Wednesday, June 3, 2009

The Potential Role of Entitlement or Budget Commissions in Addressing Long-term Budget Problems

The Potential Role of Entitlement or Budget Commissions in Addressing Long-term Budget Problems. By The Fiscal Seminar Group
Brookings, June 03, 2009

The United States is facing a looming fiscal imbalance brought on by the aging of the population and rapidly rising health care costs. And while the credit crisis and recession are understandably of top concern to policymakers at the moment, the long-run fiscal outlook, seemingly deteriorating further day by day, cannot be ignored.

Unfortunately, the current political environment creates strong disincentives for individual politicians to tackle the tough choices required to put our fiscal house back in order. An appointed commission could offer an alternative mechanism through which to address these thorny but critical issues by undertaking the heavy lifting of developing options and building the political consensus necessary to enact legislation. As evidence of the popularity of this idea, over a dozen bills were introduced in the 110th Congress that would have created commissions to find politically and fiscally acceptable solutions for reforming entitlements, taxes, the budgeting process, or some combination of the three. This paper reviews some of the recent history of appointed commissions and discusses the issues surrounding their potential role in long-term federal budgeting.

Is Universal Coverage Comparatively Effective?

Is Universal Coverage Comparatively Effective? By Michael F. Cannon
This article appeared on on May 31, 2009.

As congressional Democrats prepare to deliver on President Barack Obama's goal of "expanding coverage to all Americans,"(.pdf) an important question remains unanswered: is universal coverage worth the money?

Extending health insurance coverage to the estimated 46 million (.pdf) Americans without it could easily cost $2 trillion over the next 10 years. If the underlying goal is to make people healthier, are there other ways to spend that $2 trillion that would help Americans, including the uninsured, live even longer, healthier lives? There may well be, and one can hardly imagine a more fit topic for comparative-effectiveness research.

Health reformers love a good we-all-know statement, like, "We all know that health insurance is a good investment," or, "We all know that investing in preventive care saves money."

Health economists, on the other hand, enjoy embarrassing the we-all-know-it-alls. For example, a recent New England Journal of Medicine article concluded, "Although some preventive measures do save money, the vast majority reviewed in the health economics literature do not."
Likewise, economists Helen Levy of the University of Michigan and David Meltzer of the University of Chicago have thrown cold water on the conventional wisdom that expanding health insurance is a good investment.

In 2004, Levy and Meltzer reviewed the literature for the Urban Institute and concluded: "There is no evidence at this time that money aimed at improving health would be better spent on expanding insurance coverage than onâ?¦other possibilities," such as programs that fund inner-city clinics, screen for discrete diseases such as hypertension, or promote better nutrition.

Writing in the Annual Review of Public Health in 2008, Levy and Meltzer reaffirmed that conclusion: "The central question of how health insurance affects health, for whom it matters, and how much, remains largely unanswered at the level of detail needed to inform policy decisions."

"Understanding the magnitude of health benefits associated with insurance is not just an academic exercise," they explain, "it is crucial to ensuring that the benefits of a given amount of public spending on health are maximized."

Not only is there "no evidence" that universal coverage is the most cost-effective use of our $2 trillion, the benefits may not exceed the costs at all.

In a 2008 article for the Journal of Public Economics, Amy Finkelstein of the Massachusetts Institute of Technology and Robin McKnight of Wellesley College reported that even though Medicare achieved universal coverage for the elderly, it had no impact on elderly mortality rates in its first 10 years. Medicare may (or may not) have improved enrollees' health in other ways. Yet Finkelstein's and McKnight's results leave open the question of whether those and any additional benefits were worth Medicare's substantial cost.

For decades, health reformers have been beating the drums for "evidence-based medicine," all the while ignoring the lack of evidence behind the push for universal coverage. "Science for thee," we lecture physicians, "but not for me."

It's time to start practicing evidence-based health policy. Here's how.

Before Congress spends $2 trillion on reforms of unknown value, it should direct the $1.1 billion it has allocated for "comparative effectiveness" research toward experiments that will tell us whether universal coverage or some other strategy would deliver the most health for the money.

The idea has precedent. In the 1970s, at a time when many reformers were demanding to make health care "free" for all, Congress funded a massive social experiment to test the idea. The RAND Health Insurance Experiment startled reformers by showing that "free" care cost far more than mere catastrophic health insurance, yet offered little or no additional improvements in health.

Levy and Meltzer note that "definitive answers" will come only by "investing in social experiments designed to answer specific questions about the value of improved health insurance coverage or other policies to improve health." George Mason University economist Robin Hanson has even started a petition to demand a new RAND-like experiment, which he estimates would cost a mere $500 million over 10 years.

I oppose spending taxpayer dollars on such research, for reasons both principled and practical. But if Congress is going to spend the money anyway, the least it could do is let us know whether universal coverage is a comparatively effective use of our $2 trillion.

Michael F. Cannon is director of health policy studies at the Cato Institute and coauthor of Healthy Competition: What's Holding Back Care and How to Free It.

