US Navy Challenges Beijing In The South China Sea

WASHINGTON – The Obama administration does not have a stellar record either on national security issues or on upholding basic principles of international law. Just look at its retreat from Iraq, the tentative, in fact unserious air campaign against ISIS, and the near disaster in Afghanistan. Not to mention its passivity regarding Putin’s neo-imperial ambitions in Ukraine.

Freedom of navigation

Precisely because of this disappointing record, it is important to note Washington’s clear intention to affirm freedom of navigation in international waters in the South China Sea. This strong position on a matter of principle –protecting freedom of navigation– is a big deal. Indeed, if Obama is serious about upholding this cardinal principle of international law, this may put the US and China on a collision course.

Enter the US Navy

Today’s news is that the USS Lassen, a US Navy guided missile destroyer, openly and intentionally sailed within 12 miles off the Spratly Islands, in the South China Sea. The point was and is to challenge Beijing’s bogus claims that the islands belong to China and that no ships have the right to sail within what China claim to be its territorial waters.

What is the end game?

I applaud Washington’s move. But I am not sure that there is a clear end game here. The point of asserting freedom of navigation is that you have to keep doing it. One isolated gesture simply will not do it.

Since the Chinese will not unilaterally give up their “rights”, Beijing’s claims need to be voided by showing that they will not be enforced. And this means US and other vessels sailing through these waters claimed by China, routinely.

But this could become dangerous. What if the Chinese decide to react with force, claiming that this is only “self-defense” against an “American invasion”? Then, what next?

China’s build-up

Let’s go back a bit. Here is the story. For the past few years, the Chinese have been busy occupying several reefs and disputed rocks spread around the South China Sea. They have simply taken them over, sometimes forcing out vessels belonging to other countries, like Vietnam. They have built these reefs up, including the construction of ports and runways that can accommodate military aircraft. And now they claim that these artificial islands are, and have always been an integral part of China’s territory.

On the basis of this most extraordinary claim based essentially on nothing, the Chinese Government also claims sovereignty on almost the entire South China Sea where these various reefs and rocks are located. Beijing’s contention is that China has exclusive sovereignty on the waters around its islands (a 12 mile radius). By the same token, Beijing states that it also has a much larger Exclusive Economic Zone around them.

Bogus claims

According to international law, this would be indeed the case when we are talking about the coast line of a country, or real islands belonging to that country. The problem is that these are not real islands, and therefore they cannot be the basis for any territorial claims.

The additional problem is that, given the geography, there are other states that claim part of the those waters as their own. Taiwan, Vietnam, the Philippines and others have asserted that they should have control over at least some of the waters surrounding these rocks. And all the other parties agree that these territorial and maritime disputes should be settled through diplomacy and negotiations.

Well, the Chinese disagree. They have simply take over and established firm control over these rocks, turning them into Chinese islands.

Challenging America?

Now, let’s look at the broader context. How could this happen? America used to be a super power with a large and unchallenged naval presence in the Pacific. Twenty or thirty years ago China would not have done this. But now it did.

Is this reckless behavior, or was it a calculated move? Did Beijing act unilaterally counting on Washington’s weakness and passivity? Certainly, when Chinese diplomats observe Washington’s tepid reactions vis-a-vis Putin’s open aggression in Ukraine, it is easy to conclude that America is in retreat. Hence an opportunity to grab stuff and expand Beijing military presence in a strategic area, without any fear of retribution.

What next?

But now (unexpectedly?) Washington is taking a stand. The Obama administration, through Secretary of Defense Ash Carter, declared that China’s claims are invalid, and against international law. Sending a US Navy ship close to islands that Beijing claims belong to China is a clear signal. Needless to say, Beijing loudly protested, accusing America of creating a crisis.

OK for now. But what about later? If the US Navy keeps doing this, Beijing may capitulate and give up its preposterous claims. Or it may not capitulate. It may instead decide to “do something” to assert them.

Well, you get the picture. You see where this can go. We are talking about a possible military escalation, with the possibility of Chinese and American vessels colliding, or even shooting at each other.

