AEI » Latest Content http://www.aei.org American Enterprise Institute: Freedom, Opportunity, Enterprise Sun, 21 Dec 2014 03:01:42 +0000 en-US hourly 1 Obama’s Cuba mistake: A Q&A with Roger Noriegahttp://www.aei.org/publication/obamas-cuba-mistake-explained-seven-questions/ http://www.aei.org/publication/obamas-cuba-mistake-explained-seven-questions/#comments Fri, 19 Dec 2014 21:53:43 +0000 http://www.aei.org/?post_type=publication&p=825530 On Wednesday, President Obama announced that he would take steps to restore diplomatic relations with Cuba, reversing a policy of isolation that has stood for over a half-century and through ten presidential administrations. Below AEI scholar Roger Noriega answers several important questions that have arisen in the wake of Obama’s dramatic move.

People refer to the Cuba sanctions as an anachronism.  After all, we trade and work with many dictatorships. For example, what’s the difference between Cuba and Communist China?

Cuba is in our neighborhood—in a region whose governments have committed themselves to representative democracy and respect for human rights.  Yes, we should expect more from that government, particularly in justifying a dramatic policy change.  By relaxing these standards to accommodate a totalitarian regime, other governments will find it easier to justify undemocratic behavior that hurts their people and undermines stability in the region.

The question today is how we should go about lifting the Cuba sanctions.  Do we do so to encourage key reforms, or do we do so in a unilateral gesture in exchange for nothing?  Inexplicably, President Obama chose the latter course.

The refusal of the Castro government to open up in any meaningful way for the last 55 years—in response to pressure from the United States or engagement from the rest of the world—demonstrates that the regime in Havana, not U.S. policy, is the problem.  So, Obama has forfeited leverage that might be useful down the road in way that buys the Castro regime more time in power.

In recent years, we’ve opened up a good deal towards Cuba.  Tourism is up, and hotels are being built.  Isn’t that actually helping the Cuban people?  And if not, why?

The tourism industry, like the rest of the Cuban economy, is dominated by military-run enterprises.  Foreign companies that do business in Cuba today must accept as their partner the Cuban state.  Employees are provided by the state, which receives payments for wages from the foreign company in dollars or euros and passes on meager peso salaries to the exploited workers.

To the extent the state can use this revenue to sustain its internal security apparatus upon which it depends to smother dissent and remain in power, Cubans pay a very dear price for foreign tourism.

There’s no question among serious people that the Castros have mismanaged Cuba’s economy and that the island floats economically on a sea of Venezuelan oil.  But Maduro in Venezuela has his own economic problems and the price of oil is really hurting his dictatorial regime and the Venezuelan people.  How do you see the intersection of Obama’s opening and the oil price crash for Venezuela and Cuba?

President Obama is throwing a lifeline to the Castro regime, precisely at a time when its survival strategy of sustaining itself off Venezuelan oil is threatened by the impending collapse of their patrons in Caracas.  In recent weeks, the Maduro government has reduced from 90,000 to 40,000 barrels per day, which should just cover Cuba’s internal consumption.  Surely, the Administration knows that the Cuban government will be severely tested as Venezuela’s largesse dries up.  In that case, U.S. leverage on Havana will increase.  Therefore, the decision to give Raúl Castro diplomatic relations without conditions is even less defensible.

Another commitment Obama made to Castro was to take Cuba off the terrorism list.  He can do that unilaterally if he certifies to Congress that Cuba is no longer a state sponsor of terrorism.  Can Secretary of State Kerry do that in good conscience?  Why is Cuba on the terrorism list?  

Cuba is on the terrorism list for its historic ties to European and Latin American terrorist organizations and for its refusal to renounce terrorism.  The Administration has turned a blind eye to Havana’s associations with rogue states, so it can claim that it does not have more information upon which to retain the terrorist designation.

The policy decision by President Obama leaves very little doubt that the State Department will rationalize a decision regarding Cuba.  The Bush Administration removed North Korea from the terrorist list in 2008 in an effort to salvage nuclear talks, in a move many criticized at the time as unjustified.

Why did President Obama make this decision now?

By making this decision now, the President is able to jumpstart his engagement of the Americas rather than be on the spot to defend a policy he obviously did not support.  The normalization of diplomatic ties also is a bid for the history books.

The release of Alan Gross, a U.S. aid worker held for over two years by the Cuban government, created a pretext for action.

Moreover, since the President’s election, the Cuban regime began to rally Latin American and Caribbean governments to its cause—pressing the United States to end its policy of isolation toward Havana.  In several encounters in regional summits, virtually every regional government—including key allies like Colombia—have insisted that Cuba be invited.  The next summit is scheduled for April in Panama.  President Obama had to decide whether to boycott that meeting or sit down with Raúl Castro.

What is the role of Congress in making Cuba policy, and what is expected in the coming year?

Congressional leaders already have indicated their opposition to unilateral concessions to the Castro regime, and any meaningful relaxation of the economic sanctions will require an act of Congress.  The Cuban Liberty and Democratic Solidarity (LIBERTAD) Act of 1996 codifies the U.S. economic embargo, and restoring normal trade or commercial ties with Cuba will require an act of Congress.  There is a strong bipartisan majority in both houses of Congress that has resisted unilateral relaxation of the embargo.

Granting diplomatic recognition is wholly within the authority of the President in his normal conduct of foreign affairs.  The Senate must grant its consent to the designation of any U.S. ambassador to Havana.  Senator Marco Rubio (R-FL), who will assume the chairmanship of the Senate Foreign Relations Subcommittee on Western Hemisphere Affairs next January, already has expressed his opposition to this normalization of relations and designation of an ambassador.

Senator Lindsey Graham (R-SC), who will lead the Senate Appropriations Subcommittee on Foreign Operations, has announced his opposition to spending money to normalize relations.  The United States already maintains an “interests section” in Havana, which is staffed by U.S. Foreign Service officers and headed by a “chief of mission”; most of the costs of maintaining that staff and facility already are appropriated, so no new money will be required for these activities.

Regarding the travel and banking measures announced by the President, the Office of Foreign Assets Control (OFAC) of the Department of the Treasury writes the regulations to implement U.S. law and executive action; these changes do not require an act of Congress.  Early in his term, the President exercised a degree of discretion to allow more family travel and cash remittances to the island. In light of the President’s intention to further relax existing travel and banking restrictions, OFAC’s proposed regulations will likely be scrutinized closely by Congress.

Last big picture question:  What will this mean for Cuba after the dust settles? Real change? Or…?

Those who know the intransigent nature of the Castro regime expect no meaningful steps toward liberalization of any kind—particularly because it has been handed a major victory in exchange for doing nothing.  The normalization of diplomatic relations will have very little positive impact on the lives of Cubans, unless President Obama rallies other countries to join us in pressing for economic and political change on the island.  If he fails to do follow up with a vigorous pro-democracy campaign, his decision will be proven as a blunder that prolonged the Castro dictatorship and accomplished little else.

