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Editor, The Konformist
That '30s Feeling
June 17, 2010
Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.
Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.'s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich Brüning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.
But despite these warnings, the deficit hawks are prevailing in most places and nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity.
What's the economic logic behind the government's moves? The answer, as far as I can tell, is that there isn't any. Press German officials to explain why they need to impose austerity on a depressed economy, and you get rationales that don't add up. Point this out, and they come up with different rationales, which also don't add up. Arguing with German deficit hawks feels more than a bit like arguing with U.S. Iraq hawks back in 2002: They know what they want to do, and every time you refute one argument, they just come up with another.
Here's roughly how the typical conversation goes (this is based both on my own experience and that of other American economists):
German hawk: "We must cut deficits immediately, because we have to deal with the fiscal burden of an aging population."
Ugly American: "But that doesn't make sense. Even if you manage to save 80 billion euros which you won't, because the budget cuts will hurt your economy and reduce revenues the interest payments on that much debt would be less than a tenth of a percent of your G.D.P. So the austerity you're pursuing will threaten economic recovery while doing next to nothing to improve your long-run budget position."
German hawk: "I won't try to argue the arithmetic. You have to take into account the market reaction."
Ugly American: "But how do you know how the market will react? And anyway, why should the market be moved by policies that have almost no impact on the long-run fiscal position?"
German hawk: "You just don't understand our situation."
The key point is that while the advocates of austerity pose as hardheaded realists, doing what has to be done, they can't and won't justify their stance with actual numbers because the numbers do not, in fact, support their position. Nor can they claim that markets are demanding austerity. On the contrary, the German government remains able to borrow at rock-bottom interest rates.
So the real motivations for their obsession with austerity lie somewhere else.
In America, many self-described deficit hawks are hypocrites, pure and simple: They're eager to slash benefits for those in need, but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can't afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.
German deficit hawkery seems more sincere. But it still has nothing to do with fiscal realism. Instead, it's about moralizing and posturing. Germans tend to think of running deficits as being morally wrong, while balancing budgets is considered virtuous, never mind the circumstances or economic logic. "The last few hours were a singular show of strength," declared Angela Merkel, the German chancellor, after a special cabinet meeting agreed on the austerity plan. And showing strength or what is perceived as strength is what it's all about.
There will, of course, be a price for this posturing. Only part of that price will fall on Germany: German austerity will worsen the crisis in the euro area, making it that much harder for Spain and other troubled economies to recover. Europe's troubles are also leading to a weak euro, which perversely helps German manufacturing, but also exports the consequences of German austerity to the rest of the world, including the United States.
But German politicians seem determined to prove their strength by imposing suffering and politicians around the world are following their lead.
How bad will it be? Will it really be 1937 all over again? I don't know. What I do know is that economic policy around the world has taken a major wrong turn, and that the odds of a prolonged slump are rising by the day.
A version of this op-ed appeared in print on June 18, 2010, on page A29 of the New York edition.
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Russia Will Lead Effort to Found `New World Economic Order,' Medvedev Says
Lyubov Pronina and Lucian Kim
Jun 18, 2010
Russia will help lead efforts to recast the global economic hierarchy as the world emerges from the financial crisis, President Dmitry Medvedev said.
"We really live at a unique time, and we should use it to build a modern, prosperous and strong Russia, a Russia that will be a co-founder of the new world economic order," Medvedev said at the annual St. Petersburg International Economic Forum today.
Russia will use tax incentives and other free-market economic policies to turn the country into a destination for innovators from around the world, Medvedev told an audience including Citigroup Inc. Chief Executive Officer Vikram Pandit and French Finance Minister Christine Lagarde.
Medvedev, in the third year of his presidency, is promoting modernization to transform Russia from an oil-and-gas economy into a magnet for high technology. Its reliance on natural resources exacerbated the steepest contraction among major emerging markets last year, when the economy shrank a record 7.9 percent.
The government will abolish taxes on capital gains from long-term direct investments starting next year, seeking to lure funds to reduce the economy's energy dependence and subdue speculative capital, Medvedev said.
"Such investments are critically important for modernizing the national economy and we are ready to create institutions to facilitate such investments," he said. The government will create an investment fund within a year to help draw "strategic investors" by raising 3 rubles of private capital for each 1 ruble of state money.
"We understand that international competition is the decisive stimulus for our modernization," the president said. "Russia should become an attractive country to which people from the whole world will come in search of their dreams."
Foreign direct investment slipped an annual 17.6 percent to $2.6 billion in the first quarter.
Russia will cut the number of so-called "strategic enterprises," which are restricted for foreign investors, to 41 from 208, Medvedev said.
Medvedev in March asked billionaire Viktor Vekselberg, owner of holding company Renova Group, to oversee efforts to create a Russian version of Silicon Valley in the Moscow suburb of Skolkovo, where tax breaks and other incentives will be offered to lure investment to spur innovation and production of high-technology products. Cisco Systems Inc. and Nokia Oyj plan to join the project.