China cannot retreat

If the Chinese simply miscalculated, if they engaged in this significant build-up in the South China Sea on the assumption that a weak America would do nothing, then we may have a real problem. Having gone this far, China cannot simply quietly retreat, and pretend that nothing ever happened. Talk about “losing face”.

But if America is serious about asserting freedom of navigation in what are indeed international waters, then we may get into unknown territory. America still has an impressive Navy. But not as impressive as it used to be. Besides, the action is taking place close to China. And this gives beefed up Chinese naval forces an inherent tactical advantage.

This may get ugly

As of now, military clashes, (let alone a real war), between the US and China are a pretty remote possibility. But when you have two navies with orders to challenge each other because governments have to stick to their script, sparks may fly.

Stay tuned, because this may get a lot worse.

China Exports Excess Capacity Below Cost

WASHINGTON – In order to build strong defenses against the ill effects of the 2008 Great Recession China launched a massive domestic investment program funded by a gigantic stimulus package. This may have saved China from the direct impact of the global financial crisis; but the cure created major problems that now affect China and all its trading partners.

Too much stimulus

Simply stated, the gigantic stimulus supported mega construction projects across China. This in turn created unprecedented new demand for cement, steel, copper, wood products, plumbing, electrical fixtures and everything else that is needed in construction.

Beyond this, easy credit ordered by the Chinese authorities unleashed a huge demand for more cars. More cars meant more tires. Hence the explosion of demand for rubber. This led entrepreneurs in Indonesia and Thailand to start new rubber tree plantations.

Over capacity

As it usually happens, new supply financed by easy credit outpaced actual demand, in a major way. If we fast forward to today, the picture is rather ugly. In China today there is enormous over capacity in almost all economic sectors.

In a normal country the weaker producers would be bought by the stronger ones, or they would simply shut down, with unpleasant consequences for millions of workers who would lose their jobs. This would probably cause a recession.

Export the excess production

But this is China, not a normal country. Large scale bankruptcies and lay-offs are out of the question, for political rather than economic reasons. Keeping moribund companies afloat, with everybody still on payroll, is mostly a political issue. Therefore banks keep financing essentially bankrupt enterprises that keep producing stuff for which there is no domestic demand.

And so what happens to all this excess production? You guessed it, it is exported. In fact, since it is priced below its actual cost, it is dumped.

And so in America, (according to a detailed WSJ report), we have now an invasion of  super cheap Chinese tires, while inexpensive imported Chinese steel is causing US producers to go out of business.

Horrendous distortions

Of course low prices are good  for US consumers. But these are not low prices due to more efficient production methods. These cheap imports are the result of horrendous distortions created by improvident Chinese policy-makers. They thought they had  devised a winning strategy to avoid the impact of the global financial crisis.

Whereas, it turned out that their stimulus package was poorly designed. Massive investments led to over capacity and to an abnormal growth of demand for imported raw materials. Now that the party is over in China, Beijing decided that the smart thing to do is to export all this subsidized excess capacity, this way causing major troubles for US producers.

Dumping is illegal. But it is also difficult to prove. And there is hesitation in Washington about the prospect of starting a trade war with China.

Not a market economy

Whatever the course of action that will be decided by Washington policy-makers to deal with Chinese dumping, at least one thing is clear. China is not a true market economy.

In China credit is allocated for political reasons by state owned banks. Over production is encouraged and then subsidized. Virtually dead companies are kept alive in order to avoid unpleasant social and economic dislocations that might  morph into political unrest. And money losing companies are encouraged to export at below cost prices the excessive capacity encouraged by the central authorities.

This is Chinese “capitalism” for you.



April 4th Was NATO’s Anniversary

WASHINGTON – April 4th 2015 came and went. Nobody paid any attention to this date. And why should they? Well, because April 4th is the anniversary of the Treaty of Washington, the treaty that established the North Atlantic Treaty Organization, universally known as NATO, or the Atlantic Alliance.

NATO’s rationale

If we look back at April 4th 1949 we can see that there were many good reasons for North America (The United States and Canada) to join a few, (fragile and virtually defenseless), European democracies in a defensive alliance. NATO’s main objective was to signal to the Soviet Union that any attempt to subjugate the part of Europe Moscow did not control (it had gobbled Eastern Europe) would have been met by serious force.

