AEI » Latest Content American Enterprise Institute: Freedom, Opportunity, Enterprise Wed, 28 Jan 2015 10:00:57 +0000 en-US hourly 1 Trade in 2015: Senate Finance Committee Chairman Orrin Hatch on how America can succeed in today’s global economy Thu, 22 Jan 2015 19:38:14 +0000 Event Description

International trade and the US economy are top issues in the 114th Congress. We welcome you to join us at AEI as Senate Finance Committee Chairman Orrin Hatch (R-UT) outlines his vision for how America can succeed in today’s global economy. Sen. Hatch will speak to his longstanding efforts to renew Trade Promotion Authority and will discuss what the Obama administration must do to get ongoing trade negotiations such as the Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership successfully enacted by Congress.

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.

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Tech policy 2015: The year ahead Wed, 21 Jan 2015 17:14:27 +0000 If you have trouble registering for this event, please contact

Please join AEI’s Center for Internet, Communications, and Technology Policy for a look ahead at the top tech policy issues of 2015. Senator John Thune (R-SD) will present a keynote address, and panels of AEI scholars and outside experts will discuss issues including net neutrality, the Communications Act, and municipal broadband, cybersecurity, Internet governance, and incentive auctions.

As tech policy issues move to the fore in the national debate, this conference will offer unique insights into the year ahead.

Join the conversation on Twitter using #ThuneatAEI.

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.

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Obama, ignoring realities, sticks to his comfort zone Wed, 28 Jan 2015 10:00:57 +0000 A week after his State of the Union address, political observers are still trying to figure out what President Obama’s game is. That’s how bizarrely untethered from reality the speech was.

Obama refused to even take note of the GOP’s historic midterm gains and the fact the House and Senate are now both under Republican control. On foreign policy, Obama talked as if everything was going swimmingly abroad, prompting even the Washington Post’s Dana Milbank to marvel at Obama’s “disconnect” from what is happening in Yemen, Syria, Iraq and Russia.

And Obama’s policy agenda — “free” community college, tax hikes, mandatory sick leave — failed to take into account that it was dead-before-arrival in this Congress.

Three explanations dominate speculation about what Obama is up to. The first is that he’s trying to lay the groundwork for his successor, presumptive nominee Hillary Rodham Clinton. The second is that he’s trying to pad his legacy. The third is that he’s trying to “troll” or bait the GOP into debating his agenda rather than pursuing its own. All are plausible, and none necessarily contradicts the others.

But there’s a fourth interpretation: Obama can’t leave his comfort zone. No president since Woodrow Wilson has been as enamored of abstract ideas or more sure that disagreement with him is proof of ignorance, bad faith or dogmatism. As a candidate, he insisted his real opponent was “cynicism,” and in his address last week, he returned to the trite formulation, insisting again he was bravely battling the cynics.

Oscar Wilde famously defined a cynic as “a man who knows the price of everything and the value of nothing.” But the full quote, from his play “Lady Windermere’s Fan,” is better:

Cecil Graham asks, “What is a cynic?”

Lord Darlington responds, “A man who knows the price of everything and the value of nothing.”

To which Graham replies, “And a sentimentalist, my dear Darlington, is a man who sees an absurd value in everything, and doesn’t know the market place of any single thing.”

The phrasing is a bit archaic to the modern ear, but the point is terribly relevant as Obama heads into the home stretch of his presidency. Obama is an ideological sentimentalist.

He likes community colleges. And he should; they do very important work. But his idea to subsidize them via an expanded federal program is blindingly oblivious to the costs — fiscal and institutional — it would impose, particularly given the fact that, as Reihan Salam notes at National Review Online, “net tuition and fees were $0 for [community college] students from households earning $60,000 or less.” That is probably why Obama wants to let students who keep grades above a C-plus use Pell Grants and other aid for living expenses.

But such details don’t matter when weighed against the idea of being in favor of “free” community college.