Lessons from setting the freight railroads free

If Obama Had Carter's Courage . . . By HOLMAN W. JENKINS, JR.
Lessons from setting the freight railroads free.
WSJ, Jun 03, 2009

Barack Obama is no Jimmy Carter. The latter really did face the unraveling of an indispensable industry. Mr. Obama faces not a collapse of the domestic auto industry, but collapse of two companies miserable enough to have been extant in the 1930s when the Wagner Act was foisted upon the industry.

We have a second auto industry, founded after the political and legal system had thought better of mandatory unionization, born of foreign parents, mostly in the South. It's surviving the recession without extraordinary help.

In Mr. Carter's day, bankruptcies were scything through the railroad sector, hurtling toward a rendezvous with nationalization. Conrail, an amalgam of failed Northeastern lines, had already been taken over and analysts foresaw a $300 billion bill (in today's dollars) in the likely prospect that Washington would soon have to operate the rest of the nation's freight railroads.
A disaster must be truly sizable before Congress will correct its own errors -- and the railroads were such a case.

Rail executives and economists had been arguing since the 1920s, when competition from trucks and planes began to emerge, that comprehensive federal regulation had only distorted the industry's pricing, driven away investment, and made competitive adaptation impossible. But the argument had a new ring now that Washington would have to bear the political risk of operating and subsidizing the nation's rail services.

It still took some doing on Mr. Carter's part. When the bill stalled, a hundred phone calls went from the White House to congressmen, including 10 by Mr. Carter in a single evening. The bill essentially no longer required railroads to provide services at a loss to please certain constituencies. It meant going up against farmers, labor, utilities, mining interests, and even some railroads -- whereas Mr. Obama's auto bailout tries to appease key lobbies like labor and greens, which is why it can't work.

In his message to Congress, Mr. Carter warned of a "catastrophic series of bankruptcies" and "massive federal expenditure" unless deregulation was allowed to "overhaul our nation's rail system, leading to higher labor productivity and more efficient use of plant and equipment."
Involving Congress meant the plan had to be explained and rationally coherent -- features missing from Mr. Obama's contradictory auto policies.

In 1980, Congress passed the Staggers Act, ending a century of federal regulation and leading to the railroad industry's renaissance. Leo Mullin, then a young Conrail veep, would later look back and praise all involved for having the fortitude to recognize that salvaging the taxpayer's investment in Conrail meant more than fixing a single broken company -- it meant fixing a defective regulatory environment.

That fortitude is exactly what's missing today, as it was missing from Mr. Obama's statement on Monday, which attributed GM's failure to sins by everyone but Washington.

We're still waiting for the brave, original thinking that we were told Mr. Obama represented. Like Washington circa 1978, he has landed for once in a situation where something more than symbolism is required of him. He has finally glided into the land of the real, where the key measurable outcome is no longer whether an audience is glowing with self-approval when he leaves the room.

To wit, will GM become self-sustaining and profitable, as he promises, or a bottomless drain for taxpayer subsidies? (The same question applies to Chrysler and, likely, Ford, which may have only prolonged the Ford family's run at the top by mortgaging the company to the hilt just before the lending markets closed down.)

Nothing really will be solved, even by GM's bankruptcy, until Washington recognizes its own policy incoherence -- namely the impossibility of reconciling stiff fuel mileage mandates with gasoline prices set by the market, with a domestic labor monopoly, with a high degree of openness to international trade. (You can have three, but not four.)

It took 103 years after the Interstate Commerce Act for Congress to junk the regulatory apparatus that destroyed the railroads. To get rid of CAFE after only 34 years would be some kind of record -- if Mr. Obama had Mr. Carter's courage.

Let's face it: CAFE has done nothing to reduce gasoline usage or oil imports (car owners just end up driving more miles). In 34 years, not a whisper of testimony has come from any quarter that the policy actually works. It only causes U.S. manufacturers to make small cars and dump them at a loss on the public, subsidized with the profits of pickups and SUVs.

Detroit doesn't have to match the transplants in wages and benefits, but CAFE distorted what would have been the Big Three's natural path of adaptation to the natural fact of growing diversity in the marketplace with the arrival of foreign manufacturers. Detroit would have focused on market segments where it could compete profitably even with its higher labor cost -- on bigger, pricier vehicles where labor cost is a lower share of value added.

Unfortunately, Mr. Obama, that freethinker, took to the CAFE fraud like a bat to a belfry. He signaled his arrival on the presidential stage by sternly demanding higher mileage standards early in his campaign. The "change" candidate who might have broken with a generation of political cant about CAFE instead appropriated the fraud for his own careerist purposes.

That tangled web now catches him in a fatal contradiction as he pours tens of billions of taxpayer dollars into the failed business model that CAFE foisted on Detroit.

Global Humanitarian Forum report: A Methodological Embarassment

A Methodological Embarassment, by Roger Pielke, Jr.
Prometheus, May 29th, 2009


I am quoted in today’s NYT on a new report issued by the Global Humanitarian Forum which makes the absurd claim that 315,000 deaths a year can be attributed to the effects of rising greenhouse gas concentrations. Here is what I said:

Roger A. Pielke Jr., a political scientist at the University of Colorado, Boulder, who studies disaster trends, said the forum’s report was “a methodological embarrassment” because there was no way to distinguish deaths or economic losses related to human-driven global warming amid the much larger losses resulting from the growth in populations and economic development in vulnerable regions. Dr. Pielke said that “climate change is an important problem requiring our utmost attention.” But the report, he said, “will harm the cause for action on both climate change and disasters because it is so deeply flawed.”

