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Rest of the World Must Act now

Agenda: Rest of the World Must Act now – WSJ.com.

A rather interesting analysis. What do you think?
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As the world waits for Egyptian President Hosni Mubarak to succumb to the outgoing dictator’s traditional helicopter moment, Jordanian King Abdullah hastily thrashes out a reform program with his newly appointed prime minister and former Tunisian President Ben-Ali settles into his new life in Saudi Arabia, it’s worth pondering the global causes of this regional crisis—and what might be its global economic consequences. These go far beyond the immediate risks of political and economic contagion already manifest in volatility across many world markets and pose a risk to the global financial order.

The political turmoil in the Middle East may have revealed an overwhelming pent-up desire to overthrow years of oppressive dictatorships, but it has its origins in the vast global economic imbalances that have built up over the past decade and that continue to destabilize the global economy—in this case reflected in the form of high and rising food prices across the world. If world leaders take one message from these protests, it must be they can no longer afford to delay the agreement of a grand bargain to tackle these imbalances, following up on their G-20 commitments last year. If they fail, I fear we will see a lot more political unrest this year—and see it spread well beyond the Middle East.

It is hardly surprising the Egyptian people are angry: the country is one of the world’s most vulnerable to rising food prices. Food constitutes more than 40% of Egypt’s total final consumption—one of the highest levels among all emerging markets, according to data compiled by Absolute Strategy Research. The same is true of Tunisia, Algeria and Morocco. Worryingly, other countries where food is more than 40% of consumption include Pakistan and Ukraine, both nuclear states. The sharp rise in food prices in these countries has inevitably a much greater impact on living standards than the U.S., U.K. or Japan, where food is just 7.2%, 8.7% and 14.3% respectively.

High food and commodity prices are partly a consequence of pressures of rising demand but also reflect the vast amounts of liquidity sloshing around the global financial system. Indeed, there has been a remarkable correlation over the past 50 years between three-year growth in global liquidity and rises in industrial and food commodities, analysis by ASR shows.

The vast amounts of liquidity pumped into markets in response to the global economic crisis, most notably the U.S. Federal Reserve, has weakened the dollar while at the same time driving up the price of dollar-denominated assets, including agricultural commodities such as corn and wheat which have doubled in seven months.

Does that mean we should blame the Middle East crisis on Ben Bernanke? Many people already implicitly do exactly that, accusing the Fed chairman of embarking on the last round of quantitative easing in a deliberate attempt to weaken the dollar, thereby fuelling inflation around the world. But that is far too simplistic: Mr. Bernanke sets U.S monetary policy in response to U.S. financial conditions—but those conditions inevitably reflect policy decisions made elsewhere in the world.

The U.S, like many other highly-indebted Western countries, desperately needs to rebalance its economy away from consumer spending towards exports. But it is being prevented from doing so by a combination of the refusal by some emerging market countries to allow their exchange rates to appreciate to boost their own domestic demand and a host of bureaucratic, legal and political constraints that make it very hard for developed market investors to deploy capital in many emerging economies.

The result is that domestic growth in many developed markets for much of past year did not appear strong enough to offset the risk that economies tipped into deflation, while at the same time global excess liquidity was driven by the lack of alternatives into resuming the same desperate search for yield that lay at the heart of the global financial crisis. The effects of this search for yield are already showing up across the markets, for example, in the surge of funds into emerging markets, in falling developed market sovereign and corporate bond yields, in the huge flows into London commercial real estate.

These problems are likely to become even greater as the global recovery picks up pace. The latest data on both sides of the Atlantic suggest inflationary pressures are picking up everywhere, but central banks won’t start withdrawing liquidity while there is still so much spare capacity. At the same time, faster growth in the emerging markets means these countries will continue to accumulate reserves far beyond what their domestic markets can absorb. Add in the risk that the current political instability in the Middle East leads to funds flowing back into developed market assets, and there is a risk of a further round of destabilizing asset bubbles, laying the ground for the next crisis.

From an economic perspective, the best outcome from in the Middle East would be the emergence of open, democratic governments committed to the creation of free and open markets that can provide investment opportunities to absorb some of this global capital. But that is not going to happen overnight.

Meanwhile, the rest of the world cannot afford to delay addressing the underlying causes of the crisis before it engulfs other regions. That means action on exchange rates to rebalance developed market economies and it must mean opening up emerging market economies to wider foreign investment through structural reforms. Above all, it must include action on both scores by China, which accounts for 25% of emerging market GDP. After all, the lesson from Egypt is that China has as much at stake in resolving these issues as any country: it is very far from being a democracy—and food accounts for 30% of household spending.

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The Swedish Model – WSJ.com

The Swedish Model – WSJ.com.