Over the weekend, the same president who boasted about increased oil and gas production days earlier in the State of the Union address — despite doing nothing to make that possible — announced he wants to designate part of the Arctic National Wildlife Refuge a wilderness, in effect taking billions of barrels of oil off the table. He says it’s worth it because ANWR is “pristine.” But he also compared it to Yellowstone and the Grand Canyon, neither of which is pristine because millions visit them every year.

A president who believed in negotiating might trade a ban on offshore arctic drilling for opening up ANWR, which would be much safer. He might also consult with Alaska’s political leaders, who passionately oppose Obama’s scheme.

If Obama believed in negotiating, he would have used the Keystone pipeline as a bargaining chip. He would trade the higher taxes he (always) wants for tax reform. He would acknowledge that the GOP won an election in 2014 and that its interests matter.

But negotiating requires acknowledging that people who disagree with you have a legitimate point of view. And such concessions to reality would take Obama out of his comfort zone. And anything outside of that is a no-go zone for this president.

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Growth of school choice programs could be stunted without funding portability Wed, 28 Jan 2015 03:48:12 +0000 ...]]]> It’s National School Choice Week and across the country more than 11,000 events are planned to celebrate school choice and advocate for more options for parents.

The school choice movement has much to celebrate.

This year, more students will attend charter schools than at any other point in American history. According to the National Alliance for Public Charter Schools, at the end of last school year more than 2.7 million students attended charter schools, right around 5 percent of all public school students. When you realize that just 10 years ago there were fewer than 800,000 students in charter schools, the number is even more impressive.

Students attending private schools with the help of vouchers or tuition tax credit scholarships are at an all-time high as well. According to the American Federation for Children, in the 2013–14 school year, more than 308,000 students in 18 states and Washington, DC, used some form of publicly subsidized scholarship to attend private school, up from just 30,000 in the year 2000.

All great, right? Well not to throw a wet blanket on the jubilation, but at an event held at the American Enterprise Institute last week, John Kline, chairman of the House Education and Workforce Committee, intimated that a key issue school choice advocates have been chasing at the federal level might be a goner.

First, a little background. The average public school student’s education is funded from three streams of money. First, local dollars come from city- or county-based property tax revenue. These dollars are paired with state funds, usually derived from a sales tax and (in some states) an income tax. Finally, and particularly for poor students and students with special needs, the federal government kicks in money to top it off.

“Title I portability” would allow low-income students to take the money that the federal government sends to their public school district with them to the school of their choosing, much like vouchers and tax credit scholarships from state and local governments. Many school choice advocates would like that to include private schools. Those dollars, on average around $1,300 per student, could be coupled with state and local funds to create a substantial enough sum to cover the cost to educate a child at a quality private school.

For a while, it looked like advocates had placed Title I portability to private schools squarely in the platform of the Republican Party. Mitt Romney made Title I portability part of his education plan in the 2012 election. In 2013, now Senate HELP Committee Chairman Lamar Alexander teamed up with Rand Paul to try to include it in a budget amendment. So, with School Choice Week set to kick off during the largest and most conservative Republican congressional majority since the 1920s, you might think that Title I portability was an idea whose time had come.

Fast forward to last Thursday. At the 31:45 mark in the video, AEI’s Rick Hess asks Rep. Kline about Title I portability, and he responds:

I’m a proponent of choice. Our former majority leader, Eric Cantor, wanted to do that, to allow the money to follow the student, including to a private school, and simply couldn’t pass it. The votes weren’t in the House. So, my expectation is that you will have some portability within the public school system. I don’t think the votes are there to allow the portability into private schools, to have vouchers, in other words.

Wow. One has to imagine that if Title I portability can’t get done in this Congress, it can’t get done period.

That would be bad, because as Brian Kisida, Patrick Wolf, and Evan Rhinesmith found in a recent survey, private school leaders across the country find most voucher and tax credit allotments too small to cover the cost to educate children who participate in the programs. On average, school vouchers only provide $6,210 per student per year and tax credit scholarship programs only offer $2,282, far below what schools need to stay afloat, let alone grow and expand.

