.  Why worry?  Well, I ‘m concerned that, in time, both of those conditions, no inflation and being the reserve currency, could deteriorate, with “no inflation” being the first to go.  There is no bankruptcy court to take the US government to the woodshed.  The solution must either be political, with compromises and painful discipline applied internally, or someday, market forces (unwilling bond buyers and competing, more reliable currencies) may have to apply the discipline externally.

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A Novel Approach to Tax Reform: a True “Maximum Tax”

Sadly, any real attempts at tax “reform” seem to have faded from the current political agenda.  Both sides of the debate (lower rates, but broader base, on the one side, and higher rates for top incomes and fewer “loopholes”, on the other) seem now to be waiting for either a showdown over the debt ceiling or for the results of the 2014 Congressional elections to tip the scales one way or another.  If you take out the common theme (broader base/fewer loopholes), you’re left with the impasse of lower rates versus higher rates and no progress can occur given the current political balances and the nearly sacred ideologies underlying those polar views on rates.  Sadly, no one seems to want to do the hard work of really developing that common theme so that those opposing ideologies wouldn’t be so powerful.

Rep. Kevin Brady (R) Texas cited, in the May 6, 2013 Wall Street Journal, data that tends to inflame economic conservatives.  Since 1980, the share of income taxes paid by the top 1% grew from  19.1% to 37.4%, while the share paid by the bottom 50% shrank from 7.1% to 2.4%.  The biggest gripe is not really the change, but the end result:  1% of taxpayers pay close to 40% of the total burden while almost half the people pay none.  But, of course, that’s not the whole story.  People at the bottom of the federal income tax ledger may be paying some state income tax and some property tax and are certainly paying sales taxes and (if employed) payroll taxes that account for a much larger share of their total income than those at the upper reaches of the income ledger.  But, even that’s not a complete picture.  The relatively wealthy consume more and thus pay more sales tax and have more valuable houses and thus pay more real estate tax.   Local variations on sales tax-exempt items and differentials in “homestead allowances” can make a really thorough and accurate comparison almost impossible.

So, maybe an answer is to approach the total revenue needs of various levels of government within the aggregate fairness notions that society, as a whole, can agree is appropriate.   Maybe we could impose upper limits on the total tax that can be extracted, in the aggregate, from all these forms of taxation.  I don’t pretend that this would be easy.  What is the measure?  Income, assets, some combination?  How would this be enforced?  The already flawed “voluntary compliance” system can’t easily be relied upon for an asset-based limitation.  John Cochrane, finance professor at the Booth School at the University of Chicago (my business school alma mater…but long ago, before it was renamed in honor of David Booth’s huge donation, but still with it’s strong free market policy orientation) argues (April 15, 2013 Wall Street Journal) for applying this notion at least to the federal income tax take as a percentage of income.  As an inviolate promise to entrepreneurs and risk-takers, innovators, and all people willing to work hard, the federal tax law would never take more than X% of income…no matter when the income occurs or how much it is.    Once we would  adopt that concept, we could then have an interesting, centrist debate about what that “X” should be.  And, as a matter of fairness, on some notion that we’re all in this together, I would add a true minimum, Y%.  Again, we could have an interesting, centrist debate on how much that “Y” should be so that every income contributes at least a little to the common welfare.

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How Much do we Really Know About Our Future with China?

In yesterday’s (July 28, 2013) New York Times Sunday Review (page 5), an article by Richard Rosecrance of Harvard posits that China must come to grips with a “unified West”,  Europe and America, because of that aggregate’s absolute economic size.  Not only would such an economic union create extraordinary incremental wealth for it’s participants, it would draw China (and other countries) toward it thru its economic gravitational pull.  China needs the markets of the West for its exports and it needs raw materials imports, especially hydrocarbons and technology, to drive its internal engine.  With that economic gravity would come, Rosecrance argues, an eventually more liberal and democratic political apparatus within China.

This perspective both argues strongly for a more closely economically unified “West” and offers a counterpoint to the fairly common view these days that China’s economic ascendancy is both inevitable and largely unreliant on the existing, Western economic powers.  That view is expressed, with something of a shudder, by Heriberto Araujo and Pablo Cardenal in the June 2, 2013 Sunday Review.  There, they express the fear that China is determined to spread a form of “state capitalism”, citing the huge investments China is making in natural resources and infrastructure around the world, but especially in the non-West geography of Africa and the Asian periphery.  At the end, however, they come to the same conclusion…but, I think, with less hope for success…that China must adapt to the world, not the other way around.  To do that, they would clearly agree with the fundamental Rosecrance premise, that it is “essential that Western governments stick to what has been the core of Western prosperity:  the rule of law, political freedom, and fair competition”.

In a neighboring piece in that June 2 edition, two voices that I respect enormously, Ian Bremmer and Jon Hunstman (Ambassador to China, 2009-2011, and once, and I hope future, Presidential candidate),  argue that China and the US are locked in 21st Century form of MAD…mutually assured destruction…but this time of the economic variety.  Both countries are entitled to a sense of “exceptionalism”…a right to make the rules, not just accept those laid down by others.  The course they recommend, therefore, is perhaps the obvious one of tireless dialogue and some attempt at compromise, recognizing that both sides have limits to what they canimpose on the other.

I would add another, hopeful, perspective: time.  The West is typically in a hurry, China understands it operates on a much longer scale of events.  Still, the imperatives of human nature, the freedom and prosperity that each individual (or family, or local community, or region) naturally desires probably outweighs the benefits of stability and harmony over time.  Given enough time, the outcomes seem almost certain to me.  But careful understanding, respect, and cooperation along the way will probably make that result occur sooner and with less risk.