Strong comments I know. Shoddy work on disasters and climate change is the norm, unfortunately, and something I’ve been closely following for well over a decade. I have no illusions that this latest concoction will be repeatedly cited regardless.

Below are my comments to the NYT upon reading the report (cleaned up and formatted). Caution, strong views ahead.

Let me apologize for the length of this reply. But it is important to be clear and to set the record straight.

Let me say first that human-caused climate change is an important problem requiring our utmost attention. Second, the effects of disasters, particularly in poorer countries, is also an important problem that to some degree has been overlooked, as I have argued for many years.

However, I cannot express how strongly I feel that this report has done a disservice to both issues. It is a methodological embarrassment and poster child for how to lie with statistics. The report will harm the cause for action on both climate change and disasters because it is so deeply flawed.

It will give ammunition to those opposed to action and divert attention away from the people who actually need help in the face of disasters, yet through this report have been reduced to a bloodless statistic for use in the promotional battle over climate policies. The report is worse than fiction, it is a lie. These are strong words I know.

1. Let me first start by noting that the same group that did the analysis for the UN, the Geo-Risks group in Munich Re, earlier this year published a peer-reviewed paper arguing that the signal of human-caused climate change could not presently be seen in the loss data on disasters. [...]

3. The report cites and undates the Stern Review Report estimates of disaster losses, however, in a peer-reviewed paper I showed that these estimates were off by an order of magnitude and relied on a similar sort of statistical gamesmanship to develop its results (and of course this critique was ignored):

Pielke, Jr., R. A., 2007. Mistreatment of the economic impacts of extreme events in the Stern Review Report on the Economics of Climate Change, Global Environmental Change, 17:302-310. (PDF)

This report is an embarrassment to the GHF and to those who have put their names on it as representing a scientifically robust analysis. It is not even close.

Best regards,


Federal President should stop apologising for America

Barack Obama should stop apologising for America. By Nile Gardiner
It is time for President Obama to recognise that his strategy is weakening his country and making the United States more vulnerable to attack, says Nile Gardiner.
The Telegraph, Jun 02, 2009 10:41AM BST

No leader in American history has gone to greater lengths than Barack Obama to make amends for his own country. From condemnation of American “arrogance” in a speech in Strasbourg to acknowledging U.S. “mistakes” before millions of Muslims on Arab television, Obama has rarely missed an opportunity to apologise for the actions of the American people.

President Obama has elevated the art of national self-loathing to new heights, and seems to delight in prostrating the most powerful nation on the face of the earth before its critics and rivals, especially on foreign soil. The Obama worldview revolves around the central premise that the United States must be humble and “engage” and work with its enemies through the application of “smart power”. There is nothing smart, however, in appeasing rogue states such as North Korea or Iran.

The Obama doctrine is now lying in tatters after North Korean tyrant Kim Jong-Il and Iranian demagogue Mahmoud Ahmadinejad met Obama’s recent overtures with missile tests and even a nuclear blast from Pyongyang. The president’s video message in March offering “a new beginning” to “the people and leaders of the Islamic Republic of Iran” was followed by the launch of a surface-to-surface missile with a range of 1,200 miles capable of reaching southern Europe. Incredibly, the U.S. response has been to slash defense spending, with a dramatic scaling down of plans for a global missile defence shield.

The world today is considerably more dangerous than it was in the days of the Bush Administration, and the Obama White House has nothing to show for its weak-kneed efforts. The brutal truth is that the United States is increasingly viewed as a soft touch by its enemies, increasingly jeered rather than feared.

When he travels to the Middle East and Europe this week, the president will have ample opportunity to do what he does best – atone for America’s past. After a brief visit to Saudi Arabia he will deliver a major address to the Muslim world in Cairo, before travelling to Germany to visit the Buchenwald Nazi concentration camp and meet with Chancellor Angela Merkel in Dresden. His world tour ends with his participation in ceremonies marking the 65th anniversary of the D-Day landings in Normandy.

It will be hugely tempting for the rock star president to play to his Arab and European audiences by scoring points against his hugely unpopular predecessor. He could easily rail against the Bush Administration’s enhanced interrogation techniques, boast of the impending closure of the Guantanamo detention facility, or revive the ghosts of Abu Ghraib. The president’s advisers are no doubt furiously trying to outdo one another with the most original mea culpas.

Obama’s supine approach has become a humiliating spectacle for a country that, together with Great Britain, has done more to advance the cause of liberty and freedom across the world than any nation in the world. Every groveling apology by the president undermines America’s confidence, standing and power, and strengthens the hand of those who seek her destruction.

It is time for President Obama to recognise that his new strategy is weakening his country and making the United States more vulnerable to attack. The dream of America haters who revel in the vision of the humbling of a superpower, is being realised by an administration that has so far fundamentally rejected the idea of American exceptionalism.