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How crony capitalism is undermining US entrepreneurship and economic growthhttp://www.aei.org/publication/crony-capitalism-undermining-us-entrepreneurship-economic-growth/ http://www.aei.org/publication/crony-capitalism-undermining-us-entrepreneurship-economic-growth/#comments Fri, 19 Dec 2014 21:09:12 +0000 http://www.aei.org/?post_type=publication&p=825527 The Washington Post’s multipart series – led by Jim Tankersley and his team — on America’s struggling middle class is a must-read for policymakers. While I will have more to say on this next week, I did want to highlight the Thursday piece on the apparent decline in US entrepreneurship. Startups, especially those with dreams of expanding, are a huge source of jobs and innovation. They also apply competitive pressure on incumbents firms. Fewer startups means less competitive intensity in the economy. And a crony capitalist relationship between business and government could mean fewer startups. Tankersley:

This brings us to the second problem with U.S. entre­pre­neur­ship today: Those older firms appear to be growing more interested in what economist William Baumol called “unproductive entre­pre­neur­ship.” Put simply, that means companies are ramping up their efforts to win favors from the government — tax breaks, spending contracts or industry regulations that favor their firm over potential competitors. Many economists, such as Luigi Zingales of the University of Chicago, contend those efforts divert resources that could be boosting the economy and sparking more job creation.

From 1998 to the peak of the influence boom in 2010, after adjusting for inflation, American companies nearly doubled the money they spent lobbying federal lawmakers, according to the nonprofit Sunlight Foundation. There’s an index that tracks stock performance of the 50 companies that lobby the most, and in 2012, it outperformed the market as a whole by 30 percent.

A recent study for George Mason University’s Mercatus Center by economists Russell Sobel and Rachel Graefe-Anderson found that for companies, deep political connections (including high lobbying spending) and higher revenues go together. But instead of banking those extra revenues as profits, the firms appear to pass them on to their chief executives. The paper finds “a robust and significant positive relationship between political activity and executive compensation.”

Some economists see a link between the nation’s two entre­pre­neur­ship problems — the scarcity of start-ups and the rise in influence-peddling. By bending tax laws and new regulations to benefit them, those economists theorize, existing companies make it harder for anyone new to challenge for market share. Litan and Hathaway, the authors of the Brookings studies, say that theory would take decades of research to prove or disprove — but that it certainly appears today that established companies have unusual advantages over new companies.

Hey, devising new technology or techniques and generating consumer-relevant value is lot harder than writing a check to a politicians.

 

 

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Hollywood vs. North Koreahttp://www.aei.org/press/hollywood-vs-north-korea/ http://www.aei.org/press/hollywood-vs-north-korea/#comments Fri, 19 Dec 2014 20:53:13 +0000 http://www.aei.org/?post_type=press&p=825525 ...]]]> Hollywood and the American public alike are in uproar over the recent cancellation of Sony Pictures Entertainment’s movie, “The Interview,” which depicts the assassination of North Korea’s dictator, Kim Jong Un. US officials have confirmed that North Korean hackers are behind the attack that leaked sensitive and embarrassing Sony correspondence. AEI experts are weighing in on Sony’s decision to cancel the movie and the broader message it sends to the world.

AEI’s North Korea expert Nick Eberstadt:

Hollywood and America need to respond to this attack. The right answer is not pre-emptive self-censorship. That establishes a tremendously dangerous precedent and undermines freedom.If it is conclusively determined that the DPRK is behind this attack, forceful and far reaching retaliation must be the American response. Such a response should also include other free societies. And China–North Korea’s de facto protector and primary financial patron–must be confronted: either denounce and punish, or share responsibility.

Asia scholar Michael Auslin:

Every terrorist organization and disruptive state will be looking on with envy at the North Korean victory and hastily scribbling notes. A new type of asymmetric warfare, threatening the free flow of ideas (no matter how stupid) strikes at the core of Western liberties. There are innumerable ways in which copycat hostage takers can emulate North Korea, since everything today can be done from the shadows.

Tech expert James Glassman:

We need to build deterrence, and the first step is to make it clear that the U.S. will not ignore attacks, as we have in the past, but will respond forcefully – just as we would to a physical attack on the homeland. The kind of response will vary: financial sanctions, an electronic counter-attack, expulsion of a country from the G20 or some other prestigious organization. More attention and advanced technology must be devoted to discovering conclusively who the attackers are. In the past, we have been too concerned about revealing our sources and methods. That kind of timidity must now end.

Read Glassman’s full piece, “The electronic equivalent of war.”

Read Auslin’s full piece, “Where will Hollywood’s surrender take us?

To arrange an interview with an AEI scholar, or for other media inquiries, please contact AEI Media Services by emailing mediaservices@aei.org (202.862.5829) or a media representative below.

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On the economic nostalgia for manufacturing jobshttp://www.aei.org/publication/economic-nostalgia-manufacturing-jobs/ http://www.aei.org/publication/economic-nostalgia-manufacturing-jobs/#comments Fri, 19 Dec 2014 20:36:52 +0000 http://www.aei.org/?post_type=publication&p=825521 The only thing missing from America’s manufacturing renaissance is, you know, actual factory workers. A strong upturn in output since the Great Recession, in the number of employees not so much. Here is MIT’s Andrew McAfee (who also supplied the above chart):

So the problem is not that there’s been no renaissance, it’s that it’s been a jobless one — yet another example of how output is becoming decoupled from employment in our ever-more-technologically-advanced economy. This decoupling is evident from a graph that juxtaposes US manufacturing output and employment since the turn of the century.

Note that between the last two recessions manufacturing output (the blue line) went up quite steadily while employment (red line) did nothing but drop. Unfortunately for job seekers, I expect that pattern to resume in the very near future. Employment growth in manufacturing has recently tapered off, and I expect it to turn negative, even as output continues to increase. The historical pattern is very clear and very regular here, and I see no reason it won’t repeat itself.

In fact, as recent innovations in sensing, monitoring, robotics, 3D printing, and many other fields get adopted by manufacturers I predict that the output-up-while-employment-down trend will accelerate. Anyone see a good reason to believe otherwise?

Nostalgia for the 1950s and 1960s is a conceptual dead end, as is a policy bias in favor of jobs where  you “make stuff.” While Americans still overwhelmingly view manufacturing jobs as good jobs and important to the US economy, that view may be seriously outdated —  as this National Employment Law Project report suggests.

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The electronic equivalent of warhttp://www.aei.org/publication/sony-the-electronic-equivalent-of-war/ http://www.aei.org/publication/sony-the-electronic-equivalent-of-war/#comments Fri, 19 Dec 2014 15:03:12 +0000 http://www.aei.org/?post_type=publication&p=825481 ...]]]>

North Korea’s state-run news agency claims that suggestions Pyongyang was behind the cyber-attack on Sony Pictures are “wild rumor.” But, according to the New York Times and other media sources, US intelligence officials have concluded otherwise. The attack, those officials say, “was both state-sponsored and far more destructive than any seen before on American soil.”

Now the question is: what is the United States going to do about it?

The cyber-attack will cost Sony an estimated $100 million, not including the losses that will result after threats of violence by hackers caused the withdrawal of its movie “The Interview,” a Seth Rogen comedy featuring an assassination plot against North Korean leader Kim Jong-un.