All in all NATO worked. Despite many internal disagreement on just about everything, (strategy, costs sharing, priorities, military procurement policies, and of course the role of nuclear weapons), NATO kept the peace in Europe. It was an armed, uneasy peace. But it was peace. West Germany, France and Italy were not overrun by Soviet tanks forward positioned in East Germany, and in other Warsaw Pact countries.

But then the Soviet Union and its Empire suddenly collapsed at the end of 1989. It all started with the fall of the Berlin Wall in November 1989, and it ended with the formal demise of the Soviet Union itself in December 1991. The USSR was replaced by the new Russian Federation, that is Russia minus all the Republics, from Estonia to Uzbekistan, that had been forced into the former Soviet Union.

Keep NATO after 1989

Notwithstanding the end of the 40-year-old Soviet threat, Western leaders decided that NATO should continue, in as much as it provided the best vehicle for security cooperation between North America and Europe. And NATO did not just continue, it expanded, in a major way. Bit by bit it accepted as new members (almost) all the semi-colonies of the old Soviet Union, from Estonia to Bulgaria.

Indeed, even after the end of the Cold War, there seemed to be a good political rationale behind the decision to give a “new home” to the free but still disoriented new democracies of Eastern Europe. The creation of a Western political and security connection seemed to be a good way to strengthen their new democratic foundations, while reassuring them that, whatever might have happened in Russia, as full members of the Western Club, they would be safe.

What is the purpose?

That said, a military alliance needs a shared objective. In the old days of the Cold War it was all about deterring the Soviet Union. (In fact, an old cynical NATO joke provided a different rationale. “NATO’s purpose is to keep the Soviets out, the Americans in, and the Germans down“).

But what is NATO’s purpose today? Hard to say. There have been limited operations in the Balkans, a complicated, costly and inconclusive engagement in Afghanistan. But what is NATO’s mission, really? Ask anybody in the streets of New York or Amsterdam, or Lisbon, and you will get nothing precise.

Preserve Western Civilization

I can see a good mission, and it is clearly written in the preamble to the April 4th, 1949 Treaty of Washington:

“The Parties to this Treaty reaffirm their faith in the purposes and principles of the Charter of the United Nations and their desire to live in peace with all peoples and all governments.

They are determined to safeguard the freedom, common heritage and civilisation of their peoples, founded on the principles of democracy, individual liberty and the rule of law. [Bold added]. They seek to promote stability and well-being in the North Atlantic area.

They are resolved to unite their efforts for collective defence and for the preservation of peace and security.”

Yes, at least on paper, the mission was not (and it is not) just about “keeping the Soviets out” through the threat of American intervention in case of an armed attack against Western Europe, it was and is about safeguarding the values of our shared Western civilization “founded on the principles of democracy, individual liberty and the rule of law.”

No longer united

The NATO preamble is still there, for all to see. But I do not see that many joint efforts aimed at reinforcing the supposedly shared values of our (once revered) Western Civilization.

The fact is that, while still technically allies, Europe and America have drifted apart.

Sure enough, there are still plenty of strong connections between the two sides of the Atlantic: business, trade, culture, education, and tourism. But there is no longer a shared sense of a common heritage that we wish to preserve and uphold.

Just to name one, I suspect that “individual liberty” means vastly different things in semi-socialist Europe and in libertarian America.


And so NATO continues, but on a very low key, and within general indifference –on both sides of the Atlantic. No wonder that April 4th 2015 came and went, without public ceremonies aimed at celebrating the most important alliance ever created and sustained in the modern era.

Central Banks Administer Monetary Morphine

WASHINGTON – The financial and fiscal “New Normal” across the countries touched or devastated by the Great Recession of 2008 triggered responses by Central Banks that resulted in massive injections of liquidity. Interest rates have been effectively suppressed. In search of gains, investors have bought stocks. In America this caused Wall Street to regain all lost territory, and then move on to new historic highs.