The world needs a president who aggressively projects American power on the world stage, rather than seeks the adoration of traditionally hostile foreign audiences. In Egypt, Obama should not be afraid to offend the sensibilities of Muslim leaders, by calling for religious tolerance, freedom of speech, worship and association, and a rejection of Islamist extremism.

In Germany, the president should call on Europe to learn the lessons of the Holocaust and stand and fight against totalitarianism, whether in the form of the Taliban in Afghanistan or the Mullahs of Tehran in their drive for nuclear domination of the Middle East. He must urge the Germans to end their massive investments in Iran, which shamefully help sustain a regime that threatens to wipe the descendents of the survivors of the Final Solution from the face of the earth.

In Normandy, President Obama should take great pride in America’s role in the liberation of Europe and remind his French hosts that Europe is free today because of the huge sacrifice of American, British and Commonwealth forces. This is a moment for the president to recognise American global power and the role it has played as a great force for good, as well as the broader importance of the transatlantic alliance and the Anglo-American Special Relationship.

No one expects Barack Obama to adopt the swagger of a John Wayne or Clint Eastwood when he travels to the Middle East and Western Europe. But he should adopt a more forceful and confident approach to international affairs that marks him as a force to be reckoned with rather than a Jimmy Carter-like pushover. It is not too late for the president to acknowledge that the time for apologies is over, that the world needs robust American leadership that projects strength and power rather than timidity and weakness.

Nile Gardiner is the Director of the Margaret Thatcher Center for Freedom at the Heritage Foundation in Washington, D.C.

The Geography of Recession

The Geography of Recession. By Peter Zeihan
Stratfor, June 2, 2009 1844 GMT

The global recession is the biggest development in the global system in the year to date. In the United States, it has become almost dogma that the recession is the worst since the Great Depression. But this is only one of a wealth of misperceptions about whom the downturn is hurting most, and why.

Let’s begin with some simple numbers.

As one can see in the chart, the U.S. recession at this point is only the worst since 1982, not the 1930s, and it pales in comparison to what is occurring in the rest of the world. (Figures for China have not been included, in part because of the unreliability of Chinese statistics, but also because the country’s financial system is so radically different from the rest of the world as to make such comparisons misleading. For more, read the China section below.)

But didn’t the recession begin in the United States? That it did, but the American system is far more stable, durable and flexible than most of the other global economies, in large part thanks to the country’s geography. To understand how place shapes economics, we need to take a giant step back from the gloom and doom of the current moment and examine the long-term picture of why different regions follow different economic paths.

The United States and the Free Market

The most important aspect of the United States is not simply its sheer size, but the size of its usable land. Russia and China may both be similar-sized in absolute terms, but the vast majority of Russian and Chinese land is useless for agriculture, habitation or development. In contrast, courtesy of the Midwest, the United States boasts the world’s largest contiguous mass of arable land — and that mass does not include the hardly inconsequential chunks of usable territory on both the West and East coasts.

Second is the American maritime transport system. The Mississippi River, linked as it is to the Red, Missouri, Ohio and Tennessee rivers, comprises the largest interconnected network of navigable rivers in the world. In the San Francisco Bay, Chesapeake Bay and Long Island Sound/New York Bay, the United States has three of the world’s largest and best natural harbors. The series of barrier islands a few miles off the shores of Texas and the East Coast form a water-based highway — an Intercoastal Waterway — that shields American coastal shipping from all but the worst that the elements can throw at ships and ports.

(click image)

The real beauty is that the two overlap with near perfect symmetry. The Intercoastal Waterway and most of the bays link up with agricultural regions and their own local river systems (such as the series of rivers that descend from the Appalachians to the East Coast), while the Greater Mississippi river network is the circulatory system of the Midwest. Even without the addition of canals, it is possible for ships to reach nearly any part of the Midwest from nearly any part of the Gulf or East coasts. The result is not just a massive ability to grow a massive amount of crops — and not just the ability to easily and cheaply move the crops to local, regional and global markets — but also the ability to use that same transport network for any other economic purpose without having to worry about food supplies.

The implications of such a confluence are deep and sustained. Where most countries need to scrape together capital to build roads and rail to establish the very foundation of an economy, transport capability, geography granted the United States a near-perfect system at no cost. That frees up U.S. capital for other pursuits and almost condemns the United States to be capital-rich. Any additional infrastructure the United States constructs is icing on the cake. (The cake itself is free — and, incidentally, the United States had so much free capital that it was able to go on to build one of the best road-and-rail networks anyway, resulting in even greater economic advantages over competitors.)

Third, geography has also ensured that the United States has very little local competition. To the north, Canada is both much colder and much more mountainous than the United States. Canada’s only navigable maritime network — the Great Lakes-St. Lawrence Seaway —is shared with the United States, and most of its usable land is hard by the American border. Often this makes it more economically advantageous for Canadian provinces to integrate with their neighbor to the south than with their co-nationals to the east and west.

Similarly, Mexico has only small chunks of land, separated by deserts and mountains, that are useful for much more than subsistence agriculture; most of Mexican territory is either too dry, too tropical or too mountainous. And Mexico completely lacks any meaningful river system for maritime transport. Add in a largely desert border, and Mexico as a country is not a meaningful threat to American security (which hardly means that there are not serious and ongoing concerns in the American-Mexican relationship).