Imagine a team of North Korean saboteurs planting explosives under Sony’s sound stages and information technology equipment – then blowing them all up in the dead of night. This cyber-attack is a precise analogue. A company has been attacked on US soil; our sovereignty has been violated.

At a White House briefing Thursday, spokesman Josh Earnest said that US officials were considering an “appropriate response.” He said that the hacking was the work of a “sophisticated actor,” but, so far, the US government has not directly accused the North Korean government.

It’s not always easy to determine a return address on a cyber-attack, and, if a specific government is accused with details to back up the charge, US officials worry about revealing too much evidence of how they drew that conclusion. In this case, for example, officials say off the record that the attacks were launched from outside North Korea but were “were sanctioned by North Korean leaders.”

But, the Sony attack is a watershed event. The pretending is over. There is a real cyber-war going on, and we should admit it and develop serious, transparent policies in response. The New York Times reported Thursday that some “administration officials said a direct confrontation with the North would provide North Korea with the kind of dispute it covets.”

Maybe, but that’s a minor issue. Far more important is to make it clear that the United States sees no difference between an attack using electronic weapons and one using gunpowder or plastic explosives. These attacks — sanctioned or committed by state actors or their surrogates or by non-state terrorists — should be treated not as crimes, like theft or fraud, but as what they are: military interventions, or, to paraphrase George Orwell, the electronic equivalent of war.

More severe attacks have been escalating. In the past several months, we’ve seen invasions of White House and State Department computers – with Russia under suspicion. Hackers are believed to have the power to throw our financial system and power grid into chaos and to disable some of our most powerful weapons, such as nuclear-powered aircraft carriers.

We need to build deterrence, and the first step is to make it clear that the US will not ignore attacks, as we have in the past, but will respond forcefully – just as we would to a physical attack on the homeland. The kind of response will vary: financial sanctions, an electronic counter-attack, expulsion of a country from the G20 or some other prestigious organization.

More attention and advanced technology must be devoted to discovering conclusively who the attackers are. In the past, we have been too concerned about revealing our sources and methods. That kind of timidity must now end.

Finally, companies like Sony have to harden their targets – with the help of the US government, if necessary. It’s a fact of life that we live in an era when a few hackers can wreak extreme havoc, just as fewer than two dozen militants killed more than 3,000 Americans and caused billions of dollars of damage during 9/11. We need better back-up systems, more efficient ways to mitigate the damage that will inevitably result from future cyber-attacks.

The first duty of government is to protect the safety of its citizens and their property. What the Sony episode has shown is that that safety is in severe jeopardy today from electronic attacks. We need an aggressive defense. Now.

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Iran and al Houthi proxies threaten US counter-terrorism policy in Yemenhttp://www.aei.org/publication/iran-al-houthi-proxies-threaten-us-counter-terrorism-policy-yemen/ http://www.aei.org/publication/iran-al-houthi-proxies-threaten-us-counter-terrorism-policy-yemen/#comments Fri, 19 Dec 2014 14:57:49 +0000 http://www.aei.org/?post_type=publication&p=825475 Al Houthi militants seized the strategic al Hudaydah port on Yemen’s coast on December 17. The move gives the al Houthis, a Zaydi Shi’a movement that has received Iranian financial and materiel support, direct access to shipping and smuggling routes in the Red Sea. The seizure of the al Hudaydah port fits into what appears to be the al Houthis’ larger scheme of securing key Yemeni infrastructure since the rebel group took power in Sana’a, Yemen’s capital, on September 21. The move also raises questions as to the al Houthis’ objectives in Yemen and the sustainability of US-Yemen counter-terrorism cooperation, specifically in light of growing Iranian support for the rebel group.

Let’s take a step back. The al Houthi leadership has been messaging that the group seeks political reform and will join the government once corruption is routed out of Yemeni state institutions. However, the al Houthis’ continued military presence in Sana’a and their blatant expansion of control over state infrastructure is in opposition to the group’s rhetoric. For example, the al Houthis have taken over the state-run newspaper and Yemen’s primary oil company, and  are also rumored to have set their sights on expanding their geographic influence south in Taiz, Yemen’s third-largest city, and east in Ma’rib, where Yemen’s main gas infrastructure is located.

These recent moves signal the al Houthis may be preparing to dominate the Yemeni state. And it is possible the group may contemplate direct cooperation with Iran to receive further funding and military aid in support of these efforts. Recent reporting indicates that Iran increased financial and materiel support to the al Houthis since September. Port access to the Red Sea could now facilitate even greater movement of arms from Iran. High-ranking al Houthis recently indicated their willingness to work with Tehran, praising Iran as the “axis of resistance” to the West.

What does this mean for US counter-terrorism policy in Yemen? Nothing good. The US strategy relies on a willing partner to combat al Qaeda in the Arabian Peninsula (AQAP). Currently, the Yemeni government serves that role. It’s becoming increasingly possible, however, that the al Houthis may become the only viable power brokers in the country. Which effectively means partnering with Iran, or nothing.

The al Houthis have fundamentally changed the Yemeni political landscape. Yet, US policy remains the same. It’s time the US assesses how the al Houthis’ de-facto control of the Yemeni government affects our current strategy to combat AQAP. Because we are in danger of losing our Arab and Sunni partners by aligning ourselves with Iran’s “axis of resistance” – which Tehran means to resist us.

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US defense cuts may undermine security in Western Pacifichttp://www.aei.org/publication/us-defense-cuts-may-undermine-security-western-pacific/ http://www.aei.org/publication/us-defense-cuts-may-undermine-security-western-pacific/#comments Fri, 19 Dec 2014 14:08:55 +0000 http://www.aei.org/?post_type=publication&p=825198 In its January 2012 Defense Strategic Guidance (DSG), the Obama Administration stated that the United States “will of necessity rebalance toward the Asia-Pacific region.”1

Yet one month later, the administration released its 2013 defense budget request, including $487 billion in cuts mandated under the 2011 Budget Control Act (BCA), which provided a framework for medium-term deficit reduction—primarily through large cuts in defense and domestic discretionary spending. While the new strategic guidance garnered headlines for its renewed emphasis on the Asia-Pacific, the 2013 budget request turned out to be the far more important document.

The 2013 request was the first in a succession of BCA-driven budgets and strategic reviews that slowly-but-surely lifted the veil on America’s military decline. As the BCA’s original cut of $487 billion—contained in the 2013 request—combined with an additional reduction of close to $500 billion triggered by sequestration, ongoing crises in modernization, force structure, and readiness were laid bare.

The Congressionally-chartered, bipartisan National Defense Panel (NDP) recently issued a stark warning about the implications of mounting defense shortfalls. The NDP found that “Not only have [the cuts] caused significant investment shortfalls in U.S. military readiness and both present and future capabilities, they have prompted our current and potential allies and adversaries to question our commitment and resolve.”2

Eroding US military power is especially disconcerting because America’s military underwrites the other components of its national power. In the words of the NDP, “The effectiveness of America’s other tools for global influence, such as diplomacy and economic engagement, are critically intertwined with and dependent upon the perceived strength, presence and commitment of US armed forces.”3 Consequently, as America’s military power declines, so too will its global influence.

