international capital flows

The Lost[?] Promise of International Capital Flows

Those of us card-carrying neoliberals who pushed for large-scale opening of capital flows in the early 1990s had a particular vision of the future in our minds' eyes--a vision of the future did not come to pass. We looked at how extraordinarily strongly the world's system of relative prices was tilted against the poor: how cheap were the products that they exported, and how expensive were the capital goods made in the post-industrial core that they needed to import in order to industrialize and develop. "Why not free up capital flows and so encourage large-scale lending from the rich to the poor?" we asked. Such large-scale lending might cut a generation off the time it would take economies where people were poor to converge to the industrial structures and living standards of countries where people were rich. Certainly such large-scale borrowing and lending had played a key role in the economic development of the late-nineteenth century temperate periphery--Canada, the western United States, Australia, New Zealand, Chile, Argentina, Uruguay, and South Africa--more than a century ago.

But the future we saw did not come to pass. Instead of capital flowing from rich to poor, it flowed from poor to rich--and overwhelmingly in recent years into the United States of America, whose rate of capital inflow is now the largest of any country, anytime, anywhere. Central banks that sought to keep the values of their home currencies down so that their workers could gain valuable experience in exporting manufactures to the post-industrial core, first-world investors who feared sending their money down the income and productivity gap after the crises of Mexico '95, East Asia '97, and Russia '98, techno-enthusiasts chasing the returns of the American technology boom, the third-world rich who thought a large Deutsche Bank account would be a good thing to have in case something went wrong and they suddenly had to flee the country in the rubber boat (or the Learjet)--all of these fueled the flow of money into the United States, which was thus enabled to invest much more than it managed to save. The U.S. economy became, and remains, a giant vacuum cleaner, soaking up all the world's spare investible cash.

And so those of us who still wish to be card-carrying flag-waving advocates for international capital mobility are reduced to two and only two arguments. First, and most important, capital controls create the setting for large-scale corruption. People who badly want to move their capital across borders can't--unless they can find some complaisant bureaucrat. A well-functioning market economy needs to minimize the incentives and opportunities for corruption or it will turn into something worse. Second, perhaps the inflow of capital into America was and is justified: perhaps there is something uniquely valuable about investments in America today. (But in that case, if these investment opportunities are so great, why aren't Americans themselves saving more--both privately and publicly--to take advantage of them?)

1960-85 was the era in which development was to be financed by public institutions like the World Bank because market failures and distrust of governments made it very hard for poor countries to borrow on the private market. 1985-2000 has been the era in which development was to be financed by private lending to countries that had adopted the market-friendly and market-conforming policies that were supposed to lead to high returns and rapid growth. The first era was not one of unqualified success. And looking at the reverse inflow of capital into the United States, I cannot say that the second era has been one of unqualified success either. It is very nice that Mexican workers and entrepreneurs are gaining experience in export manufactures, and exporting enough to the U.S. to run a trade surplus. But the flip side of the trade surplus is the capital outflow. Should capital-poor Mexico really be financing a further jump in the capital intensity of the U.S. economy?

It is not possible for a card-carrying neoliberal like me to wish for any but the most minor of controls to curb the most speculative of capital flows. Capital markets can get the allocation of investment badly wrong, but governments are likely to get it even worse, and the incentives to corrupt bureaucrats do need to be kept as low as possible. But the hope for a repetition of the late nineteenth-century experience, in which core investors' money gave peripheral economies the priceless gift of cutting decades off the time needed for successful economic development, has--so far--proved vain.

Posted by DeLong at 11:58 PM | Permanent

reinventing the bazaar

'Reinventing the Bazaar': Designing Markets

By BARRY GEWEN

ere is the perfect book for the Age of Enron. ''Reinventing the Bazaar'' doesn't suggest immediate solutions for cleaning up the mess in Texas -- it was written well before the scandal broke -- but it provides a long-term perspective, an intellectual framework, for understanding what went wrong, how we should be thinking about correctives and what a properly functioning market economy should look like.

John McMillan, a professor of economics at Stanford University's Graduate School of Business, is more than a proponent of free markets. He is a celebrant, an enthusiast. He delights in taking us on an economist's tour of the world -- introducing us to the Dutch flower market in Aalsmeer; the centuries-old camel fair of Rajasthan, India; the brave, persistent vendors of Accra and peddlers of Hanoi, who keep coming back despite the brutal efforts of their governments to suppress them.

Markets, McMillan explains, empower people by encouraging autonomous decision making and individual participation; in the jargon of the moment, they are ''proactive.'' Markets generate productivity and efficiency, allowing resources to flow where they can most usefully be employed. They are flexible in ways that no centrally planned system can match. ''For poor countries,'' McMillan writes, ''they offer the most reliable path away from poverty. For affluent countries they are part of what is needed to sustain their living standards.''

Put two people together and it won't be long before one of them is figuring out what he can sell to the other. Markets emerge under the most dire conditions. Rwandans living in refugee camps following their genocidal civil war found ways to set up food exchanges and general stores. British prisoners during World War II swapped their Red Cross rations among themselves, using cigarettes as a form of currency. Rembrandt helped create an art market in 17th-century Holland. Mozart entered the marketplace to escape the domination of patrons and maintain his artistic freedom.

So far, so familiar. But McMillan has another shoe to drop. Markets may arise spontaneously as ''the most potent antipoverty engine there is,'' yet as they develop, becoming more complex, they need rules and structures to perform properly. Sometimes the rules will come from the participants, working together in their common interest. The wholesale diamond trade of New York City is regulated by the Diamond Dealers Club, which sees to it that oral agreements are adhered to. The New York Stock Exchange originated at the end of the 18th century in the closed auctions of 24 brokers who had discovered that free riders attending the daily outdoor auctions on Wall Street were distorting the actual prices of stocks (and undercutting commissions).

The most important, most necessary regulator, however, is the state. Markets achieve their full potential, McMillan insists, only if the government is providing infrastructure. He identifies five conditions that government must guarantee if markets are to flourish: information has to flow freely; people have to be able to trust one another; competition must be assured; property rights must be protected; and side effects like pollution have to be controlled. Without state intervention, markets can scarcely grow beyond primitive face-to-face transactions. The libertarian utopia of complete laissez-faire does not give you prosperity, it gives you Somalia. In 2000, five years after the United Nations had departed, Somalia was a country without a government. No taxes were being collected, and consequently the number of small businesses exploded. Yet the economy has not been a success, and will not become one. Businesses have to dispose of their own garbage, generate their own electricity, find their own sources of water. In the absence of a police force, protection money has to be paid out. Inefficiencies prevail.

McMillan is waging a two-front war here, battling against those who think markets are inherently exploitative and those who think markets can do no wrong. Markets, he writes, are human institutions, with human imperfections. They do not necessarily work well, and they are ''too important to be left to the ideologues.'' Without effective government oversight to assure good corporate market behavior, we can expect two, three, many Enrons. And everyone will suffer as trust declines and investment shrinks. ''Countries with stronger investor protections have bigger capital markets,'' McMillan points out. ''The efficacy of the stock market varies with how activist the government is in setting the platform.'' Ronald Reagan once famously declared, ''Government is not the solution to our problem; government is the problem.'' Ronald Reagan was wrong.

He was wrong because, as McMillan shows, there are no easy answers. Economies are complicated, and the interactions between governments and economies are also complicated. Decisions must be made pragmatically, on a case-by-case basis. ''Reinventing the Bazaar'' is full of examples. Why, for instance, did Silicon Valley become the center of the computer industry and not Route 128 in Massachusetts? Experts would have predicted the opposite. But Massachusetts had an intellectual property law that prohibited employees from taking the knowledge they had acquired in their current jobs to new jobs. In California, which had no such law, job-hopping was rampant. Individual companies suffered because knowledge they had developed was widely shared. But the industry as a whole prospered. ''A subtle aspect of market design, in other words, was a crucial element of Silicon Valley's success.'' Market design has also been responsible for the effectiveness of the federal government's acid rain program. In 1990, Washington created tradable emissions allowances, permitting companies to buy and sell the right to pollute. The government continued to set pollution standards, but the market would do the work of determining how much sulfur dioxide each individual company would be allowed to emit. Efficient companies sold their allowances and were rewarded; inefficient companies were penalized. And even environmentalists got into the act by buying allowances and withholding them. Most experts, McMillan reports, say emissions allowances have been more successful than any previous program at reducing acid rain.

One of McMillan's most arresting examples concerns AIDS and the pharmaceutical industry. Why shouldn't anti-AIDS medications be dispensed free to third world sufferers too impoverished to pay for them? Moralizers won't like that McMillan performs a cost-benefit analysis while people are dying, but his point is that there are costs no matter which course of action is chosen. Drug companies depend on profits to perform the research that leads to new medication, McMillan observes. No profits, no research, no new drugs. In this case, he concludes, abrogating the companies' patent rights would save lives without greatly affecting profits, since there is such a small market for AIDS drugs in the third world. But, he goes on, there is a grim side to this story. ''Letting the poor nations free-ride is of potential benefit only with diseases that strike the affluent countries and have the U.S. and European markets as an inducement to innovation. With tropical diseases, no patents would mean no research.'' And even with patent protections, unless economists can come up with ways to change the market dynamics of the pharmaceutical industry, the drug companies will spend more on fighting baldness than they do on fighting malaria.

