AEI » Latest Content http://www.aei.org American Enterprise Institute: Freedom, Opportunity, Enterprise Mon, 22 Dec 2014 21:38:31 +0000 en-US hourly 1 The CBO weighs in on the ‘replacement rates’ debatehttp://www.aei.org/publication/cbo-weighs-replacement-rates-debate/ http://www.aei.org/publication/cbo-weighs-replacement-rates-debate/#comments Mon, 22 Dec 2014 21:07:21 +0000 http://www.aei.org/?post_type=publication&p=825671 On December 18 the Congressional Budget Office released its latest report on Social Security. In addition to updating its projections for system financing – which has worsened considerably in recent years – CBO touched on the debate over how to measure Social Security “replacement rates.”

Back in July, Syl Schieber and I wrote in The Wall Street Journal that the Social Security Administration’s method of calculating replacement rates understates the adequacy of Social Security benefits. A replacement rate is designed to measure the degree to which retirement income can “replace” working-age earnings and thus allow retirees to maintain their pre-retirement standard of living. Most financial advisors recommend a replacement rate from total retirement income of about 70%, while SSA’s actuaries calculate a typical replacement rate from Social Security benefits of about 40%.

But SSA’s actuaries use a method that overstates individuals’ pre-retirement earning and thus understates their replacement rates from Social Security. SSA compares Social Security benefits to the wage-indexed average of the retiree’s highest 35 years of earnings. This “wage indexing” adjusts past earnings for substantially more than the rate of inflation and thus understates the degree to which Social Security benefits help retirees maintain their pre-retirement standard of living. Here’s how we put it back in July:

Say you are retiring at age 65 this year and earned $20,000 in 1985. The purchasing power of that 1985 salary in 2014 dollars is $43,640. But in calculating replacement rates, SSA wage indexes that $20,000 for the growth of the economy, and so under that model you earned $53,281. Replacing 70% of $53,281 is a lot more difficult than replacing 70% of $43,640. SSA’s wage indexing of past earnings in effect credits retirees with salaries that they never had, then deems retirement income inadequate if it fails to replace that nonexistent past salary.

In its new report, CBO seems to grasp these points. CBO calculates replacement rates relative both to wage-indexed earnings (its previous practice) and inflation-indexed earnings. In both cases, CBO calculates replacement rates using the 35 highest years of pre-retirement earnings.

Moreover, the language CBO uses makes clear they understand what we were getting at:

Indexing earnings to prices better captures the real amount of resources available to a worker over his or her lifetime, whereas indexing earnings to wages may overstate those amounts.

How much does this matter? A lot. CBO’s wage-indexed replacement rate for a typical worker born in the 1980s is 46%, while that person’s price-indexed replacement rate is 61%, about one-third higher.

A replacement rate is merely a shorthand for a much more complex “life cycle” calculation in which individuals try to maximize their standard of living over their full lifetime, while accounting for changing family sizes, uncertainty regarding their life expectancies and the return they can receive on their savings, their attitudes toward risk, and other factors. No shorthand will be perfect.

But CBO’s use of the inflation-adjusted average of the highest 35 years of earnings isn’t a bad shorthand. It will tend to reflects earnings from the individual’s late 20s through retirement, a period in which he or she has paid off some debts, established a career path and begun to anticipate the standard of living they will enjoy through their working life, which is the standard of living they will seek to replicate through their retirement savings. If you want a single measure that’s easy to understand while being consistent with the more sophisticated life cycle approach to retirement saving, CBO hasn’t chosen a bad one.

By contrast, SSA’s “wage-indexed” measure isn’t consistent with a life cycle approach. In the life cycle model, for which Franco Modigliani won the Nobel Prize, individuals care about smoothing their own standard of living from year to year. SSA’s actuaries, by contrast, assume that individuals want their standard of living to rise each year with the average wages of other workers in the economy. But they don’t present any research or data to back this “Keeping up with the Joneses” theory, they merely assert it. Personally, I’ll stick with the guy who’s got the Nobel Prize…

Follow AEIdeas on Twitter at @AEIdeas.