Nowhere is this trend more apparent than in the Western Pacific today. While the US has traditionally relied upon a qualitative edge to prevail against numerically superior forces, this technological edge may be rapidly shrinking.4 Indeed, the NDP warned, “The balance of power in the Western Pacific is changing in a way unfavorable to the United States, and we believe that China’s rapid military modernization is creating a challenging context for US military posture, planning, and modernization.”5

Left unsaid by the panel is the disturbing reality that as the military gap between the US and the People’s Republic of China (PRC) narrows, the likelihood of conflict increases. If an overwhelming American conventional military advantage minimizes the chances for miscalculation or conflict, a lessened American military edge brings with it higher odds of conflict.

Moreover, despite the relative priority placed by senior officials on America’s military presence in the Asia-Pacific, current plans are wholly inadequate to properly support the US military presence in the region. A rapidly shrinking US military is increasingly stressed by commitments worldwide, especially as instability grows in the Middle East, and Russia continues its assault on its neighbors. At the same time, much-needed modernization plans are too expensive for existing resources. The end result is a US military that is too small and too old to meet its many regional commitments.

In the absence of higher defense budgets, this would lead to a rapid erosion of American conventional deterrence in the Western Pacific. In the face of this challenge, the Republic of China (ROC) and other regional allies and partners can take several steps in order to minimize the danger of conflict. For one, the ROC is suggested to increase its defense spending—by as much as its finance allows. With additional defense resources, the ROC should continue and expand investments in anti-access/area-denial capabilities that seek to impose asymmetrical costs against PRC forces and the Mainland.

Fortunately, momentum seems to be building inthe US to at least partially overturn defense cuts and their consequences. Driven by international crises from Ukraine to Iraq and Syria, a clear shift seems to be taking hold both in terms of policymakers and public opinion. For instance, the NDP called for an emergency readiness supplemental to address immediate funding shortfalls, as well as a return to former Secretary of Defense Robert Gates’ 2012 budget plan over the longer-term.6

At the same time, senior military leaders are also expressing rising discontent with the current state of affairs. General Martin Dempsey, Chairman of the Joint Chiefs of Staff, recently testified that ongoing operations against the Islamic State (IS) would expose base budget funding deficiencies, while Army Chief of Staff Ray Odierno has argued that current global crises should prompt a reevaluation of cuts to ground forces.7 Moreover, members of the Republican establishment, such as former presidential candidate Mitt Romney and Senator Marco Rubio (R-FL), have recently issued high-profile calls for increased defense spending.8

Hopefully, this momentum will continue and policymakers will reverse self-inflicted US military decline. Yet responsible statecraft demands that governments prepare for the worst while hoping for the best. America’s allies and partners, including the ROC, must expand their defense spending and capabilities in case of the eventuality that US defense spending remains stagnant at best. With conventional deterrence in the Western Pacific and beyond at stake, there is no margin for miscalculation.

Mounting Defense Reductions Are Leaving a Painful Bill

Given the considerable media and congressional attention accompanying the sequestration cuts to the US military, it can be easy to forget that declining defense spending did not begin on March 1, 2013 when sequestration went into effect. Rather, defense cuts began four years prior, when the Obama Administration in 2009 and 2010 cut or redirected roughly $400 billion in planned Pentagon spending—about three quarters of which directly impacted vital modernization programs.9

While the Pentagon tried to downplay the national security impacts of these reductions, the reality is that the outright cancellation, early termination, or delay of programs such as the CG (X) next generation cruiser, F-22, and next-generation bomber significantly delayed the fielding of new military technologies in an effort to concentrate on programs more directly relevant in Iraq and Afghanistan. Five years later, as high end technological competition becomes increasingly vital in the Western Pacific, it is hard not to view the budgetary decisions of 2009 and 2010 as shortsighted—as many argued at the time.10

Of course, the Pentagon bill did not stop there. Still prior to the 2011 BCA, the budget path laid forth by Gates for fiscal year 2012 reduced an additional $78 billion—bringing the pre-BCA total of cut and redirected planned spending to $478 billion. The first tranche of cuts under the BCA more than doubled this total, cutting Gates’ baseline spending plan for fiscal years 2012-2021 by $487 billion. And because the Super Committee failed to reach an agreement on deficit reduction, sequestration was triggered beginning in fiscal year 2013, cutting an additional $450 billion as currently modified through fiscal year 2021.

Taken collectively, these numbers are staggering. However good the intentions behind the “pivot” and America’s ostensible emphasis on the Asia-Pacific are, the math does not support the administration’s policy. Increasingly, America’s global commitments are taxing its shrinking military—to the point where not even theaters of priority, such as the Asia-Pacific, will escape the consequences.

Crucially, as the NDP argued, the problem is not just sequestration or automatic budget cuts. The limited relief brought by last minute budget deals in Washington has been welcome, but it has addressed only a fraction of the problem. In the words of the NDP, “the increases above sequester levels proposed thus far, while desirable, are nowhere near enough to remedy the damage which the Department has suffered.”11

As the NDP recommended, the entire BCA should be discarded and US defense planners should start afresh to build a ground-up appraisal of the armed forces the US requires and what they would cost. In the absence of such action, the American military posture will only continue to deteriorate in Asia—with potentially catastrophic results.

Shrinking Fleet Size May Undermine US Conventional Deterrence Overseas

On a daily basis, the most important US contribution to peace and security in the Asia-Pacific is the regular presence of the US military. In the words of the 1993 Bottom-Up Review, “The presence of U.S. forces deters adventurism and coercion by potentially hostile states, reassures friends, enhances regional stability, and underwrites our larger strategy of international engagement, prevention, and partnership. It also gives us a stronger influence, both political as well as military, in the affairs of key regions.”12

To take the Bottom-Up Review’s conclusions a step further, the stronger the American military presence in a given region, the greater America’s diplomatic influence will be. Unfortunately, as we are seeing today, the inverse is just as true.

Chief of Naval Operations Admiral Jonathan Greenert has made an increased presence in the Asia-Pacific a major keystone of the Navy’s near-term plans, calling for an increased presence from 50 ships in the region in 2014 to about 65 ships in 2019.13 This is part of a broader initiative to increase the Navy’s forward presence from an average of 97 ships in 2014 to 120 by 2020.14

While this increased emphasis on forward presence is a worthy goal, questions remain about how the Navy will be able to afford its plan given current budget constraints. Options available to increase ship presence overseas include extending the length of deployments, swapping crews mid-deployment, and forward-stationing more ships.15 Yet many of these options present their own problems. For instance, as Bryan McGrath has outlined, the Navy has in some cases already resorted to scheduled ten-month deployments— well over past standards of six months.16 Stressing crews and families beyond their breaking point is not a sustainable assumption upon which to base force structure.

Most problematically, the increased presence figures are predicated upon the Navy’s aggressive 2015 thirty-year shipbuilding plan. At first glance, the 2015 shipbuilding plan is a marked improvement over recent iterations.17 While the Navy’s September 2011 plan for a 313 ship fleet averaged just under 306 ships each year over the duration of the plan, the 2013 and 2014 plans each averaged just about 298 ships per year. Surprisingly, the 2015 plan averages nearly 308 ships per year.