With geography empowering the United States and hindering Canada and Mexico, the United States does not need to maintain a large standing military force to counter either. The Canadian border is almost completely unguarded, and the Mexican border is no more than a fence in most locations — a far cry from the sort of military standoffs that have marked more adversarial borders in human history. Not only are Canada and Mexico not major threats, but the U.S. transport network allows the United States the luxury of being able to quickly move a smaller force to deal with occasional problems rather than requiring it to station large static forces on its borders.

Like the transport network, this also helps the U.S. focus its resources on other things.
Taken together, the integrated transport network, large tracts of usable land and lack of a need for a standing military have one critical implication: The U.S. government tends to take a hands-off approach to economic management, because geography has not cursed the United States with any endemic problems. This may mean that the United States — and especially its government — comes across as disorganized, but it shifts massive amounts of labor and capital to the private sector, which for the most part allows resources to flow to wherever they will achieve the most efficient and productive results.

Laissez-faire capitalism has its flaws. Inequality and social stress are just two of many less-than-desirable side effects. The side effects most relevant to the current situation are, of course, the speculative bubbles that cause recessions when they pop. But in terms of long-term economic efficiency and growth, a free capital system is unrivaled. For the United States, the end result has proved clear: The United States has exited each decade since post-Civil War Reconstruction more powerful than it was when it entered it. While there are many forces in the modern world that threaten various aspects of U.S. economic standing, there is not one that actually threatens the U.S. base geographic advantages.

Is the United States in recession? Of course. Will it be forever? Of course not. So long as U.S. geographic advantages remain intact, it takes no small amount of paranoia and pessimism to envision anything but long-term economic expansion for such a chunk of territory. In fact, there are a number of factors hinting that the United States may even be on the cusp of recovery.

Russia and the State

If in economic terms the United States has everything going for it geographically, then Russia is just the opposite. The Russian steppe lies deep in the interior of the Eurasian landmass, and as such is subject to climatic conditions much more hostile to human habitation and agriculture than is the American Midwest. Even in those blessed good years when crops are abundant in Russia, it has no river network to allow for easy transport of products.

Russia has no good warm-water ports to facilitate international trade (and has spent much of its history seeking access to one). Russia does have long rivers, but they are not interconnected as the Mississippi is with its tributaries, instead flowing north to the Arctic Ocean, which can support no more than a token population. The one exception is the Volga, which is critical to Western Russian commerce but flows to the Caspian, a storm-wracked and landlocked sea whose delta freezes in the winter (along with the entire Volga itself). Developing such unforgiving lands requires a massive outlay of funds simply to build the road and rail networks necessary to achieve the most basic of economic development. The cost is so extreme that Russia’s first ever intercontinental road was not completed until the 21st century, and it is little more than a two-lane path for much of its length. Between the lack of ports and the relatively low population densities, little of Russia’s transport system beyond the St. Petersburg/Moscow corridor approaches anything that hints of economic rationality.

Russia also has no meaningful external borders. It sits on the eastern end of the North European Plain, which stretches all the way to Normandy, France, and Russia’s connections to the Asian steppe flow deep into China. Because Russia lacks a decent internal transport network that can rapidly move armies from place to place, geography forces Russia to defend itself following two strategies. First, it requires massive standing armies on all of its borders. Second, it dictates that Russia continually push its boundaries outward to buffer its core against external threats.

Both strategies compromise Russian economic development even further. The large standing armies are a continual drain on state coffers and the country’s labor pool; their cost was a critical economic factor in the Soviet fall. The expansionist strategy not only absorbs large populations that do not wish to be part of the Russian state and so must constantly be policed — the core rationale for Russia’s robust security services — but also inflates Russia’s infrastructure development costs by increasing the amount of relatively useless territory Moscow is responsible for.

Russia’s labor and capital resources are woefully inadequate to overcome the state’s needs and vulnerabilities, which are legion. These endemic problems force Russia toward central planning; the full harnessing of all economic resources available is required if Russia is to achieve even a modicum of security and stability. One of the many results of this is severe economic inefficiency and a general dearth of an internal consumer market. Because capital and other resources can be flung forcefully at problems, however, active management can achieve specific national goals more readily than a hands-off, American-style model. This often gives the impression of significant progress in areas the Kremlin chooses to highlight.

But such achievements are largely limited to wherever the state happens to be directing its attention. In all other sectors, the lack of attention results in atrophy or criminalization. This is particularly true in modern Russia, where the ruling elite comprises just a handful of people, starkly limiting the amount of planning and oversight possible. And unless management is perfect in perception and execution, any mistakes are quickly magnified into national catastrophes. It is therefore no surprise to STRATFOR that the Russian economy has now fallen the furthest of any major economy during the current recession.

China and Separatism

China also faces significant hurdles, albeit none as daunting as Russia’s challenges. China’s core is the farmland of the Yellow River basin in the north of the country, a river that is not readily navigable and is remarkably flood prone. Simply avoiding periodic starvation requires a high level of state planning and coordination. (Wrestling a large river is not the easiest thing one can do.) Additionally, the southern half of the country has a subtropical climate, riddling it with diseases that the southerners are resistant to but the northerners are not. This compromises the north’s political control of the south.

