Monday, January 24, 2011

Wendy McElroy

Ask Not For Whom the Drug Tolls

“Fifty years ago, it made sense to assert that mental illnesses are not diseases, but it makes no sense to say so today. Debate about what counts as mental illness has been replaced by legislation about the medicalization and demedicalization of behavior. Old diseases such as homosexuality and hysteria disappear. New diseases such as gambling and smoking appear.” So writes the iconoclastic psychiatrist Thomas Szasz.

Almost 50 years ago Szasz published The Myth of Mental Illness. It changed the political framework in which mental illness was addressed by laying the foundation for a concept Szasz developed through a series of books, including The Manufacture of Madness (1970). That concept was “the Therapeutic State”—a collaboration between psychiatry and the State through which “undesirable” actions, thoughts, and behavior patterns were suppressed. Thus Szasz not only disputed the moral and scientific basis of psychiatry but also argued that modern medicine was an engine of social control, with pharmaceuticals as primary tools.

A new slate of drugs now addresses a wide range of so-called disorders, or dysfunctions, that former generations considered environmental problems or lifestyle choices: from obesity to attention deficit, from erectile dysfunction to social anxiety (shyness), from menopause to alcoholism. Indeed, laziness is now being discussed as “a neuro-developmental dysfunction” for which drugs are being developed. The current Therapeutic State may be best analyzed as a collaboration between modern medicine, the pharmaceutical industry, and the State.

The debate stirred by Szasz has muted. The medical establishment and mainstream media are now advocates of the Therapeutic State. Similar advocates dominate universities, studies, prestigious committees, FDA hearings, and governmental bodies. Since writing The Myth, Szasz himself has noted that “the formerly sharp distinctions between medical hospitals and mental hospitals, voluntary and involuntary mental patients, and private and public psychiatry have blurred into nonexistence. Virtually all medical and mental health care is now the responsibility of and is regulated by the federal government, and its cost paid, in full or in part, by the federal government.” Problems of everyday life have been medicalized, and people are viewed as having little or no ability to “cure” conditions such as alcoholism or drug abuse through willpower or change of habit. The focus Szasz tried to foster on the individual’s responsibility for his or her own dysfunctions has eroded.

Happily, a backlash against the medicalization of everyday life is occurring. Alas, it is being fought on the wrong ground.

In this regard, a fascinating book has just been published. Sex, Lies, and Pharmaceuticals: How Drug Companies Plan to Profit from Female Sexual Dysfunction by Ray Moynihan and Barbara Mintzes is a work of investigative journalism that explores the close financial relationship between the medical experts who define and develop the “science” behind new dysfunctions and the $500-plus billion pharmaceutical industry that profits from treating them. For example, Moynihan examines the makeup of experts on committees that define dysfunctions for the extremely influential Diagnostic and Statistical Manual of Mental Disorders (DSM); it is from the DSM that “social anxiety disorder” derives. (Revealingly, homosexuality was only delisted as a disorder in 1970.) Moynihan observes, “The DSM has been criticised for the closeness between the expert committees who write the definition of diseases and the pharmaceutical companies that sell the drugs prescribed to treat them. One study that looked closely at the affiliations of the men and women on those committees found that more than half of them had ties to drug companies. On the committees revising mood disorders, including depression, the figure was closer to 100 per cent.”

In short, he constructs a strong case for endemic bias within the medical establishment in favor of drug companies and the creation of disease.

Another sign of backlash is the emergence of grassroots rebellions against specific “diseases,” such as the currently emerging “female sexual dysfunction,” and against the use of drugs, such as Ritalin, to “cure” attention deficit disorder in children.

A reopening of debate on medicalizing everyday life is to be applauded. But, unlike Szasz, the new critics, such as Moynihan, do not take aim at the Therapeutic State; instead they focus on the therapeutic industry—that is, the flow of money between the medical establishment and the pharmaceutical companies. The culpability of the government in the creation of disease is either marginalized or denied.

Other pharmaceutical dissidents tend to view the State as the solution, not part of the problem. For example, feminist activist Leonore Tiefer works through the World Health Organization to impose new legislation that promotes such “rights” (or entitlements) as “the right to comprehensive sexuality education” and “the right to sexual health care, which should be available for prevention and treatment of all sexual concerns, problems, and disorders.”

It is possible that critics like Moynihan and Tiefer will accomplish some good. Perhaps they will be able to reduce the widespread prescription of the powerful Ritalin to grade-school children. But without understanding the essential role played by the State in the medicalization of everyday life, critics can never strike at the root of the problem. Indeed, they may well worsen matters by shifting blame and giving more authority to the very agency most responsible for the creation of disease.

The Need for a New Focus

The focus of the reemerging debate needs to shift onto Szaszian grounds, onto an analysis of the Therapeutic State, in at least four ways.

First, it must be clear that government defines the framework for all medical practices within North America. Second, the protection offered to pharmaceutical companies should be analyzed as legal privilege. Third, the relatively new and influential “private-public partnerships”—a marriage between the corporate sector and government institutions—should be examined and exposed. And, fourth, the role government plays in “marketing” drugs through institutions like the public school system and social services must be examined.