]]>
http://www.aei.org/publication/cbo-weighs-replacement-rates-debate/feed/ 0
‘Tis the season for better credit cardshttp://www.aei.org/publication/tis-season-better-credit-cards/ http://www.aei.org/publication/tis-season-better-credit-cards/#comments Mon, 22 Dec 2014 20:46:15 +0000 http://www.aei.org/?post_type=publication&p=825666 Last Christmas, more than $1,000 was charged to my credit card at a luxury department store. Unfortunately, I wasn’t able to enjoy this shopping spree myself. Even though I took care to secure it, my credit card was compromised.

Fortunately, I was able to get a new card and wasn’t liable for the charges. This cost is covered in the commission fees retailers pay for credit card processing. Frequently retailers also pay for the cost of the new card. However, there are costs to me — and to all other consumers — in the form of higher prices and lost trust. There is no doubt that the experience was unnerving. Now I worry that I expose myself to fraud every time I use the card.

There are hundreds of millions of old-fashioned magnetic strip credit cards in circulation in the US, and they are increasingly breached, and not just with the sophisticated attacks experienced by Target and Home Depot. With an ordinary card reader, thieves can copy your credit card information, purchase a gift card and then go shopping.

Interestingly, credit card fraud at the point of sale is little known in Europe and where I live in Denmark most of the year. European banks, responsible for fraudulent charges, requested MasterCard and Visa Europe (separate from Visa Inc., it licenses the Visa brand and technology) to improve the security of credit cards. What’s known as the chip and PIN (personal identification number) solution allows consumers to secure themselves in two ways when they shop, both with an encryption on the transaction (enabled through the chip on the card) and a four digit PIN entered to prove that the shopper is the rightful card owner.

This improved security system has been around for almost two decades and is deployed in more 100 countries, including Canada. American card issuers have this capability and have even issued cards with this technology in a few instances, but it is not widespread. The economics of two-sided markets might explain why.

The credit card industry is the classic example of a two-sided market. The credit card provider is the middleman between retailers on the one side and consumers on the other. The financial institution provides credit cards to consumers, and on the other side, it offers payment processing. It earns fees from the swipe of the magnetic card as well as a commission on the total purchase. Consumers select credit cards on a variety of factors such as financing terms, brand, security features and so on.

In a free and unregulated market, the middleman has the incentive to maximize the value — and minimize the loss — to both sides of the market. However, with a series of regulations and lawsuits between card issuers and retailers, the incentives are distorted, and costs are not distributed fairly. Moreover, consumers don’t always have information to make informed choices.

Retailers have urged for improved security on their cards for years. They have also made significant investments in payment terminals, which cost hundreds, if not thousands of dollars each and pledge to complete the upgrade to chip and pin technology by the end of 2015. New credit cards with this technology cost just a few dollars each.

While financial institutions may drag their feet on upgrading cards, a number of retailers offer their own credit cards with the chip and PIN solution, ensuring their customers state of the art protection while they reward their loyalty.

The financial industry has made a half step by agreeing to a minimum standard of chip and signature authentication beginning in 2015, but not chip and PIN. While the chip is the first line of defense, a stolen credit card with chip and signature capability can still be used, as a signature is easily forged.

Improving the security of cards may mean less revenue to banks, at least in the short to medium term. With the shift to chip transactions, banks may not earn swipe fees to the extent they have in the past. Moreover, PIN processing is offered by a number of suppliers, not just Visa and MasterCard. On top of that, banks claim that chip and PIN solutions are too complicated for consumers to use, especially when Americans have three or more credit cards and can’t remember the PIN to each.

It may be that the conditions of getting a credit card are too lax. Remembering four numbers seems insignificant compared to avoiding the calamity created by fraud. It should be the case that credit cards compete on improved security measures.

Though chip and PIN credit cards are not 100 percent secure, they are hundreds of times safer than magnetic cards and can reduce most fraud at the point of sale. There is no doubt that if fraudsters can’t succeed at the point of sale, they will move their activities online, but we shouldn’t make it so easy for them to prey on millions of Americans.

Shopping is America’s pastime and especially important at the holidays. With 90 percent of America’s retail transactions happening offline, retailers, card issuers and consumers all have an interest to maximize credit card security with chip and PIN.