In Florida, home to one of the nation’s largest tuition tax credit programs, only 60 percent of private schools choose to participate. In Indiana, which has one of the nation’s most extensive school voucher programs, only half of schools are part of the program. In Louisiana, it’s one third. Non-participating schools represent tens of thousands of potential seats for children desperate for better educational options. However, if schools cannot access funds commensurate with the cost to educate students, they will not participate in the program. Simple as that.

Title I portability could have created a boom in private school participation in current choice programs, sparking the expansion of more programs in other states. It is quite possible that without such portability, school choice programs will continue to provide inadequate funding, and their growth will be hobbled for the foreseeable future.

If in future School Choice Weeks we hope to celebrate the continued expansion of private school choice, policymakers will have to think of ways to channel more money into participating private schools. $2,300 per student is not going to get it done.

Michael Q. McShane is a research fellow in education policy studies at AEI.

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Helpful data points for the Military Compensation and Retirement Modernization Commission Wed, 28 Jan 2015 01:24:40 +0000 In advance of the final report by the congressionally established Military Compensation and Retirement Modernization Commission (MCRMC) on Thursday, the Center for a New American Security (CNAS) has released an important new report on the growing challenge of compensating the All-Volunteer Force. The report’s authors smartly call for revisiting military compensation from the ground-up, thinking through holistic solutions instead of piecemeal stop-gaps.

This approach should receive bipartisan support from lawmakers. After all, experts from AEI, along with nine other leading think tanks—including CNAS, Brookings, the Center for American Progress, the Center for Strategic and Budgetary Assessments, the Center for Strategic and International Studies, the Foreign Policy Initiative, the National Security Network, the Stimson Center, and Cato—all signed onto military compensation reform as part of the groundbreaking Defense Reform Consensus open letter in 2013.

Additionally, AEI teamed up with the Bipartisan Policy Center last July to release a chartbook that examined the numbers behind the cost growth in military compensation in more detail. CNAS’ great work builds off this momentum and more to deliver a timely product for lawmakers to consider as they await the MCRMC’s report later this week.

Follow AEIdeas on Twitter at @AEIdeas.

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Syriza is limited in the promises it will be able to keep Tue, 27 Jan 2015 20:53:57 +0000 Editor’s Note: The following is Desmond Lachman’s response to the New York Times Room for Debate question: Can Greece’s new leftist government lift the country out of its economic wreckage or, by resisting its creditors, will it only make things worse?

In the depth of an economic depression, it is perfectly understandable that Greek voters would elect a government committed to reversing the austerity policies that were imposed on Greece from abroad and that have led Greece to an economic and social disaster. But it would be fanciful to think that simply rejecting austerity and insisting on official debt relief will put the Greek economy on course for a sustainable economic recovery. Indeed, such demands risk putting Greece on a collision course with its official paymasters that could very well lead to Greece’s exit from the euro before the year is out.

While it is certainly true that both the Greek government and the German government have every interest in keeping Greece in the euro, both are highly constrained in the concessions that they can grant to make that possible. After several years promising that it would tear up the much reviled International Monetary Fund-European Union memorandum of economic policies for Greece and that it would insist on major official debt relief, it is difficult to see how Syriza can make the large U-turn needed to keep its official creditors happy. This is all the more so the case considering the lavish promises on increased social spending that it made during the electoral campaign.

For her part, it is difficult to see how Chancellor Angela Merkel of Germany can back off from her insistence that, as a condition for continued official support, Greece must honor its commitments with respect to balancing its budget as well as to streamlining its public sector and privatizing state assets. If Germany were to agree to allow Greece to substantially increase public spending and to grant it major debt relief, surely it would be forced to do the same for countries like Ireland, Italy and Portugal. Especially at a time when German voters are already incensed about the European Central Bank’s recent actions with respect to quantitative easing, Merkel would risk the wrath of her electorate were she to be seen to be too generous with Greece and with the rest of the European periphery.