As this example shows, markets can function properly and still produce undesirable results. ''The challenge of market design,'' McMillan states, ''is to devise mechanisms, or to allow mechanisms to evolve, that channel the pursuit of profits in a socially productive direction.'' Ultimately, this is a book about tinkering, a technocrat's plea to all of us to recognize that the big ideas are usually wrong, that the truth is not so much in the details as in the adjustments to the details. For a technocrat, McMillan is a surprisingly accessible writer; he deserves a wider readership than he will probably find (though when it comes to his own specialty of constructing public auctions, he can sound like the dinner guest who goes on talking long after you have stopped listening). Still, McMillan's world is not quite the real world. If he had his way, many of the country's most contentious domestic issues and many of the globe's most pressing economic problems would be handled by locking a bunch of economists in a room and letting them hack away at market designs. He may be right. And he may well get the hearing he deserves at institutions like the World Bank and the International Monetary Fund. But pragmatism and rationality have never gotten the crowds out of their seats, cheering. In the marketplace that we call the democratic arena, it will surely be the great simplifiers who continue to set the terms of the debate.

Barry Gewen is an editor at the Book Review.

europe vs america

Europe vs. America
By Tony Judt
The United States of Europe: The New Superpower and the End of American Supremacy
by T.R. Reid

Penguin, 305 pp., $25.95
The European Dream: How Europe's Vision of the Future Is Quietly Eclipsing the American Dream
by Jeremy Rifkin

Tarcher/Penguin, 434 pp., $25.95
Free World: America, Europe, and the Surprising Future of the West
by Timothy Garton Ash

Random House, 286 pp. $24.95
1.

Consider a mug of American coffee. It is found everywhere. It can be made by anyone. It is cheap—and refills are free. Being largely without flavor it can be diluted to taste. What it lacks in allure it makes up in size. It is the most democratic method ever devised for introducing caffeine into human beings. Now take a cup of Italian espresso. It requires expensive equipment. Price-to-volume ratio is outrageous, suggesting indifference to the consumer and ignorance of the market. The aesthetic satisfaction accessory to the beverage far outweighs its metabolic impact. It is not a drink; it is an artifact.

This contrast can stand for the differences between America and Europe —differences nowadays asserted with increased frequency and not a little acrimony on both sides of the Atlantic. The mutual criticisms are familiar. To American commentators Europe is "stagnant." Its workers, employers, and regulations lack the flexibility and adaptability of their US counterparts. The costs of European social welfare payments and public services are "unsustainable." Europe's aging and "cosseted" populations are underproductive and self-satisfied. In a globalized world, the "European social model" is a doomed mirage. This conclusion is typically drawn even by "liberal" American observers, who differ from conservative (and neoconservative) critics only in deriving no pleasure from it.

To a growing number of Europeans, however, it is America that is in trouble and the "American way of life" that cannot be sustained. The American pursuit of wealth, size, and abundance —as material surrogates for happiness —is aesthetically unpleasing and ecologically catastrophic. The American economy is built on sand (or, more precisely, other people's money). For many Americans the promise of a better future is a fading hope. Contemporary mass culture in the US is squalid and meretricious. No wonder so many Americans turn to the church for solace.

These perceptions constitute the real Atlantic gap and they suggest that something has changed. In past decades it was conventionally assumed—whether with satisfaction or regret—that Eu-rope and America were converging upon a single "Western" model of late capitalism, with the US as usual leading the way. The logic of scale and market, of efficiency and profit, would ineluctably trump local variations and inherited cultural constraints. Americanization (or globalization—the two treated as synonymous) was inevitable. The best—indeed the only—hope for local products and practices was that they would be swept up into the global vortex and repackaged as "international" commodities for universal consumption. Thus an archetypically Italian product—caffè espresso—would travel to the US, where it would metamorphose from an elite preference into a popular commodity, and then be repackaged and sold back to Europeans by an American chain store.

But something has gone wrong with this story. It is not just that Starbucks has encountered unexpected foreign resistance to double-decaf-mocha-skim-latte-with-cinnamon (except, revealingly, in the United Kingdom), or that politically motivated Europeans are abjuring high-profile American commodities. It is becoming clear that America and Europe are not way stations on a historical production line, such that Europeans must expect to inherit or replicate the American experience after an appropriate time lag. They are actually quite distinct places, very possibly moving in divergent directions. There are even those—including the authors of two of the books under review—for whom it is not Europe but rather the United States that is trapped in the past.

America's cultural peculiarities (as seen from Europe) are well documented: the nation's marked religiosity, its selective prurience,[1] its affection for guns and prisons (the EU has 87 prisoners per 100,000 people; America has 685), and its embrace of the death penalty. As T.R. Reid puts it in The United States of Europe, "Yes, Americans put up huge billboards reading 'Love Thy Neighbor,' but they murder and rape their neighbors at rates that would shock any European nation." But it is the curiosities of America's economy, and its social costs, that are now attracting attention.

Americans work much more than Europeans: according to the OECD a typical employed American put in 1,877 hours in 2000, compared to 1,562 for his or her French counterpart. One American in three works more than fifty hours a week. Americans take fewer paid holidays than Europeans. Whereas Swedes get more than thirty paid days off work per year and even the Brits get an average of twenty-three, Americans can hope for something between four and ten, depending on where they live. Unemployment in the US is lower than in many European countries (though since out-of-work Americans soon lose their rights to unemployment benefits and are taken off the registers, these statistics may be misleading). America, it seems, is better than Europe at creating jobs. So more American adults are at work and they work much more than Europeans. What do they get for their efforts?

Not much, unless they are well-off. The US is an excellent place to be rich. Back in 1980 the average American chief executive earned forty times the average manufacturing employee. For the top tier of American CEOs, the ratio is now 475:1 and would be vastly greater if assets, not income, were taken into account. By way of comparison, the ratio in Britain is 24:1, in France 15:1, in Sweden 13:1.[2] A privileged minority has access to the best medical treatment in the world. But 45 million Americans have no health insurance at all (of the world's developed countries only the US and South Africa offer no universal medical coverage). According to the World Health Organization the United States is number one in health spending per capita—and thirty-seventh in the quality of its service.

As a consequence, Americans live shorter lives than West Europeans. Their children are more likely to die in infancy: the US ranks twenty-sixth among industrial nations in infant mortality, with a rate double that of Sweden, higher than Slovenia's, and only just ahead of Lithuania's—and this despite spending 15 percent of US gross domestic product on "health care" (much of it siphoned off in the administrative costs of for-profit private networks). Sweden, by contrast, devotes just 8 percent of its GDP to health. The picture in education is very similar. In the aggregate the United States spends much more on education than the nations of Western Europe; and it has by far the best research universities in the world. Yet a recent study suggests that for every dollar the US spends on education it gets worse results than any other industrial nation. American children consistently underperform their European peers in both literacy and numeracy.[3]

Very well, you might conclude. Europeans are better—fairer—at distributing social goods. This is not news. But there can be no goods or services without wealth, and surely the one thing American capitalism is good at, and where leisure-bound, self-indulgent Europeans need to improve, is the dynamic generation of wealth. But this is by no means obvious today. Europeans work less: but when they do work they seem to put their time to better use. In 1970 GDP per hour in the EU was 35 percent below that of the US; today the gap is less than 7 percent and closing fast. Productivity per hour of work in Italy, Austria, and Denmark is similar to that of the United States; but the US is now distinctly outperformed in this key measure by Ireland, the Netherlands, Norway, Belgium, Luxembourg, Germany, ...and France.[4]

America's longstanding advantage in wages and productivity—the gift of size, location, and history alike—appears to be winding down, with attendant consequences for US domination of the international business scene. The modern American economy is not just in hock to international bankers with a foreign debt of $3.3 trillion (28 percent of GDP); it is also increasingly foreign-owned. In the year 2000, European direct investment in the US exceeded American investment in Europe by nearly two fifths. Among dozens of emblematically "American" companies and products now owned by Europeans are Brooks Brothers, DKNY, Random House, Kent Cigarettes, Dove Soap, Chrysler, Bird's Eye, Pennzoil, Baskin-Robbins, and the Los Angeles Dodgers.

Europeans even appear to be better at generating small and medium-size businesses. There are more small businesses in the EU than in the United States, and they create more employment (65 percent of European jobs in 2002 were in small and medium-sized firms, compared with just 46 percent in the US). And they look after their employees much better. The EU Charter of Fundamental Rights promises the "right to parental leave following the birth or adoption of a child" and every West European country provides salary support during that leave. In Sweden women get sixty-four weeks off and two thirds of their wages. Even Portugal guarantees maternity leave for three months on 100 percent salary. The US federal government guarantees nothing. In the words of Valgard Haugland, Norway's Christian Democratic minister for children and family: "Americans like to talk about family values. We have decided to do more than talk; we use our tax revenues to pay for family values."

Yet despite such widely bemoaned bureaucratic and fiscal impediments to output, Europeans appear somehow to manage rather well.[5] And of course the welfare state is not just a value in itself. In the words of the London School of Economics economist Nicholas Barr, it "is an efficiency device against market failure"[6] : a prudential impediment to the social and political risks of excessive inequality. It was Winston Churchill who declared in March 1943 that "there is no finer investment for any community than putting milk into babies." To his self-anointed disciples in contemporary America, however, this reeks of "welfare." In the US today the richest 1 percent holds 38 percent of the wealth and they are redistributing it ever more to their advantage. Meanwhile one American adult in five is in poverty—compared with one in fifteen in Italy.[7] The benefits don't even trickle down anymore. To many foreigners today this is a distinctly unappetizing vision: the "American way of life" is at a steep discount. As an economic model the US is not replicable.[8] As a social model it offers few redeeming qualities. One is reminded of Oliver Goldsmith's mordant reflections upon an earlier age of private greed and public indifference:

Ill fares the land, to hast'ning ills a prey,
Where wealth accumulates, and men decay.[9]

2.

