AEI » Latest Content American Enterprise Institute: Freedom, Opportunity, Enterprise Fri, 21 Nov 2014 04:17:13 +0000 en-US hourly 1 Have changing household composition and retirement caused the decline in median household income? Fri, 21 Nov 2014 04:15:02 +0000 ...]]]> earners

One of the most frequently reported economic trends is the gradual decline in US real median household income from its 1999 peak of about $57,000 to below $52,000 in each of the last three years (see blue line in top chart above). We hear a number of reasons from politicians and pundits for the decline in median household income over the last decade, mostly reasons that involve a narrative about economic stagnation and growing inequality caused by the progressives’ usual suspects: gains in worker productivity, income and wealth going to corporations and “the rich” instead of being shared by average workers; failure to increase the minimum wage or pass “living wage” laws; the combined effects of globalization, free trade and outsourcing putting downward pressure on middle-class incomes in America, and other variations of economic pessimism. Former President Bill Clinton recently offered his three reasons for stagnant median household income that include not raising the minimum wage and excessive corporate greed.

But there are some other very obvious, but mostly overlooked, factors that could easily explain why median household income has declined over the last decade that have nothing to do with economic stagnation: demographic changes in the composition of US households. AEI’s Alex Pollock addressed this issue recently in his essay “If income is going up, can median household income go down? It’s possible.” Here’s how Alex frames the issue:

One of the most commonly cited numbers in discussions of inequality is the trend in median household income, often used as if it settled the issue. Using median household income poses a fundamental problem, however. It conflates two measurements — changes in the composition of households and changes in income — and thus can easily mislead us.

Has the composition of households in America been changing? Obviously, it has. The percent of married couple households has fallen from more than 60 percent in 1980 to less than 50 percent in 2010. One-person households have risen from 23 percent to 27 percent of households in this period. Shifting from two-earner households to one-earner households lowers the median household income, even if everybody’s income is the same as before [or rising].

Alex provides a series of hypothetical examples showing how simple household demographic changes can result in rising individual incomes while at the same time the median household income is falling. For example, if there is a shift from two-earner, married households to one-earner single households as a result of divorce, the overall median household income could fall even when income is increasing for all individuals in the new mix of households with a greater share of single households.

Alex’s key point is that when demographics and household composition are dynamically changing, individual income and median household income can naturally move in opposite directions. The most frequent mistake, according to Alex, is to look at median household income over time assuming that household demographics are static. And that is precisely the mistake made in almost all of the discussions about median household income, and that leads to a distorted and inaccurate conclusion about why median income is falling.

One example of a major dynamic change in household composition is the significant increase in the share of US households with no earners, from fewer than 20% of all US households in 1980 to 23.7% of households in 2013 (see blue line in bottom chart above, Census data here from Table H-12). Likewise, the share of single-earner households has also increased from 33.2% in the early 1990s to above 37% for the last five years (see red line). In contrast, there’s been a decrease in the share of US households with 2 or more earners from above 46% of all households in 1989 to fewer than 40% of US households in every year since 2010 (see brown line in bottom chart above).

In summary, over the last several decades, there’s been an increasing share of no-earner, single-parent and single-earner households and a decreasing share of married and two-or-more-earner households. That major demographic shift has likely depressed median household income significantly in the last decade, even though it’s possible, as Pollock shows, that the income of individual working Americans could be rising.

Another key demographic shift is the increasing number of retired Americans as a share of the adult population based on Social Security data. As the red line in the top chart above shows, US retirees represented a pretty stable 15% share of the US population from 1990 to 2008. Starting around 2008 when the early “baby-boomers” – those born in 1946 — reached early retirement age of 62, the share of retirees started increasing from less than 15% of the adult population in 2007 to more than 16.6% in 2013.

In the five year period between 2008 and 2013, the number of retired Americans increased by 5.6 million, which was the largest five-year increase in US history, and more than double the 2.5 million increase in the previous five-year period. Given that wave of recent retirements, there have been millions of older, experienced, highly-paid workers going from their peak earning levels to a much lower retirement income that would typically include Social Security payments, pensions, and distributions from retirement accounts. As those millions of retirees are replaced in the workforce by younger, less experienced, lower paid workers, median household income could be falling even though the average income of working Americans could be rising.