In a Europe plagued by debt crises, one country has no budget deficit at all and is currently returning to surplus. This same country is consistently among Europe’s fastest growing economies, with GDP growth set to hit 4% this year.

That country is Sweden. For many years, foreign policy-makers have pointed to Sweden as a positive model to follow, making Swedes like me proud. Too often, though, foreigners have drawn the wrong lessons from Sweden’s success. For instance, whenever I give a lecture, anywhere in Europe, about economic reform, I always get the following response: “But you come from Sweden, which is socialist and successful—why should we launch free-market policies ?”

The simple truth is that Sweden is not socialist. According to the World Values Survey and other similar studies, Sweden combines one of the highest degrees of individualism in the world, solid trust in well-functioning institutions, and a high degree of social cohesion. Among the 160 countries studied in the Index of Economic Freedom, Sweden ranks 21st, and is one of the few countries that increased its economic freedoms during the financial crisis. Sweden gets higher scores for liberal markets than Germany and Belgium, or reformers such as Cyprus and Georgia.

It’s true that Sweden wasn’t always so free. But Sweden’s socialism lasted only for a couple of decades, roughly during the 1970s and 1980s. And as it happens, these decades mark the only break in the modern Swedish success story.

In the mid-1800s, Sweden was one of the poorest and underdeveloped countries in Europe. Then, Finance Minister Johan August Gripenstedt, a proponent of de Tocqueville and Bastiat, launched far-reaching economic reforms that forged Sweden’s transition to capitalism. Sweden was opened up to the world, to free trade, and to migration. Free enterprise and free competition were introduced. In particular, the financial sector was deregulated.

Corbis

Shopping street in Gamla Stan area of Stockholm

By 1890, Sweden’s economic growth was the fastest in the world, and remained so through 1950. The Swedish tax burden was lower than the European average throughout these successful 60 years, and lower even than in the U.S. Only in 1950 did Sweden’s tax burden rise to 20% of GDP, though that remained comparatively low.

But Socialism was fashionable in post-War Europe and Sweden was not immune. The 1970s were a decade of radical government intervention in society and in markets, during which Sweden doubled its overall tax burden, socialized a slew of industries, re-regulated its markets, expanded its public systems, and shuttered its borders. In 1970, Sweden had the world’s fourth-highest GDP per capita. By 1990, it had fallen 13 positions. In those 20 years, real wages in Sweden increased by only one percentage point.

Remnants of its earlier success remained, and the idea of following “the Swedish model” had already caught hold around the world. Fine, except the roots of this success were confused with Stockholm’s more recent big-government policies, which in fact were destroying the country’s enviable prosperity. This confusion also played into domestic debates, stalling reform for too long.

By the late 1980s, though, Sweden had started de-regulating its markets once again, decreased its marginal tax rates, and opted for a sound-money, low-inflation policy. In the early 1990s, the pace quickened, and most markets except for labor and housing were liberalized. The state sold its shares in a number of companies, granted independence to its central bank, and introduced school vouchers that improved choice and competition in education. Stockholm slashed public pensions and introduced private retirement schemes, keeping the system demographically sustainable.

These decisive economic liberalizations, and not socialism, are what laid the foundations for Sweden’s success over the last 15 years. After the reforms of the early 1990s, Swedes’ real wages increased by roughly 35% in a decade. And, as businesses have become more productive and people’s incomes have risen, living standards improved. More people eat at restaurants now, more people travel abroad, more people buy DVDs and new cars. More people get more.

The path to reform has, however, come only in waves. After the intense overhauls of the early 1990s, the pace slowed somewhat and it wasn’t until a center-right government returned to power in 2006 that free-market reforms picked up again. That center-right coalition, led by my own Moderate Party, was re-elected last year, after beating our leftist opposition by almost seven percentage points. The leftists’ campaign promise? To roll back economic reforms.

Even smarting from the financial crisis, Swedes turned the leftists down. Over the last four years, they have seen their borders opened for more labor migration, they have seen still more state-owned companies sold, and have seen their public authorities shrink in number. Stockholm has also cut property taxes and abolished the wealth tax, and instituted a new system of income-tax credits that lets working people with average incomes keep what amounts to an extra month of wages, after taxes, per year. Today, the state’s total tax take comes to 45% of GDP, from 56% ten years ago.

Meanwhile, unemployment benefits, sick leave and early retirement plans have all been streamlined to encourage work. The number of people receiving such welfare—which soared during the socialist decades—has fallen by 150,000 since 2006, a main reason for Sweden’s remarkably sound public finances. Stockholm has also introduced a law that empowers Swedes to chose their providers for health care and other public services. This has led to a robust surge in entrepreneurship within the health-care sector, where more competition is bound to improve services.

Challenges such as youth unemployment, inflexible housing markets, waiting lists for health services, and too-high taxes, still plague the country. So reforms that increase economic freedoms should and will continue—the results so far have been more than encouraging. That is the real lesson to be learned from “the Swedish model.”