This is the case put forward by Jeremy Rifkin and T.R. Reid. Rifkin is the more ambitious of the two, rather too much so: his book, The European Dream, is replete with efforts to summarize everything from church history to Enlightenment philosophy, all to the end of demonstrating that it is individualist America that is stuck in a time warp and cooperative Europe that represents the future. I think he is fundamentally right: but the case can only be hurt by the jejune summaries of the "Making of the Bourgeoisie" or the "Rise of the Nation-State," as well as by a crassly reductionist account of American materialism, and a hodgepodge of ill-advised allusions to chaos theory, the "Great Chain of Being," Hobbes, Descartes, Hegel, and the Enclosure Acts.

The European Dream isn't as bad a book as some reviewers have suggested and it has something important to say. Of contemporary America Rifkin writes:

With only our religious fervor to hold on to, we have become a "chosen people" without a narrative—making America potentially a more dangerous and lonely place to be.

But the book would have been a whole lot better had Rifkin stuck to what he knows about and not tried so hard to say something "important."

T.R. Reid is a journalist and his account of European superiority, which covers much the same territory as Rifkin's, is shorter, sharper, more readable, and less pretentious. It has some amusing vignettes: notably of American innocents—Jack Welch, George W. Bush (and most recently Bill Gates) —caught up in a brave new world of European regulations they can neither understand nor ignore. And Reid, like Rifkin, demonstrates very effectively just why the European Union, with its regulatory powers, its wealth, and its institutional example, is a place Americans will need to take extremely seriously in coming decades.

But though their books are timely, neither writer is saying anything very new. Their damning bill of particulars regarding the United States is fam-iliar to Europeans—it was in 1956 that Jimmy Porter, in John Osborne's Look Back in Anger, sardonically observed that "it's pretty dreary living in the American age—unless of course you're American," and one way or another that thought has echoed down the decades to the present day. But just because there is something profoundly amiss in the US today, and something no less intuitively appealing about the European social compact, this does not license us to tell fairy stories.

Anyone seeking in these books an account of the origins of the EU will be led badly astray. Reid and Rifkin trip over themselves to praise the founding fathers of Europe for their foresight and wisdom in guiding Europe to its present eminence. According to Reid, in "the years following the Schuman Declaration, the European Movement took the continent by storm." The European Coal and Steel Community was a "rip-roaring economic success." Rifkin goes further: Europe, he writes, is "a giant freewheeling experimental laboratory for rethinking the human condition..."(!)

These claims are absurd.[10] The European Union is what it is: the largely unintended product of decades of negotiations by West European politicians seeking to uphold and advance their national and sectoral interests. That's part of its problem: it is a compromise on a continental scale, designed by literally hundreds of committees. Actually this makes the EU more interesting and in some ways more impressive than if it merely incarnated some uncontentious utopian blueprint. In the same vein, it seems silly to write, as Rifkin does, about the awfulness of American "cookie-cutter housing tracts" as yet another symptom of American mediocrity without acknowledging Europe's own eyesores. This is a man who has never stared upon the urban brutalism of Sarcelles, a postwar dormitory town north of Paris; who has not died a little in Milton Keynes; who has avoided the outer suburbs of modern Milan. Reid is right to insist that Europe has the best roads, the fastest trains, the cheapest plane fares. And yes, the EU is indeed closer, as Rifkin notes, "to the pulse of the changes that are transforming the world into a globalized society." But it isn't perfect by any means.

Indeed, Europe is facing real problems. But they are not the ones that American free-market critics recount with such grim glee. Yes, the European Commission periodically makes an ass of itself, aspiring to regulate the size of condoms and the curvature of cucumbers. The much-vaunted Stability Pact to constrain national expenditure and debt has broken down in acrimony, though with no discernible damage to the euro it was designed to protect. And pensions and other social provisions will be seriously underfunded in decades to come unless Europeans have more children, welcome more immigrants, work a few more years before retiring, take somewhat less generous unemployment compensation, and make it easier for businesses to employ young people. But these are not deep structural failings of the European way of life: they are difficult policy choices with political consequences. None of them implies the dismantling of the welfare state.[11]

Europe's true dilemmas lie elsewhere. In the Netherlands, in Paris and Antwerp and other cities, antagonism and incomprehension between the indigenous local population and a fast-growing minority of Muslims (one million in the Netherlands, over five million in France, perhaps 13 million in the EU to date) has already moved on from graffiti and no-go zones to arson, assaults, and assassinations. Turks, Moroccans, Tunisians, Algerians, and others have been arriving in Western Europe since the 1960s. We are now seeing the emergence of a third generation: in large part unemployed, angry, alienated, and increasingly open to the communitarian appeal of radical Islam.[12]

For nearly four decades mainstream European politicians turned a blind eye to all this: to the impact of de facto segregated housing; isolated unintegrated communities; and the rising tide of fearful, resentful white voters convinced that the boat was "full." It has taken Jean-Marie Le Pen, the assassinated Dutch politician Pim Fortuyn, and a flock of demagogic anti-immigrant parties from Norway to Italy to awaken Europeans to this crisis—and it augurs badly that the response of everyone from Tony Blair to Valéry Giscard d'Estaing has been to cry "Havoc!" and wind up the drawbridge.

For the other problem facing Europe, and the two are of course connected, is the pressure on its outer edges. The European Union is almost too attractive for its own good—in contrast with the United States, which is widely disliked for what it does, the EU appeals just by virtue of what it is. Refugees and illegal immigrants from half of Africa periodically drown in their desperate efforts to cross the Straits of Gibraltar or beach themselves on Italy's southernmost islands —or else they land safely, only to get shipped back. Turkey had been trying for nearly forty years to gain admission to the European club before its application was (reluctantly) taken up last month. Ukraine's best hope for a stable democratic future lies inside Europe—or at least with the prospect of one day getting there, which would greatly strengthen the hand of Viktor Yushchenko and his supporters in the aftermath of their recent victory. And the same of course is true for the remnant states of former Yugoslavia. But while Brussels is all too well aware of the risks entailed in ignoring Africa or leaving Ukraine or Bosnia to fes-ter at its gates—much less casting 70 million Turkish Muslims into the fold of radical Islam—Europe's leaders are deeply troubled at the pros-pect (and the cost) of committing the EU to extending itself to the edges of Asia.

These are Europe's real challenges. The EU may be, as Reid and Rifkin suggest, a luminous model of trans-state cooperation, justice, and harmony.[13] But it will not be easy for the EU to integrate its ethnic and religious minorities, regulate immigration, or admit Turkey on workable terms.[14] Yet should it mismanage the permanent crisis on its eastern and southern borders, Europe is going to be in very serious difficulties indeed. And that, not some sort of atavistic anti-Americanism or rocket-envy, is why many reasonable Europeans and their leaders are utterly enraged by President George W. Bush.

To the Bush administration "Islam" is an abstraction, the politically serviceable object of what Washington insiders now call the GWOT: the Global War on Terror. For the US, the Middle East is a faraway land, a convenient place to export America's troubles so that they won't have to be addressed in the "homeland." But the Middle East is Europe's "near abroad," as well as a major trading partner. From Tangier to Tabriz, Europe is surrounded by the "Middle East." A growing number of Europeans come from this Middle East. When the EU begins accession talks with Turkey, it will be anticipating its own insertion into the Middle East. America's strategy of global confrontation with Islam is not an option for Europe. It is a catastrophe.
3.

Timothy Garton Ash would probably not dissent from much of the preceding analysis. In his engaging new book he actually goes further than Rifkin and Reid in certain respects. As an international citizen, he notes, the Uni-ted States is irresponsibly delinquent. The EU gave away $36.5 billion in development aid in 2003. The US managed just one third that amount—and much of that foreign aid either went to Israel or else came with strings attached: nearly 80 percent of all American "development aid" obliges recipients to spend the money on American goods and services. On Iraq alone the US spent eight times the amount it gave in overseas aid to everyone else. The US is the meanest of all the rich countries on the OECD's Development Assistance Committee. The Europeans are by far the most generous.

There is more. The US contains just 5 percent of the world's population (and falling), but it is responsible for 25 percent of the world's greenhouse gas output per annum. Each year our atmosphere has to absorb twenty metric tons of carbon dioxide for every American man, woman, and child; but just nine tons for every European. And the American share continues to grow, even as the Bush administra-tion blocks any international action on pollution or global warming. The real weapons of mass destruction, in Garton Ash's view, are global poverty and incipient environmental catastrophe. On these genuine threats to our common civilization, the European Union has a strikingly superior record. Contemporary American pundits, the "terribles simplificateurs" who babble glibly of Mars and Venus or Clashing Civilizations, attract Garton Ash's amused disdain. But on the insouciant indifference of the present incumbent of the White House he is utterly unforgiving: "It was said of ancient Rome that the emperor Nero fiddled while the city burned. In the new Rome, the president fiddled while the Earth burned."

All the same, Free World is by no means just another indictment of America. Timothy Garton Ash knows Europe—or, rather, he knows the many different Europes, the variable geometry of squabbles and interests and alliances that limit the EU's capacity to make itself felt in world politics. He shares the widespread English suspicion of French mischief-making. And he balances his remarks about the US with some well-aimed shots at the Common Agricultural Fund—noting that while in the year 2000 the EU donated $8 per head to sub-Saharan Africa, it managed to set aside, in the form of subsidies, $913 for every cow in Europe.

But for all that Garton Ash is actually quite optimistic about both Europe and the United States. More surprisingly, he is optimistic—even, as it seems to me, a touch irenic—about the future of the Western alliance. In part, to be sure, this is driven by what he sees as urgent necessity: the West had better stop squabbling and find a way to work together for the common good, because it only has about twenty years left before China (and then India) becomes a great power and the narcissistic minor differences between Europe and America will be lost to view: "In a longer historical perspective, this may be our last chance to set the agenda of world politics."