If this remarkable jump seems too good to be true, it is. After all, given shrinking budgets and another year of near-sequestration levels of spending, it seems hard to imagine how the Navy could suddenly afford to average a larger fleet over the course of the plan than in previous years—let alone buy three more ships over the first five years of plan than it could last year, as the 2015 plan calls for.

As it turns out, the Navy inflated its ship counts in the 2015 plan through a number of technical changes. For one, the Navy changed its fleet counting rules to include more types of ships, including patrol craft, mine countermeasure ships, and hospital ships as part of its total battle force.18 With these ships excluded from the count, average fleet size over the course of the plan drops from about 308 to 305. Additionally, this fleet of 305 ships also includes 11 cruisers that the Navy has proposed to “layup” for repairs and return to service in the future.19 Seven of these cruisers had been proposed for retirement in the 2014 plan, meaning they were not part of last year’s projected fleet ship count. Yet they are included over the entire duration of the 2015 plan—even for the years during which they will be inactive.

These creative accounting practices serve only to mask the real and ongoing damage to the fleet. That being said, while the Navy could be doing a better job of showcasing the devastating impact of defense reductions, most of the blame for suspect ship counts lies with the policymakers who mandated cuts in the first place. The Navy is doing what it can to do under difficult circumstances, but even with the best of intentions, declining ship levels are beginning to take a toll.

The Navy is especially candid, for instance, that its 2015 plan is unaffordable under sequestration level budgets. By its own projections, the service will require, at the very least, defense budgets at the President’s 2015 request level of $115 billion over the next five years above the sequestration imposed caps. Yet even if the Pentagon ultimately receives funding at the requested level, the Navy raises serious concerns about how it will afford its own plan. The Navy forecasts that its plan, from fiscal year 2020 through fiscal year 2044, will require an annual average of about $17.2 billion in 2014 dollars.20 The Navy notes that this is about $4 billion more per year than its shipbuilding plan has historically averaged.

The funding problem is most acute during the period of fiscal years 2025-2034, when the Navy will be purchasing the bulk of its Ohio-class replacement ballistic missile submarine fleet. Over this period, the Navy expects to spend an average of $19.7 billion per year—close to $7 billion above the historical average of $13 billion per year. Yet the Navy’s funding problems extend well beyond the Ohio-class replacement. As the service notes, even if it completely removes the Ohio-class replacement SSBN from its shipbuilding costs, its plans will still demand between $14-15 billion per year from 2020 onwards.21

Moreover, the Congressional Budget Office (CBO) has found that the Navy frequently understates the true costs of its shipbuilding plans. In its assessment of the 2014 shipbuilding plan, CBO found that the Navy underestimated projected costs by six percent over the first ten years of the plan, 14 percent over the second ten years of the plan, and by a staggering 26 percent over the final ten years of the plan.22

Taken collectively, this paints an alarming picture. Under the best circumstances, the Navy’s shipbuilding plan—upon which it is relying to increase its presence in the Asia-Pacific (and along with it, America’s strategic and diplomatic influence)—is counting on an additional $4-7 billion per year above what it has received historically. In the absence of additional resources, it is extremely difficult to see how the Navy will be able to meet its goals for overseas presence—even in the Pacific—in the coming decades.

Declining US Military Power May Reverberate through Pacific

In the absence of higher budgets, the Department’s shrinking plans and force structure will only become more acute in the near future, with devastating consequences around the globe. The NDP made clear that current budget plans would prevent DoD from generating and sustaining the forces necessary to conduct its strategy.23 In the words of the NDP, “the existing baseline will fully support neither the capability nor the capacity that the Department needs.”24 This is especially troubling given the warning of General Dempsey in the 2014 defense strategy:

The smaller and less capable military outlined in the QDR makes meeting [strategic] obligations more difficult. Most of our platforms and equipment will be older, and our advantages in some domains will have eroded. Our loss of depth across the force could reduce our ability to intimidate opponents from escalating conflict. Nations and non-state actors who have become accustomed to our presence could begin to act differently, often in harmful ways. Moreover, many of our most capable allies will lose key capabilities. The situation will be exacerbated given our current readiness concerns, which will worsen over the next 3 to 4 years.25

Increasingly, there are signs that the grim future outlined by General Dempsey is already becoming manifest. The NDP notes that Combatant Commanders consistently called for a larger force in order to “meet the requirements of contingency plans, regional presence, and theater cooperation and engagement.”26 Critically, these missions are among the most important not just for fighting and winning wars, but for preventing them in the first place. As a shrinking US military increasingly leads to zero-sum tradeoffs between regions, overseas American conventional deterrence will be weakened.

Even before the most recent round of defense cuts, the military was already stretched thin. In an interview with Military.com, Rep. Randy Forbes (R-VA) stated that while the Navy met about 90 percent of force requirements from Combatant Commanders in 2007, it was able to meet just 51 percent in 2012.27 This growing gap between force supply and demand led Admiral Greenert to testify recently that in order to meet the demand for forward-deployed naval forces, he would need a fleet of 450 ships.28

While administration officials have made clear that the Asia-Pacific is still a priority, the reality is that current global crises driven in no small part by America’s shrinking military—may lead the Pentagon to reconsider its global allocation of forces. As the NDP notes, “the Russian invasion of Crime aand ongoing threat to Ukraine call into question the 2014 QDR’s conclusion…that Europe is a net producer of security.”29

For instance, earlier this year, General Philip Breedlove, Supreme Allied Commander Europe and chief of US European Command, disclosed plans to reduce America’s F-15 fighter force in Europe.30 While General Breedlove did not say where the F-15s might be moved, it stands to reason that reductions in Europe would likely have been planned as part of the broader goal to shift forces to the QDR’s regions of emphasis, including the Asia- Pacific. However, given the crisis in Ukraine, General Breedlove recently announced that the Pentagon was reconsidering its plans to further shrink forces in Europe.31 While this move is understandable given the current security situation, it is indicative of the fact that crises caused by a shrinking military in one part of the world are weakening US plans in other regions—reducing deterrence there as well.

This all leads to a sobering conclusion: while US defense budgets remain in freefall, its military will be increasingly hard-pressed to provide adequate conventional deterrence, even in key regions of the world. In order to prevent regional balances from tipping in unfavorable directions, US allies and partners must be prepared to step in and prevent a power vacuum.

The Republic of China Must Expand Defense Capabilities

While “burden sharing” has long been a fashionable idea in US military circles as a way to encourage allied partners to contribute more to their own security, the situation today is such that increased allied defense investment is no longer a “nice to have”—it is increasingly vital to maintaining a favorable status quo in key regions, and particularly in Asia.

Simply put, America’s friends in the region must raise their defense spending in the near term to help deter aggression. This is especially important for the ROC, which as Michael Mazza has noted, must face arguments in Washington that the US “should not defend countries that do not defend themselves.”32 While the only long-term solution is a return to American military supremacy through restored budgets, modernization, force structure, and readiness, US partners have an important role to play to help stabilize the situation before the kind of aggression seen from Russia makes an appearance in the Pacific.

