The blessings of Thanksgiving

"Thus was achieved another, and still more glorious, triumph, in the case of liberty, even than that, by which we were separated from the parent country. It was not achieved, however, without great difficulties and sacrifices of opinion. It required all the wisdom, the patriotism, and the genius of our best statesmen, to overcome the objections, which, from various causes, were arrayed against it. The history of those times is full of melancholy instruction, at once to admonish us of the dangers, through which we have passed, and of the necessity of incessant vigilance, to guard and preserve, what has been thus hardly earned. … What a humiliating lesson is this, after all our sufferings and sacrifices, and after our long and sad experience of the evils of disunited councils, and of the pernicious influence of State jealousies, and local interests! It teaches us, how slowly even adversity brings the mind to a due sense of what political wisdom requires. It teaches us, how liberty itself may be lost, when men are found ready to hazard its permanent blessings, rather than submit to the wholesome restraints, which its permanent security demands.

To those great men, who thus framed the Constitution, and secured the adoption of it, we owe a debt of gratitude, which can scarcely be repaid. It was not then, as it is now, looked upon, from the blessings, which, under the guidance of Divine Providence, it has bestowed, with general favor and affection. On the contrary, many of those pure and disinterested patriots, who stood forth, the firm advocates of its principles, did so at the expense of their existing popularity. They felt that they had a higher duty to perform than to flatter the prejudices of the people, or to subserve selfish, or sectional, or local interests. Many of them went to their graves, without the soothing consolation, that their service and their sacrifices were duly appreciated. They scorned every attempt to rise to power and influence by the common arts of demagogues; and the were content to trust their characters, and their conduct, to the deliberate judgment of posterity."

Joseph Story, "Origin of the Constitution", Familiar Exposition of the Constitution (1840).

Joseph Story (1779-1845) was a Justice of the United States Supreme Court from 1811 to 1845. He was nominated by President James Monroe to the Court in November 1811, at the age of thirty-two. Story remains the youngest Supreme Court Justice at appointment. In the Court, he found a congenial home for the brilliance of his scholarship and the development and expression of his political philosophy.

As we approach Thanksgiving 2009 we have much for which to be thankful. Thanks be to God for Who He is and all He has done, for family, friends and all our material blessings.

Let us note we too often forget our history and those who've gone before us in making our nation great. We have been blessed with Founding Fathers who were men of principle and understanding of the true nature of man and the God-ordained role of government in the lives of people.

Thanksgiving is a time when we should look back on the American Revolution, the founding of this country, and the creation of the Constitution with gratitude for the Founders' wisdom and willingness to sacrifice for a cause greater than themselves.

A Tdj by Cheryl Walker, with thanks.

The Road to Fiscal Ruin

Both the New York Times and the Wall Street Journal have recently published articles about the burgeoning level of government debt and the escalating deficit that adds to its weight.

The Federal government ran a deficit of $1.4 trillion in fiscal year 2009 and spending continues to far outpace revenues this fiscal year, adding greatly to a mounting national debt that now stands at more than $12 trillion.

Worse, rather than dealing with the recession that now grips the nation or the looming explosion in Social Security and Medicare benefits now on the horizon, the Administration and Congress have chosen to aggravate the country's problems by pushing for an expensive new health care entitlement which will add greatly to the country's fiscal woes. They seem completely obvious to the fiscal nightmare they are creating.

As noted in the Times, one reason for their blindness may be that much of the recently acquired debt was financed at abnormally low interest rates brought about by the recession. These low rates made the acquisition of new debt and refinancing of old seem tolerable, at least for the moment.

However, as is always inevitable, this will soon change. The Treasury now faces what could be a significant rise in interest rates at a time when it has an immediate need for new borrowing as well as re-financing the huge debt it previously issued. According to the Times article, the Treasury estimates $1.6 trillion of the government's marketable debt is coming due in the next few months.

Add to this, as stressed in the Journal, is the need to fund higher costs associated with rising Social Security, Medicare and Medicaid expenses.

The credit demand of the Federal government seems insatiable. It raises questions about whether its huge deficits can be financed without markedly worsening the prospects for a recovery.

China and Germany as well as other countries are increasingly worried about this country's financial position and have been warning about the deteriorating state of U.S. finances. I for one am glad they are expressing their concern.

But given the way the Administration and Congress are conducting U.S. economic policy, I wonder if anyone in the U.S. government is equally concerned.

Some quotes from De Tocqueville on Democracy

“The American Republic will endure, until politicians realize they can bribe the people with their own money.”

“Democracy extends the sphere of individual freedom, socialism restricts it. Democracy attaches all possible value to each man; socialism makes each man a mere agent, a mere number. Democracy and socialism have nothing in common but one word: equality. But notice the difference: while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude.”

"Liberty has never come from the government. Liberty has always come from the subjects of government. The history of liberty is the history of resistance. The history of liberty is a history of the limitation of governmental power, not the increase of it."

“The will of men is not shattered (by the welfare state), but softened, bent, and guided. Men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence. It does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, until each nation is reduced to be nothing better than a flock of timid and industrious animals, of which the government is the shepherd.”

-Alexis de Tocqueville (1805-1859).

From a post on Virginia News Source, http://www.virginianewssource.com/.


Alexis-Charles-Henri Clérel de Tocqueville (1805–1859) was the French political thinker and historian who wrote, among other works, Democracy in America (1935), a book based on his travels through America in the early 19th Century.


The book provided reflections on American policy society and attempted to explain why America was different from Europe. For de Tocqueville, this country was an open society where the work ethic prevailed and the average man was independent and self-reliant. Although his book does focus on democracy, its central focus was on liberty. He once said that “the only passions I have are love of liberty and human dignity”.

Liberty and democracy are not the same thing. Democracy strives to gain the consent of all the governed in the determination of the affairs of men and women and spreads that aspiration far and wide. It focuses on the work we need to do together for the common good. As de Tocqueville emphasized, it is a wonderful way to organize the polity and consistent with liberty for it promotes the self-organizing of the state by a free and independent people.

Liberty, on the other hand, is much more personal and requires that the passion for democracy be kept in check if one is to remain the master of one’s own fate. As de Tocqueville noted, “everyone is the best and sole judge of his own private interest . . . society has no right to control a man's actions unless they are prejudicial to the common weal or unless the common weal demands his help. This doctrine is universally admitted in the United States.”

Liberty is also much more difficult than democracy to achieve. As the historian Henry Steele Commager commented, "Liberty must be worked at, must be achieved, and it has rarely been achieved anywhere in the whole of history. It requires a most extraordinary self-control, self-denial, wisdom, sagacity, vision to protect liberty in the face of all the forces that mitigate and militate against it. And Tocqueville regarded centralization as the most dangerous of all the threats to liberty."

Liberty is at risk. We live in an age of increasing centralization and concern for the shallow equality found in applying rules and regulations to achieve uniformity rather than the freedom that celebrates the right of each man to act for himself and rise and fall on his own. Nowhere is this clearer than in the rush to “health care reform” where a huge segment of the economy is being effectively nationalized in the name of providing equal access by all to what by its very nature is a diverse set of services that can neither be provided equally to all nor be applied uniformly to all.

Health care is not a standardized widget to be distributed in equal amount or kind to each member of the population. Saying the government is going to provide equal access to a product or service that may or may not be needed by any person and in any event must be highly personalized before it is used is utterly meaningless. Health care is not and cannot be a valid objective in a democracy because it cannot be delivered democratically. At the same time, it is a threat to liberty for it soften, bends, and guides the will of men, as Tocqueville put it, and makes them sheep as it centralizes the decisions that belong to each individual.

Let us remember that de Tocqueville believed that of the two true liberty is far more important than the superficial equality. This country has been blessed by liberty. The question is whether we can retain it at a time when we insist on centralizing everything and asking government to do what it clearly cannot do.

Rent-seeking

A Tdj by Larry Willmore.

I am a great fan of John Kay, so I am sad to report that his column in last week's Financial Times is a disaster. Perhaps even a gifted writer is entitled to an off-day.

The column begins with an inaccurate and unhelpful definition of the economic term 'rent-seeking':

“You can become wealthy by creating wealth or by appropriating wealth created by other people. When the appropriation of the wealth of others is illegal it is called theft or fraud. When it is legal, economists call it rent-seeking.”

John Kay, "Powerful interests are trying to control the market", Financial Times (11 November 2009).

http://www.johnkay.com/politics/648

This statement by Kay is totally wrong. Rent-seeking can be legal or illegal. And it involves not appropriation of wealth created by others, but rather the appropriation of value ('rents') that result from government restrictions on economic activity.