All of this puts Greece’s newly elected prime minister, Alexis Tsipras, in the most unenviable of positions. Continuing with the I.M.F.-E.U. imposed budget austerity measures risks condemning Greece to several more years of economic misery. Yet opposing austerity risks having Greece’s official creditors cut it loose from the euro. And leaving the euro would almost surely result in a massive run on the Greek banks, which would plunge the country into economic and financial chaos.

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Robots on the rise: 6 key automation trends and how they will affect workers Tue, 27 Jan 2015 20:52:59 +0000 Irving Wladawsky-Berger provides a really great roundup of numbers and analysis about automation and labor markets. And I think the bottom line here at the pace of change is accelerating, which create new challenges and insecurities for workers. It also challenges policymakers who may have to rethink some long-held views. As I mention in my new The Week column:

The GOP is the party that believes “a rising tide lifts all boats,” that faster economic growth is the best path to shared prosperity. To concede otherwise is to challenge one of the modern party’s first principles. …But what is the modern GOP offering during a time when a rising tide is leaving too many Americans stuck and stranded? … What’s more important is for Republicans to recognize (a) upward economic mobility is stalled and the economic gains we do have are going almost exclusively to the top, (b) key forces behind this trend — automation, globalization — aren’t going away, and (c) boosting economic growth is necessary but perhaps not sufficient for broadly shared prosperity.

As the Economist recently pointed out: “The modern digital revolution – with its hallmarks of computer power, connectivity and data ubiquity – has brought iPhones and the internet. … but it is disrupting and dividing the world of work on a scale not seen for more than a century. Vast wealth is being created without many workers; and for all but an elite few, work no longer guarantees a rising income.” Is it really so hard to imagine that this new state of affairs might require creative policy responses? Anyway, IWB summarizes some automation trends, which suggest the scope of the challenge:

1.) The importance of “manual” skills within jobs has decreased over time.  “Past automation has replaced routine manual tasks and can be expected to continue to do so.  Meanwhile, technology advances now allow computers to do several manual tasks that are non-routine.  Google’s autonomous car and Rethink robotics’ Baxter are two examples of relatively difficult manual tasks that can now be performed by computers.  Factory automation is transforming many other jobs, from painting automobiles to sorting mail to picking products in warehouses.”

2.) The importance of “perception” skills within jobs has decreased over time.   “An important recent change in technological capability has been in the area of perception.  There have been remarkable advances in robotic vision and perception that would have been the domain of science fiction ten or twenty years ago. For instance, computers are now are able to understand speech in ways they never could before…  Similarly, computer vision capabilities have advanced rapidly for tasks such as distinguishing objects, understanding writing, and identifying production defects on assembly lines…  Thus we expect a substitution of technology for labor in occupations that relied on routine human perception, particularly in cases that favor the machines’ inherent advantage of consistent performance over long periods without breaks.”

3.) The importance of “interpersonal” skills within jobs has increased over time.  “One important area in which computers still trail humans is interpersonal interaction…  More complex interpersonal interactions, such as those in sales, customer service, and supervision, remain the domain of human workers.  We can expect that occupations will shift toward those skills in which humans have a relative advantage over machines.  Machines have demonstrated limited ability to perform interpersonal tasks, and human customers have a preference for interacting with other humans.”

4.) The importance of workers’ facility with technology has increased over time.  “While technology can substitute for labor in many occupations, it can augment human skills in others.  Computerized systems are making workers, from call centers to factories, more productive.  Digital tools provide graphic artists and product designers with the ability to work more quickly and flexibly than ever before.  Workflow and collaboration tools improve coordination and knowledge sharing among workers.  At the high end of the skill distribution, medical diagnostics, electronic medical records, and technology- assisted surgery are improving physician productivity and patient outcomes.   As technology substitutes for some skills, it can also serve as a complement that increases the need for, and the productivity of, skills that computers cannot yet perform.”