Citigroup's Pandit backed Medvedev's plans announced last year to create a financial center in the capital.
"It's a real opportunity to turn Moscow into a hub," Pandit said in St. Petersburg today.
The nation is on the road to recovery after the decline, Medvedev said. Sovereign debt is "minimal," foreign reserves are growing again and inflation is at its lowest level in 20 years, according to the president. The country boasts government debt of about 10 percent of gross domestic product.
"Flexibility and adaptability are words that have become much more popular than stability and predictability," Medvedev said.
Medvedev said he will continue to seek economic integration on a regional level with former Soviet republics such as Kazakhstan and Belarus, a development he said doesn't conflict with Russia's aspirations to join the World Trade Organization.
In areas where it lags behind, Russia will adopt foreign practices, such as the European Union's technical standards, according to the president.
To contact the reporters on this story: Lyubov Pronina in St. Petersburg at lpronina@...; Lucian Kim in St. Petersburg at lkim3@...
High court upholds anti-terror law prized by Obama
By MARK SHERMAN
WASHINGTON The Supreme Court upheld the government's authority Monday to ban aid to designated terrorist groups, even when that support is intended to steer the groups toward peaceful and legal activities.
The court left intact a federal law that the Obama administration considers an important tool against terrorism. But human rights organizations say the law's ban on providing training and advice to nearly four dozen organizations on a State Department list squanders a chance to persuade people to renounce extremism.
The justices voted 6-3 to reject a free-speech challenge from humanitarian aid groups to the law that bars "material support" everything from money to technical know-how to legal advice to foreign terrorist organizations.
The aid groups were only challenging provisions that put them at risk of being prosecuted for talking to terrorist organizations about nonviolent activities.
But Chief Justice John Roberts said in his opinion for the court that material support intended even for benign purposes can help a terrorist group in other ways.
"Such support frees up other resources within the organization that may be put to violent ends," Roberts said in an opinion joined by four other conservative justices, but also the liberal Justice John Paul Stevens.
The court often looks skeptically on laws that criminalize speech and holds them to a high level of scrutiny. But Roberts said there is good reason in this case to defer to Congress and the president, "uniquely positioned to make principled distinctions between activities that will further terrorist conduct and undermine United States foreign policy, and those that will not."
Justice Stephen Breyer took the unusual step of reading his dissent aloud in the courtroom. "Not even the 'serious and deadly problem' of international terrorism can require automatic forfeiture of First Amendment rights," he said. Justices Ruth Bader Ginsburg and Sonia Sotomayor joined the dissent.
Solicitor General Elena Kagan argued the government's case at the high court more than two months ago before President Barack Obama nominated her to replace Stevens, who will retire in days.
The Obama administration said the "material support" law is one of its most important terror-fighting tools. It has been used about 150 times since Sept. 11, resulting in 75 convictions. Most of those cases involved money and other substantial support for terrorist groups.
Only a handful dealt with the kind of speech involved in the case decided Monday.
Human rights groups said they were stunned by the ruling.
David Cole, a Georgetown law professor who represented the aid groups at the Supreme Court, said the court essentially ruled that "the First Amendment permits the government to make human rights advocacy and peacemaking a crime."
The aid groups involved had trained the Kurdistan Workers' Party in Turkey on how to bring human rights complaints to the United Nations and assisted them in peace negotiations, but suspended the activities when the U.S. designated the Kurdish organization, known as the PKK, a terrorist group in 1997. They also wanted to give similar help to the Liberation Tigers of Tamil Eelam in Sri Lanka, but they, too, were designated a terrorist organization by the U.S. in 1997.
Representatives of the Tamil Tigers appealed the designation to a federal appeals court, which upheld the government. The PKK has not challenged its terrorist designation.
No serious dispute exists in the U.S. over the designation for groups such as al-Qaida, Abu Nidal and the Shining Path. But some others have legitimate political arms and extensive social missions as well as associations with violence through paramilitary or insurgent means. Hamas, for example, won a majority of Palestinian support in democratic elections.
Once the State Department places a group on the list, it is illegal for Americans or others in the country to provide "material support or resources" to the group. The law also bars travel to the U.S. by representatives or members of the group and freezes any assets that it has in U.S. jurisdictions.
In this case, the Humanitarian Law Project, civil rights lawyer Ralph Fertig and physician Nagalingam Jeyalingam, among others, wanted to offer assistance to the Kurdish or Tamil groups.
The government says the PKK has been involved in a violent insurgency that has claimed 22,000 lives. The Tamil Tigers waged a civil war for more than 30 years before their defeat last year.
Lower courts had repeatedly found parts of the material support law unconstitutionally vague in a lawsuit that began in the late 1990s.
Despite the risk of prosecution, Fertig said he would continue his work on behalf of the Kurds. "We will not let it inhibit our commitment to the Kurdish people," he said.
In his dissent, Breyer recognized the importance of denying money and other resources to terrorist groups. "But I do dispute whether the interest can justify the statute's criminal prohibition."