The term 'rent-seeking' was coined by Anne Krueger in a classic 1974 paper. In the very first paragraph of her paper, Ms Krueger explains that government restrictions give rise to rents, and people often compete for a share of these rents. "Sometimes, such competition is perfectly legal. In other instances, rent seeking takes other forms, such as bribery, corruption, smuggling, and black markets."

Ms Krueger is a trade economist and was Chief Economist for the World Bank from 1982 to 1986. It is not by accident that she chose import licenses - rather than tariffs - as an example of rent-seeking. Tariffs do not generally give rise to rent-seeking, since the scarcity value ('rent') of import restrictions is captured as taxes on imports. Rent-seeking takes place only when producers lobby for new tariffs or for retention of old ones. The scarcity value of import quotas can also be captured by government if the import licenses are sold by auction to the highest bidder. This is not the case with Ms Krueger's example.

John Kay's concern in this column is with concentration of economic power. This is an important subject, but one that has nothing to do with rent-seeking. Rent-seeking can and does take place in a competitive environment.

Anne Krueger's 1974 paper can be downloaded at http://bbs.cenet.org.cn/uploadimages/2004132356266152.pdf


DOW: The notion of “rent-seeking” is different from but related to the concept of “economic rent”. Economic rent is defined as an excess distribution to any factor in a production process above the amount required to draw the factor into the process or to sustain the current use of the factor. It arises, for example, as David Ricardo first explained, in the form of differential land rents which represent the difference in the productivity of one plot of land compared to the productivity of the poorest land similarly situated and used for the same purpose.

In contrast to opportunity costs involved in using factors of production, economic rent does not determine price but the other way around: Price determines economic rent. Example: All farmers receive the same price for their corn but some farmers have more productive land and a greater crop and hence earn a higher income, some of which is economic rent. If the price of corn fell, the farmers with the better land would continue farming while those with inferior land would have their income fall below the acceptable and stop farming. Because the farmers with the better land continue to farm, even when their income is reduced, part of the earlier and higher income they received was “an excess distribution … above the amount required to … sustain the current use of the factor”, to quote the definition above. That is, any income above the minimum required to keep the farmer farming, is economic rent.

Government restrictions artificially raise prices and in doing so generate the potential for economic rents, which attract rent-seekers. Rent-seeking would not exist without restrictions imposed by government policy.

Although I know of no empirical estimates of the magnitude of rents created by government restrictions, they must be huge. Otherwise, why would all those rent-seekers (better known as lobbyists) be crawling all over Capitol Hill and the White House?

I, too, am a great fan of John Kay. We all have our bad days.

Thanks again to Larry for the Tdj.

The tragedy of means tests

A Tdj by Larry Willmore.

Greg Mankiw is one of a handful of economists who worry about the effect of means tests on the welfare of the poor. Some time ago, he posted a quote of "Kennedy School economist Jeff Liebman (via Jeff Frankel's new blog) [who] tells a sad story about the incentive effects of government programs aimed at helping the poor":

“the poverty trap is still very much a reality in the U.S. A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn't make ends meet any more. I told her I didn't know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000.”

Greg Mankiw, "The Poverty Trap", Greg Mankiw’s Blog (10 February 2008).

http://gregmankiw.blogspot.com/2008/02/poverty-trap.html

Greg Mankiw is professor of economics at Harvard University. Jeffrey Liebman is now Executive Associate Director of Obama's Office of Management and Budget (OMB).

More recently, Mankiw linked to work by Boston University economists Kotlikoff and Rapson, who give the tax-transfer system of the U.S. very low marks:

“America's tax-transfer system confronts the vast majority of American households with either high, very high, or astronomically high total effective marginal tax rates on labor supply and saving. It also provides very substantial tax arbitrage opportunities to a subset of households, particularly those with high incomes or advanced ages.

The pattern of net marginal tax rates and arbitrage opportunities with respect to age, marital status, and earnings is quite simply all over the map. But this is what one would expect given the amazing complexity of the fiscal system, the fact that the various components of the system are being developed with little or no thought to their interaction, and that the various governmental bodies responsible for the different elements of our tax-transfer system appear to make little or no attempt to understand the overall work and saving disincentives as well as arbitrage opportunities they are producing.”

Laurence J. Kotlikoff and David Rapson, "Does It Pay, at the Margin, to Work and Save? -- Measuring Effective Marginal Taxes on Americans' Labor Supply and Saving", Boston University (October 2006).

http://www.econ.ucdavis.edu/faculty/dsrapson/DIPW_METR_1006.pdf

Laurence J. Kotlikoff is a professor of economics at Boston University and David Rapson is an assistant professor of economics at the University of California at Davis.


LW: For reasons that I do not fully understand, political conservatives like Mankiw frequently fail to draw the obvious conclusion that universal benefits trump targeted transfers. The unwritten implication is the poor would be better off without transfers, but with their work incentives intact. Where are the 'compassionate conservatives"?

DOW: As one political conservative, let me quickly respond to Larry with the following comment: Universal benefits are certainly better than means tested benefits for all the reasons that Mankiw and others have given about the negative effects of means tests. The problem with universal benefits is that they are universal, and because they are universal they are subject to “benefit bloating” and “benefit creep”, that is, there are strong incentives to overuse them and immense pressures to expand them. This is especially true when the universal benefits are given at the national level where the distance between the people who pay and the people who use benefits is wide. Giving the benefits to everyone simply means that everyone will overuse the available benefits and demand that they be expanded, making the approach fiscally unsound.

Tightly circumscribed and specifically tailored universal benefits, such as those for major medical problems where no one would want to make a claim and which can be closely monitored by financing authorities, are a great idea. If government benefits are to be extended to all, it would be better to provide them “universally” at the local level, which is better situated to judge what is needed and whether the resources being distributed are being wasted.

I would not be surprised if research on the negative incentives associated means tests is likely to have a significant effect on policy development in the future.

Basic economics and the health care plan

“Here are some basic principles of supply and demand: If a government policy increases the demand for a service, the price of that service tends to rise. If the government prevents prices from rising, shortages develop. The quantity provided is then determined by supply and not demand. In the presence of such excess demand, the result could be a two-tier market structure. Consumers who can somehow pay more than the government-mandated price will be able to purchase the service, while those paying the controlled price may be unable to find a willing supplier.

Those principles lie behind this story from the Washington Post:

A plan to slash more than $500 billion from future Medicare spending -- one of the biggest sources of funding for President Obama's proposed overhaul of the nation's health-care system -- would sharply reduce benefits for some senior citizens and could jeopardize access to care for millions of others, according to a government evaluation released Saturday.

The report, requested by House Republicans, found that Medicare cuts contained in the health package approved by the House on Nov. 7 are likely to prove so costly to hospitals and nursing homes that they could stop taking Medicare altogether.

Congress could intervene to avoid such an outcome, but "so doing would likely result in significantly smaller actual savings" than is currently projected, according to the analysis by the chief actuary for the agency that administers Medicare and Medicaid. That would wipe out a big chunk of the financing for the health-care reform package, which is projected to cost $1.05 trillion over the next decade.

More generally, the report questions whether the country's network of doctors and hospitals would be able to cope with the effects of a reform package expected to add more than 30 million people to the ranks of the insured, many of them through Medicaid, the public health program for the poor.

In the face of greatly increased demand for services, providers are likely to charge higher fees or take patients with better-paying private insurance over Medicaid recipients, "exacerbating existing access problems" in that program, according to the report from Richard S. Foster of the Centers for Medicare and Medicaid Services.

Though the report does not attempt to quantify that impact, Foster writes: "It is reasonable to expect that a significant portion of the increased demand for Medicaid would not be realized."”

N. Gregory Mankiw, “Supply, Demand, and Healthcare Reform”, Greg Mankiw’s Blog (15 November 2009).

http://gregmankiw.blogspot.com/


N. Gregory Mankiw is professor of economics at Harvard University and a former Chairman of President George W. Bush’s Council of Economic Advisors.


The health care bill now passed by the House and now being considered by the Senate is not simply bad legislation. It simply cannot work in the real world.

Among its many problems is that the focus of policy discussion has been on the terms and conditions of health care insurance when what really matters is the provision of health care services to the people who need them. The government can place any regulations and rules it wants on the insurance industry (and I for one consider those in the bills to be unhelpful) but they will not increase the supply of doctors or expand hospital facilities or add to the number of nursing homes needed to meet the existing demand for health care services, much less any new demand. Adding millions of new patients by subsidizing their demand for health care will only make the existing problems of access to health care worse. And on top of this, sharply reducing increases in Medicare funding associated with expected rise in recipients is equivalent to putting in place price controls which will further restrict supply and lead to the two-tier market mentioned by Professor Mankiw.