]]>
http://www.aei.org/publication/tis-season-better-credit-cards/feed/ 0
Free speech, political correctness struggle to coexist on campushttp://www.aei.org/publication/free-speech-political-correctness-struggle-coexist-campus/ http://www.aei.org/publication/free-speech-political-correctness-struggle-coexist-campus/#comments Mon, 22 Dec 2014 19:05:19 +0000 http://www.aei.org/?post_type=publication&p=825642 The total discrediting of Rolling Stone’s story on rape at the University of Virginia has shined a light on one of the least palatable features of American life: the so-called epidemic of rape on campus.

Authorities from Barack Obama on down have cited the phony statistic that one in five college women is raped. Phony, because it’s based on a 2007 survey conducted at two Midwestern schools, not of a random sample, but of a small number of self-selected respondents. The study also includes unwanted touching and kissing in its broad definition of “sexual assault.”

A Department of Justice survey released this month presents a different picture. Between 1995 and 2013, it reports, an average of 0.61 percent of female students were raped or sexually assaulted every year — 2.4 percent over four years, not 20 percent. Moreover, DOJ reports, that rate has been declining significantly in recent years, in line with a national decline in rape.

In other words, there is no suddenly raging epidemic of rape on campus. Nevertheless, colleges and universities have been scampering to comply with mandates from the Obama Department of Education to set up procedures in which campus administrators, with no legal training, act as investigators, prosecutors, judges, juries and executioners.

Accused students are not allowed to have lawyers or to confront witnesses, and legal rules of evidence do not apply. State legislatures have passed or are considering laws requiring schools to adopt (and many schools are adopting) a “yes means yes” standard, requiring express consent at each stage of a sexual encounter.

These kangaroo courts can and do expel male students, putting a blot on their records for life. No wonder dozens of them are suing universities and getting big cash settlements. No wonder 28 current and retired Harvard law professors signed a letter calling such processes “deeply unfair and undemocratic.”

Some day, I suspect, this frenzy will be seen as akin to the hysteria over satanic abuse in day care centers in the 1980s. Many people went to jail over utterly fraudulent charges based on bogus psychological research, akin to the Salem witch trials.

It’s not surprising, however, that these abusive frenzies have taken hold at the nation’s colleges and universities. Increasingly, they are our society’s least free, least fair and least honest institutions.

Consider campus speech codes. The Foundation for Individual Rights in Education (FIRE) reports that 58 percent of the 427 colleges and universities it monitors have speech codes banning or penalizing speech that is protected by the First Amendment in America generally.

The good news is that the number of speech codes is declining, partly in response to FIRE’s advocacy and lawsuits. The bad news is that the Obama Education Department continues to use threats to cut off funding to coerce universities to ban “sexual harassment,” defined as “any unwelcome conduct of a sexual nature.” As FIRE notes, “This is an overbroad definition that is not in accordance with the First Amendment.”

The rationale for speech codes? Usually it is that students, especially racial minorities and women, should not encounter anything offensive on campus. Administrators evidently believe that people should not be allowed to express thoughts someone else doesn’t want to hear. The authors of the First Amendment had a different idea.

A third way in which universities and colleges are corrupted is in the widespread resort to racial quotas and preferences — literally, racial discrimination — in admissions to selective institutions.

Administrators do not admit they are discriminating by race. That would, among other things, violate the letter of the Civil Rights Act. But everyone knows they are using “holistic” standards to admit more blacks and Hispanics (and thus fewer Asians and whites) than they would under the criteria they admit to using. They evidently feel that “diversity” justifies discriminating by race and lying about it.

Kangaroo courts, speech codes, racial discrimination: I suspect some older readers cannot believe such practices have become standard operating procedure at American colleges and universities — indeed, the major focus of many administrators, who now outnumber teachers on the nation’s campuses.

Historically, universities and colleges saw themselves as havens of free speech and fair play, insulated from the larger society to protect those things from interference. Now they insulate themselves in order to violate due process, suppress speech and discriminate by race.

There’s still some good scholarship and teaching on campus. But it exists, uneasily, amid a culture of lying and intellectual corruption.

Michael Barone is a senior political columnist for the Washington Examiner. This column is reprinted with permission from washingtonexaminer.com.

