AEI » Latest Content American Enterprise Institute: Freedom, Opportunity, Enterprise Thu, 18 Dec 2014 16:23:14 +0000 en-US hourly 1 Congress creates another tax-preferred savings account Thu, 18 Dec 2014 15:56:21 +0000 All income tax systems, including our own, impose a penalty on saving. A worker who consumes today pays tax on her wages; a worker who saves to consume in the future pays the same tax on her wages plus a second tax on the return earned on her savings, resulting in a higher percentage tax burden. The saving penalty interferes with Americans’ decisions about the timing of their consumption and slows the capital accumulation that drives long-run economic growth.

Over the years, Congress has displayed considerable ambivalence about the saving penalty. It has created dozens of tax-preferred accounts that allow savers to escape the penalty by removing either the first tax (making contributions to the account tax-deductible) or the second tax (making account withdrawals tax-exempt). Each type of account has its own, often complicated, contribution limits and eligibility rules. And, each account requires that savings be used for a different purpose, such as retirement (traditional and Roth IRAs and 401(k)s), education (Coverdell and 529 accounts), health care (HSAs), and so on.

Soon, there will be one more tax-preferred savings account. Congress has passed, and President Obama will soon sign into law, the Achieving a Better Life Experience (ABLE) Act, which will create a new ABLE account. The account is a good idea within the context of the current income tax system, but highlights the system’s inherent limitations.

The Act will allow annual contributions of up to $14,000 (rising with inflation in future years) to be made to an ABLE account by, or on behalf of, an individual who became blind or significantly disabled before age 26. Contributions will not be tax deductible, but the money will grow tax-free inside the account. Withdrawals used to meet the beneficiary’s education, housing, transportation, and certain other expenses will be tax-free. (Withdrawals for other purposes will trigger income tax, plus a 10% penalty, on the portion of the withdrawals attributable to tax-free earnings rather than the original after-tax contributions.) Also, if the beneficiary applies for Medicaid or Supplemental Security Income, the account balances will often not be counted against the programs’ asset limits.

The new ABLE accounts will allow disabled individuals and their families to save for their future needs without facing the income tax’s saving penalty. The accounts fall short of a complete solution for the challenges facing individuals with disabilities, for reasons explained by Howard Gleckman of the Urban-Brookings Tax Policy Center. But, numerous disability advocacy organizations welcome the accounts as a step forward.

More broadly, the new law should prompt us to rethink our tax treatment of saving. We have an array of complicated rules to measure and tax the income from saving and another array of complicated rules to remove the tax from dozens of types of savings that Congress has singled out for favorable treatment. Meanwhile, the large portion of national saving done outside tax-preferred accounts faces the income tax’s saving penalty, impeding economic growth.

Rather than continuing to identify, one by one, the “good” types of saving that should be spared the income tax penalty, Congress should remove the penalty from all saving and let Americans decide for themselves which kinds of saving are best. In short, we should replace the income tax with a progressive consumption tax. One such tax is the personal expenditure tax, in which individuals are allowed to deduct all of their saving from their income. Another is the Bradford X tax, in which individuals pay tax only on labor income and businesses pay a cash flow tax that doesn’t affect marginal investment incentives.

ABLE accounts will help many people by removing the income tax’s saving penalty in one more situation. Now, let’s take the next step and end the saving penalty for everyone.

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Our incredible shrinking elites Thu, 18 Dec 2014 15:29:49 +0000 ‘Schadenfreude” is probably the most accurate term to reflect how most Americans feel when watching MIT economist Jonathan Gruber grovel before Congress, tortuously trying to explain away his many comments denigrating the American voter. It also applies to the much smaller group paying attention to Harvard Business School professor Ben Edelman, caught bullying small-business owners in the Boston area.

Indeed, it would be funny in a pathetic sort of way, if it weren’t so illustrative of our incredible shrinking elites and so instructive of the mind-set that progressives have developed over the past generation or so. Once, it took a Woodrow Wilson to believe he was smarter than the Founders and knew better than “average” Americans how their constitutional system should operate. Now it takes merely a Jonathan Gruber, who won’t admit under oath to Congress that he was paid millions of dollars to distort a clear understanding of Obamacare.