Government framework. There is no genuine competition allowed in the practice of medicine or the administration of drugs. Both of these vital functions of society are monopolies that the government assigns to those who meet State requirements and abide by State rules. Thus the American Medical Association (AMA) is able to exert monopoly control of medical care, such as hospitalization, and has a long history of persecuting competitors such as midwives.

But licensing is only the most obvious way in which the State and AMA define medical care. There are many other labyrinthine ways in which the medical establishment partners with authority. In reporting on the AMA’s support of Obamacare, for example, the Wall Street Journal explained last year, “The organization wants to protect a monopoly that the federal government has created for it—a medical coding system administered by the AMA that every health-care professional and hospital must use if they wish to get paid for the services they provide. This monopoly generates income of $70 million to $100 million annually for the AMA. That makes the AMA less an association looking out for doctors and more a special-interest group beholden to Congress and the White House.”

FDA Approved

Legal privilege. All prescription drugs must be approved by the FDA; but, again, the monopoly privilege of being the sole legal drug dealers in society is only the most obvious one granted the pharmaceutical industry and hardly captures the extent of partnership. Moynihan chronicles a less obvious privilege in writing about “one of the biggest healthcare frauds in U.S. history. Pfizer was accused of illegally promoting an anti-arthritis drug for unapproved uses and, so, creating a health risk to users. Pfizer admitted to limited guilt and paid a criminal fine of $1.2 Billion and civil penalties of $1B.” Despite the hefty financial hit, not one executive was held personally responsible; no retribution was sought. The sentencing judge, federal District Court Judge Douglas Woodlock (Massachusetts) commented in his concluding remarks, “This is a case in which no human being, apparently, is going to be held responsible for substantial criminal activity by a corporation.” He notes that Pfizer absorbed the financial hit as a “cost of doing business” and still returned record profits.

Private-public partnerships (PPP). A PPP is a collaboration between government and the private sector in which a venture is funded (in part or in full) by tax dollars and operated through the private sector, or else the private sector raises capital under contract with the government to provide services. Although PPPs are most often associated with infrastructure projects, such as the repair of roads or building of bridges, this sort of ersatz capitalism is rampant within medical research and drug promotion. According to a 2001 study, “hundreds of millions of dollars” have been invested in the United States to promote partnerships around health issues, creating “thousands of alliances, coalitions, consortia and other health partnerships.” That trend has only increased in the ensuing years. Tax-funded research is commonly funneled through nominally private organizations or researchers. Conferences, studies, reports, and such are conducted at taxpayer expense. Arguably, such funding constitutes the greatest barrier to alternative, independent research.

Uncle Sam the Pusherman

Government peddling of pharmaceuticals. It is not merely that private for-profit organizations have used tax dollars to climb aboard the public health bandwagon. The government uses its agencies to create a market base. Just one example is the role of the public schools as a “pusher” of Ritalin—a form of speed more potent than cocaine—to millions of school-age children. Overwhelmingly, it is prescribed to boys who are “unruly” in class. A 2001 report stated, “If Huckleberry Finn and Tom Sawyer were in a school in Massachusetts today, they’d be drugged with Ritalin, according to many psychiatrists and other experts.” As a recent September Huffington Post headline asked, “Do 2.5 Million Children Really Need Ritalin?” Dr. Sanford Newmark continued, “What is going on here? Have millions of our children become so hyperactive and unable to focus that they are incapable of succeeding at school or dealing with the demands of normal life? Or are we creating an illness where there is none, calling normal variations in temperament and personality a ‘disease’ that requires the intervention of long term, and extremely profitable, pharmaceutical medication?”

Monopoly, legal privileges, the rise of PPPs, the use of tax dollars to create disease and eliminate competition, the peddling of pharmaceuticals through government agencies—these issues must be prominent in any productive discussion of the medicalization of everyday life. If the discussion focuses on corporate greed, then the Therapeutic State will have merely entered a new phase.

Wrong Questions

The Goal Is Freedom | Sheldon Richman

Wrong Questions

Fifty years later.

“Ask not what your country can do for you. Ask what you can do for your country.”

Fifty years ago yesterday, John F. Kennedy said those words during his inauguration as president. It is undoubtedly the best-known line from any American inaugural address, except perhaps for FDR’s “[T]he only thing we have to fear is fear itself.” (Besides the government, I’d say.)

That JFK’s words are so well remembered and so often quoted can be chalked up to one of three things, depending on who’s doing the quoting: 1) pudding-headed political naiveté, 2) condescension, or 3) cynical special-pleading by those who aspire to reap the benefits of all the “do[ing] for your country.”

First off, what does “country” mean here? We’re not really meant to ask that question, because if we do, things begin to fall apart rather swiftly. Does doing for your country mean doing something beneficial for one’s fellow human beings who live in the territorial United States? If so, any honest participant in the marketplace is doing it already. He or she hardly needs to be admonished by a president who himself never made that sort of contribution. All genuine market participants (those who eschew fraud and political privileges) offer goods and services that other people believe will make their lives better. Productive people’s direct motive may not be to do unto others, but that’s what they must do via persuasion if they are to prosper. (The existing corporate state of course enables the well-connected to prosper by other means.)

Now contrast that with the people ridiculously called “public servants” — you know, the ones who decide what is good for you and then impose it by force — all the while raking in nice incomes, perks, and prestige. Is there anything more self-serving than “public service”?