The problem of doctors refusing to accept new Medicare or Medicaid patients has been growing, especially in rural areas, and is likely to accelerate once the funding cuts in the present bills are implemented. Add to this, the large increase in demand for services stemming from its subsidies and the problems of the health care sector of this economy multiple. Finally, its impact on the supply of health care services stemming from its controls over pricing would be terrible.

The country needs to reform its health care sector. But the bills now in Congress are not the way to do it.

Milton Friedman on health care

“Two simple observations are key to explaining both the high level of spending on medical care and the dissatisfaction with that spending. The first is that most payments to physicians or hospitals or other caregivers for medical care are made not by the patient but by a third party—an insurance company or employer or governmental body. The second is that nobody spends somebody else’s money as wisely or as frugally as he spends his own. These statements apply equally to other OECD countries. They do not by themselves explain why the United States spends so much more than other countries.

No third party is involved when we shop at a supermarket. We pay the supermarket clerk directly: the same for gasoline for our car, clothes for our back, and so on down the line. Why, by contrast, are most medical payments made by third parties? The answer for the United States begins with the fact that medical care expenditures are exempt from the income tax if, and only if, medical care is provided by the employer. If an employee pays directly for medical care, the expenditure comes out of the employee’s after-tax income. If the employer pays for the employee’s medical care, the expenditure is treated as a tax-deductible expense for the employer and is not included as part of the employee’s income subject to income tax. That strong incentive explains why most consumers get their medical care through their employers or their spouses’ or their parents’ employer. In the next place, the enactment of Medicare and Medicaid in 1965 made the government a third-party payer for persons and medical care covered by those measures.

We are headed toward completely socialized medicine—and, if we take indirect tax subsidies into account, we’re already halfway there.

We have become so accustomed to employer-provided medical care that we regard it as part of the natural order. Yet it is thoroughly illogical. Why single out medical care? Food is more essential to life than medical care. Why not exempt the cost of food from taxes if provided by the employer? Why not return to the much-reviled company store when workers were in effect paid in kind rather than in cash?

The revival of the company store for medicine has less to do with logic than pure chance. It is a wonderful example of how one bad government policy leads to another. During World War II, the government financed much wartime spending by printing money while, at the same time, imposing wage and price controls. The resulting repressed inflation produced shortages of many goods and services, including labor. Firms competing to acquire labor at government-controlled wages started to offer medical care as a fringe benefit. That benefit proved particularly attractive to workers and spread rapidly.

Initially, employers did not report the value of the fringe benefit to the Internal Revenue Service as part of their workers’ wages. It took some time before the IRS realized what was going on. When it did, it issued regulations requiring employers to include the value of medical care as part of reported employees’ wages. By this time, workers had become accustomed to the tax exemption of that particular fringe benefit and made a big fuss. Congress responded by legislating that medical care provided by employers should be tax-exempt.”

Milton Friedman, “How to Cure Health Care”, Hoover Digest (2001).

http://www.hoover.org/publications/digest/3459466.html


Milton Friedman (1912-2006) was for many years Professor of Economics at the University of Chicago. In the academic arena, Friedman was best known for his theoretical and empirical research on consumption, monetary theory and history, and the complexity of fiscal policy. He received the Nobel Memorial Prize in Economics in 1976. In the political arena, he was best known for his advocacy for minimizing the role of government in favor of the private sector.


Friedman here makes two main points: First, that third party payment for health care services separates payment for health care services from the person who receives the service, and in doing so encourages the overuse of health care services; and Second, along the same lines, employer-provided health care insurance receives a tax subsidy, and by doing so it subsidizes the cost of health care, further leading to its overuse. Given these conditions, it should not be surprising that the demand for health care in the U.S. is high and the share of the health care industry in the economy is large.

Needless to say, the health care proposals now being discussed in Congress further extend the third party payment system far beyond its present scope and subsidize health care for many more millions of Americans. For this reason, one cannot expect these plans will limit either the share of health care in the economy or the continued rise in health care costs.

Who should go to college?

A Tdj by Larry Willmore:

There is growing sentiment in the United States that college may not be worth its cost for everyone. At the same time, President Obama has called on every American to receive at least one year of post-secondary education or vocational training. The Chronicle Review asked 11 experts for short responses to a number of questions, beginning with "Who should and shouldn't go to college?"

The 11 experts include W. Norton Grubb, author of Honored but invisible: An inside look at teaching in community colleges (1999); Charles Murray, co-author of The bell curve: Intelligence and class structure in American life (1994); and Alison Wolf, author of Does education matter? (2002).

My favourite response was that of George Mason University economist Bryan Caplan, author of The myth of the rational voter: Why democracies choose bad policies (2007):

“There are two ways to read this question. One is: "Who gets a good financial and/or personal return from college?" My answer: people in the top 25 percent of academic ability who also have the work ethic to actually finish college. The other way to read this is: "For whom is college attendance socially beneficial?" My answer: no more than 5 percent of high-school graduates, because college is mostly what economists call a "signaling game". Most college courses teach few useful job skills; their main function is to signal to employers that students are smart, hard-working, and conformist. The upshot: Going to college is a lot like standing up at a concert to see better. Selfishly speaking, it works, but from a social point of view, we shouldn't encourage it.
…
College attendance, in my view, is usually a drain on our economy and society. Encouraging talented people to spend many years in wasteful status contests deprives the economy of millions of man-years of output. If this were really an "investment", of course, it might be worth it. But I see little connection between the skills that students acquire in college and the skills they'll need later in life.”

Bryan Caplan, in "Are Too Many Students Going to College?", The Chronicle Review (8 November 2009).

http://chronicle.com/article/Are-Too-Many-Students-Going-to/49039/

An interesting bit of trivia: John Stuart Mill (1806-1873), author of Principles of Political Economy (1848), refused to study at Oxford or Cambridge, and went to work for the East India Company instead. He was home-schooled from an early age and never attended formal classes.

Thanks to Alex Tabarrok at MR for the link.

DOW: I mention that the Chronicle article given at the link above has many points of view on the question of who should go to college, who benefits, and who should pay the bill.

This article reflects increased attention to the benefits and costs associated with education at all levels and the fact that many decades of rising real expenditures per student have yielded nothing in the way of better educational outcomes.

I also mention that in an ageing society, such as the United States, the opportunity cost to society of having young people in school rather than the workplace rises. Every person working helps lower the dependency ratio and the burden on the working age population in supporting children and the retired population. Social pressures for the young to enter the labor force and for the elderly to working longer or re-entering the labor force are likely to rise in the years ahead as the dependency ratio rises. These trends will impact on the education industry at all levels and over the longer term result in its relative downsizing in relation to the rest of the economy.

The Chinese hukou system

“The hukou (household registration) system is often considered as unique to China. Although China's system of controlling and regulating internal movements of its citizens is indeed far more elaborate than that in almost all other countries in the world, a broader survey reveals that a similar system existed or still exists in other (former) communist countries, such as the ho khau system in Vietnam and the hoju system in present-day North Korea. In fact, these migration control systems, the Chinese one included, owe much of their common origin to the propiska (internal passport) system utilized in the former USSR ....

What is unique about migration in China is that the two aspects of internal migration (movement and citizenship) can be totally disparate; i.e., one can move to a new place (for example, because of a job change) but can be permanently barred access to community membership-based services and welfare. People who have moved to a new place but do not possess local citizenship (hukou) are referred to as the non-hukou population, meaning that they are not de jure residents even though they are de facto residents. Conceptually, this is the group that has moved away from the location where their hukou is registered. The situation of Chinese migrants without citizenship, of course, is not unique in the international context of migration. Many so-called "guest laborers" working in foreign countries, sometimes for years, without local citizenship, fall into this category. But few countries have applied such a system to their own citizens in modern times. In China, this group is commonly called the "floating population" or "mobile population" (liudong renkou). Its size has grown rapidly from a few million in the early 1980s to the present level of about 150 million. ....

As I finish this retrospective on the Chinese hukou system at its semicentenary, it is my earnest wish that no one will have occasion to write on its centennial. The present version of the system is not deserving of such longevity.”

Kam Wing Chan, "The Chinese Hukou System at 50", Eurasian Geography and Economics 50:2 (March 2009), pp. 197-221.

http://courses.washington.edu/chinageo/Chan-Hukou50-EGE2009.pdf


University of Washington geographer Kam Wing Chan has written a superb overview of China's hukou (household registration) system that was promulgated in January 1958 and is still in effect. The system took away a basic right of Chinese citizens, the freedom to choose one's place of residence. It discriminates against 800 million rural residents and allows the State to treat 150 million internal migrants as 'guest workers' in their own country. Professor Chan is also author of Cities with Invisible Walls: Reinterpreting Urbanization in Post-1949 China (Oxford University Press, New York, 1994).