Quantitative Easing for everybody

Now, while the US Fed mercifully stopped a few months ago, all the other Central Banks are also doing QE, Quantitative Easing, hoping that more liquidity will encourage more borrowing to finance investments leading to growth.

The American example is not that good. Yes, the US economy is finally growing again. But not in any spectacular way, (2.4%). This has been the worst and slowest economic recovery on record. Even though unemployment is going down to semi-acceptable levels, (a bit above 5%), the total US labor force is now smaller than it used to be, while too many new jobs are part-time and low-paying. This translates in stagnating or declining standard of living for millions of Americans. If is the best that QE can do in America, in an economic context that at least is not below average, I would not hope in much better results elsewhere.

Good Luck!

All this notwithstanding, the European Central Bank is now launching its own QE and Japan already started. Good Luck!

Speaking of Japan, the most remarkable thing is that in this country (once believed to be the wave of the future) the absurd has become normal.

Prime Minister Shinzo Abe believes that he can re-energize the economy by printing money and devaluing the currency. The point is that this remedy never works, unless it is accompanied by new productive investments that increase competitiveness and overall productivity.

Absurd Japan

And we do not see much of this in Japan. On top of that, even with absurdly low interest rates, Japan’s national debt has become so huge that it will eventually crush the country. Think of this: Japan’s debt is 240% of GDP. Debt service now absorbs 43% of all revenue. Which is to say that when you add mandates and other fixed expenditures, the Japanese government has zero discretionary spending opportunities. No investments. No nothing. Given all this, buying more Japanese bonds is either an act of charity, or the expression of total stupidity.

And yet this absurdity does not get much coverage. Japan is still the third biggest economy in the world. “Yes, it is experiencing some problems due to sluggish growth, but the Government is working on this, and markets hope that things will get better.” Really?

Well, the fact is that many Japanese are taking their money elsewhere, to Singapore for instance. The smart people now know that the boat is sinking, and are looking for alternatives. But the rest of the world contemplates all this without any uneasiness.

Fixing Greece?

By the same token, markets look at Greece trying to renegotiate the terms of its bail-out as if this were a “normal” transaction. The reality is that Greece is sunk. It is bankrupt. It is high time we would recognize reality. High time to understand that the Euro is OK only for strong economies. Greece, Italy, Spain, Portugal and France do not belong. But we hear none of this.

US entitlement spending

As for America, the ticking bomb is the slow but continuous growth of entitlement spending. Because of political gridlock in Washington, nothing will be done until Obama is President. But the problem, while currently ignored, is still there. As the national debt keeps getting bigger, (now well above US $ 18 trillion), the solutions down the line will be more painful. But, for the moment, all is well.

Monetary drugs

Welcome to the “New Normal”. Instead of minding the store, now governments do nothing, while Central Banks administer a lovely cocktail of monetary morphine and cocaine. Therefore, no anxiety and no pain.


Walking By Ford’s Theatre, Where Lincoln Was Shot

WASHINGTON – After my meeting I decided to walk to Chinatown, to an old emporium where I bought a flower pot. From there I walked up to the corner of 10th Street. And there I saw the Ford’s Theatre sign. This is a historic landmark. This is the place where President Abraham Lincoln was shot by John Wilkes Booth, as he was watching a play, on April 14, 1865. I do not know why I felt compelled to turn left and walk towards the theatre’s entrance.

As I got there, there was a guide talking to a group of teenagers: “….The president’s body guard left Lincoln alone in the theatre. He believed he was safe there, and he went drinking in a nearby tavern… Booth knew the play. So he waited until the plot would cause a lot of laughter and noise. At that point he walked into the president’s theatre box and he shot Lincoln with a derringer pistol…”

Yes, we know the rest of the story. As the guide kept talking about what happened after Booth shot Lincoln, I looked across the street at the Petersen House. This is where the dying President was taken. And this is where Lincoln died, only 5 days after Lee’s surrender at Appomattox. As I watched the house, I remembered when I last visited it, a few years ago. And there all visitors can see the bed on which Lincoln died.

As the guide kept describing to his young audience Booth’s escape from the theatre, I thought more about President Lincoln’s tragic death, and I was overtaken by a wave of sadness.