Country = Government

We may assume, then, that Kennedy did not mean we should try harder to produce goods and services that others are willing to buy. And we can rule out simply being nice to one another. It’s clear he had other things in mind, because had he meant only those things, he would have proposed radically scaling back the power of government, setting us free to do them. Of course government was wrapped up in his and every politician’s notion of country. The country may be the body, but the government is the head.

What about that second part? Taking “country” in the likely corporate political sense, why would any self-respecting person ask what he or she can do for it? This is an important question, since we grow up being told that what makes America different is our right to live our lives as we please, unfettered by duty to the State. (Theory and practice diverge here, of course.) The Declaration of Independence talks about the rights to life, liberty, and the pursuit of happiness. Where does it mention service to the State, or what Chris Matthews refers to as “the call to duty”? Who does talk about service to the State? I’ll leave you all to ponder that question.

I just don’t see where such service is any kind of virtue. It clashes with the Kantian/Randian principle that each person should be regarded as an end in him or herself. And it’s particularly unseemly for a president to preach it. With all due respect, who the heck is he – any of them — to lecture us? In theory we’re the masters and he’s the servant. (Once again, theory and practice part ways.)

Check Your Premises

Well, as Ayn Rand would say, check your premises. In fact, we’re the servants and they are the masters. (See my “The Misrepresentation of Health Care Reform” for details of this relationship.) Or more precisely, they are the self-servants, the misleaders, and the misrepresentatives. The semblance of service to us is a mere cover for their exercise of power.

I like how Milton Friedman put it:

Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. The paternalistic “what your country can do for you” implies that government is the patron, the citizen the ward, a view that is at odds with the free man’s belief in his own responsibility for his own destiny. The organismic, “what you can do for your ‘country’ implies the government is the master or the deity, the citizen, the servant or the votary.

In light of all this, we might edit Kennedy’s words thus:

Ask not what your “country” can force other people to do for you. Ask who benefits from what you do for your “country.”

Looking for Prosperity? Go North!

Looking for Prosperity? Go North!

Dalibor Rohac

When Americans think of Scandinavia, what comes to mind is probably Ikea, breathtaking landscapes and maybe Ingmar Bergman's movies.

But what they should do is ask how we can learn from Norway, Denmark, Sweden and Finland when it comes to prosperity.

After all, these are among the most prosperous nations on the planet, according to Legatum Institute's Prosperity Index, which takes into account not only the drivers of economic growth but also factors that contribute to human well-being.

The Prosperity Index is the world's only assessment of factors that lead to higher levels of material wealth and subjective well-being, looking at 110 countries accounting for more than 90 percent of the world's population. The factors identified as the "pillars of prosperity" range from purely economic indicators to the "softer" measures of social capital, personal freedom, and safety and security.

In the 2010 edition of the index, Norway ranks first, followed by Denmark, Finland, Australia, New Zealand and Sweden. United States comes in 10th, not only because of weaker economic fundamentals, but also safety and security concerns.

One might be tempted to attribute the Nordic countries' prosperity to their generous welfare states. But in reality, these four nations have shot to the top of the prosperity league because they encourage and protect innovation and entrepreneurship better than any other countries.

As American policymakers contemplate which aspects of the Nordic model to adopt, they'd be wise to take note of the true reasons for Scandinavia's success.

To be sure, a large welfare state is an important aspect of life in each Nordic country. But these nations also exhibit many characteristics that are antithetical to the standard understanding of big government.

Denmark, for instance, ranks as one of the world's freest economies, according to the Heritage Foundation's Index of Economic Freedom. The country features a uniquely liberal labor market, with the lowest firing costs in the world, according to the World Bank's Doing Business report.

Sure, taxes are high and social benefits generous, but the Nordic states also maintain incentives that encourage entrepreneurship and innovation. Also, the region went through a series of radical "neo-liberal" reforms in early 1990s. For instance, not only did the absolute size of Swedish government spending decrease markedly after 1993, but also the government put in place a massive program of deregulation in sectors such as banking, retailing and telecommunications. As a result, productivity accelerated from a 1980s average of 1.2 percent to 2.2 percent from 1991 to 1998, and 2.5 percent from 1999 to 2005, according to McKinsey Global Institute.

Furthermore, entrepreneurship is highly regarded in the Nordic states. According to the Eurobarometer survey, 83 percent of Danes and 78 percent of Finns have a favorable opinion of entrepreneurs -- the highest proportion in Europe.

Another key ingredient for prosperity in the Nordic countries has been their high level of social capital. In the broad sense, this signifies trust and moral like-mindedness within the population. Citizens adhere to social norms that facilitate cooperation. On numerous surveys, citizens of Nordic countries report the highest levels of trust and civic cooperation -- including volunteering, participation in referenda, and density of various civic networks and associations.

Such capital directly contributes to economic development by reducing the costs of doing business. Scandinavians trust their countrymen -- so they aren't concerned about being the victims of fraud or opportunistic behavior. In the long run, that helps the economy grow, and it also helps to sustain the generous systems of welfare entitlements.

Nordic countries' welfare states depend on a general acceptance of these norms of cooperation, wherein it may be considered morally wrong to abuse the welfare state. In part, these high levels of social capital are product of the Nordic countries' small size and homogeneity. As a result, larger and more culturally diverse countries ought to be cautious in trying to blindly imitate the generous welfare policies of Scandinavia.