That agenda, in Garton Ash's account, is to set aside recent quarrels and "reinvent" the post–cold war West as an example and advocate of freedom: freedom from want, freedom from fear, freedom from human and ecological oppression (the chapter on global poverty and environmental risk is revealingly titled "The New Red Armies"). The Rooseveltian echoes are no coincidence—what Garton Ash has in mind really is a new Atlantic Alliance and it is not by chance that Winston Churchill occupies a prominent place in his argument. For this is a very British book. The choice between Europe and America is presented as one that the British understand better than anyone else (because they have lived it for sixty years); Atlantic reconciliation is thus something that London— perched uncomfortably on the edge of continental Europe and with half an eye cast permanently on Washington—is best placed to help bring about.

But is Britain really, as Garton Ash writes, a "seismograph" or "thermometer" of European–American relations? It is true that the UK today manages both to be part of the European Union and to manifest some of the trashier aspects of American commercial culture, but I doubt that this is what Garton Ash has in mind. He appears, rather, to see London's role as mitigating the damage done by American unilateralism on the one hand and "Euro-Gaullism" on the other ("the Chiracian version of Euro-Gaullism leads nowhere"). An internationally minded "Euroatlanticism" is his ideal and Tony Blair incarnates it: "Tony Blair has grasped and articulated this British national interest, role, and chance better than any of his predecessors." Of course, Garton Ash can hardly deny that Blair has so far ducked the challenge of selling the European Constitution to a skeptical British public. And I don't think he harbors any illusions about the "special relationship." Yet he still insists that Great Britain has this vital role to play in bridging the Atlantic gap.

I find that a very odd claim. Tony Blair is a political tactician with a lucrative little sideline in made-to-measure moralizing.[15] But his international adventures have alienated Britain from many of its fellow EU members without gaining any influence over Washington, where the British prime minister's visits are exercises in futility and humiliation. Yes, in certain respects the UK today has real affinities with America: the scale of poverty in Britain, and the income gap between rich and poor, has grown steadily since the 1970s and is closer to that of the US than anything found in Western Europe. British hourly productivity is well below most West European rates. However, New Labour was supposed to combine the best of the European social model and American entrepreneurship: Garton Ash himself concedes it has not quite managed this.[16]

Free World understates the challenge facing Brits—or other Europeans— seeking to draw the US back into any common international project beyond the GWOT. Timothy Garton Ash is right to insist that there is more to America than neocons and Republican know-nothings and that their present dominance will pass. But his book is about the here and now. So we can't ignore that the people making policy in Washington aren't interested in reading Timothy Garton Ash's "Declaration of Interdependence." The very last thing they want is some "common initiative" in the Middle East. And they couldn't care less about his "New Red Armies." Yes: in its own interest "America should want Europe to be a benign check and balance on its own solitary hyperpower." That is good advice. But no one in power is listening.

Conservative think tanks in Washington are lobbying against any consolidated European international presence—in the words of David Frum, a fellow at the American Enterprise Institute and former Bush speechwriter, it "raises important strategic questions" (i.e., we don't like it).[17] The new US secretary of state was widely quoted in 2003 to the effect that the United States intends to "forgive Russia, ignore Germany, and punish France." According to the authors of a recent Atlantic Council report, the Bush administration regards Europe as being "on probation," its future standing with Washington dependent on better behavior.[18] For the first time since World War II, influential voices are suggesting that a united Europe would be a threat to American interests and that the US should block its emergence.

Moreover, the common European-American values upon which Timothy Garton Ash's argument rests may not be quite as common as he suggests. In its widespread religiosity and the place of God in its public affairs, its suspicion of dissent, its fear of foreign influence, its unfamiliarity with alien lands, and its reliance upon military strength when dealing with them, the US does indeed have much in common with other countries: but none of them is in Europe. When the international treaty to ban land mines was passed by the UN in 1997 by a vote of 142–0, the US abstained; in company with Russia and a handful of other countries we have still not ratified it. The US is one of only two states (the other is Somalia) that have failed to ratify the 1989 Convention on Children's Rights. Our opposition to the international Biological Weapons Convention is shared by China, Russia, India, Pakistan, Cuba, and Iran.

Abolition of the death penalty is a condition for EU membership, whereas the US currently executes prisoners on a scale matched only in China, Iran, Saudi Arabia, and the Congo. American opposition to an International Criminal Court has been supported in the UN and elsewhere by Iran, Iraq, Pakistan, Indonesia, Israel, and Egypt. The American doctrine of "preventive war" now finds its fraternal counterpart in Muscovite talk of "preventive counterrevolution."[19] And as for the United Nations itself, the jewel in the crown of international agencies set in place after World War II by an earlier generation of American leaders: as I write, a scurrilous, high-decibel campaign is being mounted from Washington to bring down Kofi Annan, the UN secretary-general, and cripple his institution.

So what can Europe do? In the first place, resist the temptation to make a virtue of the present tensions. It is pointless to deny their existence. In past eras the role of Europe's "other" —the close neighbor against whom Europeans measure their own distinctive identity—was variously occupied by Turkey and Russia; today that role is being filled by the United States. But like Garton Ash, I think it would be a mistake to follow Jürgen Habermas's advice and try to build European unity around "transatlantic value differences." Europeans certainly need to find a purpose and define their common role, but there are better ways to do it.

One would be to get on with ratifying their proposed constitution. This document arouses paranoia and anxiety in Washington (and London); but it is actually quite dull and anodyne. Much of it consists of practical prescriptions for decision-making procedures in a cumbersome body of twenty-five-plus separate sovereign states. The constitution also strengthens the role of European courts and extends the EU's cross-border competence in criminal law and policing (a wholly laudable objective for anyone serious about fighting terrorists). But otherwise it just gives substance and application to the EU's claim to "coordinate the economic and employment policies of the member states." It is not a very inspiring document—its leading drafter, Valéry Giscard d'Estaing, is no Thomas Jefferson—but it will do much practical good.

Above all, it will enable Europe to continue playing to its international strengths in spite of American obstruction[20] and the Bush administration's efforts to pick off or otherwise pressure individual EU member states. For the EU today isn't just an interesting blueprint for interstate governance without the drawbacks of supranational sovereignty. Europe experienced the twentieth century—invasion, occupation, civil war, anarchy, massacres, gen- ocide, and the descent into barbarism —to a degree unmatched anywhere else. The risks inherent in a "war of choice" (Iraq), or the abandonment of international agencies in favor of unilateral initiative, or an excessive reliance on military power, are thus clearer to Europeans than to most other peoples: "Europeans want to be sure that there is no adventure in the future. They have had too much of that."[21] The United States, by contrast, had no direct experience of the worst of the twentieth century—and is thus regrettably immune to its lessons.

American-style belligerent patriotism, as Garton Ash notes, is rare in contemporary Europe. This dislike of bellicosity goes well beyond traditional pacifism: Europeans no longer even think about interstate relations in martial terms. But pace American critics, this makes Europeans and their model more rather than less effective when it comes to addressing international crises. The US is still rather good at the old-fashioned art of making war. But war-making is the exception in modern international affairs. The real challenge is preventing war, making peace—and keeping it. And this is something at which Europe is going to be increasingly adept.

The countries of the EU already provide the largest share of the world's peacekeepers and international policemen. Europeans have a real, if limited, military capacity—though they will need to commit more resources to the planned 60,000-man "Euro-force" if it is to be effective. The best European troops—for example, the British army—have been trained for decades to work with occupied and warring civil populations, a skill with which the US Army is shockingly unfamiliar. It will be a long time before the EU develops and implements a common foreign policy—though the new constitution would facilitate that, if only by creating a European foreign minister authorized to speak for the whole union. But when it does at last speak with a single voice in international affairs, the EU will wield a lot of power.

The reason is not that the EU will be rich or big—though it already is both. The US is rich and big. And one day China may be richer and bigger. Europe will matter because of the cross-border template upon which contemporary Europe is being constructed. "Globalization" isn't primarily about trade or communications, economic monopolies or even empire. If it were it would hardly be new: those aspects of life were already "globalizing" a hundred years ago.[22] Globalization is about the disappearance of boundaries—cultural and economic boundaries, physical boundaries, linguistic boundaries—and the challenge of organizing our world in their absence. In the words of Jean-Marie Guéhenno, the UN's director of peacekeeping operations: "Having lost the comfort of our geographical boundaries, we must in effect rediscover what creates the bond between humans that constitute a community."[23]

To their own surprise and occasional consternation, Europeans have begun to do this: to create a bond between human beings that transcends older boundaries and to make out of these new institutional forms something that really is a community. They don't always do it very well and there is still considerable nostalgia in certain quarters for those old frontier posts. But something is better than nothing: and nothing is just what we shall be left with if the fragile international accords, treaties, agencies, laws, and institutions that we have erected since 1945 are allowed to rot and decline—or, worse, are deliberately brought low. As things now stand, boundary-breaking and community-making is something that Europeans are doing better than anyone else. The United States, trapped once again in what Tocqueville called its "perpetual utterance of self-applause," isn't even trying.

—January 12, 2005
Notes

[1] The US television network that recently broadcast a passing glimpse at Janet Jackson's anatomy was excoriated for its wanton lapse of taste; but the avalanche of accompanying commercials for products designed to enhance male potency passed quite without comment. The female breast, it seems, can rot a nation's moral core; but malfunctioning penises are wholesome family fare.

[2] See Robin Blackburn, Banking on Death: Or, Investing in Life: The History and Future of Pensions (Verso, 2002) p. 201, Table 3.2.