A registration record includes such information as the name of the person, date of birth, names of parents and spouse, if married, and identifies the person as a resident of an area. Family registers have existed in China for millennia and have developed over time into a means to support taxation, conscription and social control. In modern times they have been used by the state for purposes of population management control of emigration and immigration from urban and rural area within China. In modern times such movements have been tightly controlled.

Consistent with a socialist economy, the system has been used to regulate labor so as to ensure an adequate supply of low-cost labor to state-owned businesses. It has also been used to monitor and control people who are regarded as politically unreliable.

While the system has weakened in recent decades with the introduction of market reforms, it still exists and remains as an oppression on the Chinese people and a warning to the American people of the potential loss of liberty caused by too much personal information and authority in the hands of the state.


Thanks to Larry Willmore for the Tdj.

Remembering Trotsky’s fight with Stalin

“In their persecution of revolutionists, the Thermidorians [those who react against the excesses a revolution, in this case, the Russian revolution] pour out all their hatred upon those who remind them of the past, and make them dread the future. The prisons, the remote corners of Siberia and Central Asia, the fast multiplying concentration camps, contain the flower of the Bolshevik Party, the most sturdy and true. Even in the solitary confinement prisons of Siberia the Oppositionists [that is, Trotskyists and others opposed to Stalin] are still persecuted with searches, postal blockades and hunger. In exile wives are forcibly separated from their husbands, with one sole purpose: to break their resistance and extract a recantation. But even those who recant are not saved. At the first suspicion or hint from some informer against them, they are subjected to redoubled punishment. Help given to exiles even by their relatives is prosecuted as a crime. Mutual aid is punished as a conspiracy.

… During these years [i.e., the years of the Great Purge 1934-1938] hundreds of Oppositionists, both Russian and foreign, have been shot, or have died of hunger strikes, or have resorted to suicide. Within the last twelve years, the authorities have scores of times announced to the world the final rooting out of the opposition. But during the “purgations” in the last month of 1935 and the first half of 1936, hundreds of thousands of members of the party were again expelled, among them several tens of thousands of “Trotskyists.” The most active were immediately arrested and thrown into prisons and concentration camps.

As to the rest, Stalin, through Pravda, openly advised the local organs not to give them work. In a country where the sole employer is the state, this means death by slow starvation. The old principle: who does not work shall not eat, has been replaced with a new one: who does not obey shall not eat. Exactly how many Bolsheviks have been expelled, arrested, exiled, exterminated, since 1923, when the era of Bonapartism opened, we shall find out when we go through the archives of Stalin’s political police. How many of them remain in the underground will become known when the shipwreck of the bureaucracy begins.”

Leon Trotsky, The Revolution Betrayed, Chapter 11: Whither the Soviet Union (1936).

http://www.marxists.org/archive/trotsky/1936/revbet/ch11.htm


Leon Trotsky (née Lev Davidovich Bronstein, 1879-1940), Bolshevik revolutionary, Marxist theorist and a close friend of Lenin, was a key figure in the Russian revolution and the early years of what became the Soviet Union, holding many important posts in the new socialist state including commander of the Red Army and People's Commissar of War. He was also among the first members of the Politburo. An opponent of Stalin, he was exiled from the Soviet Union but remained a major Marxist thinker until his death in 1940 in Mexico at the hands of an NKVD agent, who buried an ice axe into his skull. In his death throes Trotsky’s last words were “I will not survive this attack. Stalin has finally accomplished the task he attempted unsuccessfully before." The world did not lament the passing of this evil man.


Neither Trotsky and Trostskyism are important today except to a few “Trots” and as a reminder of the fanaticism to which the “ideals” of socialism can be pursued by those committed to the complete destruction of the liberal Capitalist order. What is interesting about these particular passages is that when conducted by socialists the fight over the political order is one where no quarter is given, not even to fellow socialists. When one political faction gains complete control over the economy it always uses that control to destroy everyone who opposes it, both its avowed enemies and its former allies. In the case of the Russian revolution it would not have mattered if the Trotskyites has won over those allied with Stalin. For whoever loses, in socialism the treatment is the same: Banishment from participation in the economy and loss of all benefits it can provide.

This is why granting the government influence over a large and important part of the economy such as health care is so unwise. While not direct socialism, it is a step toward it because it weakens consumers in their relationship with producers. Power is disbursed in the private markets of the Capitalist order and because it is spread over many firms private power is challengeable by conducting business with a different supplier. Once vested with the authority of the state, however, those with political power inevitably become more determined and more difficult to deal with because they face no competition. Moreover, because the stakes in keeping power are so high for them, they will fight to keep their monopoly position, even within the group sharing that power, and the difficulties of creating countervailing power to dislodge them multiply.

The U.S. is blessed with a history very different from that of Russia. Let us pray that its history of decentralized economic institutions and coordination through markets can prevail over the growing tendency toward centralization of economic power at all levels of government we have seen in recent years. Russian history shows that this latter tendency is even more prone to disputes and disagreements than the competitive pressures of free markets.

Some economics students learn about collectivism

“An economics professor at a local college made a statement that he had never failed a single student before, but had once failed an entire class.

That class had insisted that Obama's socialism worked and that no one would be poor and no one would be rich, a great equalizer.

The professor then said, "OK, we will have an experiment in this class on Obama's plan".

All grades would be averaged and everyone would receive the same grade so no one would fail and no one would receive an A.

After the first test, the grades were averaged and everyone got a B.

The students who studied hard were upset and the students who studied little were happy.

As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.

The second test average was a D!

No one was happy.

When the 3rd test rolled around, the average was an F.

The scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

All failed, to their great surprise, and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great but when government takes all the reward away, no one will try or want to succeed.”

From an e-mail from Sue Davids, with thanks.


I have heard variants of this yarn for many years and believe it is based on true story. Certainly, it reflects great truths, going back to the early miseries of Jamestown Settlement and the very beginnings of this country. The collective nature of Jamestown’s organization and the fact that many in the group were “gentlemen” unused to work and hard labor and insistent that others serve them almost doomed the enterprise. Indeed, had it not been bailout out by the Pocahontas and the Indians. Without this help from the outside, which lasted until more commercial arrangements replaced its initial communal focus, Jamestown would have perished.

So it is with the current American flirtation with socialized medicine. For the moment, emphasis is on the benefits to be received by many not now integrated into the economy and contributing little to covering its costs while at the same time attention is directed away from the sacrifices to be placed upon those carrying the burden of its expenses. Later, when the full negative impact of the mammoth changes to be introduced falls on those who pay the bills and enjoy the best medical care in the world, they will react like the students above and the more hard-working settlers at Jamestown. The quantity and quality of health care in the U.S. will deteriorate markedly.

Social experiments in collectivism never end well and can never be sustained for long without external funding. In the case of American socialized medicine the only source of external funding are the Chinese and the oil producers, and it is my suspicion they will not be willing to finance the Federal budget deficit much longer.

For those who do not believe the health care plans now discussed in Congress represent socialized medicine my response is let us not quibble about words when it is ideas that matter. There is no question about the road Congress is taking and no doubt about where it is headed. One only has to read Hayek to understand the inevitability of it all.

But at the same time, as shown by Jamestown and reflected in the unforgettable words of Herbert Stein, economist and father of the entertainer Ben Stein, “If something cannot go on forever, it will stop”. Hayek would agree. Stein’s Law underlies all public policy initiatives, health care being no exception. If the current version of “health insurance reform” is passed it will not be too many years before its growing difficulties cause the American health care system to be radically altered back toward its more market-oriented present version. It is not simply that the current plans are not fiscally sustainable, and they are not. More importantly, they are not socially acceptable in their distribution of benefits and burdens.

I doubt Congress can pass meaningful health care legislation this year or any year along the lines of the present health care bills. The great costs and limited benefits should be obvious to all. Even if Congress does vote for one of the present plans, the legislation will not define American health care over the longer-term. It will simply create greater problems which we will have to address in the future, and the direction of change will be back to what we have now, perhaps with the minor changes that should have been the focus of Congress’ attention.

Thanks again to Sue for the Tdj.

Is the Fed losing its independence?

“It’s now official. The proposed legislation to reform America’s financial service supervision includes granting the Secretary of the Treasury a veto over Section 13(3) emergency action by the Federal Reserve Board of Governors. If this becomes law, it will be a sad day for the independence of America’s central bank.