]]>
http://www.aei.org/publication/free-speech-political-correctness-struggle-coexist-campus/feed/ 0
More and more of America’s superrich may be getting that way through entrepreneurshiphttp://www.aei.org/publication/americas-superrich-getting-way-entrepreneurship/ http://www.aei.org/publication/americas-superrich-getting-way-entrepreneurship/#comments Mon, 22 Dec 2014 18:04:09 +0000 http://www.aei.org/?post_type=publication&p=825608 In a recent National Review story, economist Tino Sanandaji takes issue with inequality researcher Thomas Piketty, author of this year’s surprising best-seller, “Capital in the Twenty-First Century,” over how America’s superrich got that way. Sanandaji:

Piketty believes that most top wealth is inherited and that the rich tend to pass on their growing wealth to the next generation. It goes like this: Assume that the wealthy receive a return of 6 percent of their capital, spend half and reinvest the remaining 3 percent perpetually while the growth rate of the economy is 2 percent; the fortunes of the rich will outgrow the economy by 1 percent per year and eventually take over the economy.

But Piketty is aware that the force driving his r > g theory — rentiers with ever-growing inherited fortunes — is ill-suited for the United States. The book therefore introduces a second force behind inequality to better account for trends here. Piketty believes that most top earning Americans are senior managers of large firms, a group that he labels “supermanagers.”

But there is a problem with Piketty’s analysis: Where are the entrepreneurs?  Again, Sanandaji:

Wealthy rentiers and salaried corporate executives may be vaguely unsympathetic groups, but they do not constitute the bulk of rich Americans. In particular, Piketty underestimates the importance of entrepreneurs and business owners. It’s not a minor oversight: Self-employed business owners who actively manage their firms own around 70 percent of the wealth of the top 0.1 percent. With top earnings, too, business owners are far more important than salaried executives. This doesn’t change the fact that inequality is high and rising, but it undermines Piketty’s explanation for why inequality is increasing in the United States.

Indeed, if you dig deep into Forbes magazine’s annual surveys of the superrich in the US and abroad — a key data source for Sanandaji — you find a couple of interesting data points. First, the US creates billionaire entrepreneurs at a faster clip than any other large advanced economy. One might argue this a healthy sign soon for US innovation and growth.

Second, self-made billionaires increasingly populate the ranks of the richest people in the country. In its latest Forbes 400 issue, the magazine gave each member a 1-to-10 score with “1 indicating the fortune was completely inherited, while a 10 was for a Horatio Alger-esque journey.” Forbes then applied that analysis all the way back to 1984. Here is what Forbes found: “Looking at the numbers over time, the data lead us to an interesting insight: in 1984, less than half of people on The Forbes 400 were self-made; today, 69% of the 400 created their own fortunes.”

The chart below helps illustrates that point by comparing  the 1s  vs. the 10s over time, Forbes finds that for “the first time in our data set, we see the number of self-made billionaires who rose from nothing, and overcame various tough obstacles, outpacing those that just sat on their fortunes.”

Forbes

Forbes

 

]]>
http://www.aei.org/publication/americas-superrich-getting-way-entrepreneurship/feed/ 0
Time for the IMF in Russiahttp://www.aei.org/publication/time-imf-russia/ http://www.aei.org/publication/time-imf-russia/#comments Mon, 22 Dec 2014 17:23:42 +0000 http://www.aei.org/?post_type=publication&p=825623 The last thing that a beleaguered Vladimir Putin will want to hear is that Russia has now reached the stage where it desperately needs an IMF supported economic adjustment program. Without such a program it is difficult to see how Russia can regain domestic and international confidence in the management of its economy. Absent the IMF, it is also difficult to see how Russia will be able to avoid the imposition of damaging capital controls on its economy.

There can be no denying that Russian policymakers were totally blindsided by the recent collapse in international oil prices from around US$110 a barrel in mid-2014 to US$60 dollars a barrel at present. All too likely this will prove to have been a very costly lapse in economic policy judgment particularly considering that energy accounts for around two thirds of Russian exports and around half of its tax revenues.

A dramatic drop in international oil prices would have been difficult for Russia in normal times. Yet these are hardly normal times for Russian since effective financial sanctions are now being imposed on the country in the context of the ongoing Ukrainian crisis. Those sanctions have already precipitated more than US$100 billion in capital flight from Russia since the start of this year. They are also now seriously restricting the ability of Russian corporations to refinance their large US dollar debts coming due.