The first step is for the ROC to reverse its defense budget decline and invest in expanded military capabilities. As Mazza has chronicled, in 2012, the ROC spent 20 percent less on defense than it did, in real terms, in 1996.33 This dramatic decline in defense spending—contrasted with the rapid development of PRC military capabilities over the past decade—sends the exact wrong message to potential aggressors—and potential allies.

One promising area for increased ROC defense investment, according to a recent RAND report, could be to “employ inexpensive anti-access technologies similar to those used by the PLA to significantly raise the cost of a conflict for China and, should deterrence fail, to drastically limit China’s ability to inflict damage off the Asian Mainland.”34 Notably, this strategy would turn anti-access and area-denial capabilities against the PRC. Depending on how it was executed, this kind of approach not only could complicate invasion plans and raise the barriers to conflict, but it could also promise to hold targets on the Mainland at risk and thereby deter aggressive actions short of all-out invasion.35

Fortunately, the ROC has realized the potential of these kinds of technologies and has developed the Hsiung Feng IIE (HF-2E) and Hsiung Feng III (HF-3) cruise missiles for just this purpose. The ROC should continue to develop large amounts of both of these weapons as a relatively low-cost way to threaten enemy forces and in the case of the HF- 2E, hold targets on the Mainland at risk.36 The ROC, however, must learn from the experience of NATO, which almost exhausted its supply of precision guided munitions in less than a month in Libya in 2011.37 While investing in the HF-2E and HF-3 missiles is a good start, the ROC must maintain a large and survivable supply of these and similar weapons.

Another critical area for increased defense investment is modernizing and expanding ROC capabilities in the undersea domain, and its submarine fleet in particular. Given the PRC missile threat to land and surface-based assets, a sizeable submarine fleet would likely play a major role in contesting any attempted amphibious landing.38

Nearly a decade and a half after President George W. Bush offered to sell eight diesel submarines to the ROC with little subsequent progress, it is time to move on from this potential deal. While American production of diesel submarines for the ROC would be a welcome development, at this point, it is unlikely to materialize. Instead, the ROC and the US should continue their announced cooperation on a domestic ROC submarine program.39 Over the long-term, an indigenous ROC submarine production capability would serve as a vital deterrent and an indispensable component of the ROC’s defense strategy.40 Yet this ambitious goal would still leave unaddressed ROC submarine modernization in the near-term. As a short-term fix, the ROC should pursue acquiring diesel submarines from a third party such as Germany, Japan, or Australia, requesting US assistance throughout the negotiation process as necessary.41

Complementing this fleet could be an array of undersea sensors. Given its prime location, the ROC could provide a wealth of sustained maritime surveillance that would be indispensable in monitoring the movements of the People’s Liberation Army (PLA) inside the Straits and beyond.42 As Mazza argues, expanded ROC surveillance capabilities would help complicate PLA plans relying on strategic, operational, or tactical surprise.43

Over the long-term, the ROC should invest in next-generation systems that could dramatically impact control of its airspace, including emerging technologies such as directed energy weapons.44 While the US military continues its development of these “game changing” technologies, the same attributes that makes these systems so alluring to US defense planners should make them doubly relevant to the ROC. Most importantly, these weapons would help address the most glaring problem facing an island defense: limited magazines against overwhelming numerical superiority. Emerging technologies like directed energy weapons could play a vital role in eliminating missile threats and maintaining control of ROC airspace. These weapons will not arrive overnight, but the sooner they come online, the sooner that ROC defense planners can begin to address the large PLA missile inventory.

Critically, investing in key military capabilities is important for both war and peacetime. While capabilities such as advanced cruise missiles, submarines, and directed energy weapons might be vital for wartime operations in the coming years, their most important contribution would likely be at the strategic level. A capable and survivable ROC anti-access/area-denial network would cause key PRC leaders to think twice before attempted coercion. As Daniel Blumenthal has argued, capabilities that can inflict both material and psychological costs upon the mainland would strengthen deterrence while enhancing the ROC’s warfighting position.45

While a robust ROC anti-access/area-denial network, supported by increased defense spending, is not enough to maintain peace and security by itself in the Asia-Pacific, it does present a promising route forward for the US and its friends in the face of ongoing American military decline. In the best case, if the ROC develops a capable anti-access/area-denial network and the US reverses its current spending trends, the situation in the Asia-Pacific will become all the more stable. If US defense reinvestment does not come soon, new ROC defense capabilities may play an indispensible role in upholding the regional balance.

America’s Defense Investments May Have Enduring Consequences for the Asia-Pacific

In order for deterrence to be successful, it must first be credible. Unfortunately, the current decline in US defense capabilities is undermining its conventional deterrence in the Pacific and indeed, around the entire globe. If this trend continues, we can expect to see increased aggression in Asia and elsewhere as potentially hostile actors find fewer restraints on their actions.

While rapidly deteriorating global events may be causing a major re-evaluation of US defense budgets, it behooves America’s regional partners to bulk up their defenses as necessary in order to maintain conventional deterrence even as the American military shrinks in size and capability.

For the ROC, increased defense spending, along with increased and expanded investment in asymmetrical weapons would be a good start to bolster allied defense capabilities in the Asia Pacific. As the world has seen in Ukraine, military vacuums do not last for long. The United States and its partners around the world must seek to act before competitors take the initiative.

 

1 United States Department of Defense, “Sustaining Global Leadership: Priorities for 21st Century Defense,” January 2012, p2, <http://www.defense.gov/news/defense_strategic_guidance.pdf>.

2 William J. Perry & John P. Abizaid, “Ensuring a Strong U.S. Defense for the Future,” United States Institute of Peace, July 31, 2014, p1, <http://www.usip.org/sites/default/files/Ensuring-a-Strong-U.S.-Defense-for-the-Future-NDP-Review-of-the-QDR_0.pdf>.

3 Perry & Abizaid, et al., “Ensuring a Strong U.S. Defense for the Future,” p1.

4 Perry & Abizaid, et al., “Ensuring a Strong U.S. Defense for the Future,” p20.

5 Perry & Abizaid, et al., “Ensuring a Strong U.S. Defense for the Future,” p16.

6 Perry & Abizaid, et al., “Ensuring a Strong U.S. Defense for the Future,” p30.

7 Mackenzie Eaglen, “These Days, Defense Dollars Don’t Go As Far,” US News & World Report, September 17, 2014,<http://www.usnews.com/opinion/blogs/world-report/2014/09/17/defense-spending-alone-wont-fix-pentagon-woes>. See also Julian E. Barnes, “Army Chief Calls for Rethink of Cuts,” Wall Street Journal, September 19, 2014 <http://online.wsj.com/articles/army-chief-calls-for-rethink-of-cuts-1411168293>.

8 Mackenzie Eaglen, “Why Sen. Rubio’s Vision for Rebuilding US Strength Matters,” AEIdeas, September 18, 2014, <http://www.aei-ideas.org/2014/09/why-sen-rubios-vision-for-rebuilding-us-strength-matters/>. See also Mitt Romney, “MittRomney: The Need for a Mighty US Military,” Washington Post, September 4, 2014, <http://www.washingtonpost.com/
opinions/mitt-romney-the-world-needs-a-mighty-us-military/2014/09/04/f5234064-342d-11e4-a723-fa3895a25d02_story.html>.