Similarly, what to make of a man privileged enough to attend Harvard University as an undergraduate, graduate student, and law student, and then to obtain a lifelong teaching position in Harvard Business School, and who then uses his legal training to squeeze a few measly dollars out of a family-run Chinese restaurant (and a sushi restaurant before that). Ben Edelman went full-lawyer on a takeout place over four whole dollars; the average associate-professor salary at Harvard is more than $120,000 a year (and probably more for HBS professors). No Oliver Wendell Holmes Jr., is young Mr. Edelman.

Comparatively rich and entitled: Those are the characteristics that Messrs. Gruber and Edelman share. Those, and the certitude that comes from being card-carrying members of the progressive elite. After all, how much more heady can it get for an academic than to be consulted by the president of the United States himself on health-care reform, or to be paid handsome sums of money by leading corporations such as Microsoft and the NFL for “consulting services”? Being tenured at Harvard or called into the Oval Office gives one a sense of invulnerability and a presumption that the rules don’t apply to you.

All this matters, not because these are the personal peccadillos of a few petty egomaniacs, but because these are the type of people forming the iron triangle of the government-corporate-academic elite in America today. Credentialism and pedigree (conferred often for holding the “right” opinions) get one invited into the fraternity of the socially powerful, which is a lifetime appointment, revocable only for making the type of stupid mistakes now bedeviling both Gruber and Edelman.

Which is why they both looked like deer in the headlights when caught. Who knows what actually went through Gruber’s head when he spilled the beans and displayed the contempt he and Obamacare’s crafters held for the American voter and our political process. But you can be sure he never thought twice that he would be held to account for his comments. After all, he had been the man in the room, possessed of far more knowledge than those not fortunate enough to see just how the political game was played. If he chose to open his kimono a bit, well, then that was simply his benevolent enlightenment of the not-as-fortunate academic masses whom he was addressing.

As for the precocious Mr. Edelman, it apparently took being ridiculed and excoriated on the Internet to move him to drop his threats of continued legal action and instead “reflect” on his poor behavior. Does anyone doubt that, absent the public dissemination of his e-mails, he would have pressed ahead in his quixotic attempt to receive triple “damages” for incorrectly listed prices for egg fu yung or chicken chow mein? Damages, by the way, that came to the staggering amount of $12.

No, both men saw fit to apologize only when exposed to the scrutiny of the broader public. You see, being a tenured professor means never having to say you’re sorry. Or at least it used to.

Here is the most important lesson that Professors Gruber and Edelman will ever teach: The days of elite immunity from public knowledge of their words and actions are over. The iPhone and Twitter are stripping away the thick walls that used to hide what was said and done in oak-paneled conference rooms or the hothouse of a Cambridge, Mass., apartment. This process is just beginning and will take time to gather enough steam to have an effect on our politics, but it is unstoppable.

The knowledge that nothing is private anymore may lead our great and powerful to have as little candor in private as they do in public. But it also may serve a more useful purpose, by hastening the end of the era of progressive arrogance (and that of conservative arrogance, as well). One reason for the attitude of today’s elites is that they are almost never held accountable for their opinions or utterances. Now that they know their words and acts have consequences, our privileged class might question their assumptions, think before they speak or act, and possibly develop more respect for their fellow citizens. At the least, they might learn humility. If not, then there’s more than enough bandwidth to shame them in perpetuity on the Internet.

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A Greek exit would be a big deal for Europe Thu, 18 Dec 2014 15:00:46 +0000 Judging by the pace at which Greece’s politics is unraveling, European policymakers could soon be faced with a fundamental policy choice. Do they again make Herculean efforts to keep Greece within the euro? Or do they allow Greece to be cut loose from the euro? How European policymakers decide to answer this basic question will be critical not only for Greece’s economic future but also for that of the eurozone as a whole.

Voices are now being raised in Europe that Greece’s situation today is very different from what it was some two years ago at the height of the euro crisis, when policymakers feared contagion from a Greek exit. Following a massive debt restructuring in which Greece’s privately owned sovereign debt was written down by 75 percent in 2012, Greece no longer has a particularly high level of privately owned sovereign debt. While, to be sure, Greece does have an extraordinarily high public debt to gross domestic product ratio, the overwhelming majority of that debt is owed to the International Monetary Fund (IMF), the European Union and the European Central Bank (ECB). As such, being a small economy without strong linkages to the European financial system, it is argued that European policymakers can now afford to let Greece be cut loose without the fear of precipitating a European banking crisis.