In responding to a burgeoning balance of payments crisis, Russian policymakers appear to have made every mistake in the book. The central bank was painfully slow to use its large international reserves or interest rate policy to calm market fears about the currency’s stability. Compounding matters, the central bank has managed to convey the impression that the Russian government stands fully behind the Russian corporate sector’s more than US$600 billion in foreign currency debt.

Worse yet, the central bank’s actions have not been backed up by any serious adjustment to the government’s budget spending plans despite the fact that the oil price now is around 40% below the level assumed in the government’s budget. Similarly no changes have been proposed to reform the insidious interconnection between the government and the corporate sectors, which has seriously undermined confidence in the management of the economy.

With the government seemingly at sea, there has been a dramatic swoon in the Russian ruble, which has lost almost half of its value since the start of the year. This is something that Russia can ill-afford considering that inflation is already over 9% and that the Russian people are  all too familiar with the pain associated with very high inflation rates. The public is already starting to hoard groceries before they get more expensive and are rushing to their ATMs while the going is still good. It would seem to be only a matter of time before they start running on their banks.

Experience amply suggests that it is very difficult to regain economic confidence once it has been lost. Those countries in Russia’s present dire economic circumstances that have succeeded in doing so have done so in the context of a carefully coordinated economic adjustment program that had the imprimatur of an outside independent agency like the IMF.

For Vladimir Putin to successfully approach the IMF, he would have to back down on his Ukrainian adventure to win Western support. Considering that to be highly unlikely, Russians should brace themselves for a rough economic ride next year. For not only is it all too likely that Russia will experience a deep economic recession and double digit inflation. It will also be subjected to capital controls that will further distort Russia’s already highly distorted economy.

Follow AEIdeas on Twitter at @AEIdeas.

]]>
http://www.aei.org/publication/time-imf-russia/feed/ 0
Cuba’s next move after US policy shift: Noriega on Fox News’ ‘Defcon 3 with KT McFarland’http://www.aei.org/press/cubas-next-move-us-policy-shift-noriega-fox-news-defcon-3-kt-mcfarland/ http://www.aei.org/press/cubas-next-move-us-policy-shift-noriega-fox-news-defcon-3-kt-mcfarland/#comments Mon, 22 Dec 2014 16:30:25 +0000 http://www.aei.org/?post_type=press&p=825650

]]>
http://www.aei.org/press/cubas-next-move-us-policy-shift-noriega-fox-news-defcon-3-kt-mcfarland/feed/ 0
No, China is not ready to cut off North Koreahttp://www.aei.org/publication/china-ready-cut-north-korea/ http://www.aei.org/publication/china-ready-cut-north-korea/#comments Mon, 22 Dec 2014 16:12:38 +0000 http://www.aei.org/?post_type=publication&p=825590 Like clockwork, just days after another North Korean provocation, the press begins reporting that this time, China is upset, for real, no kidding. The story at the moment is from the New York Times, headlined “Chinese Annoyance With North Korea Bubbles to the Surface,” asserting that an article critical of Pyongyang written by a retired, once-influential army general might represent a deeper current of thought in China about the dangers of continuing to support the Kim regime. In a country of 1.3 billion people, it would be shocking if there weren’t divergent views on just about everything, and even surprising if a few of those didn’t make their way into the state-controlled press. Yet this is a long way from saying that China is thinking of cutting North Korea loose, pulling the life support that has kept the Kim government alive as it continues to destroy what little remains of the country’s economy and comes ever closer to a miscalculation that could ignite conflict on the Korean peninsula.

To give a bit of perspective on how Western reporters and officials continue to hope for something that just ain’t happening, a few headlines from recent years: “China Frustration With North Korea Offers Hope for U.S.” appeared in June 2013, and a few months before that it was “China’s Anger at North Korea Overcomes Worry About U.S. Stealth Flights,” while “China’s Anger at North Korea Test Signals Shift” came out way back in May 2009. Those are just a few of the pieces asserting that ties were cooling between Beijing and Pyongyang and that Washington could soon see a major shift in China’s attitude.

The hope each time, fed by ever-optimistic U.S. government officials, who would regularly share the same sentiments in off-the-record meetings in Washington, was that maybe now we could turn to Beijing to start putting real pressure on North Korea to end its nuclear program, curb its missile launches, and in general stop acting crazy. That is why we still see stories such as “U.S. Approaches China in Effort to Respond to North Korean Hacking,” in which a “senior U.S. official” states that “we have discussed this issue with the Chinese to share information, express our concerns about this attack, and to ask for their cooperation.”