[3] For the 2003 PISA (Programme for International Student Assessment) report, issued by the OECD on December 6, 2004, see www.pisa.oecd.org.

[4] See Andrew Sharpe, Appendix Table 2, "Output per House Levels in the OECD Countries Relative to the United States" for 2003; Centre for the Study of Living Standards, International Productivity Monitor, No. 9 (Fall 2004), at www.csls.ca/ipm/9/sharpe-tables.pdf.

[5] Note, too, that the steadily rising cost of private medical insurance in the US puts at least as much of a burden on American firms as social taxation and welfare privileges place upon their European counterparts—while providing none of the attendant social benefits.

[6] Katrin Benahold, "Love of Leisure, and Europe's Reasons," The New York Times, July 29, 2004.

[7] Following the OECD definition of a family income, less than 50 percent of the mean personal income of the nation.

[8] Appetizing or not, the American economic model could never be replicated anywhere else. Americans are the world's consumers of last resort. But their national deficits on budget and current account are reaching unprecedented levels. The collapsing dollar is sustained only by foreigners' willingness to hold it: Americans are currently spending other people's money on other people's products. Were the US any other country it would by now be in the unforgiving hands of the International Monetary Fund.

[9] The Deserted Village (1770).

[10] As is Reid's description of David Beckham as "Europe's Michael Jordan." Beckham is a journeyman footballer with a first-class hairdo and a celebrity wife. He would never have made the cut in the days of Pele, Johann Cruyff, or Ferenc Puskas. His prominence on European sports pages illustrates the power of transcontinental marketing, but in this as other respects Beckham is just a depressing monument to the spirit of our age: he is, in Camus's phrase, a "prophète vide pour temps médiocre." The pertinent analogy here is not Michael Jordan but Dennis Rodman.

[11] In any case, America's present indebtedness is at least as much a lien on the future as Europe's welfare commitments. And Americans who point fingers at the European pension gap should recall that were United Airlines, General Motors, or any other semisolvent company to abandon its unfundable pension commitments, it is US taxpayers who would be left with the tab.

[12] For a thoughtful and rather more optimistic account of the French case, see Herman Lebovics, Bringing the Empire Back Home: France in the Global Age (Duke University Press, 2004).

[13] Perhaps not so very harmonious: already West European leaders are asking why they should make generous budget transfers to new members like Slovakia, only to see the latter use these subsidies to hold down their local corporate tax rates and thereby steal business and factories from their more expensive Western colleagues.

[14] The Turkish dilemma is complicated, and well-meaning European liberals can find themselves on both sides of the debate. For a sensitive and cogently reasoned summary of the case for keeping Turkey at a certain distance, see the interview with Robert Badinter, a former French minister of justice and longstanding Europhile, in Le Figaro, December 13, 2004.

[15] At the last Labour Party conference, rather than try to defend his reasons for going to war in Iraq, Blair simply informed the audience that he "believes," that they must share his "faith," and that in any case (like Martin Luther: "Here I stand, I can do no other") he would not budge.

[16] Indeed he cites a popular joke: Britain was promised that Blair's Third Way would bring it American universities and German prisons— what it is actually getting are American prisons and German universities.

[17] Frederick Studemann, "US Conservatives Cast Wary Eye at EU Treaty," Financial Times, November 5, 2004. The new tone of anxiety about a renascent Europe can even be found in august journals of mainstream foreign policy debate. See, for example, Jeffrey L. Cimbalo, "Saving NATO from Europe," in Foreign Affairs, November/December 2004.

[18] See Bowman Cutter, Peter Rashish, and Paula Stern, "Washington Wants Economic Reform in Europe," Financial Times, November 22, 2004.

[19] The phrase is used by Kremlin adviser Gleb Pavlovski to describe President Putin's emerging strategy for addressing "containment" challenges at Russia's edges. I am indebted to Ivan Krastev of the Central European University in Budapest for this reference, in his unpublished essay on "Europe's Fatal Attraction."

[20] The US continues to impede European efforts to reach a nuclear settlement with Iran. Even on such a volatile issue, Washington has been more concerned about the risks of a successful European initiative than the benefits of a regional settlement.

[21] Alfons Verplaetse (governor of the National Bank of Belgium).

[22] On this, see the magisterial opening paragraphs of John Maynard Keynes's essay The Economic Consequences of the Peace (Penguin, 1995).

[23] Jean-Marie Guéhenno, The End of the Nation-State, translated by Victoria Elliott (University of Minnesota Press, 1995), p. 139.

Letters

February 24, 2005: Avis Bohlen, HOW BUSH SCUTTLED THE BIOWEAPONS PROTOCOL

Dollar falls

The disappearing dollar

Dec 2nd 2004
From The Economist print edition

How long can it remain the world's most important reserve currency?

THE dollar has been the leading international currency for as long as most people can remember. But its dominant role can no longer be taken for granted. If America keeps on spending and borrowing at its present pace, the dollar will eventually lose its mighty status in international finance. And that would hurt: the privilege of being able to print the world's reserve currency, a privilege which is now at risk, allows America to borrow cheaply, and thus to spend much more than it earns, on far better terms than are available to others. Imagine you could write cheques (for Chinese TV’s, Japanese cars, etc) that were accepted as payment by other countries but never cashed. That is what it amounts to. If you had been granted that ability, you might take care to hang on to it. Bush-America is taking no such care, and may come to regret it.

The cost of neglect

The dollar is not what it used to be. Over the past three years it has fallen by 35% against the euro and by 24% against the yen. But its latest slide is merely a symptom. Bush-America has habits that are inappropriate, to say the least, for the guardian of the world's main reserve currency: rampant government borrowing, furious consumer spending and a current-account deficit big enough to have bankrupted any other country some time ago.

America's current-account deficit is at the heart of these global concerns. The OECD's latest Economic Outlook predicts that the deficit will rise to $825 billion by 2006 (6.4% of America's GDP) assuming unchanged exchange rates. Optimists argue that foreigners will keep financing the deficit because American assets offer high returns and a haven from risk. In fact, private investors have already turned away from dollar assets: the returns on investments in America have recently been lower than in Europe or Japan – which educate all their children. Can a currency that has been sliding against the world's next two biggest currencies for 30 years be regarded as “safe”? Most of the blame for America's deficit lies at home. America needs to cut its budget deficit.

Simple but harsh

Many Bush administration policymakers talk as though it is better to rely entirely on a falling dollar to solve, somehow, all their problems. Such a one-sided remedy would require existing foreign creditors to hang on to their vast stock of dollar assets, estimated at almost $11 trillion - as a fall in the dollar by another 30% wipes $3 or $4 trillions off the value of foreigners' dollar assets. OPEC (Organisation of Petroleum Exporting Countries) has already cut the proportion of deposits held in dollars from 75 per cent in the third quarter of 2001 to 61.5 per cent now, to avoid incurring losses as the dollar has fallen and prepare for a shift away from pricing oil exports in dollars alone.

If foreigners do not subsidize the Bush scam, the dollar will lose its reserve-currency status. That would lead America's creditors to start cashing those cheques—and what an awful lot of cheques there are to cash. As that process gathered pace, the dollar could tumble further and further. American bond yields (long-term interest rates) would soar, quite likely causing a deep recession. Cutting the budget deficit would require political courage now. Why not leave the time-bomb for the non-voting kids?

Warning From the Markets

Published: February 24, 2005 en a seemingly innocuous remark from the central bank of South Korea makes the dollar tank, as happened on Tuesday, all is not well with the United States' position in the world economy.

The dollar has been on a downward trajectory for three years, thanks in part to the Bush administration's decision to try to use a cheap dollar to shrink the nation's enormous trade deficit. (A weak dollar makes exports cheaper and imports costlier, a combination that theoretically should narrow the trade gap.) To be truly effective, however, a weak dollar must be combined with a lower federal budget deficit - or even a budget surplus, something the administration clearly hasn't delivered. So predictably, the weak-dollar ploy hasn't worked. The United States' trade deficit has mushroomed to record levels, as has the United States' need to borrow from abroad - some $2 billion a day - just to balance its books.

Enter South Korea. On Monday, its central bank reported that it intended to diversify into other currencies and away from dollar-based assets. And why not? It holds about $69 billion in United States Treasury securities, or 4 percent of the total foreign Treasury holdings. Such dollar-based investments lose value as the dollar weakens, leading to losses that any cautious banker would want to avoid. But as the Korean comment ping-ponged around the world, all hell broke loose, with currency traders selling dollars for fear that the central banks of Japan and China, which hold immense dollar reserves - a combined $900 billion, or 46 percent of foreign Treasury holdings - might follow suit.

That would be the United States' worst economic nightmare. If it appeared that the flow of investment from abroad was not enough to cover the nation's gargantuan deficits, interest rates would rise sharply, the dollar would plunge further, and the economy would stall. A fiscal crisis would result.

Tuesday's sell-off of dollars did not precipitate a meltdown. But it sure gave a taste of one. The dollar suffered its worst single-day decline in two months against the yen and the euro. Stock markets in New York, London, Paris and Frankfurt dropped, and gold and oil prices, which tend to go up when the dollar goes down, spiked.

Luckily, the markets calmed down yesterday, as Asian central banks said they they did not intend to shun dollars. While such damage control is welcome, it's no fix. Tuesday's market episode has its roots in American structural imbalances that will be corrected only by new policies, not more of the same tax-cut-and-weak-dollar deficit-bloating ploys.

If Mr. Bush were half the capitalist he claims he is, he would listen to what the markets are telling him.

Honey, I Shrunk the Dollar

By THOMAS L. FRIEDMAN

Published: February 24, 2005

have just one question about President Bush's trip to Europe: Did he and Laura go shopping?