It is also argued that letting Greece go now might be beneficial for the eurozone as a whole in that it might send a salutary message to the political class in the rest of the European periphery. On seeing Greece’s economic and financial chaos, which will almost surely follow its euro exit as its citizens run on its banks, it is thought that the political class in France, Italy, Portugal and Spain will see the folly of not playing by the eurozone’s rules of budget austerity and structural economic reform.

Tempting as these arguments might be, one must hope that European policymakers weigh the very real risks to the eurozone that might result from a hasty Greek exit. Among the more important of those risks is that the resulting run on the Greek banks and further collapse of the Greek economy, which would almost certainly follow a Greek exit, might send a very graphic message to depositors in the rest of the eurozone’s periphery as to what can happen to their deposits. No longer will Eurozone depositors feel secure that their deposits were fully backstopped by the ECB. This might produce real contagion from Greece to countries like Italy, Portugal and Spain, as depositors in those countries rush to withdraw their bank deposits while the going is still good and before their already shaky economies weaken any further.

Another real risk is that a Greek exit might fan the political forces in the eurozone’s core countries opposed to bailing out countries in the European periphery. A financial and economic collapse in Greece will almost certainly cause Greece to default on its very large official debt from the ECB, the IMF and the European Union. As a result, no longer will European policymakers be able to maintain the fiction with their taxpayers that there was little risk in lending money to the European periphery. This might make future European official bailouts more difficult. More importantly, it might make it very difficult for the ECB to activate its Outright Monetary Transaction mechanism, which is already facing strong political opposition, especially in Germany, and which is the central plank of Mario Draghi’s pledge to do “whatever it takes” to save the euro.

Yet another risk that European policymakers might want to consider is that a Greek exit could complicate the ECB’s task of undertaking quantitative easing now to address Europe’s incipient deflation problem. If the ECB is forced to recognize large losses on its past Greek lending, one must expect the resistance of those ECB board members already opposed to ECB quantitative easing to grow. In particular, those members must be expected to strongly resist any notion that the ECB might buy the sovereign bonds of those countries with poor debt dynamic that could result in the ECB incurring further loan losses on its balance sheet.

In September 2008, when U.S. policymakers were faced with the decision as to what to do about Lehman Brothers’ acute financial difficulties, they grossly miscalculated the likely fallout from letting Lehman go bankrupt. That decision had devastating consequences for both the U.S. and global economies. One has to hope that European policymakers have learned the lessons from that sad episode and that they weigh very carefully the pros and cons of letting Greece go before they come to any decision that they might later come to regret.

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Competition is the only way to preserve an open Internet Thu, 18 Dec 2014 14:56:45 +0000 ...]]]> The Federal Communications Commission is actively considering turning the internet access industry into a public utility by classifying it as a “Title II” service under the Communications Act of 1934. Proponents of the idea, including President Obama, argue that doing so is necessary to protect “the open Internet” and all the benefits it has produced.

Everyone is for preserving an open Internet, but replacing a competitive industry with a regulated utility is not the way to do it. Broadband competition has produced a remarkably innovative, dynamic market in which output and performance double, and prices are cut in half, every few years. You can’t say that about public utilities.

The public utility model is a response to the problem of natural monopoly: In some industries — water, electricity and natural gas distribution among them — economies of scale are so strong that the most efficient solution is to have a single firm serve all customers. Competition in such industries is not only inefficient but, in the long run, unsustainable: In a competitive market, the largest firm will ultimately drive out the rest.

Different countries have dealt with the natural monopoly problem in different ways. In much of the world, governments owned everything from water systems to railroads, airlines and telephone networks. In the U.S., government ownership was the exception rather than the rule: government ran the Post Office, a few municipal utilities, and the Tennessee Valley Authority, but for the most part left industries in private hands, overseen by public utility commissions.

The downsides of both approaches are well documented. First, and foremost, when government takes charge of allocating economic resources, politics inevitably comes into play. Regulated firms want higher prices, customers lower ones — and suppliers, including organized labor, have skin in the game as well. All of the affected interests have strong incentives to “capture” the regulator through various forms of lobbying (or worse). The remedy — forcing bureaucrats to navigate a forest of procedural requirements before making any important decision — can be worse than the disease, especially in industries where speed and flexibility are important.