Central control is also threatened by China’s maritime geography. China boasts two other rivers, but they do not link to each other or the Yellow naturally. And China’s best ports are at the mouths of these two rivers: Shanghai at the mouth of the Yangtze and Hong Kong/Macau/Guangzhou at the mouth of the Pearl. The Yellow boasts no significant ocean port. The end result is that other regional centers can and do develop economic means independent of Beijing.

(click image)

With geography complicating northern rule and supporting southern economic independence, Beijing’s age-old problem has been trying to keep China in one piece. Beijing has to underwrite massive (and expensive) development programs to stitch the country together with a common infrastructure, the most visible of which is the Grand Canal that links the Yellow and Yangtze rivers. The cost of such linkages instantly guarantees that while China may have a shot at being unified, it will always be capital-poor.

Beijing also has to provide its autonomy-minded regions with an economic incentive to remain part of Greater China, and “simple” infrastructure will not cut it. Modern China has turned to a state-centered finance model for this. Under the model, all of the scarce capital that is available is funneled to the state, which divvies it out via a handful of large state banks. These state banks then grant loans to various firms and local governments at below the cost of raising the capital. This provides a powerful economic stimulus that achieves maximum employment and growth — think of what you could do with a near-endless supply of loans at below 0 percent interest — but comes at the cost of encouraging projects that are loss-making, as no one is ever called to account for failures. (They can just get a new loan.) The resultant growth is rapid, but it is also unsustainable. It is no wonder, then, that the central government has chosen to keep its $2 trillion of currency reserves in dollar-based assets; the rate of return is greater, the value holds over a long period, and Beijing doesn’t have to worry about the United States seceding.

Because the domestic market is considerably limited by the poor-capital nature of the country, most producers choose to tap export markets to generate income. In times of plenty this works fairly well, but when Chinese goods are not needed, the entire Chinese system can seize up. Lack of exports reduces capital availability, which constrains loan availability. This in turn not only damages the ability of firms to employ China’s legions of citizens, but it also removes the primary reason the disparate Chinese regions pay homage to Beijing. China’s geography hardwires in a series of economic challenges that weaken the coherence of the state and make China dependent upon uninterrupted access to foreign markets to maintain state unity. As a result, China has not been a unified entity for the vast majority of its history, but instead a cauldron of competing regions that cleave along many different fault lines: coastal versus interior, Han versus minority, north versus south.

China’s survival technique for the current recession is simple. Because exports, which account for roughly half of China’s economic activity, have sunk by half, Beijing is throwing the equivalent of the financial kitchen sink at the problem. China has force-fed more loans through the banks in the first four months of 2009 than it did in the entirety of 2008. The long-term result could well bury China beneath a mountain of bad loans — a similar strategy resulted in Japan’s 1991 crash, from which Tokyo has yet to recover. But for now it is holding the country together. The bottom line remains, however: China’s recovery is completely dependent upon external demand for its production, and the most it can do on its own is tread water.

Discordant Europe

Europe faces an imbroglio somewhat similar to China’s.

Europe has a number of rivers that are easily navigable, providing a wealth of trade and development opportunities. But none of them interlinks with the others, retarding political unification. Europe has even more good harbors than the United States, but they are not evenly spread throughout the Continent, making some states capital-rich and others capital-poor. Europe boasts one huge piece of arable land on the North European Plain, but it is long and thin, and so occupied by no fewer than seven distinct ethnic groups.

These groups have constantly struggled — as have the various groups up and down Europe’s seemingly endless list of river valleys — but none has been able to emerge dominant, due to the webwork of mountains and peninsulas that make it nigh impossible to fully root out any particular group. And Europe’s wealth of islands close to the Continent, with Great Britain being only the most obvious, guarantee constant intervention to ensure that mainland Europe never unifies under a single power.

Every part of Europe has a radically different geography than the other parts, and thus the economic models the Europeans have adopted have little in common. The United Kingdom, with few immediate security threats and decent rivers and ports, has an almost American-style laissez-faire system. France, with three unconnected rivers lying wholly in its own territory, is a somewhat self-contained world, making economic nationalism its credo. Not only do the rivers in Germany not connect, but Berlin has to share them with other states. The Jutland Peninsula interrupts the coastline of Germany, which finds its sea access limited by the Danes, the Swedes and the British. Germany must plan in great detail to maximize its resource use to build an infrastructure that can compensate for its geographic deficiencies and link together its good — but disparate — geographic blessings. The result is a state that somewhat favors free enterprise, but within the limits framed by national needs.

And the list of differences goes on: Spain has long coasts and is arid; Austria is landlocked and quite wet; most of Greece is almost too mountainous to build on; it doesn’t get flatter than the Netherlands; tiny Estonia faces frozen seas in the winter; mammoth Italy has never even seen an icebreaker. Even if there were a supranational authority in Europe that could tax or regulate the banking sector or plan transnational responses, the propriety of any singular policy would be questionable at best.