“Ich Bin Ein Berliner”, (JFK, 1963). “F***k The EU”, Victoria Nuland, US Assistant Secretary Of State For European Affairs, 2014

By Paolo von Schirach

February 9, 2014

WASHINGTON – There was a time in which Europe was –with cause– at the very top of Washington’s priorities. Now the NSA taps the phones of supposedly friendly European leaders (Germany’s Angela Merkel), while Victoria Nuland, the US Assistant Secretary of State for European Affairs, in a telephone conversation with Geoff Pyatt, the US Ambassador to the Ukraine, dismissed the European Union, ostensibly a large group of friendly countries, with a disparaging comment, most likely intercepted by Russian intelligence, (“f…k the EU”). She said this in the context of the simmering crisis in the Ukraine. Ms. Nuland clearly believes that the EU is pretty close to useless in any effort aimed at preventing Moscow’s objectives to entice the Ukraine into a much closer association with Russia.

European-American relations: not what they used to be

Much has changed in European-American relations, and not for the better. During the lengthy Cold War Europe was the potential battleground of an East-West military confrontation. NATO was the tangible instrument of America’s strong committment to European security. Whatever happened in Europe was of great concern among key policy-makers in Washington.

After the Soviets and the East Germans erected the Berlin Wall, (June 15, 1961), president John Kennedy went to West Berlin where he gave his famous “Ich bin ein Berliner” speech”, (June 26, 1963), right outside of the Rathaus Schoneberg. “I am a Berliner” Kennedy said to his German hosts. Of course, he meant to say that the Americans stand together with the embattled Germans. America and Germany are united in this great fight for the defense of freedom against Soviet tyranny. Indeed.

Marriage of convenience

But this unity between the two sides of the Atlantic was not real. Deep down, the marriage between America and Europe was a marriage of convenience, and not of real conviction. It all boiled down to this: Europe needed American military protection; Washington did not want to see Soviet domination extended to Western Europe. Hence the creation of NATO in 1949, lots of US troops in West Germany and elsewhere, later on the deployment of US nuclear weapons in Europe, and so forth.

Of course, at the time many hoped that the Atlantic Alliance would develop into a more meaningful “Atlantic Community”, that is a group of Western countries united by shared values and a common purpose: the promotion of political and economic freedom.

No “Atlantic Community”

But this evolution into a real “Community” never took place. And this is because the degree of commitment to the values that supposedly constitute the glue that unites Europe and America was and is unequal. America acts on their behalf. Europe is usually satisfied with talking about them.

In the end, the vanishing of the Soviet Union took away the rationale for close European-American ties. Sure enough, the NATO Alliance is still there. In fact it has been enlarged. It now includes most of Eastern Europe and the Baltic States. But it is clear to all that this Alliance is an almost meaningless shadow, as it has fewer and fewer military means and an ill-defined mission.

Declining Europe…

At the same time, it is clear that there is no deeply shared common purpose uniting America and Europe. Europe is slowly declining. Its economy does not grow. Its societies are concerned mostly with social safety nets: pensions and care for the larger numbers of senior citizens. America, is also getting older and slower. But it has a bit more energy. While Europe talks, America is more prone to act.

…Dismissive America

Hence the dismissive comments made by Ms. Nuland about the EU and it slow-moving diplomacy on an urgent matter like the crisis in the Ukraine. America wants to act to prevent the Ukraine from falling back into Russia’s orbit, while Europe is hesitant.

Be that as it may, sadly Ms. Nuland’s (private but now public) disparaging comment most likely captures what the Washington elites really think about Europe: a slow-moving, indecisive blob that can be assertive only when defending its core economic and trade interests.

Forget about the “Atlantic Community”. Forget about shared values and ideals. And –most of all– forget about shared policy agendas.


Just By Engaging In Negotiations About Its Nuclear Program Iran Has Won The Public Relations Battle

By Paolo von Schirach

February 6, 2014

WASHINGTON – Whatever the final outcome of the Iran nuclear negotiations, Iran has already won. Just by hinting about a desire to reach a deal, it has received a huge prize: moral rehabilitation. All of a sudden, a more friendly looking president Hassan Rouhani is described as the embodiment of a gigantic –and certainly benign–policy shift. Iran, it is now clear, wants peace with the West –really. You want proof? Well, he says he wants a deal. What more do you want? 