The upshot is that public utilities — whether government owned or not — systematically underperform industries that are subject to competition. One major issue is the lack of political support for needed investment in the upkeep and modernization of existing facilities. Search the phrase “America’s aging infrastructure” and you will find article after article about our outmoded electricity grid, water systems still using lead pipes, and citizens killed in natural gas explosions resulting from inadequate investment. For example, USA Today reports that, on average, gas leaks cause property damage, injury, or death at least once every other day. In the last 10 years, gas explosions have killed 135 people, injured over 600, and caused more than $2 billion in property damage. Sixty-two percent of the gas mains in Washington, DC are more than 50 years old.

There is plenty of economic evidence that public utilities underperform competitive markets. For example, a recent study by economists at the Bureau of Economic Analysis (BEA) found that the output of the utility sector actually shrank by about two percent annually between 1998 and 2010. Another, by Harvard’s Dale Jorgenson and others, shows the utility sector actually contributed negatively to U.S. productivity growth over the post-World War II period.

The broadband sector, by contrast, is growing and innovating, literally, as fast as the Internet itself. U.S. broadband connections are getting faster by more than a third annually, and the amount of traffic carried is doubling every three years. Americans use more data than in any other country except South Korea (and, by some measures, Japan). The BEA study ranks Broadcasting and Telecommunications among the top ten sectors in terms of contributions to GDP growth, immediately behind Information and Data Processing Services and ahead of Computer Systems Design and Related Services. Jorgenson ranks the sector sixth (out of more than 60) for contributions to productivity growth.

These results don’t prove that public utility regulation, in and of itself, causes slow growth, but they do demonstrate how fundamentally different broadband is from the industries we treat as public utilities. We still generate electrons using the technology invented by Michael Faraday in the 1820s, and distribute it over the same old copper wires (too often literally the same wires). The same is basically true for water and gas. But broadband is constantly evolving: the first major fiber optic deployment — Verizon’s FiOS — is less than a decade old and the technology is already in its second major generation. Today’s 4G LTE wireless networks left the drawing board less than five years ago — at about the time the FCC was issuing its last round of net neutrality regulations.

Competition isn’t an option in every industry, but it is working and producing great results in the market for broadband. Promoting competition, not replacing it with a public utility model, is the best way to preserve the economic and social benefits of a free and open Internet.

This piece was originally published in Real Clear Markets.

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Time to start prepping Obamacare reforms Thu, 18 Dec 2014 14:44:55 +0000 ...]]]> The Supreme Court’s decision to hear arguments in King v. Burwell next year poses an enormous danger to ObamaCare, but it also presents an urgent challenge to the law’s opponents. The outcome might result in many thousands of residents in more than half the states being unable to afford health insurance. The next Congress must be ready to respond with a consumer-oriented health reform. That means preparing now.
The issue in the case is that the Affordable Care Act makes subsidies available for individuals to buy health insurance through exchanges “established by the states.” But 36 states have not established exchanges of their own and rely instead on the federal portal. The plaintiffs assert that the IRS has no authority under the law as written to provide subsidies to residents of states with no state exchange.

If the court agrees, about four million individuals who are currently receiving these subsidies would lose them. For these people, the highly regulated and expensive coverage mandated by the law’s insurance rules might not be affordable. Governors and legislators in those 36 states that declined to set up exchanges may confront intense pressure to quickly restore access to subsidies.

In essence, if the court rules today’s subsidies illegal, those state officials could face a choice between creating a state exchange (and so reinforcing ObamaCare) or seeing some residents lose coverage they now have. ObamaCare’s opponents in Congress should give them a third option: a viable alternative to the Affordable Care Act.

Read the full article here.

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The ruble and Russia’s food imports: More than Putin’s life source Thu, 18 Dec 2014 14:28:20 +0000 Following the downward trajectory of the price of oil, the Russian ruble continues to plummet. And amidst this currency free-fall, it is the political ramifications of the country’s skyrocketing food prices, caused by heavy dependence on food imports that are most troubling. An increase in the price of food that outpaces inflation has the potential to threaten citizens’ access to food and, consequentially, fuel social unrest, alienating Putin’s political base among lower income Russians and threatening his political legitimacy.

In a 2009 essay titled, “Oil-for-Food” When Oil Is Down (and the Ruble Is Weak), Leon Aron argued that from 2000-2008, domestic food production had been increasingly depressed by the overvalued ruble, corruption, and the creeping state takeover of the economy. As a result, Russian food prices became hostage to the price of oil. Aron warned:

Superimposed on the already substantial inflation in food prices,…Russia’s inordinate dependence on imported food may yet become an explosive issue when the economic crisis and the falling oil prices increase unemployment and further weaken the ruble. Alongside other key economic and political certainties of Putinism, the “oil-for-food” structure is very likely to deteriorate rapidly and even collapse.