It’s probably no coincidence that the recent increase in retirees, both in absolute numbers and as a share of the adult population, along with the other demographic changes described above, has naturally coincided with a decline in median household income. It would be hard to imagine that an aging population with a significant increase in the number and share of retirees, wouldn’t depress median household, for purely demographic reasons.

Bottom Line: Most explanations of the recent decline in US median household income are based on some variation of a narrative of economic stagnation, rising inequality and pessimism. But what is almost always overlooked are the very significant demographic changes that have taken place in the composition of US households over time that would significantly impact the income of the median US household. Taken together, a) the increase in the share of no-earner, single-earner, and single-parent households, b) the increase in the number and share of retirees, along with c) the decline in the share of two-earner and married households, would logically and necessarily depress the income level of the median US household.

In summary, the composition of US households is not static, fixed and permanent; rather it’s dynamic, evolving and ever-changing. Discussions on changes in median household income over time that ignore the changes in household composition over time will always be incomplete, distorted and misleading. Perhaps the decline in median household income this century is not a narrative of economic pessimism and stagnation after all, but a more upbeat story of a greater number of Americans living longer lives, and enjoying periods of time in retirement that were never possible until this century.

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Capitalism and compassion: Why morality matters in a market economy Mon, 17 Nov 2014 17:53:20 +0000 ananta-AEI-logos_800px

Please note this event is Indian Standard Time.

In much of the world, including India, the free enterprise system has come to be associated with material greed, or wealth creation for its own sake. AEI President Arthur C. Brooks believes that supporters of the free market system need to develop a new way of addressing the big human questions of our time. Based on both empirical research he conducted as an economist and his interactions with some of the world’s leading spiritual figures — including the Dalai Lama and Sri Sri Ravi Shankar — Brooks argues that supporters of free enterprise must make not just an economic but also a moral case for their ideas.

During this event at the Ananta Centre in New Delhi, India, Brooks and acclaimed Indian author and commentator Gurcharan Das will discuss the dynamic between making money and doing good.

Full video of this event will be posted 2-3 business days after.

Email or click here to RSVP.

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Good policy, good politics Thu, 20 Nov 2014 22:56:52 +0000 ...]]]> After years of playing defense, apologizing for while doubling down on his lies about the Affordable Care Act, President Barack Obama has chosen to go on offense. Not against the junior varsity terrorists of the Islamic State group in any sort of new, more meaningful way, but on the domestic front, by finally taking action to shield large numbers of illegal immigrants from deportation. Later today, in a prime-time address, the president is expected to announce that he will grant millions of undocumented aliens, seemingly mostly those with close family ties to U.S. citizens (often their children), reprieve from deportation and some sort of permission to work legally.

These actions appear to be wise ones, both on political and on substantive grounds. What the president is doing, in effect, is going from not enforcing federal immigration law (much like his predecessors) to announcing that he is not enforcing federal immigration law, and detailing more of the specifics of this non-enforcement. In other words, he’s gone from not deporting 11 million people to not deporting 5 million or 3 million people. For a number of reasons this is, along practically all dimensions, good and helpful public policy.

You can read the rest of the article at the US News & World Report. It will be available here on November 27, 2014.

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Remembering Bill Frenzel, institution-builder, bridge-builder, and just a prince of a man Thu, 20 Nov 2014 22:25:43 +0000 The news that Bill Frenzel had died hit me hard, in many ways. First was the personal. I met Bill fairly early in his congressional service, became friends with him in part because he represented my home district and in part because I was close to his mentor in the House, Barber Conable of New York. He was just a prince of a man, thoughtful, kind, nice, smart as hell and someone who cared as much about the process and about the institutions as he did about his policy preferences, his party and his ideology.

That part was a key for me; I looked for legislators who cared about the legislature, about what we call the “regular order,” about a process designed by the Framers to focus on debate and deliberation, on finding broad coalitions via the art of compromise and a relentless search for common ground. Which also meant a primacy for solving nettlesome national problems over gaining political or partisan advantage.