5.) The skills that are important within jobs will change over time.  “Complementarity across skills has changed, creating an increased need for workers to be flexible in their skill development.  One striking example is that facility with technology has become such a common job requirement that it is no longer a major differentiator between jobs…  For any given skill one can think of, some computer scientist somewhere may already be trying to develop an algorithm to do it.   So, workers – especially those with many years left in their careers – need to stay flexible in focusing on new skills or finding occupations with new complementarities.”

6;) These major changes are likely to accelerate, given the continuing advances in many digital technologies.  “This suggests that the significant economic disruption  – and the large changes in the demand for skills like perception, supervision, interpersonal facility, and equipment use  – are likely to grow.  The disruption is an opportunity for organizations, but may be a threat to many workers.  Researchers, managers and policymakers need to understand these changes if they are to diagnose them correctly and ultimately prescribe effective solutions.”

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Another promising startup, regulated out of business Tue, 27 Jan 2015 20:11:30 +0000 Over at Business Insider,  James Rosenbush writes about the need for startups (a favorite topic of mine):

The private sector economy has a life blood, and it is startups. New businesses are started by inventive entrepreneurs out of economic necessity or because their new ideas won’t wait. Technology has been a boon and a barrier to job creation. In past cycles, startups were more labor intensive — requiring more people to run them. Ford Motor Company, once a startup, is a good example. Technology shies away from jobs and shifts productivity and lifestyle gains to software. We’re going to need many more startup zealots and maniacs to sustain and grow an economy where people can find and keep good jobs with growing wages.

But government often erects barriers and lays down minefields in front of America’s entrepreneurs. Pacific Standard’s Susie Cagle writes about just such a situation, the story of Night School, which “just wanted to provide a modest, low-cost bus service from San Francisco to the East Bay.” It wasn’t complicated. Regular old school buses driven by insured, licensed drivers between two stops every half hour. But it was not to be:

The response to Night School’s speculative press was overwhelmingly positive. But less than two weeks later, the week of its planned launch, Night School was postponed indefinitely while its founders grappled with the [California Public Utilities Commission] which claimed the start-up was not properly licensed as a passenger carrier. If Night School had sought to operate as a service only available to members of a private club, the CPUC wouldn’t have had jurisdiction over the business. But the founders’ vision was decidedly public, from the school buses to the low fares. The CPUC has struggled to codify new rules for “transportation network companies,” shifting and changing regulations over the last three years while those companies continued to operate. Night School never got the chance to open its doors.  After months of back and forth, false starts, and moved goal posts, Night School announced its closure last December.

The CPUC, by the way, is the same regulator which has tried to fine and regulate Uber, Lyft, and other ride-sharing services.

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Your barber faces stricter licensing requirements than an EMT Tue, 27 Jan 2015 19:42:59 +0000 A new post by Brookings’s Melissa  Kearney, Brad Hershbein and David Boddy points out that almost 30% of workers in the US need a license to do their job. Occupational licensing has increased quite a bit from its 1950s level of 5%, growing to 10% in the 70s, and now affects “workers of all skill levels,” reaching many more than “doctors, lawyers, nurses, and teachers.” Kearney, Hershbein and Boddy:

It is important to realize that occupational licenses are not mere state-sponsored certificates to signal that workers have completed some level of training; occupational licensing laws forbid people from practicing in their occupation without meeting state requirements. If the rationale for licensing an electrician is to protect public safety, it is difficult to see what rationale supports licensing travel guides. Yet, twenty-one states require a license for travel guides. …

There can be an obvious disconnect between the strictness of licensing regulations and the potential harm to consumer safety. For example, Michigan requires 1,460 days of education and training to become an athletic trainer, but just 26 to be an emergency medical technician (EMT). In fact, across all states, interior designers, barbers, cosmetologists, and manicurists all face greater average licensing requirements than do EMTs.