Those who argue that the United States should adopt the redistributionist policies existing in Nordic countries should realize that the U.S. will probably never possess the same degree of cultural homogeneity that helps to sustain these policies in countries like Norway or Denmark.

Yet the U.S. can still learn a lot from the Nordic countries. When it comes to prosperity, a flexible and very lightly regulated economy and high levels of trust and cooperation can go a very long way.

Dalibor Rohac is a research fellow at the London-based Legatum Institute, an independent, nonpartisan organization that researches and advocates for an expansive understanding of global prosperity.

The U.S. Economy is Unsustainable

Collapse Of The Entire World Economy In 24 hours

Economic Collapse 2.0 - North American Union - Part 4

2008 Legatum Prosperity Index - How to Navigate

Hard choices for the government

Syria's economy

Hard choices for the government

Will President Bashar Assad hold his nerve?

The market must prevail

SYRIA has been edging away from a centrally planned socialist economy to a “social market” one. “The last five years have been about deconstructing the socialist ideology in favour of the market,” says an adviser to the government. “The next five will be about implementing it.” That means big cuts in subsidies and painful belt-tightening for Syria’s far-from-opulent masses. But will the government, seeing unrest simmer in the region in the wake of Tunisia’s upheaval, hold its nerve?

The proposed changes risk breaking the social contract long upheld by President Bashar Assad’s Baath party. The old deal meant low wages and secure jobs, while providing life’s basics, such as food and fuel, very cheaply. The new plan envisages raising cash by issuing government bonds and soliciting foreign investment to the tune—it is hoped—of $55 billion. As subsidies shrink, the price of fuel, electricity, water, transport and food should rise to market levels.

Fearing unrest, the government recently wobbled. It announced a 72% rise in heating-oil benefits for public workers and froze the price of electricity. But it sorely needs more cash. Oil revenue has dipped as the population, which has doubled to 22m since the mid-1980s, continues to soar. The government cannot put off its reforms for long.

The IMF has for years been urging Syria to do away with subsidies. In 2008 the government leapt ahead of its counterparts in the region, notably Egypt, by raising petrol prices. It removed subsidies for fertiliser but kept many items, including electricity and food, artificially cheap. Direct energy subsidies still cost Syria around 5% of GDP a year, according to the government and the IMF.

Farming, a mainstay of the economy, is also being liberalised. An agricultural fund has been set up to replace blanket subsidies. The list of key crops, which have their prices set by the government as the sole buyer, has been pared down from seven a decade ago to three today: cotton, sugar beet and wheat—deemed the “red-line” crop since it is the basis for bread, the people’s staple. But Syria’s land is hard-pressed to meet demand, let alone provide for a strategic reserve.

The steady introduction of market reforms since 2005 has yet to make a big difference. Opening up business has so far benefited only a few. Property has been bought for speculation. Food prices have risen faster than wages. Quite a few industrialists have seen their businesses founder in the face of cheaper goods from China and Turkey. Plans to ease the pain by creating a welfare safety net have fallen behind. People scrimp to pay for private education and health care because state provision, due to be overhauled in the next five years, is so bad. “The growing wealth gap is threatening the middle class,” says a local economist.

Elections due this year are sure to be tightly controlled. People are still too scared to protest. And events in Tunisia may make the government even warier about pushing ahead with its reforms.

Opium Wars

Opium Wars

Cutting Down Opium Poppies

Opium Wars

A key step to securing peace will be to wean Afghan farmers off growing poppies.

By Robert Draper

The chief of police has a memorable way of demonstrating that he's not afraid of the drug smugglers. He holds up his right hand, revealing the absence of his middle finger. Four years ago, Brig. Gen. Aqa Noor Kintuz was hired as provincial chief of police in the northeastern Afghan province of Badakhshan and charged with destroying its plentiful poppy fields. "After I finished one of the first eradications," he says, "my vehicle was blown up by a remote-control bomb." He rolls up his right shirtsleeve. His forearm is badly mangled. In the years since, he has received innumerable death threats. Women and children of poppy farmers have hurled stones at his policemen. One of his eradication tractors was torched.

The grim axiom defining today's Afghanistan, 85 percent of whose citizens are farmers, is that its economy relies on two dueling revenue streams. One flows from Western aid, in the hopes that the country will renounce the Taliban. The other flows from opium trafficking supported by the Taliban, which use the proceeds to fund attacks on Western troops. Only recently has the Afghan government seemed to take stock of the obvious: For the outside world's largesse to continue, the national economy's addiction to opium must end. The poppy fields must be destroyed. But just as this devoutly Muslim nation did not become the world's leading opium supplier overnight, uprooting Afghanistan's poppy mind-set promises to be a complicated endeavor.

In Badakhshan, chief of police Kintuz appears to be making some headway against poppies. Five years ago the province was Afghanistan's second-biggest opium producer, after the Taliban-controlled province of Helmand. For a brief period after a Taliban ban on poppies in 2000, Badakhshan even took the lead in poppy cultivation, because the province was controlled by the Northern Alliance militias, rather than the Taliban. When Kintuz started his job in 2007, 9,000 acres were planted with poppies. Two years later fewer than 1,500 were.