In early 2007, Vladimir Putin, recognizing this vulnerability, warned that 45% of Russian food overall, and up to 85% in larger cities, came from abroad. In his 2009 essay, Aron outlined a scenario, in which the Russian people may take to the streets:

In one such hypothetical development, in a small to medium-sized Russian city of the kind in which most Russians live, supermarkets are closed and only the “most elemental” products–bread, buckwheat, cheap sausage, and milk–are available at kiosk-like “trading points” or sold by old women on the streets. As the situation continues to deteriorate and people grow desperate, the local administration, which used to rely on the Kremlin’s “vertical of power” for any decision, waits for orders from Moscow. No directives are forthcoming, and spontaneous demonstrations break out.

While a quick rebound in oil prices in the aftermath of the 2008-2009 crisis temporarily alleviated this danger, Russia’s current economic outlook is far gloomier today. With Kremlin-enforced import-bans on food products, Western sanctions and the low price of oil, Putin’s oil-for-food foundation of the Russian economy is coming to haunt its creator.



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Slashing IRS budget carries a heavy price Thu, 18 Dec 2014 14:09:26 +0000 The “Cromnibus” that was enacted last week has received its share of brickbats, mostly over the Citigroup-written and Rep. Kevin Yoder-instigated provision giving banks taxpayer protection for derivatives trading. Also for the campaign-finance provision blowing up most of what was left of campaign contribution limits, pushed by Mitch McConnell but also apparently crafted by Democratic campaign lawyer Mark Elias. Another awful provision got much less attention but is deeply destructive—the successful move by Republicans, including Sen. Ron Johnson and Rep. Ander Crenshaw, to cut $350 million from the IRS budget, following other cuts this year totaling $1 billion or more that have forced the IRS to cut 13,000 employees while it faces a much heavier workload from 7 million additional taxpayers.

Why these moves? One part is strategic—another in the series of guerrilla actions by congressional Republicans to destroy the Affordable Care Act while avoiding the once-standard tactic of working to improve the law’s policies or coming up with an alternative. Another part is just punitive, trying to cause deep pain to an agency that, in the eyes of GOP lawmakers, took off after conservative groups trying to register as 501(c)(4) nonprofits, and held a few expensive conferences. As Rep. Peter Roskam, who should know better, said to Politico, “This is an agency that [had the] wherewithal to make mock videos and to have lavish gatherings…. I don’t think it’s credible for them to say they don’t have enough.”

Take out the “lavish gatherings,” and you can save, what—$2 million? $10 million? Great reason to cut $1.35 billion! Here is the reality. Cutting the Internal Revenue Service will result in a serious drop in revenue—fewer audits, less oversight, with many studies showing that additional funding for the agency has always resulted in a sixfold or greater increase in federal revenues without changing the law to increase taxes. That will worsen our federal budget deficits. At the same time, fewer personnel will mean many fewer taxpayers reaching the IRS to get answers to questions, more delays in processing returns and refunds, a much rougher tax season, and lots of pain for individuals.

It would be easy to see this as a plot by radical antigovernment nihilists to create even more anger at government, with the IRS as a perennial punching bag reaching new heights as a target. Or maybe this is a conspiracy to benefit the richest among us, who already have the advantage of being able to hire the best and brightest lawyers and accountants to find ways to evade taxes—and now will encounter even less resistance to their schemes and many fewer problems with audits.

But let’s be more generous, and say that the perpetrators are lashing out at an agency run by one of the best and most respected administrators to grace government in decades, John Koskinen, without fully appreciating the ramifications.

The Partnership for Public Service recently came out with its annual rankings of government employees’ satisfaction by department, agency, and bureau. The ratings overall are down (more about that below). The IRS ranks 163rd among sub-components of agencies and departments (it is a unit in the Treasury Department). Why? Here are a few reasons: A stressed and undermanned staff of accountants and tax attorneys who have to do battle with private counterparts who make three, 10, or 100 times what they do, who know that tax collectors are never popular, now have to face deeper budget cuts, more strain, more politically driven attacks, more pay freezes, and no ability to keep up with advances in their field because any conferences or meetings will be ripped in “oversight” hearings by Roskam, Crenshaw, and Johnson, among others.