A disconnect indeed. I’m all for basic, sensible safety precautions, but it’s just not reasonable that a barber faces stricter licensing requirements on average than an EMT. So what effect do these extremely varied regulations have?

An obvious burden of such practices falls on would-be workers looking to enter licensed occupations… This can have real consequences for job creation. By erecting a barrier to entry into an occupation, occupational licensing can slow job growth and limit employment opportunities. It can also make it harder for workers—including licensed ones—to relocate. Because requirements to obtain a license vary by state, a worker moving to a new state may need to undertake more education, training, or new examinations to work in the same occupation.

Occupational licensing can also be costly to consumers, who may pay as much as 15 percent more for services when an occupation is licensed, according to some estimates. These higher prices (and earnings of licensed practitioners) could result from licensing weeding out low-quality providers: as consumers come to perceive higher quality, they are willing to pay more, and prices rise. On the other hand, requiring extra training and qualifications may simply reflect a barrier to occupation entry that reduces market competition and allows the incumbent provider to collect profits. Given this possibility, it is perhaps not surprising that much of the push for new and expanded occupational licensing has come from occupational associations themselves, not the general public.

As I pointed out in a previous post, government regulation is the biggest barrier to innovation, according to a poll of Silicon Valley insiders. While you probably want your doctor or electrician to have a proven level of competency, regulation is getting out of hand in other areas (for instance, in Nevada a person hoping to be a travel guide must have 733 days of training and pay $1,500 for the license). Let’s be sensible and trim back the unnecessary licensing requirements.

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

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Pricey carbon tax clobbers California consumers, business Tue, 27 Jan 2015 19:04:23 +0000 The most preposterous thing about a carbon tax, which California is in the process of implementing under the guise of a cap-and-trade program and which some other states are now considering, is the pretense that it will curb carbon emissions.

This notion — that states can save the planet from getting too hot — is great soap opera, but it is just a way to bring more revenue to state governments regardless of its stated intent.

Whether it’s called cap-and-trade or a carbon tax, California is now stuck with a fee on the carbon content of fuels. It’s the first of its kind in the United States, but environmental groups are urging other states to do the same.

The California Air Resources Board, whose goal is to reduce greenhouse gas emissions to 1990 levels by 2020, claims the tax is a cost for oil refineries. But that’s disingenuous.

Oil companies will simply pass the carbon tax along to California consumers in the form of higher prices. Experts estimate that the tax — which took effect at the start of this year — has the potential to increase gasoline prices by as much as 75 cents per gallon.

Guess who would pay the bill for the carbon tax? A carbon tax would disproportionately impact those who are most vulnerable in our economy — low- and middle-class families and small businesses. It would be foolish to think otherwise.

Make no mistake, the tax on transportation fuels will push gas and diesel prices upward and burden drivers, businesses, and schools, effectively erasing the economic benefits that Californians currently enjoy at the pump.

Think about its impact: To save money, some drivers may fill up at service stations in neighboring states that don’t have a carbon tax.

And companies might be tempted to relocate elsewhere in the country to save on energy costs. Other companies might have no choice but to shut down, resulting in a loss of jobs. States without a carbon tax would gain economically at the expense of those with one.

In Vermont, a coalition of environmental groups has proposed a state tax of between $50 and $150 per ton of carbon emissions to be levied on businesses that distribute gasoline, heating oil, natural gas, propane and diesel. The groups claim the tax would produce $35 million in revenue by 2017 and as much as $700 million by 2030. Of the new revenues, 10 percent would automatically go to renewable energy companies.

State government is a great milieu for “pass the buck” politics, but carbon taxation is merely a way to reduce a staggering debt and reward political allies.

What someone like California Gov. Jerry Brown might not be able to achieve through tighter controls on spending, he can certainly gain by using public concern about climate change to ratchet up taxes. And you can be sure it won’t stop at the gas pump.

The next target for carbon taxes could be electricity utilities and their customers. Environmentalists say it’s no big deal. But fossil fuels account for about 60 percent of the nation’s electricity supplies.