That set of traits defined Bill Frenzel, through his service in Congress on the Ways and Means Committee, through his efforts on behalf of a series of Republican and Democratic presidents to find ways to pass and implement trade agreements, through his coalition building on taxes, entitlement programs, deficits and debt in and out of Congress. Make no mistake: Bill Frenzel was a strong, free-market-oriented fiscal conservative, and a proud and strong partisan Republican. But those qualities were trumped by the others.

Frenzel saw his service as an honor
One of the many things Bill loved to do was appear with his wonderful wife, Ruthie, at freshman orientation every two years for the new members of the House, where both would stress to the members and their spouses what a remarkable honor it was to serve their constituents in the Congress of the United States, and what a shame it would be if the new members left their families back home in the district so they could not share in the special experiences that come with service in Congress. It was a message that began to fall on deaf ears just a few years after Frenzel left the House, starting with the Newt Gingrich-led sweep in 1994.

When Bill left Congress, he settled at the Brookings Institution in its Governmental Studies program — a place where I have tended to hang out a lot because of my many decades of collaboration with Tom Mann. So I would see Bill there, and we would talk about Minnesota, about Congress, about our deteriorating politics.

I saw him more when he took on, six years ago, a new burden of public service, on the independent Office of Congressional Ethics, which Tom and I helped to create and midwife through a suspicious and hostile House. I feared that Republican leader John Boehner, who strongly opposed creation of the office, would appoint members who would either try to block any action by OCE, or turn it into another polarized battlefield for ethics complaints and investigations. But Boehner stepped up to the plate, choosing a solid institutionalist, former Rep. Porter Goss of Florida as a co-chair, and picking other solid people, including Bill Frenzel, to round out the group.

Characteristically, Bill became both an institution-builder and bridge-builder, seeing the office as a key place to build confidence in Congress and protect its standards — in what is a thankless and non-remunerative task where one faces vilification and condemnation from members and staff facing an allegation, who see any independent ethics body as a threat to them. Even during a period as an alternate for purposes of voting, Bill threw himself into making sure that OCE would work, do its job fairly and thoroughly, and would do everything as much as possible with unanimity, including members spanning every ideological and party spectrum. I would huddle with him whenever the office was under attack, from the existing House Ethics Committee, which resented anyone intruding on its turf, to members and their lawyers facing a probe. His integrity and reputation was almost like an invisible shield protecting OCE from the most outrageous assaults on it.

He represented a mindset that is so rare today
More broadly, I lament the loss of Bill Frenzel because of what he represented — a set of characteristics, and a mindset, that are extraordinarily rare to find in today’s Congress, especially among Republicans. Caring about their own institution and its processes, valuing the regular order and compromise, are now trumped by the tribal impulses of the permanent campaign and the shrinking center on the Hill. At the same time, I miss the kind of Minnesota Republican that I grew up watching and admiring — from the late Doug Head to Arne Carlson to Bill’s successor, Jim Ramstad. All people of the broad center, all men of integrity, all individuals who put solving big problems ahead of partisanship, facts ahead of ideology, measured words ahead of overheated rhetoric.

Bill Frenzel may not be the last of a breed. But the numbers like him are vastly diminished, and those with his personal and public qualities are rare at any time.

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Iran’s three thorns: Nukes, ISIS, and Israel Thu, 20 Nov 2014 21:29:48 +0000 ...]]]> It is expected that the November 24 deadline for an Iranian nuclear deal will be extended, dragging on the prospect of additional sanctions and the economic problems that go with them. In a new report, AEI Iran expert Matthew McInnis explains that the Islamic Republic of Iran is in fact being challenged by much more than the objections to its nuclear program. McInnis specifically focuses not only on the implications of these talks, but on two other critical variables affecting Iran’s behavior: the threat of ISIS and Iran’s diminishing influence over the Gaza Strip. Together, McInnis argues, these three crises could threaten the regime and by extension impact the entire Middle East.

McInnis evaluates the implications of a deal with Iran:

As long as the Islamic Republic is able to easily and rapidly produce more highly enriched uranium, it can give up some of its supply with relative ease… This is also why negotiations continue to stall. Real reversals in the nuclear program’s capability to produce enriched uranium would undermine the regime’s motive to engage in talks. But reducing Iran’s capability to produce enriched uranium is exactly what the United States and other P5+1 countries have been seeking as the best way to ensure Iran cannot make a nuclear weapon.