Eradication efforts have forced poppy farmers into the margins of the countryside. Their fields are, by design, all but invisible. To find one, you must drive for hours on a crumbled and isolated mountainside road, accompanied by someone who knows the district and will if necessary explain your presence there. You must look far from the roadside, gazing over the rolling terra incognita of northern Afghanistan—studying its monochromatic creases for that rogue burst of color, simultaneously innocent and obscene, that finally screams out what it can only be: a field of poppies.

A farmer squats with his back to the flowers, weeding an adjacent field. He is a 37-year-old man with the distinct Mongolian features characteristic of the borderlands, and he wears a brown tunic, a turban, and a tentative smile. He introduces himself as Mohammed Khalid. He acknowledges that the poppy field is his.

"My father taught me how to grow poppies ten years ago," he says. "Until this year, I was able to produce 60 pounds of opium from my farmland." Crouching while his fingertips brush against the tilled soil, Khalid describes how the smugglers would advance him the money for his crop and how a half-dozen members of his family would join him in the fields to weed, thin, and finally harvest the inky opium paste from the poppy bulbs—a four-month season of tedium that he hardly begrudged, given the benefits. The bricks of opium that he wrapped in plastic and took to the market would pay for all the food his family needed. In addition, the farmer would use the seeds to make cooking oil and burn the stalks as firewood and for ash to make soap. "It provided everything," he says.

With the relentless eradication, Khalid has come up with a strategy. His most visible farmland, the area he is now weeding, will hereafter be used for wheat and melons. Only the sliver of land that is almost impossible to see from the road will remain the sanctum of his high-value crop. "From that small field," he says with a glance over his shoulder at the riotous profusion of violet and pink and white, "I'll get about two pounds of opium. Maybe $80."

Possessing only the barest sense that he has become the hinge on which Afghanistan's future and America's national security interests swing, Khalid frowns and says, "I have no idea why they're eradicating. I'm just a poor farmer, and all I have time to think about is how to feed my family."

One morning during harvest season, Chief Kintuz and his team conduct a poppy eradication in the Argo district of Badakhshan, just two days after nine members of his counter-narcotics force were killed by a roadside bomb in Darayem. At dawn the convoy sets out from the provincial capital of Feyzabad—driving past clusters of newish houses built in the days before eradication brought such construction to a halt. Thanks to Chief Kintuz's efforts, this undulating countryside no longer features endless vistas of poppies.

The nine-mile road to Argo is a splintered mess—deterioration has left it worse now than it had been before a U.S. subcontractor was paid $2.5 million to resurface it. Rolling through the district center, past dozens of shuttered shops where opium was once sold openly, the convoy is greeted with hard stares from the villagers. A few miles beyond Argo, near the village of Barlas, the 30 or so armed counter-narcotics officers dismount their vehicles. The men set out on foot into the hills, searching for sequestered poppies.

The fields are everywhere: dozens upon dozens of crazy-colored tracts, none larger than an acre. The officers descend on them with bamboo canes and swing away at the flowers, reaper-like. The chief bashes away as well. A surveyor from the United Nations Office on Drugs and Crime (UNODC) faithfully records each obliterated site on his clipboard. A young farmer watches the havoc while crouching in his field. "That land belongs to my neighbor Israyel," he says. "I think he knew they were coming and didn't want to be around to see it. The police warned us last year not to plant poppy. So I've switched to melon. But all of this is rain-fed land, so if there's a drought, I've got a real problem."

I ask if he or his neighbors have received any of the millions of dollars being poured into Badakhshan Province by the U.S. Agency for International Development (USAID) and other Western organizations in an attempt to lure Afghan farmers away from poppies. "They promised the Argo district's governor that they'd give us bags of wheat seed and fertilizer," he replies. "But they haven't." The remark is similar to one by an elder of the nearby Tashkan district: "The government said, 'We'll build roads, bridges, and canals, and you'll forget poppies forever.' That was five years ago. They've done nothing."

In fairness, several things have been done—a newly paved highway from Feyzabad to Kabul, road construction projects in Tashkan, a saffron farm in Baharak, and 18 new district police offices. But for every worthy project scattered throughout this vast northern province is a village like Sar Ab in Yamgan district, where the lack of a medical clinic led residents to use opium as their only medicine until half of the 1,800 villagers became addicts. Or the village of Du Ghalat, in Argo, where a hundred children huddle like cattle on the dirt floor of a collapsing schoolhouse built with opium money that has dried up as poppy eradication proceeds. Or the millions of U.S. taxpayer dollars earmarked to fund agricultural projects in Badakhshan, which, according to one counter-narcotics official, "never got here—it disappeared."

In Case of Tech Bubble, Do Not Break Glass

In Case of Tech Bubble, Do Not Break Glass

Even if bloated valuations of Facebook and Groupon point to another bubble bound to burst, the Fed shouldn't head it off but prepare for the fallout

In Silicon Valley, it's beginning to feel like déjà vu all over again. Much as in the early-to-mid-90s, a euphoria is surrounding new consumer technologies. Then, it was early Internet software, such as Netscape, and such dot-com darlings as eBay (EBAY) and Yahoo! (YHOO). Now the excitement involves mobile devices such as Apple's iPhone and iPad and social network services such as Facebook.