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Differing World Views

This past weekend, two influential economic commentators, Niall Ferguson and Robert Shiller, pronounced importantly different views of what is needed for a continuing successful future for our society.  Perhaps characteristic of the venues,  Ferguson wrote in the weekend (June 8-9) Wall Street Journal, drawing from his new book, “The Great Degeneration..” and Shiller wrote in the June 9th SundayNew York Times.

It won’t surprise readers of this blog that I am much more sympathetic to the views of Niall Feguson, who presents startling…and  embarrassing statistics… showing a deteriorating position for the US for economic freedom, regulatory efficiency, reliable legal apparatus and defense of property rights,  and global competitiveness.  At one time, the US was the world’s unparalleled standard bearer on these dimensions and many US institutions are founded and run on fostering these characteristics for the rest of the world.  If the change in relative position were a case of the pupils excelling their teacher, we could be happier about this result.  Ferguson believes, and I suspect he’s right, that instead, this decline reflects a true degeneration.  He cites classic theory to suggest that it may be the inevitable outcome of all republics (governments of the people, by the people, for the people) “giving way to oligarchy or tyranny”, where the chief benefits of  a society flow only to the powerful.  More optimistically, he cites many ongoing advantages to American society, relative to other already developed economies, but still faults many poor policy choices, especially in the tax and regulatory environment, and particularly at the federal level.   His cure would be an honest look at  and a careful dismantling of the impediments we’ve created to economic success.

At the outset of Robert Shiller’s piece, I was excited to see a well respected voice argue for a more nuanced approach to fixing the funding/benefits problem looming in Social Security.  As I’ve commented in this blog ( “Elections have Consequences…” November, 2012) and elsewhere, there are many ways to fix the problem.  No one of them needs to do all the work; and, in any case, trying to solve the problem on only one dimension is probably…and appropriately…politically impossible, even if it could be economically viable.  Instead, small doses of those many forms of medicine will probably need to be combined in some form of generally tolerable prescription for the aggregate change to have any political viability.

Thanks to Shiller for adding another: benefit changes (presumably down as well as up) to reflect changes in real GDP per capita, rather than in mere CPI, chained or unchained.  As he puts it, this would better insure that one generation doesn’t bear too much or enjoy too little of real changes in society’s overall welfare.  Bravo!  But, to my dismay, Shiller several times mentions, as if just in passing, that tax rates or the contribution base for employees, and employers, might have to be raised…as if that were an unimportant consideration. “So, be it”, he says, “…keeping our eyes on the integrity of Social Security, which is crucial to our identity as a civil society”.  This sounded to me more like the classic logical fallacy of assuming the very thing to be proven (“begging the question”) and a politician’s pronouncement than the cooler perspective of a social scientist.   Similarly, he makes only very brief mention of the relativesize of respective generations, thus dismissing probably the most important element in the arithmetic of inter-generational economic justice.  How we divide up the per capita GDP of the economy as a whole will be hugely reliant on how many capita there are in one generation or another.

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Hope on Inauguration Day

Today we witnessed one of our country’s most magnificent events, a Presidential Inauguration, celebrating our ability to be governed by officials who are elected only for specified terms.   It also ennobles all of us by causing us to recognize that, despite very important differences, we all respect the process even when it produces results we don’t prefer.

As readers of this blog have gathered, I am among those tens of millions of American voters who would have preferred a different result this time around.   And I am still annoyed by the commonly expressed narrative that President Obama achieved a “great victory”.  In fact, it was one of the narrowest popular vote victories in history (about 1%), especially for a re-elected incumbent, with very small margins in states that gave him his electoral vote win, which, itself, was smaller than the first time around.  In any event, he won and let us all hope that he and his administration can work with the co-equal Legislative Branch (let’s not forget the basics of how our government is intended to work) to achieve good results for our country over the next four years.  A lot of our future, for better or for worse, will depend on what we’re able to accomplish in this short time.

Like many, I was surprised, but pleased, by the specificity of the President’s inaugural address.  Rather than mere thematic platitudes about America’s exceptional natural and human endowment and its unique set of core values leading us to continued greatness as a nation, we heard a long list of intentions for particular results.  I was personally very pleased to hear the calls to better deal with gun violence, a much more welcoming policy for immigration, gay rights, tax reform, and better managing the costs of entitlements.  It would be hard to disagree with the broad goals; the problems will lie in the details of how those goals are to be achieved. And I would have preferred him to say more about cooperative engagement with those who don’t share all his views and less continuing to divide the nation on economic terms.  There was a lot of “code” in his speach to reassure his electoral base that they could count on him to further their agendae; there was little to suggest that he genuinely respected the views of those not in that base.  And most fundamentally, there was little to suggest that he is prepared to truly grapple with the most fundamental of all the problems we face…the completely unsustainable mismatch of government expenditures and revenue.  That problem must be set on a credible course of correction or all of the other goals will be impossible to achieve.

Still, today, I am prepared to be hopeful, both because that’s in the spirit of celebration of our success as a democratic republic and because our newly inaugurated President should be looking to how history will judge him over all future time.  If he is as wise as he is smart, he will not want to waste this fabulous opportunity to do some very good things…that the country is actually able to pay for indefinitely.  Still, I’m glad that the next election is only about 21 months away, just in case.

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