The Secretary of the Treasury, a very senior cabinet position, is appointed by the President and meets with the President in the Oval Office weekly. The governors of the Federal Reserve Board are also appointed by the President. Both cabinet officers and Federal Reserve governors are confirmed by the US Senate. There are supposed to be seven governors; politics has purposefully limited this to five throughout the three-year financial crisis period.

The Federal Reserve governors are supposed to serve staggered 14-year terms with all seven seats filled. Instead, we have been governed by the present five member politically configured board.

The original seven governor construction was designed to insulate them from political pressure for very good reasons. Decades of monetary history throughout the world have disclosed what happens when political influence on a central bank intensifies. The Weimar Republic and Zimbabwe are evidence of the worst inflationary effects of politics. The Great Depression in the US and the nearly two decade deflationary recession in Japan demonstrate that monetary policy is not only inflation-prone. When central banks are under political influence you can get fire or you can get ice.
…
History shows that, over time, politics tends to favor easier monetary policy and lower interest rates than would otherwise be required. Thus inflation-prone tendencies are more likely to be the outcome of political intervention in monetary affairs of the US.

In the US we are experimenting with a massive issuance of federal debt. We now measure that additional debt in the trillions each and every year. And we are now trying to intensify and formalize the political intervention into the governing body responsible for the value of the US dollar. At the same time, this legislative initiative concentrates unprecedented power in the executive branch and in the hands of the Secretary of the Treasury.

If this becomes law, will global financial markets reprice the US currency to reflect this new asymmetrical policy threat? Will this risk premium result in higher interest rates, where deregulated markets can set them? Will there be a currency crisis? Will politics that create class warfare with “too big to fail” also, by implication, create an under class of “too small to survive?” “

David Kotok, “Fed Independence: R.I.P.?”, Cumberland Advisors Market Commentary (23 October 2009).

http://www.cumber.com/commentary.aspx?file=102909b.asp


David Kotok is Chairman and Chief Investment Officer of Cumberland Advisors, a money management firm headquartered in New Jersey.


The Federal Reserve System is the organization charged with the responsibility to set U.S. monetary policy. This is a task of great importance for the economy and the prosperity of the country. Given its critical important, it is also one of the few functions of government (another being the judiciary) where an effort has been made to isolate it from the vagaries of popular opinion and political control. This is the reason Fed Governors have such long tenure and their deliberations are withheld from immediate release.

The decisions of the Fed have tremendous immediate and long-term consequences for the economy. The Federal Open Market Committee of the Fed has been given the arbitrary power to determine the monetary stock of the country and short-term interest rates, which have great influence over long-term rates. It does this by buying and selling Treasury securities, which puts cash into the economy when it purchases securities or removes cash from the economy when it sells securities. Buying securities and putting cash into the economy lowers interest rates by increasing the price of the securities, and hence lowering their yield. Interest rates can be raised in a reverse operation, when securities are sold and their price falls, hence raising their yield. Long-term rates tend to follow the course of short-term rates. Taken together, lowering and raising the constellation of interest rates has an enormous effect on the prospects for economic activity, employment and inflation.

Pumping too much money into the economy spurs domestic economic activity and inflation. Not enough money depresses commerce and employment and tends to bring down inflationary pressures.

In the case of the United States, the actions of the FOMC spill over into the international economy and literally affect the external balance and money supplies of all countries, in some countries more than the actions of their own central banks. The value of the dollar on foreign exchange markets and hence the economic fate of all industries, both here and abroad, are greatly affected by Fed decisions.

The ability of central banks to affect the state of the economy is a great political temptation. For this reason, an effort is made in almost all countries to keep central banks politically independent. Nowhere is the central bank truly independent and in too many countries its independence is totally compromised. But it is equally true to say that the more the central bank is subject to political control the greater are the problems of the economy, both in terms of inflation and financial crises and in terms of deflation and recession. Moreover, keeping monetary policy decisions independent of political interference is consistent with the principle of separation of powers, and any loss of independence by the Fed should be seen as portending political as well as economic problems.

The U.S. has been slowly marching down the road to greater involvement by the political authorities in the setting of monetary policy. Last year at the urging of the Treasury the Fed relied on its rarely used legal authority to lend to “any individual, partnership or corporation” in “unusual and exigent circumstance” to prop up financial institutions. It has refused to provide details about many of the actions it has taken, including the financial institutions it has helped and the amount of help provided. This is not good.

It would appear that the U.S. is now going to go further and explicitly inject politics into the broad setting of U.S. monetary policy. Let me suggest that this is dangerous and a development to be watched closely in the months and years ahead.

The onerous burden on the poor of Obama’s health care plan

“Barack Obama is, in many ways, the left’s answer to Ronald Reagan.

Both came to office as charismatic and self-confident leaders, elected in times of economic crisis and determined to move the economy in a new direction. What is less obvious, however, is that the signature domestic issue in President Obama’s first year in office — health care reform — is shaping up to be the antithesis of President Reagan’s supply-side economics.

The starting point for Ronald Reagan was the idea that people respond to incentives. The incentives that he most worried about were those provided by the tax system. …
…
The key economic concept here is the marginal tax rate, which measures the percentage of a family’s incremental income to which the government lays claim. During Mr. Reagan’s time in office, the top marginal tax rate on earned income fell to 28 percent from 50 percent.

The verdict on supply-side economics is mixed. The most striking claim associated with the theory — that cuts in marginal rates could generate so much extra work effort that tax revenue would rise — is unlikely to apply except in extreme cases. But substantial evidence supports the more modest proposition that high marginal tax rates discourage people from working to their full potential. …

President Obama has said he wants to raise marginal tax rates on high-income taxpayers. Yet under his policies, the largest increases in marginal tax rates may well apply not to the rich but to millions of middle-class families. These increases would not show up explicitly in the tax code but, rather, implicitly as part of health care reform.

The bill that recently came out of the Senate Finance Committee illustrates the problem. Under the proposed legislation, Americans would have the opportunity to buy health insurance through government-run exchanges. Depending on a family’s income, premiums and cost-sharing expenses, like co-payments and deductibles, would be subsidized to make health care more affordable.

A family of four with an income, say, of $54,000 would pay $9,900 for health care. That covers only about half the actual cost. Uncle Sam would pick up the rest.

Now suppose that the same family earns an additional $12,000 by, for example, having the primary earner work overtime or sending a secondary worker into the labor force. In that case, the federal subsidy shrinks, so the family’s cost of health care rises to $12,700.

In other words, $2,800 of the $12,000 of extra income, or 23 percent, would be effectively taxed away by the government’s new health care system.

That implicit marginal tax rate of 23 percent is a significant disincentive. And it comes on top of the explicit marginal tax rate the family already faces from income and payroll taxes. Altogether, many families would face marginal rates at or above the 50 percent level that animated the Reagan supply-side revolution.”

N. Gregory Mankiw, “Supply-Side Ideas, Turned Upside Down”, The New York Times (31 October 2009).

http://www.nytimes.com/2009/11/01/business/economy/01view.html?_r=1&ref=business


N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser to President George W. Bush.

The CBO numbers on which Professor Mankiw’s assessment is based can be found at http://www.cbo.gov/ftpdocs/106xx/doc10642/SFC_Subsidies_Penalties_10-09.pdf.


This Tdj is further on that of 9 October, which pointed out that if one includes Social Security contributions, state and local income taxes and the hidden taxes on consumption expenditure the total tax take of the government could easily exceed two-thirds of any raise in pay that low and moderate income families receive. In fact, in the case of families making between $42,000 and $54,000 the implicit marginal tax rate of the Senate Finance Committee bill is 34 per cent of any additional income they might earn, bringing the total tax take of the government to over 75 per cent of any additional income that family might earn.

It is not just that the health care reform proposals are confiscatory on the incomes of the poor. Large increases in marginal tax rates also tend to depress labor effort across all income groups, and in doing so they depress the level of GDP compared to what it would be without the added taxes. As the negative effect on the GDP of the hike in marginal tax rates from the health reform takes lowers GDP, it will also lower tax revenue, making the budget deficit larger than the CBO assumed. This is only one reason why the budget deficits associated with the health reform packages in Congress will inevitably be much larger than the CBO estimates.

When politicians tout their policy proposals they always hype the benefits that are supposed to come if their ideas are implemented and never talk about the costs associated with what they propose to do. It is particularly contemptible for them to advertize that they are going to help the poor when in fact any help they propose to give comes at the expense of the very people they say they want to help.