Such stark regional differences give rise to such variant policies that many European states have a severe (and understandable) trust deficit when it comes to any hint of anything supranational. We are not simply taking about the European Union here, but rather a general distrust of anything cross-border in nature. One of the many outcomes of this is a preference for using local banks rather than stock exchanges for raising capital. After all, local banks tend to use local capital and are subject to local regulations, while stock exchanges tend to be internationalized in all respects. Spain, Italy, Sweden, Greece and Austria get more than 90 percent of their financing from banks, the United Kingdom 84 percent and Germany 76 percent — while for the United States it is only 40 percent.

And this has proved unfortunate in the extreme for today’s Europe. The current recession has its roots in a financial crisis that has most dramatically impacted banks, and European banks have proved far from immune. Until Europe’s banks recover, Europe will remain mired in recession. And since there cannot be a Pan-European solution, Europe’s recession could well prove to be the worst of all this time around.

Federal President's Visit to Germany: Mythologies of Dresden Must Be Rejected

President Obama's Visit to Germany: Mythologies of Dresden Must Be Rejected. By Ted R. Bromund
Heritage WebMemo #2460, May 28, 2009

On June 5, President Obama will visit the German city of Dresden. This visit will be intensely controversial. Dresden is most famous for the Anglo-American bombing raid against it on February 13, 1945. The Dresden raid did cause serious loss of life, but in the Second World War it was not unprecedented or unusual. The myths that have grown up about the raid were fostered by the Nazis and spread by post-war Soviet propaganda.

Because of this spurious symbolism, President Obama's decision to visit Dresden is ill-advised. During his visit, the President must absolutely reject any equation of the Western Allies and the Nazis. He must avoid accepting as true the claims of the Nazi and Soviet propagandists about the Dresden raid. Finally, he must stoutly defend the Anglo-American air campaign, which served vital military purposes and which led to the liberation of Western Europe from the Nazis in 1945, and, ultimately, of Eastern Europe from the Soviet Union in 1989.

The Raid on Dresden

On February 13, 1945, 1,100 British and American bombers attacked the city of Dresden, which lies south of Berlin. The bombers dropped a mix of high explosives and incendiary bombs, which created a firestorm that destroyed the center of the city. The number of casualties will never be known, but at the time Nazi authorities privately estimated that 25,000 people lost their lives. A 2004 study of the raid by British historian Frederick Taylor sets the toll at between 25,000 and 40,000 killed,[1] while in 2008 an authoritative commission of German historians estimated the likely toll at 18,000 and definitely no more than 25,000.[2]

The attack on Dresden was not unusual. In July 1943, a British raid on Hamburg created a similar firestorm that destroyed 56 percent of the city's dwellings and killed 40,000 people.[3] Both attacks were part of the Anglo-American strategic bombing campaign that was launched after U.S. President Franklin Roosevelt and British Prime Minister Winston Churchill met at the Casablanca Conference in January 1943. That campaign followed the German bombing of Warsaw in September 1939 and Rotterdam in May 1940, the Nazi blitz against London in the summer and fall of 1940, the German destruction of Belgrade from the air in April 1941, and the British bombing campaign against Germany that began in May 1940 and intensified in 1942.

The raid on Dresden was made at the request of the Soviet Union, which wanted the city's railway junction destroyed to prevent the Germans from concentrating forces against advancing Soviet armies.[4] Dresden also contained over a hundred factories engaged in war-related work. As Taylor sums up, "Dresden was ranked high among the Reich's wartime industrial centers." This work included firms that made parts for torpedoes and machine guns.[5] Though Dresden was known as a cultural center, it was not, as later myth had it, a city of no military importance.

The Myths Surrounding Dresden

The Nazi regime, frustrated by its inability to stop the Anglo-American attacks, countered by waging a propaganda campaign against them. After the raid on Dresden, Propaganda Minister Joseph Goebbels, instead of downplaying it, decided to exaggerate the attack. He leaked falsified documents to the press that multiplied German casualties in the attack by 10: 25,000 became 250,000. He also played on Dresden's reputation by claiming that it was a city of cultural and artistic treasures only, not a center of war work.[6]

Goebbels's lies were widely accepted. As Taylor concludes, "The extent of the wide, long-lasting ripple of international outrage that followed the Dresden bombing represents, at least in part, Goebbels's final, dark masterpiece."[7]

After the war, Dresden was part of the Soviet zone of occupation and, later, East Germany. The Soviet and East German authorities used the Nazi myth of Dresden as part of their Cold War propaganda campaign against the U.S., Britain, and West Germany. By 1953, mass meetings in East Germany were being told that former Allied Commander Dwight Eisenhower--by then, President of the United States--was personally responsible for the attack of the "Anglo-American Air Gangsters," a term invented by Goebbels. In 1954, the death toll for the raid was officially set by the Communist regime at "hundreds of thousands."[8]

This Nazi-inspired falsehood was widely accepted. It was repeated in Kurt Vonnegut's Slaughterhouse-Five (1969), which was informed by David Irving's The Destruction of Dresden (1963). In a 2000 libel trial in Britain, Irving was described by the judge as an "active Holocaust denier" who "for his own ideological reasons persistently and deliberately misrepresented and manipulated historical evidence."[9] Irving's treatment of the Dresden raid marked the beginning of an ideological assault on the morality of the war and of the Western Allies.