Tech valuations are once again soaring: Apple (AAPL) recently became the second most valuable company in the world, behind ExxonMobil (XOM), with a market cap of $305 billion. Even more striking is the $50 billion valuation that private investors have placed on Facebook. Groupon, a cyber-coupon company, turned down a $6 billion takeover offer from Google (GOOG) last month, and it's now considering an IPO that could reach $15 billion. "We may be on the cusp of another technology-driven boom," says Erik Brynjolfsson, director of the MIT Center for Digital Business.

Or another tech bubble. The last one ended badly—for stockholders, when the tech-heavy Nasdaq index fell from more than 5000 in March 2000 to 1100 in late 2002, and for everyone else in the recession that followed. Now, as investors grow giddy again, odds are the Federal Reserve Board will confront far sooner than expected one of the most difficult and divisive issues in central banking: Should it attempt to deflate an asset price bubble before it grows large enough to threaten the financial system and economy when it pops?

Blunt Instruments in Abeyance

The answer, in a nutshell, is no. But that isn't the same as saying the Fed should do nothing. Quite the contrary. Much as it's hard to watch a slow-motion traffic accident play out—especially if you're still stumbling away from another totaled vehicle, as we are with the housing crash—it's far better for the Fed actively to prepare institutions for the fallout of another bursting bubble than to try to head one off with its limited array of blunt instruments. The call to action is targeted, but bold, regulatory initiative.

Of course, speculating about a bubble is, well, highly speculative at a time when inflation is dormant and the unemployment rate is 9.4 percent. Nevertheless, the parallels between now and the mid-'90s are striking. For instance, the milestone marking the dawn of the Internet era was the August 1995 initial public offering of Netscape at $28 a share, closing at $58. It captured consumer imagination and woke companies up to the Web's commercial possibilities. The boom began, with entrepreneurs from Silicon Valley to Route 128 forming startups at an astonishing pace. Established companies raced to invest in e-commerce, construct their own websites, and overhaul their organization to take advantage of the Internet. Think (AMZN), Google, and as well as Cisco Systems (CSCO), Microsoft (MSFT), and Intel (INTC).

Today's surge in technology investment also goes deeper than the latest Web raves. Private sector investment in equipment and software was up 15.4 percent in the third quarter of 2010 vs. a 4.2 percent gain in the same period of 2009 (and an 11.1 percent decline in the third quarter of 2008). Investors are thrilled. The one-month return on the Information and Technology sector is 4.61 percent, while the Standard & Poor's 500 index came in at 2.96. The numbers for the past three months are 12.1 percent and 8 percent, respectively.

Climbing Again

It's intriguing to note another echo. When Netscape went public, according to calculations by economists John Campbell at Harvard and Robert Shiller at Yale, a cyclically adjusted price/earnings ratio, which takes into account earnings going back a decade, of the S&P 500 stood at 23.2 times. Yet by December of the following year, the ratio had climbed to 29 times—a nosebleed figure that persuaded then Fed Chairman Alan Greenspan to give his "irrational exuberance" speech at the American Enterprise Institute in December 1996. The current Campbell/Shiller p-e ratio is 23.2, up from a recent low of 19.7 in June 2010. It's on the upswing. "With the mobile-tech boom scenario, core inflation might stay low and unemployment might stay high, because it would elongate the productivity gains," muses James W. Paulsen, chief investment strategist at $354 billion Wells Capital Management in San Francisco.

Indeed, inflation was tame and productivity strong during both the boom and the real estate bubble. And the Fed—America's guardian against a debased currency—felt little pressure to make major shifts in monetary policy with inflation quiescent. Yet the toll when the bubbles burst was huge. During the Great Recession, 8.4 million workers were dropped from payrolls, household wealth plunged more than $11 trillion, and, over a 24-month period ended in June 2009, more than 167,000 businesses failed, according to Dun & Bradstreet. The accumulated human and economic price tag of allowing bubbles to run their course has convinced Mark Thoma, economist at the University of Oregon, that "there is a role for the Fed to pop bubbles."

Problem is, it's a tricky business figuring out whether an asset is over- or undervalued. For instance, when Shiller persuaded Greenspan that the stock market was overvalued, priced at about three times the underlying fundamentals, Shiller also expected that over the next decade the return on stocks would be zero. Yet the stock market did slightly better than its historic average of a real 6 percent return by the end of 2006. (Of course, timing matters; Shiller was right for the 2000s as a whole.) Thoma favors a more activist Fed, but he worries it doesn't have good enough statistical measures to know when to lean against a boom and when to let the excitement rip. "It's hard to judge the costs vs. the benefits," he says.

Positive Side of Speculation

Among those benefits are entrepreneurial risk-taking and the animal spirits of innovation. "I do not feel confident that a policy which, in the pursuit of stability of prices, output, and employment, had nipped in the bud the railway boom of the forties, or the American railway boom of 1869-71, or the German electrical boom of the [1890s], would have been on balance beneficial to the populations concerned," wrote the British economist Dennis Robertson in 1926. Arthur Rolnick, former head of research at the Federal Reserve Bank of Minneapolis and currently senior fellow at the Humphrey Institute of Public Affairs, agrees with the Robertsonian point of view: "Sure, there's speculation, but this is how we want markets to work," Rolnick says. "It's the way we innovate and bring new products to market."