Negotiations are good, give diplomacy a chance

Well, sensible people would want more, a lot more than just generic declarations. And so far it is clear that Iran, at best, is prepared to freeze its advanced nuclear program in place, a totally meaningless gesture because the country would retain all it needs to resume creating weapons grade material at  a moment’s notice. But the world is mostly happy. “Look, there are negotiations.  The Americans and the Iranians are sitting at the same table, and they are talking. There is clearly a thaw in relations. This must be good.”

No real concessions

I doubt it. The Iranians are prepared to make symbolic gestures in exchange for fewer or no sanctions. I believe that they have made a shrewd calculation about how tough the West really is. And they have concluded that through a charm offensive it is possible to break the sanctions front without giving anything up.

They will keep saying that they have no intention to make nuclear weapons. But they want to keep in place a program that is inconsistent with their declared purpose of pursuing only a civilian use of nuclear technology. And so they are adamant about their will to keep in place all their capabilities to easily build nuclear weapons at any point in the future, this way retaining their prestige and influence in the region. In the meantime, all those in the West who are salivating at the prospect of business opportunities with Iran will lobby their governments so that they will accept any deal, including a bad deal.

Cracking the sanctions front

The current Washington official policy stance whereby “if Iran misbehaves we are ready to put in place even tougher sanctions“, may deter the Iranians for a while. But watch out. When we all get used to doing business with a “normal” Iran, it will be very difficult to recreate a strong, pro-sanctions united front. And, without a united front, sanctions are meaningless.

The Iranians know all this and most likely are counting on this outcome. A charm offensive is the best tool to create cracks in what has been until yesterday a strong pro-sanctions front that really damaged the country’s economy. And consider how easy this is. Just by looking a bit more reasonable, they have already won the public relations battle.

Pariah state no more

Think about it. Beyond its nuclear program clearly in contravention with the non proliferation regime, Iran is a state that sponsors terrorism against Israel. It is the principal ally of Assad in Syria, and the main threat to the security of the region. And yet now they get away with all this simply via the election of a new president who smiles and says he wants peace.

Not a bad comeback for a pariah state.

Washington DC Mayor Vincent Gray Vetoed “Walmart Bill”

By Paolo von Schirach

September 13, 2013

WASHINGTON – Washington DC Mayor Vincent Gray vetoed the “Walmart Bill” passed by the City Council with an 8 to 5 vote, calling it a “job-killer” and a “bill that will deal a huge blow to economic development”. Pretty strong language. The ostensibly noble intent of the bill is to guarantee a “living wage” of at leat $ 12.50 for all workers in the retail sector. In reality this bill specifically targets Walmart, as it excludes unionized chains that already operate in DC. The retail giant, (the largest in the world), is planning to open 6 centers in the District of Colombia. Three of them are under construction, and three more are on the drawing boards. Walmart already indicated that, if this bill becomes law, it will scale down or cancel altogether its plans for entering the DC market.

Higher wages kill jobs?

The laudable goal of a higher minimum wage is of course to improve the living conditions of the working poor. It is true that there are millions of Americans who have a job but have a hard time making ends meet because of very low-income. Still, as Mayor Gray argued in his veto letter to the City Council, by making it a lot more costly for new retailers to operate in the Distric of Columbia, the outcome of this law will be losing Walmart altogether. 

The retailer will build stores elsewhere. And so, the net effect of legislation that would like to improve living standards for the working poor will be to kill new job opportunities altogether. If Walmart cancels its DC expansion plans, there will be no new jobs, whatever the minimum wage mandated by law. Besides, the city would lose tax revenue, while residents in poor neighborhoods would lose the chance to benefit from Walmart’s abundant offerings at comparatively low prices.