If they did, I would love to have been a fly on the wall when Laura must have said to George: "George, do you remember how much these Belgian chocolates cost when we were here four years ago? This box of mints was $10. Now it's $15? What happened to the dollar, George? Why is the euro worth so much more now, honey? Didn't Rummy say Europe was old? If we didn't have Air Force One, we never could have afforded this trip on your salary!"

The dollar is falling! The dollar is falling! But the Bush team has basically told the world that unless the markets make the falling dollar into a full-blown New York Stock Exchange crisis and trade war, it is not going to raise taxes, cut spending or reduce oil consumption in ways that could really shrink our budget and trade deficits and reverse the dollar's slide.

This administration is content to let the dollar fall and bet that the global markets will glide the greenback lower in an "orderly" manner.

Right. Ever talk to someone who trades currencies? "Orderly" is not always in the playbook. I make no predictions, but this could start to get very "disorderly." As a former Clinton Commerce Department official, David Rothkopf, notes, despite all the talk about Social Security, many Americans are not really depending on it alone for their retirement. What many Americans are counting on is having their homes retain and increase their value. And what's been fueling the home-building boom and bubble has been low interest rates for a long time. If you see a continuing slide of the dollar - some analysts believe it needs to fall another 20 percent before it stabilizes - you could see a substantial, and painful, rise in interest rates.

"Given the number of people who have refinanced their homes with floating-rate mortgages, the falling dollar is a kind of sword of Damocles, getting closer and closer to their heads," Mr. Rothkopf said. "And with any kind of sudden market disruption - caused by anything from a terror attack to signs that a big country has gotten queasy about buying dollars - the bubble could burst in a very unpleasant way."

Why is that sword getting closer? Because global markets are realizing that we have two major vulnerabilities that this administration doesn't want to address: We are importing too much oil, so the dollar's strength is being sapped as oil prices continue to rise. And we are importing too much capital, because we are saving too little and spending too much, as both a society and a government.

"When people ask what we are doing about these twin vulnerabilities, they have a hard time coming up with an answer," noted Robert Hormats, the vice chairman of Goldman Sachs International. "There is no energy policy and no real effort to reduce our voracious demand of foreign capital. The U.S. pulled in 80 percent of total world savings last year [largely to finance our consumption]." That's a big reason why some "43 percent of all U.S. Treasury bills, notes and bonds are now held by foreigners," Mr. Hormats said.

And the foreign holders of all those bonds are listening to our debate. They are listening to a country that is refusing to raise taxes, and an administration talking about borrowing an additional $2 trillion so Americans can invest some of their Social Security money in stocks. If that happened, it would almost certainly weaken the dollar, further depreciating the U.S. Treasury bonds held by all those foreigners.

On Monday, the Bank of Korea said it planned to diversify more of its reserves into nondollar assets, after years of holding too many low-yielding and depreciating U.S. government securities. The fear that this could become a trend sparked a major sell-off in U.S. equity markets on Tuesday. To calm the markets, the Koreans said the next day that they had no intention of selling their dollars.

Oh, good. Now I'm relieved.

"These countries don't have to dump dollars - they just have to reduce their purchases of them for the dollar to be severely affected," Mr. Hormats noted. "Korea is the fourth-largest holder of dollar reserves. ... You don't want others to see them diversifying and say, 'We'd better do that, too, so that we're not the last ones out.' Remember, the October 1987 stock market crash began with a currency crisis."

When a country lives on borrowed time, borrowed money and borrowed energy, it is just begging the markets to discipline it in their own way at their own time. As I said, usually the markets do it in an orderly way - except when they don't.

pentagon's new map

Since the end of the cold war, the United States has been trying to come up with an operating theory of the world—and a military strategy to accompany it. Now there’s a leading contender. It involves identifying the problem parts of the world and aggressively shrinking them. Since September 11, 2001, the author, a professor of warfare analysis, has been advising the Office of the Secretary of Defense and giving this briefing continually at the Pentagon and in the intelligence community. Now he gives it to you.

LET ME TELL YOU why military engagement with Saddam Hussein’s regime in Baghdad is not only necessary and inevitable, but good.

When the United States finally goes to war again in the Persian Gulf, it will not constitute a settling of old scores, or just an enforced disarmament of illegal weapons, or a distraction in the war on terror. Our next war in the Gulf will mark a historical tipping point—the moment when Washington takes real ownership of strategic security in the age of globalization.

That is why the public debate about this war has been so important: It forces Americans to come to terms with I believe is the new security paradigm that shapes this age, namely, Disconnectedness defines danger. Saddam Hussein’s outlaw regime is dangerously disconnected from the globalizing world, from its rule sets, its norms, and all the ties that bind countries together in mutually assured dependence.

The problem with most discussion of globalization is that too many experts treat it as a binary outcome: Either it is great and sweeping the planet, or it is horrid and failing humanity everywhere. Neither view really works, because globalization as a historical process is simply too big and too complex for such summary judgments. Instead, this new world must be defined by where globalization has truly taken root and where it has not.

Show me where globalization is thick with network connectivity, financial transactions, liberal media flows, and collective security, and I will show you regions featuring stable governments, rising standards of living, and more deaths by suicide than murder. These parts of the world I call the Functioning Core, or Core. But show me where globalization is thinning or just plain absent, and I will show you regions plagued by politically repressive regimes, widespread poverty and disease, routine mass murder, and—most important—the chronic conflicts that incubate the next generation of global terrorists. These parts of the world I call the Non-Integrating Gap, or Gap.

Globalization’s “ozone hole” may have been out of sight and out of mind prior to September 11, 2001, but it has been hard to miss ever since. And measuring the reach of globalization is not an academic exercise to an eighteen-year-old marine sinking tent poles on its far side. So where do we schedule the U.S. military’s next round of away games? The pattern that has emerged since the end of the cold war suggests a simple answer: in the Gap.

The reason I support going to war in Iraq is not simply that Saddam is a cutthroat Stalinist willing to kill anyone to stay in power, nor because that regime has clearly supported terrorist networks over the years. The real reason I support a war like this is that the resulting long-term military commitment will finally force America to deal with the entire Gap as a strategic threat environment.

FOR MOST COUNTRIES, accommodating the emerging global rule set of democracy, transparency, and free trade is no mean feat, which is something most Americans find hard to understand. We tend to forget just how hard it has been to keep the United States together all these years, harmonizing our own, competing internal rule sets along the way—through a Civil War, a Great Depression, and the long struggles for racial and sexual equality that continue to this day. As far as most states are concerned, we are quite unrealistic in our expectation that they should adapt themselves quickly to globalization’s very American-looking rule set.

But you have to be careful with that Darwinian pessimism, because it is a short jump from apologizing for globalization-as-forced-Americanization to insinuating—along racial or civilization lines—that “those people will simply never be like us.” Just ten years ago, most experts were willing to write off poor Russia, declaring Slavs, in effect, genetically unfit for democracy and capitalism. Similar arguments resonated in most China-bashing during the 1990’s, and you hear them today in the debates about the feasibility of imposing democracy on a post-Saddam Iraq—a sort of Muslims-are-from-Mars argument.

So how do we distinguish between who is really making it in globalization’s Core and who remains trapped in the Gap? And how permanent is this dividing line?

Understanding that the line between the Core and Gap is constantly shifting, let me suggest that the direction of change is more critical than the degree. So, yes, Beijing is still ruled by a “Communist party” whose ideological formula is 30 percent Marxist-Leninist and 70 percent Sopranos, but China just signed on to the World Trade Organization, and over the long run, that is far more important in securing the country’s permanent Core status. Why? Because it forces China to harmonize its internal rule set with that of globalization—banking, tariffs, copyright protection, environmental standards. Of course, working to adjust your internal rule sets to globalization’s evolving rule set offers no guarantee of success. As Argentina and Brazil have recently found out, following the rules (in Argentina’s case, sort of following) does not mean you are panicproof, or bubbleproof, or even recessionproof. Trying to adapt to globalization does not mean bad things will never happen to you. Nor does it mean all your poor will immediately morph into stable middle class. It just means your standard of living gets better over time.

In sum, it is always possible to fall off this bandwagon called globalization. And when you do, bloodshed will follow. If you are lucky, so will American troops.

SO WHAT PARTS OF THE WORLD can be considered functioning right now? North America, much of South America, the European Union, Putin’s Russia, Japan and Asia’s emerging economies (most notably China and India), Australia and New Zealand, and South Africa, which accounts for roughly four billion out of a global population of six billion.

Whom does that leave in the Gap? It would be easy to say “everyone else,” but I want to offer you more proof than that and, by doing so, argue why I think the Gap is a long-term threat to more than just your pocketbook or conscience.

If we map out U.S. military responses since the end of the cold war, (see below), we find an overwhelming concentration of activity in the regions of the world that are excluded from globalization’s growing Core—namely the Caribbean Rim, virtually all of Africa, the Balkans, the Caucasus, Central Asia, the Middle East and Southwest Asia, and much of Southeast Asia. That is roughly the remaining two billion of the world’s population. Most have demographics skewed very young, and most are labeled, “low income” or “low middle income” by the World Bank (i.e., less than $3,000 annual per capita).

If we draw a line around the majority of those military interventions, we have basically mapped the Non-Integrating Gap. Obviously, there are outliers excluded geographically by this simple approach, such as an Israel isolated in the Gap, a North Korea adrift within the Core, or a Philippines straddling the line. But looking at the data, it is hard to deny the essential logic of the picture: If a country is either losing out to globalization or rejecting much of the content flows associated with its advance, there is a far greater chance that the U.S. will end up sending forces at some point. Conversely, if a country is largely functioning within globalization, we tend not to have to send our forces there to restore order to eradicate threats.