The irony is that the largest U.S. environmental groups oppose nuclear power, arguably the most important energy source in the battle against global warming.

The U.S. fleet of 100 nuclear plants accounts for nearly two-thirds of the nation’s zero-carbon energy. But environmentalists don’t recognize nuclear power’s environmental value or its critically important role in maintaining a diverse mix of energy sources for reliable electricity.

To my mind, the path forward begins with environmentalists recognizing the importance of keeping existing nuclear plants in operation and realizing that nuclear power can collaborate well with other forms of emission-free energy like solar and wind. If something better comes along, fine.

But carbon taxes should be the last resort — they won’t help the environment much, they’ll expand the size of government, and they’ll damage the economy.

Mark J. Perry is a professor of economics at the University of Michigan-Flint and resident scholar at the American Enterprise Institute.

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Why America is betting on Modi Tue, 27 Jan 2015 15:25:05 +0000 Barely a year ago, most foreign policy pundits would likely have agreed on one simple prediction: the election of Narendra Modi as Indian prime minister would set back relations with the United States, and by extension with the West more broadly.

Instead, the opposite has happened. Yesterday President Barack Obama shattered a symbolic taboo by becoming the first American chief guest at India’s annual Republic Day parade. Arguably, the US and India are poised to pursue a deeper and wider partnership – one whose impact will potentially be felt far beyond the two countries’ borders – than at any time before.

To be sure, the detailed mechanics of stepped up cooperation between the US and India outlined in Sunday’s joint statement and joint strategic vision for Asia and the Indian Ocean region need to be fleshed out in the months ahead.

The prudent will hold the champagne until both countries actually begin co-producing weapons, US companies break ground on new Indian nuclear reactors, and we see tangible gains against the likes of Haqqani network, Lashkar-e-Taiba and D Company. But one thing is clear: the US and India don’t lack ambition for the relationship.

Why is America betting on Modi, a man whose visa it rejected a decade ago in a public rebuke for the 2002 Gujarat riots that occurred on his watch? In a nutshell, Washington’s posture reflects a blend of hard-nosed calculation and a genuine reassessment of the Indian prime minister.

To begin with, the alleged Modi-Obama personal chemistry ought to be taken with a pinch of salt. The bookish former law professor and the fiery former RSS pracharak hardly make the most natural friends. If anything, their apparent willingness to forge a personal bond says more about their pressing national interests.

Shared concerns about China’s hegemonic ambitions in Asia and the destabilising impact of radical Islamist terrorism drive the US and India towards each other. Thanks to India’s size, democratic polity, pluralistic society and vast economic potential, Washington has placed a long-term bet on the idea that the rise of India is good for America.

But the success of this bet depends on India fulfilling its own ambition to claim a seat at the high table of global power. Simply put, Modi’s sweeping electoral mandate gives him a better shot at achieving India’s goals than any of his recent predecessors.
To be sure, Modi’s own record has helped generate these hopes. In policy circles, his reputation for no-nonsense administration and business-friendly economic policies earned in Gujarat has eclipsed misgiving generated by the 2002 riots. That Modi stressed development – not identity politics – in his campaign last year helped complete a public makeover years in the making. To the prime minister’s credit, he has remained tightly on message even after winning the election.

That Modi chose to take the high road towards the US also helped. Hardliners in BJP, and in the larger ideological family to which it belongs, would have applauded had the prime minister chosen to snub the US by downplaying ties with it, at least early on in his tenure.

Instead Modi accepted Obama’s invitation to visit Washington with alacrity. This signalled two reassuring qualities: that the prime minister is not a man to put personal peeves ahead of the national interest and that he sees the US as a vital partner in fulfilling his ambitious vision for India.

At the margins, Modi’s passionate following among Indian-Americans also helped boost his reputation in Washington. It didn’t hurt that over the years Indian-Americans have been among Obama’s fiercest supporters. A higher proportion voted for him than in most ethnic groups. When Modi filled New York’s Madison Square Garden with his fans last year, it brought him the kind of domestic political attention foreign leaders rarely enjoy in America.