We should provide better access to health care to those at the bottom of the economic ladder. To this end, there are many ways to channel additional resources to the poor that do not come at the expense of low-income families. Substantial increases in marginal tax rates on the incomes of the working poor, however, is not one of them. Indeed, when economists say that means-tested entitlements financed by heavy marginal taxes on the incomes of the poor are especially oppressive, the health care reform bill provides a perfect example of what they are talking about.

Professor Mankiw is right to stress the work incentives of these bills now in Congress. I would go further. The health care reform measures now in the Congress should be rejected as creating a poverty trap for the poor. Then better alternatives can be debated and a real program of benefit to those who need help can be considered and passed by the Congress.

Protectionism and the Gold Standard

“The Great Depression was a breeding ground for protectionism. Output fell, prices declined, and unemployment rose, pressuring governments to do something to revive their economies, even if that meant limiting imports. But contrary to popular perception, some countries went much further down this protectionist road than others, according to a [study by Barry Eichengreen and Douglas Irwin. The authors] conclude that a key factor behind this variation in trade policies was nations' adherence to the gold standard. Those countries that clung to the gold standard were more likely to restrict trade than those that abandoned it.

Previous research has shown that countries that remained on the gold standard tended to endure sharper and longer downturns than those that allowed their currencies to depreciate. Eichengreen and Irwin offer an important trade-policy corollary: without the flexibility to depreciate their currencies, many gold-standard nations turned to trade restrictions in hopes that these would boost their domestic industries and curb unemployment. Thus, the 1930s' rush to protectionism was not so much a triumph of special-interest politics as it was a result of second-best macroeconomic policies, the authors write. Their study "suggests that had more countries been willing to abandon the gold standard and use monetary policy to counter the slump, fewer would have been driven to impose trade restrictions."”

Laurent Belsie, “The Roots of Protectionism in the Great Depression”, National Bureau of Economic Research Reporter (26 October 2009).

http://www.nber.org/digest/oct09/w15142.html


Laurent Belsie has worked for the Christian Science Monitor for 28 years. He now runs the Monitor's “Rebuilding the Economy” section, blogs about the economy, and writes for the National Bureau of Economic Research. Barry Eichengreen is George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley. Douglas Irwin is Robert E. Maxwell Professor of Arts and Sciences in the Department of Economics at Dartmouth College.


The conclusion of Eichengreen and Irwin’s study is that the more flexible exchange rate systems and macroeconomic policy measures employed today limit the appeal of protectionism, and in doing so allow modern economies more flexibility to adapt and adjust to changes than the fixed exchange rate gold standard of the pre-World War II era permitted. For this reason, protectionist tendencies, while still with us (e.g., the “Buy America” provisions of the 2009 Federal stimulus package), are weaker today than during the years before 1932 when the gold standard was the prevailing exchange rate system underlying the world economy.

Tyler Cowen on health insurance mandates

“Defenders of a broad health insurance mandate argue that it will lower average costs in the health care market. The claim is that many of the uninsured are young, healthy or both, and that bringing them into the insurance pool might lower average premiums by spreading risk across low-cost groups. Yet Massachusetts has had a health insurance mandate for several years and this cost-saving mechanism does not appear to be kicking in.

At this point, it seems more plausible that the cost of health insurance will keep rising, just as the costs of health care services have continued to climb. The upshot is that the burdens of mandatory purchase, the subsidy costs and the associated implicit marginal tax rates will all increase, eventually to the point of unsustainability.

A further problem is “mandate creep,” which we’ve seen at the state level, as groups lobby for various types of coverage — whether for acupuncture, alcoholism and fertility treatments, for example, or for chiropractor services or marriage counseling.

There are now about 1,500 insurance mandates among the various states, and hundreds of others are under consideration. The dynamic at work here is that the affected groups have a big incentive to push for mandates, while most other people are unaware of the specific issues and don’t become involved.

Because mandates don’t stay modest for long, health insurance would become all the more expensive. …

If there is a problem with mandates, why do they seem to work in countries like Switzerland and the Netherlands? One answer is that mandates are more effective when health care cost inflation is under control, and both of those countries fare better at technocracy than the larger, less tightly ordered United States.

And mandates also fare better in those nations because of their greater equality of incomes. In other words, it’s less of a stretch to offer poorer people coverage that is roughly comparable to that of the wealthy.

If anything, however, European mandates will face growing problems, as health care cost inflation is spreading globally.

We’re often told that America should copy the health care institutions of Western Europe. Yet we’re failing to copy the single most important lesson from those systems — namely, to put cost control first. Instead, we’re putting our foot on the gas pedal and ratcheting up the fiscal pressures on the system, in the hope that someday, somehow, it will all work out.

As it stands, we’re on the verge of enacting a policy that is due to explode, penalizing many of the very people that it was ostensibly designed to help.”

Tyler Cowen, “How an insurance mandate could leave many worse off”, The New York Times (24 October 2009).

http://www.nytimes.com/2009/10/25/health/policy/25view.html?_r=1&ref=todayspaper

Tyler Cowen is a professor of economics at George Mason University.

Generally, as noted by Professor Cowen, government programs with means-tested mandates, such as the proposed health insurance plans now under discussion in the Congress, create ‘poverty traps”. The high marginal rates of taxation required to phase out the subsidies associated with mandates on the poor lead to confiscatory rates of taxation on families of modest incomes. In doing so, they destroy the incentive to work and earn additional income.

This is why many economists recommend universal programs financed out of general revenues rather than subsidized programs directed at the poor. But even in the case of programs funded by general taxation, fiscal pressures on upper-income groups can easily become unsustainable, especially in a country like the United States with wide differences in incomes between the rich and the poor.

The accelerating demographic decline of Russia

“Everyone interested in modern Russia should read a report out this week on the nation’s deepening demographic crisis. It’s published by the United Nations Development Programme, but it’s written by a team of Russian academic experts, so no one can say it’s tainted with bias.

The report describes the stark reality of a country whose population is falling fast, to a considerable extent because of rampant alcohol abuse among men, who on average are dying before they make it to 60 years old. “Short life expectancy is the main feature of this crisis, though by no means its only feature. The birth rate is too low, the population is shrinking and ageing, and Russia is on the threshold of rapid loss of able-bodied population, which will be accompanied by a growing demographic burden per able-bodied individual. The number of potential mothers is starting to decline and the country needs to host large flows of immigrants,” the report says.

Since 1992, the natural decrease of Russia’s population has amounted to a staggering 12.3m people. This has been compensated to some degree by the arrival of 5.7m immigrants. But many are ethnic Russians from former Soviet republics, and the source is drying up. Overall, Russia had 142m people at the start of 2008, compared with 148.6m in 1993. By 2025, the figure will almost certainly fall below 140m and could be as low as 128m.

The implications for Russia’s economy are enormous. The authors cite forecasts from Rosstat, the national statistics agency, that Russia’s working age population will decline by 14m between now and 2025. As Vladimir Putin said three years ago when he was president, the demographic emergency is “the most acute problem facing Russia today”.

Alcohol abuse has a very long history indeed in Russia. Some of the first western European visitors to the ancient Russian heartland were astonished to see Russians of all types, high and low, male and female, drinking themselves into oblivion. Over time, the Russian (and Soviet) authorities came to depend heavily on revenues from alcohol sales, especially of vodka. This deterred serious state-led anti-alcohol campaigns.

But as I remember well from several years I spent in Moscow in the mid-1980s, Mikhail Gorbachev, the reformist Soviet leader, tried to change all this, cracking down on alcohol production and sales in a way that earned him the nickname “mineral water secretary”, as opposed to “general secretary”, of the Soviet communist party. The UN report’s authors say Gorbachev’s 1985-87 campaign had a substantial impact, raising life expectancy for men by 3.1 years and for women by 1.3 years.

Dmitry Medvedev, the Russian president, is now trying to do something similar, calling alcoholism a “national disaster”. The Gorbachev experience suggests that Medvedev may achieve some short-term success, but not much in the longer run.”

Tony Barber, “Stark truths of Russia’s demographic crisis exposed in UN report”, Brusselsblog of the Financial Times (6 October 2009).

http://blogs.ft.com/brusselsblog/2009/10/stark-truths-of-russias-demographic-crisis-exposed-in-un-report/

The UNDP report on demographic trends in the Russian Federation can be found at http://hdr.undp.org/en/reports/nationalreports/europethecis/russia/NHDR_Russia_2008_Eng.pdf.


Tony Barber is the Brussels bureau chief at the Financial Times. He was previously bureau chief in Frankfurt and Rome, and has worked for other major newspapers in many countries.