The partnership survey shows growing dissatisfaction across most federal agencies. That is coupled with another grim reality, highlighted earlier this week by Lisa Rein in The Washington Post, in a story headlined, “Millennials Exit the Federal Workforce as Government Jobs Lose Their Allure.” The problem here is not just the budget cuts, budget uncertainty, sequester pain, and shutdown threats and reality; it is also a continuing, broken recruitment process that takes smart, talented young people motivated to try public service and throws obstacle after obstacle in their way. Some of this is built into the law, while much comes from failures in the executive branch to streamline and modernize recruitment and retention.

The problem is not just getting young people to come into the government or to stay, but also replacing the most important senior managers in the Senior Executive Service, who are overwhelmingly baby boomers on the verge of retirement. These government service crises have broad and deep implications.

Except for the hardiest nihilists in Congress (of whom there are more than a few), there has to be some recognition that protecting against cyberattacks, combating terrorists, protecting our borders, thwarting Ebola or other potential epidemics, doing vital medical research to combat Alzheimer’s and cancer, and collecting the revenue that pays for these tasks among other vital ones requires having talented people staffing the agencies responsible for them. But with the current zeal to blow up government, drain its coffers, thwart President Obama at every turn, and use the budget process to wreak havoc on efforts to manage federal agencies and plan ahead, the perpetrators of this approach are damaging all of government, including the departments and agencies that most of us would see as vital.

There used to be a web of Democrats and Republicans who understood these issues and provided some safety net against the most mindless attacks. But with John Warner and Tom Davis retired and Frank Wolf soon to join them, the Republicans who care about government employees and see them in the context outlined above are nearly all outside of Congress looking in. The lawmakers in the anti-IRS squad will no doubt get kudos from their colleagues and their constituents; there is no price to be paid beating up on the tax collectors. But at some point, we will all pay a heavy price for the government-bashing.

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Can Arab states take the next step against ISIS? Thu, 18 Dec 2014 13:20:47 +0000 Following a visit to Jordan last month, Rep. Rob Wittman (R-VA) argued the campaign against the Islamic State (ISIS) “needs an Arab face.” Saudi Foreign Minister Saud Al-Faisal agreed, declaring success “requires the presence of combat troops on the ground.” It is a notion shared by Jordan’s King Abdullah as well. During an interview with PBS’s Charlie Rose, Abdullah said, “We, as Arab and Muslim countries…need to take ownership of this.”

Rhetoric comes easily, but implementation does not. When pressed by Rose about deploying Jordanian troops the King demurred, noting “at the end of the day, whether it’s in Iraq or in Syria, it has to be done by the local populations themselves.” Here lie the limits of the anti-ISIS coalition: US partners in the region are unable or unwilling to do more.

Key reasons for this reticence include limited capability, Iraq’s uninterest in foreign troops, regional tensions, and fear of domestic blowback. US allies in the region invest heavily in air power, but their conventional land forces remain limited (Saudi Arabia, UAE, Qatar, and Bahrain), or outdated (Jordan). The coalition’s contribution to date is limited: of 1,219 air strikes conducted in Iraq and Syria since August, coalition partners contributed 208.

Second, Iraq’s leaders have dismissed the idea of foreign troops. Saudi Arabia has stationed 30,000 troops along the Saudi-Iraq border since July and reports from September hinted at possible Jordanian deployment, but Iraqi Prime Minister Haider al-Abadi has emphasized “Not only is it not necessary,” he said, “We don’t want them. We won’t allow them. Full stop.”

Third, existing regional tensions make a cohesive coalition unlikely. While Qatar and the United Arab Emirates (UAE) both joined NATO operations in Libya in 2011, they are now on opposite sides of a regional proxy war, with Qatar backing the parliament in Tripoli, while the UAE, other Gulf states, and Egypt back the parliament based in the eastern Libyan city of Tobruk. Qatar supports Egypt’s Muslim Brotherhood, while Saudi Arabia backs Abdel Fattah al-Sisi’s regime. Amid these competing regional rivalries, even the backdrop of a growing ISIS threat may not be sufficient to create unity among Arab League or GCC members.

Finally, the potential for domestic blowback concerns regional leaders. Most ISIS fighters appear to be Iraqi or Syrian, yet the top three states of origin for foreign fighters joining ISIS are Tunisia and Saudi Arabia, followed closely by Jordan. ISIS’s continued advance threatens neighboring states, and returning fighters could destabilize regional governments, but with many citizens distrustful of US policy in the region further participation in the coalition could spark domestic protest as well.