DC needs more jobs

Mayor Gray wrote in his letter to the City Council that Washington DC needs all the new jobs it can get. In the long run, it may be a good idea to progressively raise the minimum wage, currently at $ 8.25, for all workers. But to target large retailers by forcing them to pay higher wages (while exempting others) is the best way to convince them to go elsewhere; a net loss for the city in terms of employment, tax revenue and new shopping opportunities for chronically under served poor neighborhoods. 

Sustain this veto

The proponents of this bill would need an additional vote in the City Council to override Mayor Gray’s veto. For the sake of low-income DC residents, let’s hope that they will not get it. Low-income jobs are not a great prospect. But no new jobs and no affordable shopping for thousand of residents is an even worse one.

Let’s be clear, Walmart is not a charity. But its stores will improve quality of life in poor DC neighborhoods.

From Beijing To Washington People Cry Out For Good Governance – Professional Politicians In Developing And Developed Countries Are Often Behind The Curve

By Paolo von Schirach

March 10, 2013

TRAVELING BETWEEN EMERGING MARKETS – In the developing world, a few decades ago the cry was for “Independence” and “Freedom”, and then “Justice”. Now it is mostly about the more prosaic yet far more tangible issue of “Good Governance”. Governance is a catch-all term that encompasses quite a few things: clear rules, transparency, accountability, honesty, (that would be the opposite of rampant corruption), institutions capable of delivering services, and the implementation of sound policies that actually improve lives. This is about “Value for Money”. Taxpayers want to see what elected leaders actually do with the funds they raise through taxation.


The rising middle classes made out of professionals and entrepreneur in what experts call “Emerging Markets” generally hold a dim of view of their elected leaders. They are judged rather harshly. Either dishonest or incompetent. Opinions collected here and there: “They said they would improve the city. But nothing happened. They convene a conference, organize workshops, and have a big lunch. But nothings happens”. “On a scale of 1 to 10, I would give this government a 4 when it comes to its ability to deliver”.

From China To Europe

Even in fast growing China people demanding transparency are getting louder. Yes, they also want transparency. Believe it or not, some activists have been told that data about soil pollution in China is a “state secret”; and therefore it cannot be released to the public. Until not too long ago the state refused to publish real data about air pollution, fearing that the public might react badly once the truth about intolerable levels became known.

In Europe it is not that different. Despite strong “anti-everything” populist messages in countries badly hit by the debt crisis, there is a widespread feeling that many states have been ruled  by professional politicians who are either crooked or incompetent. In fact, in many cases it is both. Witness the emergence in Italy, out of nothing, of the anti-establishment Party 5 Stelle created by comedian Beppe Grillo.

Gridlock in America

And what about America? Over there, an otherwise brilliantly conceived  system of “checks and balances” has morphed into perpetual political and policy gridlock on account of mediocre leaders in both parties now hostages of extreme ideologies that make pragmatic compromise virtually impossible. America’s Government has become a giant, mostly inefficient, money eating machine that delivers very little value for money. Beyond that, an American political leadership made out of lawyers who love procedures and do not understand policy cannot competently lead a knowledge society that can prosper only if driven by pro-growth, pro- innovation policies.

Governing is hard

In the end, it comes down to this. Governing is hard. Free people demand a lot: sensible policies, accountability and good management of tax payers money. But Governments are not run by corporate managers. They are run by politicians who contest elections making outlandish promises; therefore creating expectations that cannot be fulfilled, especially by public institutions that are far too often under resourced.

Hence a state of semi-perpetual disappointment. Of course, if you are a Hugo Chavez devotee in Venezuela, you have reasons to believe that Chavez was a good President who really wanted to help you. And he did help the poor. But he did so very badly, creating a semi-dictatorship; while showing how incompetent he was as an economic policy steward. In this oil rich country oil production actually went down under Chavez.

Striving for social justice and fairness is good. But good leaders have to mix these noble goals with accountability, transparency and overall competence. As I said, governing is hard. Governing well is like being a pianist virtuoso. Many aspire, very few succeed.

America Stagnates – Global Competition And Lack Of Pro-Growth Tax Policies Stifle The Economy – Urgent Need Of Policy Changes; Will The President Lead?