Breyer said the aid groups' mission is entirely peaceful and consists only of political speech, including how to petition the U.N.
But Roberts said the U.N. was forced to close a refugee camp in northern Iraq, near the Turkish border, because it had come under PKK control.
"Training and advice on how to work with the United Nations could readily have helped the PKK in its efforts to use the United Nations camp as a base for terrorist activities," Roberts said.
The other justices in the majority were Samuel Alito, Anthony Kennedy, Antonin Scalia and Clarence Thomas.
The cases are Holder v. Humanitarian Law Project, 08-1498, and Humanitarian Law Project v. Holder, 09-89.
AP Writer Matthew Lee contributed to this report.
State Department list: http://www.state.gov/s/ct/rls/other/des/123085.htm
June 22, 2010
Obama's Deficit Panel Draws Ire from Liberals
House Majority Leader Steny Hoyer said today that Congress will not pass a traditional budget resolution this year because long-term deficit questions are better left to President Obama's bipartisan deficit commission, an 18-member panel charged with creating a plan to bring down the deficit to 3 percent of the economy by 2015.
"It isn't possible to debate and pass a realistic, long-term budget until we've considered the bipartisan commission's deficit-reduction plan, which is expected in December," he said. "I believe that Congress must take up and vote on that plan."
To the Democratic Party's liberal base, however, the majority leader's full-throated endorsement of the deficit commission is simply confirmation that the president and Congress are seeking to scale back Social Security and Medicare -- and avoid accountability by ceding responsibility to an unelected group.
Liberal activist David Swanson, who runs the site Democrats.com,attended Hoyer's speech this morning to protest the prospect of seeing Social Security benefits cut while Congress continues to fund the Afghanistan war. He characterized Hoyer's statements this way: "We're going to wait for the guy [Mr. Obama] whose constitutional responsibility is to execute the will of the Congress to tell us what to do."
"And then we're going to do what his commission says," Swanson continued, "and everybody knows what his commission is going to say."
Opposition to Mr. Obama's deficit commission has reached a fever pitch among liberal activists, who have even adopted some of the most notorious rhetoric conservatives used during the health care debate to relay their concern. Two of Mr. Obama's own presidential campaign and transition team members last month penned an article entitled, "Has Obama Created a Social Security 'Death Panel'?"
The article's co-authors Nancy Altman and Eric Kingson, now co-directors of the group Social Security Works, point to the clear interest among some commission members in rolling back Social Security.
"We're going to mess with Medicare, Medicaid and Social Security because if you take those off the table, you can't get there," commission co-chair Erskine Bowles, former Clinton White House chief of staff, said in a March speech. "If we don't make those choices, America is going to be a second-rate power and I don't mean in 50 years. I mean in my lifetime."
Altman and Kingson also point out that if the Treasury were to repay the billions it has borrowed from Social Security, the program would pay out the full benefits owed for more than another 25 years.
"So what is the rush?" they write, blasting Congress for giving the commission so much deference. "What is the need for such an unaccountable, fast-tracked process when one has never been needed before?"
Liberal economists like the New York Times' Paul Krugman have accused deficit commission co-chair Alan Simpson, former Senate Republican whip, of perpetuating zombie lies when he warns that Social Security will be bankrupt in a matter of years.
Nevertheless, many contend entitlement programs, which make up the government's largest expenditure, need to be reformed.
"We're lying to ourselves and our children if we say we can maintain our current levels of entitlement spending, defense spending and taxation without bankrupting our country," Hoyer said today.
Concern over the deficit has, in fact, hamstrung debate in Congress over the budget, as well as extending unemployment benefits. Both Democrats and Republicans have expressed concern that within just 10 years, the debt could reach unsustainable levels, according to the Congressional Budget Office.
Hoyer today outlined the type of entitlement reforms the deficit commission could recommend.
"On the spending side, we could and should consider a higher retirement age, or one pegged to lifespan," he said, "more progressive Social Security and Medicare benefits; and a stronger safety net for the Americans who need it most."
Swanson, meanwhile, said that the commission should start by "dropping the pretense that Social Security is broken already and dropping the pretense that the public wants to cut back Social Security."
Jane Hamsher, founder of progressive blog FireDogLake, contends that "the Obama White House has been interested in cutting Social Security right out of the gate" and has pressed for more transparency from the deficit commission by running a live webcast on FireDogLake of the closed front door every time the deficit commission meets.
In one such recording, the man behind the camera, Alex Lawson of Social Security Works, engaged in a testy exchange with Simpson, who raised the ire of the left even further with references to the "lesser people" who rely on Social Security. The video prompted the liberal grassroots group MoveOn.org to start an e-mail campaign asking for Simpson to step down from the commission.
The commission has all year to consider recommendations, and 14 of the commission's 18 members must agree to a proposal before it is included in the final package of recommendations Congress will vote on. Commission members say adjusting Social Security benefits is a likely point of consensus, the Washington Post reports.
Tags: deficit, Social Security, deficit commission, Democrats
Topics: Democrats, Domestic Issues, Congress