Mr. Munkhammar is a Moderate Party member of the Swedish Parliament, and the author of “The Guide to Reform” (Timbro/IEA 2007).

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A vanishing breed | Janie B. Cheaney

WORLD Magazine | A vanishing breed | Janie B. Cheaney | Jan 15, 11.

What will happen to society if dismal marriage trends continue? | Janie B. Cheaney

Elizabeth Cole

I once enjoyed the privilege of visiting Greece, where antiquity is so thick even the Athens subway tunnels are museums. But it was at Mycenae that I felt history’s weight. And no wonder: Mycenae, stranded on the rolling plains of the southern coast, is one of the first beachheads of Western civilization.

It was from here that the Greeks sailed to Troy to wage their legendary war. According to Homer, the expedition almost failed before it started: Thwarted by unfavorable winds, King Agamemnon was driven to sacrifice his daughter Iphigenia to the gods, an act for which his wife Clytemnestra never forgave him. Ten years later, when the king returned, she and her lover murdered him—loosing a chain of events dramatized ca. 500 B.C. by the great Athenian playwright Aeschylus, in his Orestia trilogy.

Orestes is the prince of Mycenae, who feels duty-bound to kill Clytemnestra in revenge for his father. The Furies, ancient earth-­goddesses whose chief function is avenging blood, torment Orestes mercilessly until the sun god Apollo takes the young man’s part. The story becomes a courtroom drama posing this question: Which has greater weight, a blood relationship or a civil contract? Or, is the murder of the husband, not a blood relative, less of a crime than matricide?

The court decides for Orestes. This, according to Charles Hill in his book Grand Strategies, is literary notice of a huge milestone in human progress: the determination that marriage, not blood, is the foundation of civil society. God settled that question in Genesis 2:14, and every civilized culture has followed suit. It’s only in primitive societies that kinship takes precedence, often accompanied by feuds and vendettas.

With California’s Prop 8 under review, we’re rightly concerned about the legal future of same-sex “marriage.” But in the long run, that burning issue may be little more than a side show. The real problem is among heterosexuals.

A study by the National Marriage Project, disturbingly titled When Marriage Disappears, indicates that stable unions are vanishing in the very social strata where they once were strongest: the “moderately educated middle,” or high-school graduates with some college. “In the last three decades,” says project director W. Bradford Wilcox, “nonmarital childbearing, divorce, low-quality marriages and family instability all have been on the rise in middle-American homes. For instance, nonmarital childbearing among women with high school degrees more than tripled in the last three decades—from 13 percent in 1982 to 44 percent in 2006.”

The results are reduced earning power, greater stress, and troubled adolescence leading to a continuation of the cycle: “So the health, wealth and happiness of middle America is taking a serious toll.” The good news is that marriage rates among the more affluent and educated (about 30 percent of the population) have actually improved. But if trends continue, the gap between rich and poor will only widen, with an increasingly hopeless and tumultuous underclass creating havoc outside the gated communities of the happily married. (For more about the National Marriage Project findings, see page 61.)

Years ago, my daughter worked for entertainer Andy Williams in Branson. Part of her job was to be onstage, lip-synching choral background, while Andy sang a medley of his greatest hits. She told me that at every performance, when he segued into “The Hawaiian Wedding Song,” she could look into the audience and see gray-haired couples cuddling up in the darkness. Chances are, they were not all soul mates, but they’d molded to each other for 40-plus years. They were the epitome of “middle America” whose grandchildren Wilcox surveyed. Are they also the last of their breed?

We walk around all day with no thought for the ground under our feet. But if the earth turned to Jell-o, we’d notice. While a return to the tribalism and blood feuds of antiquity isn’t likely, social chaos looms. The reformation of our country begins at home.

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Public Unions take Hostages

No problems here, right?

By FRED SIEGEL

The turbulent years of the 1960s and ’70s are best known by the headline-grabbing civil rights and women’s rights movements. But there was another “rights” movement, largely overlooked, that has also had a profound effect on American life. The looming public-pension crisis that threatens to bankrupt city, county and state governments had its origins in those same years when public employees, already protected by civil-service rules, gained the right to bargain collectively.

Liberals were once skeptical of public-sector unionism. In the 1930s, New York Mayor Fiorello LaGuardia warned against it as an infringement on democratic freedoms that threatened the ability of government to represent the broad needs of the citizenry. And in a 1937 letter to the head of an organization of federal workers, FDR noted that “a strike of public employees manifests nothing less than an intent on their part to prevent or obstruct the operations of Government until their demands are satisfied. Such action, looking toward the paralysis of Government by those who have sworn to support it, is unthinkable and intolerable.”