The West will likely see greater Iranian anxiety during the final rounds of nuclear negotiations. Real concerns about Iran’s worsening economic prospects and a covert military threat could help push a recalcitrant Iran toward compromise. Perhaps we should even encourage those insecurities. Reiterating that military action may seriously be back on the table in the absence of a deal, or aiding in policies that keep oil prices low could reinforce Tehran’s uncertain negotiating stance.

McInnis on Iranian interests in the fight against ISIS:

Based on Iran’s ideological and political need to resist US policies and influence, Iran will make sure the United States does not come out of this [ISIS] crisis in a stronger position, either in Baghdad or in the region. Iran will likely tolerate or even welcome a short-term tactical engagement by the United States but will strongly resist any form of activity that could appear a resumption of a permanent American military presence or significant influence in Iraq, such as expanded government advisory and intelligence support roles for US personnel.

McInnis on Iran’s efforts in the Gaza strip:

Iran cannot afford to have another country or radical group — whether Saudi Arabia, al Qaeda, or ISIS — fill the vacuum that might be created by uncertainty in Gaza and the West Bank. A weakened Hamas leaves Gaza and the West Bank more vulnerable to greater intervention by Iran’s rivals and enemies…The United States should recognize that efforts toward Palestinian unity and a more lasting security situation between Hamas and Israel are not to Iran’s strategic benefit…[and] work with its Israeli and Palestinian partners to identify and check Iran’s attempt to spoil efforts toward political resolution among the various Palestinian factions and Israel.

Read Matthew McInnis’s full report, “ISIS, Israel, and nukes: Iran faces crises.”

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Why are some generic drug prices soaring? Thu, 20 Nov 2014 21:12:39 +0000 ...]]]> Over the past decade, the declining cost of generic drugs has subdued the growth of health care spending in the US. Yet, while overall generic prices continue to fall, some generic drugs have soared in price, leading to attention from consumers and policy makers alike. In his testimony today at 1pm before the Senate Committee on Health, Education, Labor and Pensions, AEI’s Dr. Scott Gottlieb discusses the potential factors in rising pharmaceutical prices and their impact. Full testimony can be found below and is embargoed until delivery:

In recent years, FDA has increased its oversight of generic manufacturing. The merits of FDA’s oversight are beyond dispute. And the balance struck between safety and access by FDA’s sometimes-abrupt imposition of these new standards is beyond the scope of this discussion. But the fact remains that new standards were sometimes imposed with little notice or accommodation, leading to plant closures while facilities were remediated. Product shortages resulted. It’s reasonable to ask whether, in cases where there was no imminent risk, facilities could have been remediated under close FDA supervision while they continued to produce key medicines, reducing the likelihood of shortages. This, however, has not been the policy. The bottom line is that COGS (cost of goods sold) in this sector have gone up as a result. Higher manufacturing costs, and the tighter scrutiny applied to new manufacturing facilities, have increased the entry costs for new generic drugs and generic drug makers.

He continues:

The underlying cost pressures inside the generic drug industry are indeed changing. There is a risk that increased barriers to entry, increased cost of goods, and increased cost of regulatory scrutiny and manufacturing, can coalesce to lower the competition that this sector has long enjoyed, and the savings consumers have long appreciated. The anecdotal cases of substantial price increases that plague a subset of drug categories are concerning, but don’t themselves point to any uniform trends. Instead, it is the underlying cost pressure that should merit our policy attention.

Read his full testimony, “Why are some generic drugs skyrocketing in price?

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Banter #164: Cami Anderson Thu, 20 Nov 2014 19:50:08 +0000 We’re joined this week by Superintendent of Newark City Public Schools, Cami Anderson. Appointed by Governor Chris Christie, Anderson has been implementing an aggressive reform agenda that expands charter school options, allows for merit pay, makes room for the dismissal of ineffective teachers, and provides “open enrollment” to students so that they can choose which schools they attend. We talk with her about what she’s accomplished since taking over in 2011 and what she hopes to accomplish going forward. Enjoy!