Could the coalition ever overcome these challenges? It is difficult to imagine how. Short of an about-face by Iraq’s leadership, or a sudden thawing of tension in the Gulf, the dysfunction will likely continue. Overt US pressure on regional partners might backfire, yet in absence of broader participation from the coalition, the United States should plan to assume much of the operational burden going forward.

Tara Beeny is a Research Assistant at the American Enterprise Institute.

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Will China join the fight against ISIS in 2015? Thu, 18 Dec 2014 13:15:26 +0000 In an interview with Financial Times this week, Iraqi foreign minister Ibrahim Jafari revealed China has offered to provide support for Iraqi airstrikes against ISIS. It’s unclear whether Beijing plans to follow through on this proposition, but potential Chinese-Iraqi cooperation could include weapons sales, intelligence sharing, and military training.

Strategically, it makes sense for Beijing to combat ISIS. China has enormous economic interests at stake in the region. Currently, China receives 10% of its oil imports from Iraq. Chinese state-owned energy companies have invested billions in infrastructure, pipelines, and roads across the country. During ISIS’s summer offensive into Iraq, over 10,000 Chinese workers were forced to evacuate to safety.

Beijing is also concerned that ISIS elements threaten the Chinese homeland. In early July, Abu Bakr Al-Baghdadi, the self-proclaimed caliph of ISIS, explicitly referred to the Chinese government as a persecutor of Muslims, making China a legitimate ISIS target. Over 300 Uighur Chinese fighters have flocked to ISIS’s ranks. The Chinese government is concerned that battle- hardened extremists with Chinese passports could reenter the country. Unorganized Uighur separatists already carry out increasingly frequent bombings and knife attacks in Xinjiang province, on China’s western border, and elsewhere in the country. The influx of well-trained ISIS affiliates would further threaten China’s domestic stability.

Beijing’s offer to assist the Iraqi government reveals a gradual, but important, shift in Chinese foreign policy. In 1953, Prime Minister Zhou Enlai established the “principal of non-interference” as a corner stone of Chinese foreign policy, according to which China (in theory) refused to meddle in the internal affairs of other nations. The principle of non-interference resonated in China during its economic infancy, as the nation focused on domestic growth and remained wary of foreign intervention. Now, however, China has turned outward to invest overseas and secure natural resources. China’s national interests are increasingly out of step with its principle of non-interference. This dissonance between China’s rhetoric and actions is what we are observing in Iraq today.

China’s proposed assistance to the Iraqi government signals a change in Beijing’s strategic calculus. The Chinese leadership no longer believes it can afford to count on America to provide stability in the Persian Gulf and thus protect China’s economic interests.

As multinational military operations against ISIS continue into 2015, look for China to take small steps in contributing to the fight. Will the People’s Liberation Army coordinate with the US coalition or the Iranians? Would Chinese military involvement affect Iraq’s tenuous political situation? The answer to these questions will determine whether Iraq becomes an area for Sino-American cooperation or competition.

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Heaven on Earth? Thu, 18 Dec 2014 01:59:49 +0000 ...]]]> A small number of overwhelmingly white Northern European countries with a Christian cultural heritage or even a Protestant established church are, for quite a few American “progressives,” the place to turn to for public-policy inspiration. This can probably be explained by a strong belief that those countries – Denmark, Sweden, and Finland, perhaps even Iceland, the Netherlands, or Austria – are characterized by more equal outcomes, higher rates of social mobility, better public education, and higher taxes. (I suppose that secularism, drug policy, and bike lanes help as well.)

The high taxes are particularly awesome, especially because they don’t seem to destroy everyone’s willingness to show up to work.

Now, it is obviously infuriating to believe that other countries have discovered and implemented a technology to immanentize the eschaton, and that you could too if only your political opponents believed in science and weren’t so racist. Why, you ask, why, tell me why!

Well, to the rescue comes Henrik Jacobsen Kleven, an economist at the London School of Economics, writing in the most recent number issue of the Journal of Economic Perspectives – not quite a peer-reviewed journal, but as an outlet of the American Economic Association it does provide articles with at least a veneer of intellectual authority. Professor Kleven asks the question, and titles his article: “How Can Scandinavians Tax So Much?” He is Scandinavian himself, so perhaps he can tell us what he learned before he escaped Denmark’s high tax rates.

You can read the rest of the article at the US News & World Report. It will be available here on December 25, 2014.

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