Of course, just because the stars appear to have aligned at the moment for Obama and Modi does not necessarily mean that they will remain permanently aligned. At its core, the US bet on Modi is that he will revive India’s economy, deepen its engagement with fellow democracies, and steer clear of domestic strife. Beyond that, sceptics will also look for evidence of concrete progress in the many areas of cooperation suggested during Obama’s visit.

How will the US and India advance a rules-based international order in the Indian Ocean? How do shared concerns about Islamic State in Iraq and Syria translate into counterterrorism cooperation? When it comes to climate change, have the US and India really drawn closer than before?

Nonetheless, there’s no question that Modi has forced India back on Obama’s foreign policy agenda. He has raised expectations that he is a new kind of Indian leader – unafraid to break some geopolitical crockery while pursuing his goals. If Modi continues to reform the economy and revitalise Indian diplomacy, his honeymoon with Washington will only lengthen. The consequences for India, Asia and the world could be huge.

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The $2 trillion question: Is the CBO overly pessimistic about the US budget deficit? Tue, 27 Jan 2015 15:03:17 +0000 The new CBO budget projection predicts annual deficits will continue to shrink the next few years before rising again in 2018, from 2.5%  of GDP in 2017 to 4.0% in 2025. Two reasons: Higher entitlement spending (from 13.0% of GDP in 2017 to 14.2% in 2025) and interest on the national debt (from 1.7% of GDP in 2017 to 3.0% in 2025).

The almost doubling in interest costs is based on the assumption that long-term Treasury rates normalize back to prerecession levels. Yet at the same time, CBO predicts real GDP growth to average just 2.2%, below the prerecession pace. Paul Ashworth of Capital Economics finds those two predictions — interest rates and economic growth — to be “inconsistent” with their historical relationship:

The CBO assumes that the 10-year Treasury yield rebounds fairly quickly to 4.6% by the end of the decade which, assuming inflation is 2.0%, puts the real long-term rate at 2.6%. At the same time, however, the CBO also assumes that real GDP growth averages only 2.2%. As Chart 4 illustrates, the average real long-run interest rate has historically been lower than average real GDP growth. With the so-called term premium on the 10-year Treasury yield slumping over the past few months, there is a case to be made that real long rates will remain substantially below real GDP growth for quite some time yet. Under those circumstances, the Federal deficit would remain below 3% of GDP for much longer that the CBO currently believes.

Those few tenths of a point make a big difference. If interest costs as a share of GDP stayed at 2.5% over that period, total interest costs would be about $2 trillion less, lowering the 2025 debt-GDP ratio by nearly 10 percentage points. Here is an interesting new paper by Barry Eichengreen looking at the case for low rates withing the context of the secular stagnation thesis. That being said, I certainly would not want to assume a brighter scenario if it means even less urgency to deal with our long-term entitlement spending problems.  A bit on the political implications of the improving budget picture from Potomac Research:

WE’VE BEEN VERY OUTSPOKEN ABOUT THE DEFICIT PLUNGE that CBO underestimated, but now we have to concede that the dramatic progress is slowing. Nevertheless, CBO’s prediction of $468 billion in red ink strikes us as too high; something in the $425 billion neighborhood seems likely if the economy continues to surge. That would take the deficit to under 2.5% of GDP, where it will stay for the next two or three years.

WHAT ARE THE POLICY IMPLICATIONS? In the short run, the good news on deficits will reinforce a movement to replicate the two-year budget deal hammered out by Paul Ryan and Patty Murray 15 months ago that loosened the rigid budget sequester.  A new deal — perhaps in conjunction with a debt ceiling extension late this summer — probably would waive meat-ax sequester caps for defense and perhaps allow domestic spending to stay roughly flat.
"Secular Stagnation: The Long View" by Barry Eichengreen

“Secular Stagnation: The Long View” by Barry Eichengreen


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