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Yikes. Here’s just how high the corporate tax rate is in the US Thu, 20 Nov 2014 19:11:09 +0000 The Tax Foundation recently came out with a compilation of charts on “Business in America” that look at US economic growth, labor force, corporate tax rates and more. Here are three charts that illustrate just how high the US corporate tax rate is compared to other countries.

1.)    The US corporate tax rate has stayed basically constant for the last 25 years. As seen below, this breaks from the norm, as other OECD countries have reduced their corporate tax rate, increasing their economic competitiveness. Alan Viard and Eric Toder write that “The current method of taxing the profits of large, publicly traded corporations was designed for an economy in which international investment was relatively unimportant and most corporate profits were produced by tangible assets, such as machinery and buildings. It doesn’t work well in today’s economy, which features increasing globalization and a rising share of profits produced by patents, brand reputation, and other intangible property.” Read their full piece to see the two structural reform options they suggest.

US corporate tax rate is out of line with our trading partners

2.)    Because the US has not cut corporate tax rates, we now have the highest corporate tax rate — 39.1%— in the OECD, beating out Japan, Sweden, and France (see featured graph). In fact, we are 10% above the weighted average and about 14% above the simple average for OECD countries. Jim Pethokoukis notes, “for many US multinationals, there is little incentive to stay officially based in America and remain subject to a complex, confiscatory tax code. … There’s no mystery as to why companies are going through all this trouble to escape the Treasury Department. It has nothing to do with a lack of patriotism, or the evasion of some sort of national duty, and everything to do with reducing costs and maximizing profits. That’s what businesses do — at least the ones that want to stay in business.”

3.)    When matched up with 163 countries’ corporate tax rates, not just OECD ones, the US is beat only by Chad (40%) and UAE (55%). Something to think about.

Corporate tax rates throughout the world have declined over the past decade

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.

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Why are some generic drugs skyrocketing in price? Thu, 20 Nov 2014 18:36:49 +0000 ...]]]> In our economy for medicines, the dual principles of market-based rewards that attract entrepreneurship and deep value once patents have lapsed are longstanding features of our system. The competition between branded and generic drug makers has enabled remarkable advances in science, and vibrant competition on price.

The compromises struck in the Hatch-Waxman legislation decades ago, have endured even as the market has changed. Generic drug makers have grown more sophisticated at challenging patents and unlocking new value for consumers. At the same time branded drug makers — recognizing this competition — have moved into new areas of science where resulting products are more specialized, unique, and beneficial. The competitive interplay between branded and generic firms, and the benefits that it affords, grows more relevant as the industries continue to evolve.

Recently, questions have been raised whether this competitive landscape is giving way to new economic features that erode some of the original intent of Hatch-Waxman. Market observers have made note of the substantial price increases observed with a select number of drugs, even though these medicines have been long subject to generic price competition. Yet in observing these cases, while all the facts surrounding each particular circumstance are not fully known, there is no one discernable feature, or policy shortcoming, that explains all of the events. In each case, there are some unique features that seem to have led cost of goods to rise, or competition to temporarily erode. At the same time, market-wide generic drug prices continue to decline when you look across all of the drugs.

So what is one to conclude?

Read the full testimony here.

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G7 broadband dynamics: How policy affects broadband quality in powerhouse nations Fri, 07 Nov 2014 20:44:31 +0000 ...]]]> G7 Report   Bennett Op-Ed

Event Summary

Debate rages on about the need to fix America’s supposedly broken broadband networks. However, as AEI’s Jeff Eisenach noted at the start of an AEI event on Thursday, after taking into account US smartphone adoption, next-generation network coverage, available speeds, America’s geographical hanidcaps, and various other factors, it is clear that the United States leads the G7 in both wired and wireless broadband.

Following Richard Bennett’s presentation of his AEI report on these topics, Jonathan Banks of US Telecom spoke to the value of Bennett’s paper as a resource for those studying broadband, particuarly because of its reliance on usage metrics. Akamai’s David Belson expanded on Akamai data trends that Bennett introduced in his report.