Not all innovations are desirable, of course, as we've seen recently. Much of the whiz-bang financial technology that made the housing bubble possible turned out to be toxic. Still, even if economists can agree on a set of statistical guideposts for determining the madness of crowds, monetary policy is often too blunt a policy instrument. Sure, the Fed can always pop a bubble by sharply hiking the fed funds rate. But that will also stymie angel investors, venture capitalists, and other intrepid investors from funding profitable ideas bubbling up from university labs and corporate research departments.

"The Fed raising the fed funds rate to deal with a bubble in one sector of the economy isn't very smart," says David Laidler, economist at the University of Western Ontario. "Whether the problem is in high tech or in housing, you're using an economy-wide instrument to deal with it, which isn't wise."

The Canadian Model

The solution, many economists agree, is for the Fed to place a far greater emphasis on regulatory initiative than monetary policy when confronting bubbles.

Take the new mortgage rules announced by Canadian finance minister Jim Flaherty on Jan. 17. For the second time in less a year, the Canadian government acted to lean against ballooning consumer debt in a low interest rate environment to "protect the stability of the economy." In sharp contrast, when the stock market entered nosebleed territory in the late 1990s, the Fed ignored calls to raise margin requirements in the stock market, a targeted regulatory move.

During the real estate bubble, federal regulators had plenty of tools at their disposable to cut short the widespread abuses. Edward Gramlich, the late Federal Reserve governor, repeatedly warned about abuses in the subprime mortgage market and urged that the Greenspan Fed unleash investigators on lenders trolling for customers in poor neighborhoods and examine in detail their relations with major financial institutions. The Greenspan Fed, enamored with the elixir of deregulation, ignored his advice. "Regulators didn't do their job," says Rolnick.

Indeed, the Securities & Exchange Commission should step up its scrutiny of private investors and company valuations in the growing trading market for private share offerings of such marquee high-tech companies as Facebook, Twitter, and LinkedIn. Even more important, the Fed needs to exercise the extra oversight powers it got in the Frank-Dodd financial services reform legislation last July. (And Congress should avoid watering down the rules and regulations.)

Here's the thing: Plenty of mobile Internet companies, social networking firms, and other information technology companies will get funded over the next few years. Many of them will fail. That's capitalism. Regulators need to concentrate on preventing major financial institutions from feeding the frenzy and putting the taxpayer at risk. That's regulatory prudence. Stay tuned.

China's New World Order

China's New World Order
By Robert Samuelson

WASHINGTON -- By all appearances, last week's visit of Chinese president Hu Jintao to Washington changed little in the lopsided American-Chinese relationship. What we have is a system that methodically transfers American jobs, technology and financial power to China in return for only modest Chinese support for important U.S. geopolitical goals: the suppression of Iran's and North Korea's nuclear weapons programs. American officials act as if there's not much they can do to change this.

It's true that the United States and China have huge common interests in peace and prosperity. Two-way trade (now about $500 billion annually) can provide low-cost consumer goods to Americans and foodstuffs and advanced manufactures to the Chinese. But China's and America's goals differ radically. The United States wants to broaden the post-World War II international order based on mutually advantageous trade. By contrast, China pursues a new global order in which its needs come first -- one in which it subsidizes exports, controls essential imports (oil, food, minerals) and compels the transfer of advanced technology.

Naturally, the United States opposes this sort of system, but that's where we're headed. Clashing goals have trumped shared interests.

Start with distorted trade. The New York Times recently reported that Evergreen, a maker of solar panels, is shutting its Massachusetts factory, moving production to a joint-venture in China and laying off 800 U.S. workers. Despite $43 million in Massachusetts state aid, Evergreen's CEO said that China's subsidies -- mainly low-interest loans from state-controlled banks -- were too great to pass up.

Thus subsidized, Chinese solar panel production rose fiftyfold from 2005 to 2010, reports GTM, a market analysis company. Cheap bank loans to solar companies total about $30 billion, but it's unclear whether they'll be repaid in full, notes GTM analyst Shyam Mehta. "It could be free money," he says. China's share of global production jumped from 9 percent to 48 percent. In 2010, about 95 percent of China's solar panels were exported.

With details changed, similar stories apply to many industries. The undervaluation of China's currency, the renminbi, by 15 percent or more magnifies the advantage. Jobs shift to China from factories in the United States, Europe and elsewhere.

Next, consider technology transfer. Big multinational firms want to be in China, but the cost of doing so is often the loss of important technology through required licensing agreements, mandatory joint ventures, reverse engineering or outright theft. American software companies estimate that 85 percent to 90 percent of their products in China are pirated.

Writing in the Harvard Business Review, Thomas Hout and Pankaj Ghemawat cite China's high-speed rail projects. Initially, foreign firms such as Germany's Siemens got most contracts; in 2009, the government began requiring foreign firms to enter into minority joint ventures with Chinese companies. Having mastered the "core technologies," Chinese companies have captured 80 percent or more of the local market and compete with foreign firms for exports. The same thing is occurring in commercial aircraft. China is building a competitor to the Boeing 737 and the Airbus 320; General Electric has entered into a joint venture that will supply the avionics, the electronics that guide the aircraft.