9 Secretary of Defense Robert M. Gates, “Statement on Department Budget and Efficiencies,” United States Department of Defense, January 6, 2011, <http://www.defense.gov/speeches/speech.aspx?speechid=1527>.

10 Thomas Donnelly and Gary Schmitt, “Obama and Gates Gut the Military,” Wall Street Journal, April 8, 2009, <http://online.wsj.com/articles/SB123914897083399179>.

11 Perry & Abizaid, et al., “Ensuring a Strong U.S. Defense for the Future,” p30.

12 Secretary of Defense Les Aspin, “Report on the Bottom-Up Review,” United States Department of Defense, October 1993, p8 <http://www.dod.mil/pubs/foi/administration_and_Management/other/515.pdf>.

13 Admiral Jonathan Greenert, “CNO’s Navigation Plan 2015-2019,” United States Department of the Navy, August 19, 2014, p3, <http://www.navy.mil/cno/docs/140818_cno_navigation_plan.pdf>.

14 Greenert, “CNO’s Navigation Plan 2015-2019,” p3.

15 Bryan McGrath, “CNO’s Losing Battle to Avoid a Hollow Navy,” Real Clear Defense, August 26, 2014 <http://www.realcleardefense.com/articles/2014/08/26/the_cnos_losing_battle_to_avoid_a_hollow_navy_107392.html>.

16 Bryan McGrath, “CNO’s Losing Battle to Avoid a Hollow Navy,” Real Clear Defense, August 26, 2014,<http://www.realcleardefense.com/articles/2014/08/26/the_cnos_losing_battle_to_avoid_a_hollow_navy_107392.html>.

17 Deputy Chief of Naval Operations, “Report to Congress on the Annual Long-Range Plan for Construction of Naval Vessels for FY2015,” United States Department of the Navy, June 2014, <http://news.usni.org/2014/07/07/document-navys-30-yearshipbuilding-plan-fiscal-year-2015>.

18 Secretary of the Navy Ray Mabus, “Congressional Notification of Changes to the Navy’s Battle Force Ship Counting Methodology,” United States Department of the Navy, March 7, 2014, p2 <http://www.crenshawconsultingassociates.com/wp-content/uploads/2014/03/211911894-mabusbattleforce.pdf>.

19 Ronald O’Rourke, “Navy Force Structure and Shipbuilding Plans: Background and Issues for Congress,” Congressional Research Service,” August 1, 2014, p8, <http://fas.org/sgp/crs/weapons/RL32665.pdf>.

20 Deputy Chief of Naval Operations, “Report to Congress on the Annual Long-Range Plan for Construction of Naval Vessels for FY2015,” p5.

21 Deputy Chief of Naval Operations, “Report to Congress on the Annual Long-Range Plan for Construction of Naval Vessels for FY2015,” p5.

22 Eric J, Labs, et al., “An Analysis of the Navy’s Fiscal Year 2014 Shipbuilding Plan,” Congressional Budget Office, October 2013, p13, <http://www.cbo.gov/sites/default/files/cbofiles/attachments/44655-Shipbuilding.pdf>.

23 Perry & Abizaid, et al., “Ensuring a Strong U.S. Defense for the Future,” p36.

24 Perry & Abizaid, et al., “Ensuring a Strong U.S. Defense for the Future,” p48.

25 United States Department of Defense, Quadrennial Defense Review 2014, March 4, 2014, p64, <http://www.defense.gov/pubs/2014_Quadrennial_Defense_Review.pdf >.

26 Perry & Abizaid, et al., “Ensuring a Strong U.S. Defense for the Future,” p47.

27 Kris Osborn, “Navy’s Plan for a 306-Ship Fleet Fading Away,” Military.com, July 31, 2013,
<http://www.military.com/dailynews/2013/07/31/navys-plan-for-306-ship-fleet-fading-away.html>.

28 O’Rourke, “Navy Force Structure and Shipbuilding Plans: Background and Issues for Congress,” p23; p29

29 Perry & Abizaid, et al., “Ensuring a Strong U.S. Defense for the Future,” p7.

30 Jon Harper, “Expect cuts to F-15 fleet in Europe, Breedlove says,” Stars and Stripes, June 30, 2014,<http://www.stripes.com/news/europe/expect-cuts-to-f-15-fleet-in-europe-breedlove-says-1.291346>.

31 Nick Simeone, “Breedlove: U.S. Reconsidering Troop Reductions in Europe,” DoD News, September 16, 2014,<http://www.defense.gov/news/newsarticle.aspx?id=123181>.

32 Michael Mazza, “Taiwan’s Crucial Role in the US Pivot to Asia,” American Enterprise Institute, July 2013, p5,
<http://www.aei.org/files/2013/07/09/-taiwans-crucial-role-in-the-us-pivot-to-asia_082026691749.pdf>.

33 Michael Mazza, “Taiwanese Hard Power: Between a ROC and a Hard Place,” American Enterprise Institute, April 2014,
p2, <http://www.aei.org/files/2014/04/24/-taiwanese-hard-power-between-a-roc-and-a-hard-place_092826925958.pdf>.

34 Terrence K. Kelly et al., “Employing Land-Based Anti-Ship Missiles in the Western Pacific,” RAND, 2013, p2,
<http://www.rand.org/content/dam/rand/pubs/technical_reports/TR1300/TR1321/RAND_TR1321.pdf>.

35 Mazza, “Taiwanese Hard Power: Between a ROC and a Hard Place,” p9.

36 Mazza, “Taiwanese Hard Power: Between a ROC and a Hard Place,” p7.

37 Zachary Fryer-Biggs, “NATO Allies Might Be Unprepared for Syria,” Defense News, December 17, 2012, <http://www.defensenews.com/article/20121217/DEFREG01/312170002/NATO-Allies-Might-Unprepared-Syria>.

38 Kyle Mizokami, “How Taiwan Would Defense Against a Chinese Attack,” USNI News, March 26, 2014, <http://news.usni.org/2014/03/26/taiwan-defend-chinese-attack>.

39 Zachary Keck, “US to Help Taiwan Build Attack Submarines,” The Diplomat, April 15, 2014, <http://thediplomat.com/2014/04/us-to-help-taiwan-build-attack-submarines/>.

40 For more on the ROC’s ambitious domestic shipbuilding plan, see, Wendell Minnick, “Taiwan Previews Major Naval Acquisition Plan,” Defense News, September 20, 2014, <http://www.defensenews.com/article/20140920/DEFREG03/309200024/Taiwan-Previews-Major-Naval-Acquisition-Plan>.

41 James R. Holmes, “Why Taiwan Wants Submarines,” The Diplomat, April 22, 2014,
<http://thediplomat.com/2014/04/whytaiwan-wants-submarines/>.

42 Mazza, Taiwan’s Crucial Role in the US Pivot to Asia,” pp. 6-7.

43 Mazza, Taiwan’s Crucial Role in the US Pivot to Asia,” p7.

44 William Lowther, “Chinese Missile Has ‘Profound Effect on Taiwan: Expert,” Taipei Times, January 15, 2014,
<http://www.taipeitimes.com/News/taiwan/archives/2014/01/15/2003581338>.

