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US Debt and Reason for Optimism April 20, 2011

Posted by Afflatus in Economics, Politics, World Affairs.
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On Monday morning, April 18, the ratings agency Standard & Poor lowered its outlook on American debt from “stable” to “negative.” The change in S&P’s outlook on America’s credit worthiness signals that there is a one in three chance S&P will downgrade America’s credit rating (currently AAA) by 2013. The pundits, news anchors, and politicians went almost haywire over the announcement. The markets? They hardly budged. The Economist reports: “The market reaction has been about as benign as one could hope for; relative to the Friday close, equities are higher, bond yields are lower, and the dollar is basically flat. Markets shrugged.”

In a fantastic piece on the reality of America’s debt crisis, “American Government Debt: What, US Worry?”, The Economist’s Free Exchange blog provides logic and level-headedness throughout. The article clearly shows that America has a debt problem, but not an absurdly bad one. “America’s ratio of gross government debt to GDP currently stands at about 99%. That’s not an absurdly high level for a rich country at the present time. It’s about 24% above Germany’s ratio and 20% above Britain’s. It’s 82% of Italy’s debt ratio, 66% of Greece’s, and less than half of Japan’s.”

The problem is that America’s debt-to-GDP ratio is projected to continue growing for the foreseeable future, whereas many of those large European countries are expected to have falling debt-to-GDP ratios by 2013.

However, there are some truly optimistic signs of hope when one seriously looks at America’s debt situation. America’s projected economic growth is strong; by 2016 the IMF believes America will grow at twice the pace of the German economy. America has better demographics than countries in Europe or Japan. America’s population is generally younger and immigration flows are higher (Immigration is good for long-term growth!) Additionally, America issues the world’s dominant reserve currency and the most plentiful safe asset. This means the dollar will remain strong and America will be able to continue borrowing at low interest rates.

Additionally, the article points out that there are clear routes forward to solve its fiscal situation, both on the taxing side and the spending side. The Economist supports low taxes but still recommends comprehensive tax reform which would marginally raise taxes on all individuals while broadening the tax base substantially. This is common sense and it is what President Obama has proposed.

Further on the optimistic front: “it was scarcely a decade ago that America was running actual surpluses and not long before that that bitterly opposed politicians were cutting deals that made those surpluses possible.”

Without question, America requires action on fiscal matters. But it’s delusive for two reasons to suggest that America must make imminent budget cuts to discretionary spending programs to solve its long-term debt problem. One: the problem is not an imminent crisis. Two: cuts to discretionary programs mathematically cannot solve the debt problem.

In fact, the cuts made in the FY2011 budget compromise made last week will hurt the economy. Unfortunately, politicians on both sides of the aisle grandstand as if deficit reduction has begun in order to capitalize on the country’s budget-cutting mood. Meanwhile, objective economists on both sides of the aisle state that the economy will suffer as a result of these cuts. Consumer spending will decrease, and some jobs will be destroyed or not created.

To solve America’s long-term debt problem, maturity and cool heads must prevail in Congress. Bipartisanship has always taken place in the past, and it will take place in the future. While America’s political system is at times maddening, it was designed to produce compromise. During the course of America’s history, congressional leaders and presidents have generally risen to the challenge when crises were in fact imminent. If America’s debt problem becomes a crisis, it can be resolved. Until then, America should focus on rebuilding its economy, and structuring it to compete successfully in the future.

Egypt in Crisis January 28, 2011

Posted by Afflatus in Events, Politics, World Affairs.
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Protests in Egypt are larger and more intense than they’ve ever been before. “Unprecedented” is the word most frequently used to describe the current political events there. The size of the democratic revolt is unprecedented, as are the levels of repression and censorship. After videos like this Tiananmen square incident and this government shooting were posted to internet sites, the Egyptian government shut down Facebook, Youtube, Twitter, and other social networking sites. This extreme form of government repression and censorship reminds me of the Iranian protests after their June 2009 election was allegedly rigged. The main difference between these protests and those of the Green Movement in Iran is that the Egyptian regime is a staunch ally of the US, whereas the Iranian government is Americas top foe in the region. This fact makes for an extremely delicate challenge for the Obama administration. How should the U.S. respond when a democratic revolution threatens to topple a government that serves our interests?

In his State of the Union, the President spoke of the ideas our nation was founded upon. Perhaps the two most fundamental ideas of the American revolution was that all people have the rights to liberty and to govern their own affairs. The political repression in Egypt is on par with the harshest in the world. The economy has been horribly mismanaged for years. Egyptians don’t have certain inalienable rights. America’s fundamental values from which American exceptionalism is derived – liberty, democracy, and the pursuit of happiness – are in direct conflict with a state which protects our core vital interests i.e. counter-terrorism, cheap flow of oil through the Suez Canal, as well as mediation in regional issues such as Gaza, Lebanon, and Iran. Our values conflict with our realpolitik national interests. Historically, for the United States the later has nearly always trumped the former; our core vital interests as a state override our the values we profess to uphold.

But this is the wrong time to forsake our values. Not only is standing on the side of freedom and democracy the right thing to do, if the calculation of the United States’ core interests is made with a long-term view, it is also in the best interest of the United States. Mubarak is 84 years old and sick, the population is young, unemployed and restless, and inflation is off the charts. These protests may or may not topple the regime, but they have already made the US support for Mubarak more costly. Mubarak’s succession is imminent. One way or another he will be replaced soon. Rather than attempting to prop him (or his son) up indefinitely, the United States should support the people of Egypt, both in words and deeds by using its immense leverage with the Egyptian government to make serious, democratic reforms.

Like all revolutions, the one gathering steam in Egypt is multifarious. Thus, it is difficult to tell whether the next government of Egypt (whenever it comes) will be closer in political outlook to the Muslim Brotherhood or Mohammed El-Baraedi. The US would certainly prefer the later, but that is not a choice for the US to make. Instead it should distance itself from the Mubarak regime (something the Obama administration is already beginning to do). The US should also seek better relations with future power brokers in Egypt, so that when power changes hands the US will be more likely to find common ground with the new regime.

This should get very interesting!

The best Western-based coverage I’ve seen so far is a primary account in the NY Review of Books, however it’s author was a Cairo-based Egyptian journalist, Yasmine El Rashidi. Twitter has some good coverage as well: lots of links to primary coverage. One tweet read: “The entire nation of Egypt has no Internet access, and the top story on the NYT is the Chicago Mayor’s race? WTF??”