Finally, there's finance. China's foreign exchange reserves -- earned mainly through massive export surpluses -- approached $2.9 trillion at year-end 2010. These vast holdings (which increase by hundreds of billions annually) enable China to expand its influence by sprinkling low-cost loans around the world or making strategic investments in raw materials and companies. The Financial Times recently reported that China -- through the China Export-Import Bank and the China Development Bank -- has "lent more money to other developing countries over the past two years than the World Bank."

It's important to make several qualifications. First, Americans shouldn't blame China for all our economic problems, which are mostly homegrown. Indeed, the ferocity of the financial crisis discredited U.S. economic leadership and emboldened China to pursue its narrow interests more aggressively than ever. Second, the point should not be (as Chinese allege) to "contain" China's growth; the point should be to modify its economic strategy, which is predatory. It comes at others' expense.

The U.S. response has been mostly carrots -- to pretend that sweet reason will convince China to alter its policies. Last week, Presidents Obama and Hu exchanged largely meaningless pledges of "cooperation." Alan Tonelson of the U.S. Business and Industry Council, a group of manufacturers, says U.S. policy verges on "appeasement." We need sticks. The practical difficulty is being tougher without triggering a trade war that weakens the global recovery. Still, it's possible to do something. The Treasury could brand China a currency manipulator, which it clearly is. The administration could move more forcefully against Chinese subsidies. America's present passivity encourages China's new world order, with fateful consequences for the United States and everyone else.

U.S. Slips to 9th Freest Economy

U.S. Slips to 9th Freest Economy – by Deroy Murdock

America has slipped one spot since last year — from Earth’s eighth freest economy in 2010, according to 2011′s Index of Economic Freedom. This 17th annual report, jointly published by the Heritage Foundation and the Wall Street Journal, sifts through the wreckage caused by government’s turbocharged acceleration during the Bush-Obama years. America’s slumping score (down from No. 5 in 2008) confirms the urgent need for Washington, D.C. to revitalize free markets and restrain government intervention.

Among the Index’s 179 countries, Hong Kong is rated first, followed by Singapore, Australia, New Zealand, Switzerland, Canada, Ireland, and Denmark. These nations all outscored the US across 10 categories, including taxes, free trade, regulation, monetary policy, and corruption.

America barely made the Top 10. Bahrain was tenth, with 77.7 points, one decimal point behind America’s 77.8 rating. Chile reached No. 11 with 77.4, just 0.4 points behind the US.

Even worse, with a score below 80, the US is spending its second year as a “mostly free” economy. As it departed the family of “free” nations in 2010, it led the “mostly free” category. Even within this less-than-illustrious group, America now lags behind Ireland and Denmark.

How did our once unassailable country wind up so winded?

“The national government’s role in the economy has expanded sharply in the past two years, and the federal budget deficit is extremely large, with gross public debt approaching 100 percent of GDP,” explain the Index’s authors, Terry Miller and Kim R. Holmes. “Interventionist responses to the economic slowdown have eroded economic freedom and long-term competitiveness. Drastic legislative changes in health care and financial regulations have retarded job creation and injected substantial uncertainty into business investment planning.”

Miller and Holmes also criticize Washington for abandoning the free-trade posture of earlier years, an area where former Democratic President Bill Clinton boldly guided his party, starting with the NAFTA trade pact. Washington Democrats these days scorn Clinton’s successful example. As Miller and Holmes write: “Leadership and credibility in trade also have been undercut by protectionist policy stances and inaction on previously agreed free trade agreements with South Korea, Panama, and Colombia.”

On fiscal freedom, the Index marks the U.S. below average. The top American federal income-tax rate is 35 percent, versus a worldwide average of 28.7 percent. At 35 percent, America’s federal corporate tax outpaces the world’s 24.8 percent average and increases US exports…of jobs. America’s overall average tax burden was 26.9 percent of GDP, compared to 24.4 percent globally.

America also suffers a below-average score for government spending. Worldwide, such expenditures average 33.5 percent of GDP; in the US: 38.9 percent.

Compare America to Rwanda, the Index’s most-improved nation. This landlocked African nation leapfrogged 18 spots, from No. 93 in 2010 to No. 75 today. How?

“Rwanda scores relatively high in business freedom, fiscal freedom, and labor freedom,” Miller and Holmes observe. “Personal and corporate tax rates are moderate. With a sound regulatory framework that is conducive to private-sector development, Rwanda has achieved annual economic growth of around 7 percent over the past five years.”

As I noted on my visit there last month, Rwanda remains poor, with a long list of challenges. Yet there is no denying its self-confidence and unflagging commitment to pro-market modernization, Rwanda is moving on up.

America remains blessed with wealth, durable institutions, and creative, clever, industrious citizens. Yet its self-doubt is fueled by an insatiable state that constantly devours more of the nation’s output, and with little to show for its gobbling. Depleted, America stumbles downhill.

Miller and Holmes surveyed the globe and reached this conclusion: Rather than multi-billion-dollar stimuli and 2,000-page regulatory behemoths, “The best results are likely to be achieved instead through policy reforms that improve incentives that drive entrepreneurial activity, creating greater opportunities for investment and job growth.”

The path back to American prosperity and pre-eminence lies in Washington’s bipartisan leadership abiding by the previous paragraph.

* Deroy Murdock is a columnist with Scripps Howard News Service and a media fellow with the Hoover Institution on War, Revolution and Peace at Stanford University. E-mail him at deroy.Murdock(at)

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