If such senior U.S. officials are playing a psy-ops game, and maybe sending some unsettling threats to Pyongyang through Chinese intermediaries — such as “We’re going to empty your bank accounts” — then we should applaud their Machiavellian finesse. However, if they are talking to Beijing with a straight face, which is more likely the case, then they are living in some version of the Matrix, where they have not yet taken the red pill. Maybe a simpler analogy is Lucy and the football. Normally, it’s the North Koreans who pull the football away from our negotiators, but in this case, we’re setting the ball up ourselves and all but asking the Chinese to yank it away as we hurtle down the field of international cooperation at full speed. I mean, if you’re Chinese president Xi Jinping, or his underlings, what else are you going to say to the gullible Americans but “Of course we hear your pain, and believe me, we are here to help”?

That is not to say the Chinese aren’t worried by just how insane Kim Jong-un may well be, seeing that he pulled a Godfather-style family dinner on his uncle last year — an uncle who just happened to be until that moment the power behind the throne and China’s main conduit into the Bizarro world of North Korea. But the bigger picture hasn’t changed. Beijing is essentially receiving an in-kind donation from the United States thanks to the stalemate with North Korea: tens of thousands of U.S. troops tied down every year on the Korean peninsula, costing us millions of dollars and requiring thousands of hours of government work on all levels. It’s a waste of resources that Beijing could hardly hope to get us to do otherwise. The Chinese have no incentive to help us “solve” the North Korean problem, since that would release a not insignificant amount of U.S. strength to focus on China’s own moves to extend their control through much of Asia’s strategic waters.

Actually, I don’t think American officials are that desperate, self-delusional, or amateurish. However, they cannot break out of their dialogue dependency trap, either with North Korea, which has led to two decades of broken agreements, or with China, where they cannot but think that keeping open the lines of communication somehow gets us closer to our goals. If so, then the hundreds (thousands?) of man-hours of chitchat with our Chinese friends should have resulted in a North Korea that is busy stuffing Christmas sack with toys for tots and, oh, closing down its concentration camps and turning off the thousands of nuclear centrifuges spinning 24/7 making little juche nukes.

No, as attractive as the prospect of engaging in meaningful diplomatic dialogue with our Chinese partners is, the signal we send is one of being both helpless and clueless: helpless in that we have no North Korea policy in Year Six of the Obama administration (which may almost be better than the disaster of the Bush years) and clueless in that we somehow think that we’re showing just how responsible we are by diplomatically engaging North Korea’s major supporter, which has no interest in any type of lessening of tensions between the U.S. and North Korea.

The problem is that North Korea has just opened up a whole new, and much more dangerous, chapter in state-sponsored terrorism. American companies are at direct risk, self-censorship has already been adopted, and there is still no American response, as we seem to have been caught with our pants down once again. That augurs for a lot more cyber terrorism in the coming years while we are busy paying courtesy calls on our Chinese friends who are, this time, really, really angry with North Korea. Trust us.

]]>
http://www.aei.org/publication/china-ready-cut-north-korea/feed/ 0
The pathetic Pacific pivothttp://www.aei.org/publication/pathetic-pacific-pivot/ http://www.aei.org/publication/pathetic-pacific-pivot/#comments Mon, 22 Dec 2014 16:06:21 +0000 http://www.aei.org/?post_type=publication&p=825605 ...]]]> As the historically minded will recall, back in 2012 the Obama administration declared that the United States “will of necessity rebalance toward the Asia-Pacific.” That was the guidance the commander in chief gave to the U.S. military, the idea being that since, the peace of Europe was eternal and self-sustaining, and the Middle East was a mess made by George Bush, that the most important mission for the 21st century was to keep an eye on the Chinese, the “rising” great power.

Our Asian allies were very pleased by this, particularly the Japanese who had become a frequent target for expressions of Chinese nationalism incited by the government in Beijing. But the South Koreans, Southeast Asians, and the Australians – who had just published a defense white paper speculating about the retreat of the United States from the region – were likewise reassured when the U.S. Navy announced that it would base 60 percent of its ships in the Pacific.  There will soon be 2,500 Marines based in Darwin, in northern Australia, too.