Cisco’s Jeff Campbell then turned to the relative influence of geography, technology, and policy on broadband outcomes, arguing that policy has less of an effect on broadband outcomes than Bennett suggests in his paper. Everett Ehrlich of ESC Company closed the panel by remarking that there is still room for discussion of the methodological hurdles involved in comparing national broadband rates.

Overall, the discussion supported the idea that US broadband is flourishing: American consumers have access to the speeds they desire at resonable prices, and the capacity for future progress in US broadband is limited only by lack of creativity.
–Evelyn Smith

Event Description

The United States is the birthplace of the technology that underpins global broadband. Our leadership in broadband infrastructure continues today, but it is rarely acknowledged. Conventional wisdom tells us that we are falling behind, but do the data support the need for radical policy change?

Please join us for a discussion of AEI visiting fellow Richard Bennett’s new study, “G7 broadband dynamics: How policy affects broadband quality in powerhouse nations.” Following Bennett’s presentation, a panel of experts will discuss the issues raised in his research.

If you are unable to attend, we welcome you to watch the event live on this page. Full video will be posted within 24 hours.

If you have trouble registering, please contact

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Banter #164: Cami Anderson Thu, 20 Nov 2014 16:51:34 +0000 We’re joined this week by Superintendent of Newark City Public Schools, Cami Anderson. Appointed by Governor Chris Christie, Anderson has been implementing an aggressive reform agenda that expands charter school options, allows for merit pay, makes room for the dismissal of ineffective teachers, and provides “open enrollment” to students so that they can choose which schools they attend. We talk with her about what she’s accomplished since taking over in 2011 and what she hopes to accomplish going forward. Enjoy!

Subscribe to AEI’s Banter series on iTunes.

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Obama’s immigration move: Sliding towards the Rubicon Thu, 20 Nov 2014 16:32:14 +0000 Almost a year ago, I wrote on the Corner that President Obama was not the cause of today’s constitutional tensions, but rather a symptom of an imperial presidency that has grown far beyond what the Founders intended. A chief executive who was not also head of state and symbol of the nation would be easier to counterbalance than the magnified president of the early 21st century.

While I still think that’s true, Obama is doing his best to prove that indeed he is the problem. The latest but perhaps most serious danger is over his proposed unilateral amnesty for millions of illegal aliens. The lack of critical attention this showdown is getting except among conservative circles is leading many to assume a “been there-done that” attitude, namely, that Obama is not doing anything different from his predecessors. But when serious commentators across the political spectrum begin sounding the tocsin, it is time for the rest of the country to pay attention. When Charles Cooke’s homepage piece powerfully predicts “chaos” and a “slow, tragic descent into … monarchy”; when the unflappable Ross Douthat decries Obama’s “will to power” and “creeping caudillismo”; and when liberal constitutional scholar Jonathan Turley calls Obama’s actions a “tipping point,” then maybe something rather serious is happening.

In a Twitter exchange with Charles, described in his piece, RealClearPolitics’s Sean Trende hits the nail on the head in his description of what is happening (though like Charles, I disagree with his solution): What is being undermined are the norms on which our system rests. Once those begin to go, they are extremely difficult to reassemble. Instead, that slow, irreversible slide towards ever-more destruction of laws and customs becomes the rule of the day.

That, then, leads to the obligatory Rome reference. No, we are not Rome and Barack Obama is not Julius Caesar. But he is, perhaps analogous to Sulla, whose crossing of hitherto sacrosanct lines and blatant disregard for timeless norms set the Republic on a dangerous path into chaos. What Sulla represented was the idea that anything was now conceivable, even though he justified his actions as responses to those taken by his political opponent Marius. Yet what he did could well be called the tipping point, and only inertia in the Republic’s system kept it going for another nearly half-century. As Julius Caesar crept towards the Rubicon, all of Rome could see it coming; all knew that two irresistible forces (Caesar and Pompey) were about to collide, yet the norms of restraint had been so eaten away, and creative politics so attenuated, that there was no chance of avoiding the explosion.

What Barack Obama sows in 2014 may not be reaped for years or decades. But it eventually will be reaped, unless the political leadership of this country today and tomorrow shows far more wisdom, self-restraint, and civic duty than it does now.

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