Now, that may seem like a tautology—in effect defining any place that has not attracted U.S. military intervention in the last decade or so as “functioning within globalization” (and vice versa). But think about this larger point: Ever since the end of World War II, this country has assumed that the real threats to its security resided in countries of roughly similar size, development, and wealth—in other words, other great powers like ourselves. During the cold war, that other great power was the Soviet Union. When the big Red machine evaporated in the early 1990’s, we flirted with concerns about a united Europe, a powerhouse Japan, and—most recently—a rising China.

What was interesting about all those scenarios is the assumption that only an advanced state can truly threaten us. The rest of the world? Those less-developed parts of the world have long been referred to in military plans as the “Lesser Includeds,” meaning that if we built a military capable of handling a great power’s military threat, it would always be sufficient for any minor scenarios we might have to engage in the less advanced world.

That assumption was shattered by September 11. After all, we were not attacked by a nation or even an army but by a group of—in Thomas Friedman’s vernacular—Super Empowered Individuals willing to die for their cause. September 11 triggered a system perturbation that continues to reshape our government (the new Department of Homeland Security), our economy (the de facto security tax we all pay), and even our society (Wave to the camera!). Moreover, it launched the global war on terrorism, the prism through which our government now views every bilateral security relationship we have across the world.

In many ways, the September 11 attacks did the U.S. national-security establishment a huge favor by pulling us back from the abstract planning of future high-tech wars against “near peers” into the here-and-now threats to global order. By doing so, the dividing lines between Core and Gap were highlighted, and more important, the nature of the threat environment was thrown into stark relief.

Think about it: Bin Laden and Al Qaeda are pure products of the Gap—in effect, its most violent feedback to the Core. They tell us how we are doing in exporting security to these lawless areas (not very well) and which states they would like to take “off line” from globalization and return to some seventh-century definition of the good life (any Gap state with a sizable Muslim population, especially Saudi Arabia).

If you take this message from Osama and combine it with our military-intervention record of the last decade, a simple security rule set emerges: A country’s potential to warrant a U.S. military response is inversely related to its globalization connectivity. There is a good reason why Al Qaeda was based first in Sudan and then later in Afghanistan: These are two of the most disconnected countries in the world. Look at the other places U.S. Special Operations Forces have recently zeroed in on: northwestern Pakistan, Somalia, Yemen. We are talking about the ends of the earth as far as globalization is concerned.

But just as important as “getting them where they live” is stopping the ability of these terrorist networks to access the Core via the “seam states” that lie along the Gap’s bloody boundaries. It is along this seam that the Core will seek to suppress bad things coming out of the Gap. Which are some of these classic seam states? Mexico, Brazil, South Africa, Morocco, Algeria, Greece, Turkey, Pakistan, Thailand, Malaysia, the Philippines, and Indonesia come readily to mind. But the U.S. will not be the only Core state working this issue. For example, Russia has its own war on terrorism in the Caucasus, China is working its western border with more vigor, and Australia was recently energized (or was it cowed?) by the Bali bombing.

IF WE STEP BACK for a minute and consider the broader implications of this new global map, then U.S. national-security strategy would seem to be: 1) Increase the Core’s immune system capabilities for responding to September 11-like system perturbations; 2) Work the seam states to firewall the Core from the Gap’s worst exports, such as terror, drugs, and pandemics; and, most important, 3) Shrink the Gap. Notice I did not just say Mind the Gap. The knee-jerk reaction of many Americans to September 11 is to say, “Let’s get off our dependency on foreign oil, and then we won’t have to deal with those people.” The most naïve assumption underlying that dream is that reducing what little connectivity the Gap has with the Core will render it less dangerous to us over the long haul. Turning the Middle East into Central Africa will not build a better world for my kids. We cannot simply will those people away.

The Middle East is the perfect place to start. Diplomacy cannot work in a region where the biggest sources of insecurity lie not between states but within them. What is most wrong about the Middle East is the lack of personal freedom and how that translates into dead-end lives for most of the population—especially for the young. Some states like Qatar and Jordan are ripe for perestroika-like leaps into better political futures, thanks to younger leaders who see the inevitability of such change. Iran is likewise waiting for the right Gorbachev to come along—if he has not already.

What stands in the path of this change? Fear. Fear of tradition unraveling. Fear of the mullah’s disapproval. Fear of being labeled a “bad” or “traitorous” Muslim state. Fear of becoming a target of radical groups and terrorist networks. But most of all, fear of being attacked from all sides for being different—the fear of becoming Israel.

The Middle East has long been a neighborhood of bullies eager to pick on the weak. Israel is still around because it has become—sadly—one of the toughest bullies on the block. The only thing that will change that nasty environment and open the floodgates for change is if some external power steps in and plays Leviathan full-time. Taking down Saddam, the region’s bully-in-chief, will force the U.S. into playing that role far more fully than it has over the past several decades, primarily because Iraq is the Yugoslavia of the Middle East—a crossroads of civilizations that has historically required a dictatorship to keep the peace. As baby-sitting jobs go, this one will be a doozy, making our lengthy efforts in postwar Germany and Japan look simple in retrospect.

But it is the right thing to do, and now is the right time to do it, and we are the only country that can. Freedom cannot blossom in the Middle East without security, and security is this country’s most influential public-sector export. By that I do not mean arms exports, but basically the attention paid by our military forces to any region’s potential for mass violence. We are the only nation on earth capable of exporting security in a sustained fashion, and we have a very good track record of doing it.

Show me a part of the world that is secure in its peace and I will show you a strong or growing ties between local militaries and the U.S. military. Show me regions where major war is inconceivable and I will show you permanent U.S. military bases and long-term security alliances. Show me the strongest investment relationships in the global economy and I will show you two postwar military occupations that remade Europe and Japan following World War II.

This country has successfully exported security to globalization’s Old Core (Western Europe, Northeast Asia) for half a century and to its emerging New Core (Developing Asia) for a solid quarter century following our mishandling of Vietnam. But our efforts in the Middle Ease have been inconsistent—in Africa, almost nonexistent. Until we begin the systematic, long-term export of security to the Gap, it will increasingly export its pain to the Core in the form of terrorism and other instabilities.

Naturally, it will take a whole lot more than the U.S. exporting security to shrink the Gap. Africa, for example, will need far more aid than the Core has offered in the past, and the integration of the Gap will ultimately depend more on private investment than anything the Core’s public sector can offer. But it all has to begin with security, because free markets and democracy cannot flourish amid chronic conflict.

Making this effort means reshaping our military establishment to mirror-image the challenge that we face. Think about it. Global war is not in the offing, primarily because our huge nuclear stockpile renders such war unthinkable—for anyone. Meanwhile, classic state-on-state wars are becoming fairly rare. So if the United States is in the process of “transforming” its military to meet the threats of tomorrow, what should it end up looking like? In my mind, we fight fire with fire. If we live in a world increasingly populated by Super-Empowered Individuals, we field a military of Super-Empowered-Individuals.

This may sound like additional responsibility for an already overburdened military, but that is the wrong way of looking at it, for what we are dealing with here are problems of success—not failure. It is America’s continued success in deterring global war and obsolescing state-on-state war that allows us to stick our noses into the far more difficult subnational conflicts and the dangerous transnational actors they spawn. I know most Americans do not want to hear this, but the real battlegrounds in the global war on terrorism are still over there. If gated communities and rent-a-cops were enough, September 11 never would have happened.

History is full of turning points like that terrible day, but no turning-back-points. We ignore the Gap’s existence at our own peril, because it will not go away until we as a nation respond to the challenge of making globalization truly global.

http://www.nwc.navy.mil/newrulesets/ThePentagonsNewMap.htm

Social security - Samuelson

Lots of Gain And No Pain

By Robert J. Samuelson

Wednesday, February 16, 2005; Page A19

You've probably never heard of Flemming v. Nestor, but it's a 1960 Supreme Court decision that demolishes the Bush administration's case for borrowing vast amounts to pay for its proposed "personal" Social Security accounts. The White House has crafted a clever bit of intellectual camouflage to do what's politically convenient: create a new government benefit at no obvious cost. True, borrowing is a cost, but it's largely hidden from the public. It's not as conspicuous as a tax. What we have here is an exercise in mass deception that, in a weird way, is encouraged by a public that prefers to be deceived rather than face the difficult choices posed by Social Security or the government's budget.

If personal accounts are worth having (they're not), then they're worth paying for through taxes or cuts in other government spending. Perish the thought. The administration created a massive Medicare drug benefit (estimated 2006-15 cost by the Congressional Budget Office: $795 billion) without new taxes, and why shouldn't it do the same for personal accounts? The White House estimates the needed borrowing at $754 billion in the next decade. Democrats on the House budget committee put the first full decade of borrowing at $1.4 trillion. Regardless of amount, the administration's justification is the same: The borrowing simply replaces one debt (future Social Security payments) with another (borrowing now for personal accounts). As Joshua Bolten, head of the Office of Management and Budget, testified last week: "The transition financing [of personal accounts] does not represent new debt. These are obligations that the government already owes in the form of future [Social Security] benefits." Sounds reasonable. It isn't.

A bond is a legal debt; Social Security is not. When the government sells a bond -- that is, borrows -- it assumes a legal obligation to pay the lender interest and to repay the principal. If the government defaulted, creditors would go to court to demand repayment. Social Security does not involve this kind of debt; Congress can raise or lower benefits at any time. This is both common sense and the law -- Flemming v. Nestor.