[the-subtitle ]

By Paolo von Schirach

February 7, 2013

WASHINGTON – The American economy has yet to recover from the spending binge that led to the 2008-2009 financial collapse. Simply stated, most American households are spending less as they are trying to pay back the debt they accumulated during the go-go years. And they are doing so while their homes (housing recovery notwithstanding) are worth much less.

Painful de-leveraging

As US GDP is driven mostly by consumer spending, thrifty consumers are bad news for the economy. Hard to say how long it will take for this painful de-leveraging process to lead to more acceptable levels of household debt, an essential precondition for higher level of consumer spending in the future.

Competition from low cost Asian workers

But this is not all. As the financial and housing debacle destroyed the value of real estate, while everybody got into debt, America was also hit badly by systemic global labor market changes whose net effect has been and will be to eliminate many jobs while hurting the earning power of the US middle class.

Whatever the at times grotesque demonization of “outsourcing” as a sinister plot hatched by evil US corporate leaders, the truth is that in the global market place there are now hundreds of million of new, able bodied Asians workers. Most of them are reasonably skilled and willing to do the very same jobs Americans do at a fraction of the cost. This is a fact. While cheap labor advantages are not for ever, (indeed we already see wages moving up in parts of China), for the moment they determine the location of many labor intensive economic activities.

Low labor costs, combined with ”hyper-connectivity” provided by inexpensive communications, plus reliable and lean supply chains made transferring manufacturing to Asia possible. As a result of this gigantic change, many US middle class jobs have disappeared, while there is no chance for wage increases for employed US workers who have to compete with cheaper Asians.

More US manufacturing

As for the hopes of a US manufacturing renaissance, they may actually be real, at least in energy intensive sectors. Some corporations want to relocate to the USA in order to take advantage of low electricity prices due to abundant and cheap American natural gas. However, a few more factories do not translate into more jobs. IT systems, automation and more robots are actually eliminating factory jobs at a fast pace.

No innovation, mediocre education

To add more misery to the picture, the American marvelous technology/innovation engine has stopped. At the moment, we have no great breakthroughs opening up entirely new fields, just as it happened with the IT revolution in the 1980s and 1990s.

And if you really want to be pessimistic, you have to add a mediocre to bad public education system that produces sub par high school graduates, many of whom end up getting a semi-worthless college degree.

Disappointing public policy

In order to reverse this economic stagnation, we need better education, more private and public resources devoted to R&D and a tax system that encourages business creation.

But instead we have a semi-broken Washington government machine that is not even capable of passing budgets, let alone frame new pro-growth policies. Due to bitter ideological feuds, the President and the Congress are able at the very best to pass short term stop gap measures, so that America will not go into default and so that we do not need to shut down the Federal Government. And these band aid deals last for just a few months.

Indeed, today’s “policy debate” is about the short term and long term consequences of the “sequester”, an emergency, across the board spending cut provision encompasing all discretionary spending (defense and non defense) that will soon kick in lacking broader agreements on spending and taxes between Democrats and Republicans. And we call this governing?

We know what needs to be done: tax and entitlement reform

And yet, all the centrists and all the smart economic and fiscal policies experts in Washington know exactly what needs to be done. There are Blue Ribbon Commissions Reports and plenty of studies generated by think tanks that provide the basis for substantive reforms.

In brief: America badly needs tax reform based on simplification and the closing of loopholes designed to protect special interests. A modern tax code will create incentives to create new enterprises and to invest in future technologies. At the same time, America needs a long term, bipartisan agreement on entitlement reform that will take into account the growing number of seniors (and therefore the cost of programs dedicated to them), while trying to reform health care, so that its costs will stop growing at a faster pace than the economy. Entitlement reform can and should be phased in gradually, without hurting current recipients. But it needs to be done.


A new, credible and sustainable tax and fiscal reform package that will encourage economic activities, while signaling the beginning of a real inflection in America’s public spending, over time would do wonders to re-inject confidence in the system.

Confidence, in turn, will stimulate investments and business growth. All this has been said by wise people many times. Remember Simpson-Bowles and their “Debt Commission” December 2010 Report? It’s all in there. It is time for Washington, starting with the White House, to lead and take action.