Private-sector union leaders were also divided. George Meany, the president of the AFL-CIO from 1955-1979 who came out of the building trades, argued that it was “impossible to bargain collectively with the government.” Private unionists more generally worried that rather than winning a greater share of profits, public-sector labor would be extracting taxes from a public that included their own workers. But in the late 1950s, with the failure of the labor movement’s organizing campaign in the South, Meany’s own executive council insisted on the necessity of winning the right to organize public employees.

The first to seize on the political potential of government workers was New York City Mayor Robert F. Wagner. The mayor’s father, a prominent New Deal senator, had authored the landmark 1935 Wagner Act, which imposed on private employers the legal duty to bargain collectively with the properly elected union representatives of their employees. Mayor Wagner, prodded by Jerry Wurf of the American Federation of State, County and Municipal Employees (Afscme), gave city workers the right to bargain collectively in 1958.

Running for re-election in 1961, Mayor Wagner was opposed by the old-line party bosses of all five boroughs. He turned to a new force, the public-sector unions, as his political machine. His re-election resonated at the Kennedy White House, which had won office by only the narrowest of margins in 1960.

Ten weeks after Wagner’s victory, Kennedy looked to mobilize public-sector workers as a new source of Democratic Party political support. In mid-January 1962, he issued Executive Order 10988, which gave federal workers the right to organize in unions.

Getty ImagesThe scene in downtown Manhattan during a sanitation workers’ strike, 1968.

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Two young and militant public-sector unionists, Al Shanker of the American Federation of Teachers and Wurf of Afscme, both strong supporters of the still nascent civil rights movement, seized the opportunity. Shanker saw both teachers and African-Americans as second-class citizens fighting the old-line political bosses. He’d also called a brief teachers strike in 1960. Shanker called another strike in 1962 that shifted the balance of power from principals to teachers, where it has remained down to the present.

In 1958, there had been but 15 public-employee strikes nationwide, involving a handful of workers. By 1968, after the old guard in Afscme had been deposed by the so-called young Turks led by Wurf, more than 200,000 union members, mostly in local and state government, were involved in 254 strikes.

In 1968, amid rioting, civil rights and antiwar protests, Martin Luther King Jr. backed an Afscme strike by poorly paid, mostly African-American sanitation men in Memphis, Tenn. After King’s tragic assassination, the city quickly settled with the union.

In the 1970s, government-worker unions became a political venue for New Leftist, feminist and black activists hoping to carry on in the militant spirit of the 1960s. The divisions within organized labor over the Vietnam War allowed Wurf and his allies to take on the declining private unions of the AFL-CIO, whose leader Meany backed the war. Wurf made himself a key player in George McGovern’s 1972 presidential campaign, and public employees have had a lead role in Democratic Party politics ever since.

Public-employee unionism seemed to be moving from success to success—Afscme was gaining a thousand (mostly female) workers a week—until the summer of 1975. At that point there was a surge in strikes, and the government unions began to threaten Democratic officeholders.

On July 1, 1975, New York sanitation workers walked off the job, allowing garbage to pile up in the streets of a Gotham already in the throes of fiscal crisis. In short order, cops objecting to furloughs imposed by the city’s liberal Democratic Mayor Abe Beame shut down the Manhattan side of the Brooklyn Bridge, with marchers carrying signs that read “Cops Out, Crime In” and “Burn City Burn.”

On that same July 1, 76,000 Pennsylvania state workers went on strike against liberal Democratic Gov. Milton Shapp’s austerity measures. Afscme’s leader in Pennsylvania, Gerald MacIntee, told his members “Let’s go out and close down this God-damned state.” And in Seattle, the fireman’s union initiated a recall ballot on July 1 directed against the one-time union favorite, Mayor Wes Uhlman, who held back pay hikes in the midst of rising deficits.

Mr. Uhlman narrowly survived and he, like Beame and Shapp, calmed the situation by largely caving in to the striker’s demands. But a line had been crossed: With New York’s near-bankruptcy a visible marker, the peril posed by public-sector unionism became a problem for Democrats as well as Republicans.

The fiscal burden of public-employee unions briefly became visible again in the early ’80s, when many warned of a looming public-pension crisis. That crisis was averted by the stock market boom that began in 1982-83 and lasted until 2007-08. It is now back with a vengeance.

Restraining the immense clout that government-employee unions have accumulated over the past half-century will be difficult, but not impossible. Civil rights for African-Americans and women was a fulfillment of the universalist American promise as expressed in the Declaration of Independence. Collective bargaining by public employees was not rooted in deep-seated American tradition.

Instead, the decision to grant this privilege was a political decision designed to enhance the power of a pressure group whose interests, even many liberals assumed, would be at odds with those of the general public. Political decisions can be reversed.

Mr. Siegel is a scholar in residence at St. Francis College and a senior fellow at the Manhattan Institute.

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