45 Daniel Blumenthal, “5 Faulty Assumptions About Taiwan,” Foreign Policy, February 12, 2014,
<http://shadow.foreignpolicy.com/posts/2014/02/12/5_faulty_assumptions_about_taiwan>.

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What to fear in a 2015 economy: Lachman on MSNBC’s ‘Three Cents’http://www.aei.org/press/fear-2015-economy-lachman-msnbcs-three-cents/ http://www.aei.org/press/fear-2015-economy-lachman-msnbcs-three-cents/#comments Fri, 19 Dec 2014 13:45:51 +0000 http://www.aei.org/?post_type=press&p=825516

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The magic and miracle of the marketplace: Christmas 1964 vs. 2014 – there’s no comparisonhttp://www.aei.org/publication/magic-miracle-marketplace-christmas-1964-vs-2014-theres-comparison/ http://www.aei.org/publication/magic-miracle-marketplace-christmas-1964-vs-2014-theres-comparison/#comments Fri, 19 Dec 2014 03:54:44 +0000 http://www.aei.org/?post_type=publication&p=825458 ...]]]> Pictured above are some color TVs from the 627-page 1964 Sears Christmas Catalog, available here at the WishbookWeb website along with many other Christmas catalogs from 1933 to 1988. The original prices are listed ($750 for the Sears Silvertone entertainment center and $800 for the more expensive one), and those prices are also shown converted to today’s 2014 dollars using the BLS Inflation Calculator: $5,700 for the basic 21-inch color TV model and $6,100 for the more expensive model.

To put that in perspective, the pictures below illustrate what about $5,700 in today’s dollars (actually only $5,600) would buy in the 2014 marketplace using current prices from the Sears and Best Buy websites:

appliances2014

Bottom Line: For an American consumer or household spending $750 in 1964, they would have been able to purchase the 21-inch color TV/entertainment center from the Sears Christmas catalog pictured above (includes phonograph and AM/FM radio). An American consumer or household spending that same amount of inflation-adjusted dollars today (about $5,600) would be able to furnish their entire kitchen with 5 brand-new appliances (refrigerator, gas stove and oven, washer, dryer, and freezer) and buy 7 state-of-the-art electronic items for their home (a Toshiba Satellite 14″ laptop computer, a Garmin 5 Inch GPS, a Canon EOS Rebel T5 DSLR Camera, a Sony 1,000 Watt, 5.1-Channel 3D Smart Blu-Ray Home Theater System, a Sharp 50 inch LED HDTV, an Apple iPod Touch 32GB MP3 Player, and an Apple iPhone 6 [with 2-year contract]). And of course, even a billionaire in 1964 wouldn’t have been able to purchase many of the items that even a teenager can afford today, e.g. laptop computer, GPS, iPhone, digital camera.

As much as we might complain about a slow economic recovery, the decline of the middle class, stagnant median household income, rising income inequality and a dysfunctional Congress, we have a lot to be thankful for, and we’ve made a lot of economic progress in the last 50 years as the example above illustrates, thanks to the “magic and miracle of the marketplace.”

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On the left’s dream of turning America into Scandinaviahttp://www.aei.org/publication/lefts-dream-turning-america-scandinavia/ http://www.aei.org/publication/lefts-dream-turning-america-scandinavia/#comments Thu, 18 Dec 2014 22:25:17 +0000 http://www.aei.org/?post_type=publication&p=825452 Many left-liberals have a real thing about the social democracies of Scandinavia. As University of Arizona sociologist Lane Kenworthy has put it, “Over the course of the next half century, the array of social programs offered by the federal government of the United States will increasingly come to resemble the ones offered by [the Nordic welfare states].” And he might be right, if Democrats have their way. No sooner the arrival of universal healthcare did Democrats move into their next project: universal preschool. And next perhaps a universal basic income. (Hey, where is the VAT to pay for all this stuff?) There are fans in the media, too. Again, here is New York Times reporter Neil Irwin on what lessons America can learn from Scandinavia’s high labor force participation rates  in creating a pro-work safety net:

In short, more people may work when countries offer public services that directly make working easier, such as subsidized care for children and the old; generous sick leave policies; and cheap and accessible transportation. If the goal is to get more people working, what’s important about a social welfare plan may be more about what the money is spent on than how much is spent. If correct, it could have broad implications for how the United States might better use its social safety net to encourage Americans to work. In particular, it could mean that more direct aid to the working poor could help coax Americans into the labor force more effectively than the tax credits that have been a mainstay for compromise between Republicans and Democrats for the last generation.

AEI’s Mike Strain, quoted in the Irwin piece, has a response here. So too does AEI’s Stan Veuger. Let me pull out a few of their insights. First, Strain:

I’m quoted in an article in the New York Times on the paper, and as the article reports I do think that we can learn some things from Scandinavia — better transportation, better public education — and I oppose expanding the government’s role in child care (we have enough middle-class entitlements, thank you very much). … I would make two other points as well. Americans might be willing to fork over more of their hard-earned cash to the government if they had more confidence that the government would spend the money in a productive way. … And, as I have written, very high marginal income tax rates would likely be very damaging to the long-term future of the United States. Why would a young person want to be a surgeon or an entrepreneur if the government will take seventy cents of her top dollars of income? Like Scandinavian culture, the longer-term reactions to high top rates — skill acquisition, occupational choice, general attitudes about work — are much harder to measure. And it is fine for economists to focus on what they can measure when writing their papers. But it is not fine for the public debate to assume that these effects are zero just because economists can’t measure them.

And Veuger:

But might policy and politics be downstream from culture? Well, that certainly appears to be the case once we look at Scandinavian culture. Scandinavians trust their fellow citizens. They think poor people have typically been unlucky instead of lazy. They vote actively and participate in civil society. They respect the rule of law, and they donate to charity. Professor Kleven recognizes all of these things, and ultimately chooses not to guess what causes what. Yet for the ambitions of American progressives, that distinction matters very much. If all of these things are so precisely because the Scandinavian countries are small and homogeneous and have been that way for quite some time, then there is not much to be learned from this Scandinavian business. The Scandinavians themselves seem quite confident that they know the answer: culture matters and that their countries are small and homogeneous matters. They are the most Euroskeptic peoples of the continent. Norway is not a member of the European Union, Sweden joined only recently, and none of the three adopted the eurozone’s common currency. They seem to like their small, homogeneous countries just fine. And perhaps that’s what Scandinavia ultimately teaches us: the value of subsidiarity, not of subsidies.

Other economists wonder if Nordic-style capitalism is as conducive to innovation. Certainly they file fewer patents and generate fewer superrich entrepreneurs. (Recall Strain’s remarks on taxes.) As economists Daron Acemoglu, James Robinson, and Thierry Verdier explain in their paper “Can’t We All Be More Like Scandinavians?”: “We cannot all be like the Scandinavians, because Scandinavian capitalism depends in part on the knowledge spillovers created by the more cutthroat American capitalism. … Some countries will opt for a type of cutthroat capitalism that generates greater inequality and more innovation and will become the technology leaders, while others will free-ride on the cutthroat incentives of the leaders and choose a more cuddly form of capitalism.”

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