Once a country starts on a deep demographic descent, as Russia has, the problems begin to multiply: An ageing population, slowing economic growth, a general lowering of the country’s strength and dynamism, growing difficulties mobilizing saving to support investment, and a resurgence of poverty. While it remains a regional power for the moment, Russia’s shrinking demographics severely limit its possibilities for the future.

Given its present plight, it is difficult to see how Russia can maintain its position in the world for more than a decade or two.

Bernanke warns of imbalances, deficits and the dollar

“Ben S. Bernanke, the chairman of the Federal Reserve, said on Monday that Asian nations were pulling the global economy out of its downturn but warned that both Asia and the United States needed to do more to reduce global trade imbalances.
…
But Mr. Bernanke also warned that huge trade imbalances between the United States and the rest of the world had played a central role in the global economic crisis and that they could do so again.

“We were smug,” Mr. Bernanke said of the United States in a question-and-answer session, referring to the attitude of American policy makers toward the large inflows of cheap money from countries like China that were running huge trade surpluses. The flood of foreign money might not have been a major problem, he said, but the American financial regulatory system was “inadequate” in preventing a surge of reckless lending that aggravated the bubble in housing prices.
…
“The United States must increase its national saving rate,” he said. “The most effective way to accomplish this goal is by establishing a sustainable fiscal trajectory, anchored by a clear commitment to substantially reduce federal deficits over time.”

The federal deficit for the 2009 fiscal year soared to $1.4 trillion, almost triple the deficit in 2008, and budget analysts predict that budget deficits will average almost $1 trillion a year over the next decade.

By the same token, he said, Asian countries needed to rely less on exports and more on their consumption at home for their economic growth. One way to increase Asian household consumption, he said, would be for countries like China to increase their social safety net programs and reduce the uncertainty that currently hangs over many consumers.

Mr. Bernanke noted that global trade and financial imbalances had narrowed considerably since the crisis began, largely because the volume of international trade contracted by 20 percent from its peak before the crisis.

But he cautioned that the imbalances could widen again as economic growth revived.
…
Mr. Bernanke avoided what was in many ways the elephant in the room: the value of the United States dollar. The dollar has dropped sharply in recent weeks against the euro and the Japanese yen, a move that has helped increase American exports by making them cheaper in some foreign markets. But the dollar has not budged in more than a year against China’s renminbi, which the Chinese continue to tightly manage and which many economists say remains greatly undervalued.”

Edmund L. Andrews, “Asia Said to Be Leading the Globe Out of Crisis”, The New York Times (19 October 2009).

http://www.nytimes.com/2009/10/20/business/economy/20fed.html?_r=1&adxnnl=1&adxnnlx=1256083284-zaXTsfBtZgmobeXy5w0siA


Edmund L. Andrews is a reporter for The New York Times. Ben Bernanke (1953-), former chair of the Department of Economics at Princeton University, is currently Chairman of the Federal Reserve Board.


Seen from the point of view of the world, the global financial crisis can be traced to three important factors: A global saving glut that financed the persistent and growing deficit in the U.S. current account, a low interest rate policy on the part of the Fed that encouraged American investment and discouraged American saving, and failures of markets and errors of policy that contributed to the severity of the crisis and the difficulty of restoring the foundations for rapid and widespread world growth.

These factors were at work for several decades and as a result of their influence outsized and unsustainable budget and trade surpluses and deficits arose in almost every country, especially the United States. Patterns of production, employment and consumption adjusted to the prevailing network of trade relationships, including the persistent imbalances, and large-scale financial flows from one country to another served as a means of financing the growing balance of payments disequilibria. In particular, the United States, with its strong propensity to consume, recorded large current account deficits reaching six per cent of its gross domestic product. In contrast, China and other countries, with their strong propensities to save, recorded large current account surpluses which were used to finance the U.S. deficits through an accumulation of U.S. liabilities to foreign central and commercial banks. These imbalances were a major contributing factor in the global financial crisis and have become so large policy makers at the national and international level recognize they are no longer sustainable and place the prosperity of the world in jeopardy.

In this talk, Dr. Bernanke points out that correcting the international imbalances will be very difficult. The U.S. must consume less and China must consume more, with similar adjustments in other countries. As Dr. Bernanke stresses, first and foremost, the U.S. must reduce the Federal deficit, which is now projected to exceed $1 trillion a year over the next decade. This estimate for the deficit, let me add, is probably understated and in the event of passage of a health care legislation, considerably understated. Reducing the deficit will represent a major challenge to American policy makers. Similar adjustments will have to be undertaken by Asian countries.

It must also be noted that the adjustment to be undertaken involves much more than balancing national budgets. What is required to establish a worldwide pattern of sustainable export and import trends that can serve as a basis for widespread prosperity among all countries. This is much more than a financial adjustment. It is an adjustment that affects all lines of production and every worker and household in the country. Productive resources must be reallocated sector by sector from present patterns of use to new ones as some countries expand their exports by increasing the range of products they sell on world markets and other countries shift their production toward their home markets. Employment levels and real incomes will be reduced, at least initially, as workers in some lines of production are transferred to other activities in a process of change fraught with the possibility of permanent loss of livelihood. Changes to exchange rates and terms of trade will affect every individual, already underway, will affect the pace of growth of the world economy, and it is likely to slow as the adjustment proceeds. For the U.S. and for China very large changes are needed to create patterns of production and consumption and exports and imports that are compatible with a rapidly growing world economy. For international agencies, a new set of arrangements must be instituted which will profoundly affect their work and the success of efforts to promote development in the least developed countries.

It took several decades for these huge global imbalances to arise and it will take several decades to remove them.

No one should underestimate the difficulty of the adjustment process that must be undertaken and its importance for the future of every person on this planet. Vibrant and rapidly growing world trade is essential for a peaceful and prosperous world. To achieve this goal requires difficult decisions that will raise tensions among countries at a time when tensions are already high.

One wonders whether policy makers understand the depth of the problems before their countries and their willingness to make the hard decisions necessary to promote and sustain the rapid pace of world development that has characterized the past half century.

China and the dollar

“When will China finally realize that it cannot accumulate dollars forever? It already has more than $2 trillion. Do the Chinese really want to be sitting on $4 trillion in another five to 10 years? With the United States government staring at the long-term costs of the financial bailout, as well as inexorably rising entitlement costs, shouldn’t the Chinese worry about a repeat of Europe’s experience from the 1970’s?

During the 1950’s and 1960’s, Europeans amassed a huge stash of US Treasury bills in an effort to maintain fixed exchange-rate pegs, much as China has done today. Unfortunately, the purchasing power of Europe’s dollars shriveled during the 1970’s, when the costs of waging the Vietnam War and a surge in oil prices ultimately contributed to a calamitous rise in inflation.

Perhaps the Chinese should not worry. After all, the world leaders who just gathered at the G20 summit in Pittsburgh said that they would take every measure to prevent such a thing from happening again. …

The fact that world leaders recognize that global imbalances are a huge problem is welcome news. Many economists, including myself, believe that America’s thirst for foreign capital to finance its consumption binge played a critical role in the build-up of the crisis. …
…
With the US government currently tapping financial markets for a whopping 12% of national income (roughly $1.5 trillion), foreign borrowing would be off the scale but for a sudden surge in US consumer and corporate savings. For the time being, America’s private sector is running a surplus that is sufficient to fund roughly 75% of the government’s voracious appetite. But how long will US private sector thrift last?

As the economy normalizes, consumption and investment will resume. When they do – and assuming that the government does not suddenly tighten its belt (it has no credible plan to do so) – there is every likelihood that America’s appetite for foreign cash will surge again.
…
Chinese leaders clearly realize that their hoard of T-Bills is a problem. Otherwise, they would not be calling so publicly for the International Monetary Fund to advance an alternative to the dollar as a global currency.

They are right to worry. A dollar crisis is not around the corner, but it is certainly a huge risk over the next five to 10 years.”

Kenneth Rogoff, “China’s dollar problem”, Project Syndicate (10 October 2009).

http://www.project-syndicate.org/commentary/rogoff61


Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University. He was formerly chief economist at the IMF.


The Chinese should worry.

The dollar has been trending downward on foreign exchange markets for more than seven years, and since early 2002 has lost 25 per cent of its value in relation to a basket of currencies including the euro, the pound sterling, the yen, and the Canadian dollar. It has also had its ups and downs. Early in 2008 the dollar hit an all time low, then bounced back a bit and is now sinking once again. The rise since its low point has not been particularly strong and now another downward drift seems underway. Given its recent unsteadiness a plunge below its 2008 low may well be before us.

The dollar has been decline for a simple reason. The U.S. has been sending out too many dollars for too many years and the world is flooded with them.