The Achievements of the Air Campaign

In reality, the raid on Dresden was part of the broader Anglo-American strategic bombing campaign. This campaign achieved five vital objectives that were central to the defeat of Nazi Germany.

First, from 1940 through 1942, it demonstrated that Britain retained the will to fight back. This was vital for British relations with the U.S. and, after June 1941, with the U.S.S.R.

Second, as eminent historian Richard J. Evans argues, the campaign "did even more than the defeats at Stalingrad and in North Africa to spread popular disillusion about the Nazi Party."[10]
Third, the campaign did immense damage to German war production: The Germans calculated in January 1945 that bombing had reduced their tank production by 25 percent.[11]

Fourth, the campaign compelled Germany to expend substantial resources on an air defense system, resources that could have been devoted to fighting the Western and Soviet armies. It also led Hitler to emphasize the development of the V-1 and V-2 rockets. Both were amazing technological achievements but military irrelevancies that consumed scarce resources.

Finally, the air campaign drew the German Luftwaffe away from the Eastern Front--so aiding the Soviet advance--and ultimately destroyed it in the West. Without this air superiority, the D-Day landings would not have been possible. It was those landings that liberated Western Europe from the Nazis and created a base of freedom that led to the collapse of Communist Eastern Europe in 1989. The air campaign did not win the war on its own, but its contributions were immense, and they did not end in 1945.

The Symbolism of Dresden and of Obama's Visit

But for many critics, the Dresden raid has come to symbolize the wrongs of the entire Anglo-American air war against Nazi Germany. For these critics, who are as strong on the far left as on the far right, the attack on Dresden was only the most egregious example of the Anglo-American conduct of that campaign, which they allege constituted a war crime.

The city of Dresden, thus, is the focal point of an effort to establish a degree of moral equivalence between the Western Allies and Nazi Germany and, more broadly, to discredit and criminalize U.S. and British foreign policy when--as in 2003 in the Iraq War--it moves in a direction the critics dislike.

This effort began with the Communist propaganda after 1945. As long as the Cold War lasted, it made little headway, but with the fall of the U.S.S.R. and the reunification of Germany, it grew in popularity. By 2002, with the publication of Jörg Friedrich's Der Brand, which subtly equates the air war on Germany with the Holocaust, the campaign had reached best-seller status.

The symbolism of Dresden, even if it is poorly grounded in the facts of history, is a reality: It stands in mythology for the supposed war crimes committed by the Americans and the British in their war against the Nazis and, by implication, for their supposed offenses since 1945. By choosing to visit Dresden, of all Germany's cities, President Obama will have this myth as his backdrop. He would have been better advised to avoid Dresden.

Obama's decision to visit the city raises the concern that he will use the opportunity to apologize for the Dresden raid. As that raid has come to symbolize the supposed evils of the entire air war, an apology for Dresden would have far reaching implications about the morality of the Second World War itself. It is particularly unfortunate that Obama will visit Dresden and the Buchenwald concentration camp on the same day. The fact that both the camp and Dresden have been deemed worthy of a presidential visit could be taken to imply the moral equivalence between them that revisionists like Friedrich have sought to create.

What Obama Must Do

The President must not fall for the Nazi- or Communist-inspired myths about Dresden, such as the number of people killed in the raid or the importance of the war-related work being done in the city.

He must also avoid giving any credence whatsoever to efforts to equate the Western Allies and the Nazis, or the air war and the Holocaust. Indeed, he should counter the unfortunate scheduling of his visit to the Buchenwald camp by making an explicit statement that Dresden was part of the broader Anglo-American air campaign against the Nazi regime and that this campaign was vital to the defeat of the Nazis and the victory of the West in 1945.

Finally, he should make the broader point that the lesson of the Second World War is not that there should never again be a war nor that pacifism is a moral choice. The lessons of that war are that evil is a reality, that appeasement is not a virtue, and that no war--even in pursuit of just ends like the defeat of Nazi Germany--can be won without difficult but necessary choices.

Ted R. Bromund, Ph.D., is Senior Research Fellow in the Margaret Thatcher Center for Freedom, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation.


[1]Frederick Taylor, Dresden: Tuesday, February 13, 1945 (New York: HarperCollins, 2004), pp. 443-48.
[2]Frederick Taylor, "How Many Died in the Bombing of Dresden?" Spiegel Online, October 2, 2008, at,1518,581992,00.html (May 27, 2009).
[3]Richard J. Evans, The Third Reich at War (New York: Penguin Press, 2009), p. 446.
[4]Taylor, Dresden, pp. 190-191.
[5]See Taylor, Dresden, ch. 13, and in particular p. 148.
[6]Ibid., pp. 370-371.
[7]Ibid., p. 372.
[8]Ibid., pp. 392-393.
[9]"The Ruling Against David Irving," The Guardian, April 11, 2000, at,,181049,00.html (May 27, 2009).
[10]Evans, Third Reich, p. 463.
[11]Ibid., p. 462.