East Asia’s enthusiasm for this “pivot” – the term initially pedaled by the White House – has subsided substantially since then.  In the part of the Pacific that matters most, the waters of the western Pacific from the Sea of Japan through the South China Sea to the Malacca Strait, the U.S. military is decreasing toward a vanishing point. Budget cuts are slashing the overall size of the armed forces and the wars of the Middle East remain a giant, sucking chest wound that demands attention, exposing the Pacific Pivot as all hat, no cattle.

A good way to measure this is to chart the deployments of the five aircraft carriers that comprise the backbone of the Pacific Fleet.  Looking at the official Navy information cataloged by the website STRATFOR reveals how gaping the American absence has become.  In the 32 months from May of 2012 through this December, there have been 12 months where there has been no aircraft carrier – none – in the area controlled by the 7th Fleet, the command that oversees the western Pacific.  In only four of those 32 months have there been two carriers in the region; in such a large area, that’s probably the absolute minimum requirement for any kind of effective presence and deterrence.  The numbers would be even worse but for the fact that the USS George Washington, which is based in Yokosuka, Japan, was constantly at work; alone it accounted for more than 80 percent of the total carrier presence in this period.  Alas, the George Washington is about to undergo the periodic overhaul of its nuclear powerplant, a process that will take it out of service for about two years.  Today’s 10-carrier Navy can’t come up with a substitute until next summer, when the USS Ronald Reagan may begin to operate from Japan.

This heavy use of the Yokosuka-based carrier has been necessary to offset the fact that two of the other Pacific fleet carriers, the Ronald Reagan and the USS John C. Stennis, have been in periods of extensive, if normal and predictable, servicing. But just as crippling to the Navy’s Pacific posture has been the need to participate in deployments to the Persian Gulf, a mission that occupied much of the Stennis’ time prior to maintenance and has also eaten up large slices of the Everett, Washington-based USS Nimitz deployments.

The carrier presence picture is mirrored almost exactly when it comes to Marine amphibious ships.  The Pacific amphib fleet consists of five ships, with one based at Sasebo, Japan.  The Marines were able to keep two of these “mini-carriers” in the 7th Fleet area of operations for only three of the 32 months, again relying on the Japan-based Bonhomme Richard to maintain the majority of the presence.

To be sure, carrier presence is not the only, or perhaps even most important, measure of naval power, let alone overall U.S. military power.  Nonetheless, these numbers are strongly indicative.  Where carriers sail, they are accompanied by a bevy of escort ships, including Arleigh Burke-class destroyers and attack submarines – also, with their Tomahawk cruise missiles, much in demand in the Middle East these days.

This deployment arithmetic is the reality of the Obama Pivot.  And it is no accident, comrade, that the increase in boat-bumping and other aggressive behavior by the Chinese People’s Liberation Army correlates pretty nearly to the decrease in U.S. patrolling, particularly in the South China Sea, which is a long way even from Yokosuka.  That port is on the northeast side of Japan, about 1,300 miles as the crow flies from the Taiwan Strait and 2,100 miles from the middle of the South China Sea.  The Navy’s carriers are extremely capable warships, but they can’t be in two places at once.  Even if the missions are split perfectly between the Navy and Marine Corps, the line is thin.

And the Obama “Rebalance” is, in fact, an Obama Retreat, not simply from the Middle East or in the face of Vladimir Putin’s aggression, but from the Pacific theater that was touted as its focus.  Chinese leader Xi Jinping will, no doubt, be happy to conclude treaties that pretend to control the climate while he exerts increasing military control over maritime East Asia.

]]>
http://www.aei.org/publication/pathetic-pacific-pivot/feed/ 0
Shouldn’t shale billionaire Harold Hamm be Person of the Year?http://www.aei.org/publication/shouldnt-shale-billionaire-harold-hamm-person-year/ http://www.aei.org/publication/shouldnt-shale-billionaire-harold-hamm-person-year/#comments Mon, 22 Dec 2014 16:04:40 +0000 http://www.aei.org/?post_type=publication&p=825589 I’m not going to argue Time magazine was wrong to give its annual “Person of the Year” award to the Ebola fighters. Perfectly reasonable choice. But how could one of the finalists  — a group that also included Vladimir Putin, Taylor Swift, Jack Ma, Tim Cook, Masoud Barzani, and Roger Goodell — not be fracking billionaire Harold Hamm, founder and CEO of Continental Resources?