Ephram Nestor came to the United States from Bulgaria in 1913. In 1956 he was deported because he'd been a Communist Party member for six years (1933-39) and was also stripped of his Social Security benefits -- both acts following congressional law passed in the prevailing anti-communist climate. Nestor had paid payroll taxes for 19 years; he sued to get his Social Security. The court rejected his claim. The court said that, generally, Congress could alter Social Security as it pleased. It needed to have "flexibility" to adjust Social Security to "ever-changing conditions."

It may shock most Americans to know that Congress could legally cut or eliminate their Social Security benefits tomorrow. But that's also the White House position. Dig deep into its budget documents, and here's what you find: "Future Social Security . . . benefits may be considered as promises or responsibilities of the Federal Government, but these benefits are not a liability [debt] in a legal or accounting sense. . . . There is no bright line dividing Social Security . . . from other programs that promise benefits to people." Well, this flatly contradicts the administration's logic that Social Security is a future debt that must be paid. If it can borrow tons of money for personal accounts, it can borrow tons for future food stamps or Medicaid.

In a sense, this has been happening, because the federal budget has run deficits in all but five years since 1960. The new Bush budget envisions deficits seemingly forever. Yet there is little public appetite for anything else. Bush's budget proposes cutting 150 programs with savings of $20 billion in 2006. The response: The sky is falling. "President Offers Budget Proposal With Broad Cuts," headlined the New York Times. Not really. The cuts amount to eight-tenths of 1 percent of proposed spending of $2.57 trillion. The media criticize deficits -- and also spending cuts that might trim deficits.

In an expanding economy, Bush should have proposed a balanced budget, and his projected deficits are understated because they exclude some Iraq war costs and borrowing for Social Security. Still, closing the unrealistic deficits would require unpopular measures. The projected deficit for 2009 is $233 billion. In that year a 10 percent income-tax surcharge, raising about $125 billion, and repeal of the Medicare drug benefit, saving $66 billion, would cover most of the deficit.

Americans dislike deficits but dislike them less than the alternatives -- higher taxes or lower spending. There's a quiet clamor for hypocrisy and deception, and pragmatic politicians respond with massive borrowing schemes that seem to promise something for nothing. Please, spare us the truth.

It's More Than Social Security

By Robert J. Samuelson

Friday, January 14, 2005; Page A19

"We have a problem, and the problem is America is getting older and that there are fewer people to pay into the system to support a baby boomer generation which is about to retire. Therefore, the question is, does this country have the will to address the problem?"

-- President Bush, Dec. 9, 2004

The answer seems to be "no," starting with the president. Language matters. How we discuss something -- the words and phrases we select -- determines whether what we say makes sense. The fact that both Bush and his opponents have chosen to debate only Social Security, highlighted by the president's "personal accounts" proposal, betrays a lack of seriousness that promises failure. The nation's problem is not Social Security. It is all federal programs for retirees, of which Social Security is a shrinking part. Admit that and the debate becomes harder, but it also becomes more honest and meaningful.

Our national government is increasingly a transfer mechanism from younger workers (i.e. taxpayers) to older retirees. In fiscal 2004 Social Security ($488 billion), Medicare ($300 billion) and Medicaid ($176 billion) represented 42 percent of federal outlays. Excluding spending that doesn't go to the elderly, the Congressional Budget Office crudely estimates that these programs pay an average of almost $17,800 to each American 65 and over. By 2030 the number of elderly is projected to double; the costs will skyrocket.

It makes no sense to separate Social Security from Medicare. Most Social Security retirees receive Medicare. Similarly, it is the total cost of these programs that matters for the budget, taxpayers and the economy. By itself, Social Security is almost irrelevant. Indeed, the big increases in future spending occur in health care. The actuaries of Social Security and Medicare project that Medicare's costs will exceed Social Security's in 2024 -- and then the gap only widens. (The projections don't include Medicaid, which pays for some nursing home care. Including Medicaid would widen the gap further.)

Look at the numbers. From 2004 to 2030, the combined spending on Social Security and Medicare is expected to rise from 7 percent of national income (gross domestic product) to 13 percent. Two-thirds of the increase occurs in Medicare. To add perspective: The increases in Social Security and Medicare represent almost a third of today's budget, which is 20 percent of GDP. Covering promised benefits would ultimately require a tax increase of about 30 percent; that assumes today's budget is balanced (dispensing with the issue of Bush's tax cuts). In current dollars, the needed tax increase would be about $700 billion annually.

The central budget issue of our time is how much younger taxpayers should be forced to support older retirees -- and both political parties and the public refuse to face it. What's fair to workers and retirees? How much of a tax increase (never mind budget deficits) could the economy stand before growth suffered badly? How much do today's programs provide a safety net for the dependent elderly, and how much do they subsidize the leisure of the fit or well-to-do? (About 15 percent of elderly households have incomes exceeding $75,000.) How long should people work?

We need a new generational compact to reflect new realities. In 1935, when Congress passed Social Security, life expectancy at birth was 62; now it's 77. In 1965, when Congress passed Medicare, the 65-and-over population was 9 percent of the total; by 2030, it's expected to be 20 percent. The generational compact includes Social Security, Medicare and Medicaid. If this year's debate focuses only on Social Security, it will be an exercise in deception. Unfortunately, both the White House and congressional Democrats have a stake in that deception.

Democrats argue that "the Social Security problem" can be fixed with tolerable tax increases and benefit cuts, imposed mostly on the upper middle class and the rich. True. The long-term gap between promised benefits and present taxes equals 1 to 2 percent of GDP. Though large, the needed changes in taxes and benefits probably wouldn't be crippling. There's no "crisis," say Democrats and supporting pundits. What they omit is Medicare. Adding that, tax increases would be huge -- and hard to limit to the wealthy.

The focus on Social Security also suits the White House. For starters, it avoids the reality that until now many Bush policies have favored the old over the young. In 2030 the new drug benefit raises Medicare spending by an estimated 36 percent. The tax cut on dividends and capital gains (to 15 percent) benefits the old -- particularly the wealthy elderly -- because they own a disproportionate share of stocks. Elderly households with incomes exceeding $100,000 will receive 27 percent of the benefits of these cuts (worth about $6 billion) in 2005, estimates the Tax Policy Center. As for personal accounts, they would involve immense practical problems. Why run the risks if, because Medicare has been ignored, the real problem of federal retirement spending remains largely unaddressed? Good question. The White House isn't asking.

What's discouraging is that, along with most Republicans and Democrats, many "experts" and pundits also evade the hard questions. Their purpose is mainly to condemn or cheer George Bush. The debate we need involves generational responsibility and obligation. Anyone who examines the outlook must conclude that, even allowing for uncertainties, both Social Security and Medicare benefits will have to be cut. We can either make future cuts now, with warnings to beneficiaries, or we can wait for budgetary pressures to force abrupt cuts later, with little warning. That's the problem, and to answer Bush, no one wants to address it.

 The Bigger Problem

    THE PROGRAM NOW consumes one-eighth of the federal budget; in 10 

years that share is expected to grow to one-fifth. It will consume more 

money this year than enters the Treasury through payroll taxes. By 2019, if current spending patterns hold, the trust fund that finances the biggest part of the program will be out of cash. 

 The program is not Social Security but Medicare. Those frightening 

figures emerged during what might be called the Medicare Moment of 

President Bush's economic summit -- an official pause to recognize the problem and then crisply move on. "My role is to say: 'Remember health care, remember Medicare,' " said Dr. William Roper, dean of the University of North Carolina School of Medicine. Indeed, the figures tell the story. Medicare is a bigger problem than Social Security: its hospital care trust fund is on track to go bust two or even three decades before the Social Security surplus runs out; its unfunded liabilities dwarf those of Social Security -- $27.7 trillion over the next 75 years, compared with $3.7 trillion liability for Social Security. 

 So why is the administration devoting its attention to Social Security 

rather than grappling with the bigger problem? One answer may be that, 

as ambitious as the administration's plans for private accounts may be, 

"fixing" Social Security is by far the easier task. Medicare faces the 

same relentless demographic pressures as Social Security -- plus the 

burden of rapidly rising health care costs. Another may be that grappling with Medicare will require thinking about the nation's irrational health care system as a whole, a task for which the administration and Congress appear to have little stomach.

 Indeed, the gaping Medicare hole was dug even deeper last year with 

the adoption of a new prescription drug plan for seniors. The 

administration initially sought to link moves to constrain Medicare costs with the  prescription drug benefit, but the legislation ended up with a supersized new benefit and slimmed-down cost-containment measures that mostly take effect -- if they work -- years down the road. The Government Accountability Office estimated earlier this month that the drug benefit will cost $8.1 trillion over the next 75 years -- and that's if politicians resist the temptation to fill in the "doughnut hole" gap in coverage. 

Comptroller General David M. Walker called the drug plan "one of the 

largest unfunded liabilities ever undertaken by the U.S. government." 

  You wouldn't know it from Mr. Bush, though, and that's the truly 

scary part as he presses for Social Security reform. "We did take on 

Medicare, and it was the Medicare reform bill that really began to change 

Medicare as we knew it," he said at his news conference Dec. 20. "It 

introduced market forces for the first time, provided a prescription drug 

coverage for our seniors, which I believe will be cost-effective. I 

recognize some of the actuaries haven't come to that conclusion yet, but the 

logic is irrefutable." 

 Actually, none of the actuaries have come to that conclusion; their 

only disagreement is about how mammoth the cost will be. And while the 

president is right that in some cases paying for prescription medication 

saves money down the road, we disagree in suggesting that the drug 

benefit will even come close to paying for itself overall. Mr. Bush's rosy 

scenario notwithstanding, Dr. Roper's admonition -- "remember Medicare" 

-- is precisely on point.