As Forbes magazine puts it, “Harold Hamm has transformed the U.S. oil industry like no one since John D. Rockefeller, while helping to keep domestic prices low — and making himself a $17 billion fortune. And the Wall Street Journal: ” …  since 2005 America truly has been in the midst of a revolution in oil and natural gas, which is the nation’s fastest-growing manufacturing sector. No one is more responsible for that resurgence than Mr. Hamm. He was the original discoverer of the gigantic and prolific Bakken oil fields of Montana and North Dakota that have already helped move the U.S. into third place among world oil producers.”

At the very least give the nod to the shale revolution, which is the driving force behind the economic and geopolitical story of the year — the stunning collapse in oil prices. So long income stagnation. A new Citi note calculates that the fall to below $60 per barrel will boost real net income by $1,150 per household next year, or more than 2% of median family income.

What’s more, the oil gusher has provoked a wild gamble by Saudi Arabia: Instead of cutting production to support prices, the Saudis have decided to  “let prices slide to test how long, and at what levels, American shale producers can keep pumping,” according to WSJ reporters Jay Solomon and Summer Said. And as you may have heard, this is also not so great news for the petro-dictatorships of Iran, Russia and Venezuela. To focus for a second on the nasty Putin regime, the Financial Times reports that Alexei Kudrin, former finance minister and possible future prime minister, says Russia faces a “full-blown economic crisis next year” that could trigger a series of bank defaults and turn Russia’s sovereign debt into junk.

Actually, the falling oil prices are also lousy news for Hamm, who has lost half of his $20 billion fortune during the decline. Maybe a shoutout from Time would soften the blow.

122214oil2 ]]>
http://www.aei.org/publication/shouldnt-shale-billionaire-harold-hamm-person-year/feed/ 2
2015: Breakthrough in India?http://www.aei.org/publication/2015-breakthrough-india/ http://www.aei.org/publication/2015-breakthrough-india/#comments Mon, 22 Dec 2014 15:27:28 +0000 http://www.aei.org/?post_type=publication&p=825574 The safe bet is always that India won’t get its act together economically. For risk-takers, next year may be a time to make the unsafe bet. It’s possible that India will finally adopt a unified goods and services tax (GST). This would constitute a major step toward a unified market, which is a basic contributor to prosperity that has been absent to now.

It seems bizarre to outsiders but India does not have a true national economy. States do not freely trade with each other. Perhaps the worst problem is the application of different taxes at each state border, which discourages inter-state commerce. The solution is a single tax system, the GST.

The problem dates back to independence and solutions have been considered for almost three decades. They have all either failed or been plainly inadequate. But the necessary votes, both procedural and substantive, to create a unified GST have now been scheduled for 2015. This could be the breakthrough reform India and its friends have been waiting for since Narendra Modi’s electoral triumph in May.

Of course, a number of things can still go wrong. The GST can be rejected by the legislature or, despite their tentative agreement, by the states themselves.

Opposition to GST could be substantial enough that it is postponed again rather than forcing anyone to actually make a difficult choice. This would hardly be a surprise in India. Or the GST could be modified such that the country remains effectively divided economically and few benefits are realized.

If a sound GST can somehow emerge, however, it could be the start of the transformation so many have waited for. In particular, Indian manufacturing has been the story of a few fairly successful states, with most of the country performing poorly.

A unified national market encourages specialization that makes production in each state more efficient. It enables the creation of supply chains across states. And, of course, it greatly expands the pool of available customers. A sound GST would help create conditions for better manufacturing performance in all states.

The happiest outcome would be an employment boost. This, in turn, would make manufacturing labor reform much easier politically.

At present only small manufacturers can freely fire regular workers, which sharply discourages hiring. If this restriction is loosened across the country, as it has been in a limited way in the state of Rajasthan, then the labor market and the tax system will both be far more conducive to fulfilling Prime Minister Modi’s dreams of India as a global manufacturing powerhouse.

The odds of this happy sequence remain low. But they are higher than they were even a month ago. Indian reform may be the key global economic story in 2015.

Follow AEIdeas on Twitter at @AEIdeas.

]]>
http://www.aei.org/publication/2015-breakthrough-india/feed/ 0