Until the recent financial crisis, the decline of the dollar abroad was rooted in persistent overconsumption and undersaving at home, reflected in a decades-long export of a huge volume of domestic currency in return for an import of foreign saving that indirectly financed the consumption binge of increasingly overweight, constantly whining and ever more self-absorbed Americans. (Yours truly in the lead.) This showed up in a massive trade deficit that reached 6 per cent of the GDP and left the country heavily in debt to foreigners.

The American consumption binge was aggravated by public policy. Many decades of relatively low interest rates and high marginal tax rates increasingly depleted the prospective pool of domestically-generated investment funds and decades-long fiddling around with the tax and regulatory codes to promote consumption (write-offs for mortgage interest, health insurance, education costs and a host of other consumer expenditures, plus a long list of regulations whose sole purpose is to increase artificially access to consumer credit to unqualified buyers, such as mortgages for sub-prime borrowers) left the country dependent upon foreigners to finance the investment its overconsumption would not allow.

Adding to the problem has been the increased use of foreign financing to cover deficits in U.S. government accounts, especially the past year. The U.S. is now heavily in debt abroad and there is an increasing unwillingness on the part of foreigners to hold more greenbacks. While American saving has risen, this is because of a greatly depressed level of economic activity and a retrenchment in spending by consumers. It is unlikely to continue, at least at its present rates, once the employment recovers.

Even if consumption remains subdued, the dollar is likely to continue to fall. And as the dollar falls, foreigners can be expected to rebel against holding more increasingly worthless Federal Reserve notes and other government paper and they will be loath to take on any more dollar-denominated debt. China and other buyers of U.S. Treasuries have made that clear. The days of the strong dollar and the ability of the U.S. to borrow abroad without limit are over.

Not everyone in the U.S. seems aware of the changed position of the U.S. on international financial markets. The Congress in particular seems oblivious to the perception by many here and abroad that the country simply cannot continue to accumulate debt at the rate it has in the past. The health care reform bill now being discussed in the Congress provides an example of domestic actions that may have international repercussions. Despite assurances to the contrary by politicians, all of the health care reform bills currently under discussion in the House and the Senate will add greatly to budget deficits that are already out-of-control . No one is fooled by what politicians say and everyone understands that the money to finance many of its provisions will have to be borrowed abroad, mainly from China.

Even if the Americans do not seem to be worried about their accumulating debt, foreigners are. They know that any increase in external borrowing will further erode the value of the dollar.

Rogoff believes a dollar crisis is not around the corner.

I am not so sanguine.

How the health care reform bill oppresses the poor

“CBO [the Congressional Budget Office] has just released some new tables that demonstrate the increase in marginal tax rates inherent in the Baucus healthcare reform bill. CBO doesn't directly show the marginal tax rates, but, if I am interpreting the tables correctly, a little bit of arithmetic gets you from CBO numbers to marginal tax rates pretty fast. These figures apply to workers buying their health insurance on the newly created exchanges with the newly offered subsidies.

According to CBO, a family of four making $54,000 would pay $4,800 for health insurance. The rest of the premium would come from government subsidies. If the family's income rises to $66,000, the subsidy falls, and the cost of health insurance rises to $7,600. In other words, earning an additional $12,000 requires the family to pay an additional $2,800. The implicit marginal tax rate is $2,800/$12,000, or 23 percent.

Similarly, a single person earning $26,500 would pay $2,300 for health insurance, but if his income rises to $32,400, his premium rises to $3,700. This yields an implicit marginal rate of 24 percent.

You get somewhat different numbers at other income levels. Typically, however, the implicit marginal tax rates are around 20 percent. Those figures for marginal tax rates are, of course, added on top of those already imposed by existing income and payroll taxes.”

N. Gregory Mankiw, “Marginal Tax Rates from Health Reform”, Greg Mankiw’s Blog (12 October 2009).

http://gregmankiw.blogspot.com/

N. Gregory Mankiw is professor of economics at Harvard University and a former Chairman of President George W. Bush’s Council of Economic Advisors. His textbook is used in Regent’s Principles of Economics course. He is also a Republican policy advisor.


It is not easy to help the poor through public policy. Almost always, efforts by the government to do so end up burdening the poor and putting obstacles in their way to a better life.

Versions of the health care reform bills now making their way through Congress provide many examples. Professor Mankiw focuses here on one aspect of the Baucus bill which is set to be voted on in the Senate Finance Committee tomorrow.

Here the problem before the policymakers trying to help the poor afford health insurance: Because the cost of health care is expensive and beyond the ability of low-income families to afford full coverage, they propose subsidizing its cost to low-income families, and the poorer the family, the greater the subsidy. There is no problem with a subsidy if the family remains poor. It continues unchanged. However, it does affect their incentive to work and earn more income. If the family earns more income, for example, its subsidy is reduced, and the cut in the subsidy falls faster than the rise in the family’s income until the family’s income has risen to the point where it no longer qualifies for a subsidy. On first appearance, this seem fair since low-income families should be subsidized more than high-income families, and at some point the subsidy should end.

Now we ask the question: If the family’s income rises, what happens to the taxes and fees it must pay to the government. In the case illustrated by Mankiw, if a family earning $54,000 receives a $12,000 increase in pay its health care insurance premium increases by $2,800, or about 23 per cent of his pay raise.

But this is not all. A higher pay check means higher Federal income taxes. A family earning $54,000 a year is in a 25 per cent marginal tax bracket. 25 per cent of the addition $12,000 means $3,000 in extra Federal income tax.

It also means higher Social Security and Medicare contributions of 7.65 per cent (actually, double this figure, since the employee pays the employers share in the form of lower wages, not considered here). This amounts to a deduction of another $918 from the $12,000 pay raise. So far, the government has taxed $6,718 out of the $12,000 raise.

But there are yet more taxes. Here in Virginia we have a state income tax. The additional tax attributable to a pay raise that lifts a family’s income by $12,000 from $54,000 a year to $66,000 a year generates another $788 in tax owed to the state of Virginia.

Even this is not the end of it. Virginia has a general sales tax rate of 5 per cent (4 to the state, 1 to the city). If the family decides to spend the approximately $4,500 left after paying the mandatory health care insurance premium, the Federal income tax, the mandatory Social Security and Medicare contributions, and the state income taxes, another $225 will have to be paid in taxes.

And there is yet more. Embedded in the price of all products purchased are taxes and fees paid by producers, from the corporate income tax to property taxes on commercial property to the import tariffs and duties on goods and services imported into the country. These taxes are either shifted forward to the consumer or backward to the factors employed. A good estimate of these added costs to the consumer is another 5 per cent of their additional consumption expenditures, or another $225.

Given all these deductions for taxes and fees, the actual amount of additional purchasing power to the example family from a $12,000 raise in pay is only about $4,000, or one-third of the supposed increase their increase in income.

In other words, in this example, the government takes two-thirds of any additional income of a family with a modest income of $54,000.

These are confiscatory rates of taxation on families of modest incomes. The rates are even higher, it should be noted, on families with higher incomes.

The burden of taxation in this country has reached the point of oppression, even on the poor. People should object to the health care bill because it will, as illustrated above, increase their already high taxes markedly. More than that, they should insist that government spending and their taxes be reduced.

America the Beautiful at a crossroads

AMERICA

“O beautiful for spacious skies,
For amber waves of grain,
For purple mountain majesties
Above the fruited plain.
America! America!
God shed His grace on thee,
And crown thy good with brotherhood
From sea to shining sea.

O beautiful for pilgrim feet
Whose stern impassion'd stress
A thorough-fare for freedom beat
Across the wilderness.
America! America!
God mend thine ev'ry flaw,
Confirm thy soul in self control,
Thy liberty in law.

O beautiful for heroes prov'd
In liberating strife,
Who more than self their country lov'd
And mercy more than life.
America! America!
May God thy gold refine
Till all success be nobleness,
And ev'ry gain divine.

O beautiful for patriot dream
That sees beyond the years,
Thine alabaster cities gleam,
Undimmed by human tears.
America! America!
God shed His grace on thee,
And crown thy good with brotherhood
From sea to shining sea.”

Katharine Lee Bates, “America”, The Congregationalist (1895).

http://www.harvardsquarelibrary.org/poets/bates.php


Katharine Lee Bates (1859-1929) was Professor of English Literature at Wellesley College, where she taught for 40 years. Professor Bates began to write the poem “America” following a trip she had taken to Colorado Springs, Colorado in 1893 to teach a short summer session at Colorado College. On this trip she visited Chicago, traveled through the wheat fields of Kansas, and stood atop Pikes Peak and was awed by the majestic views it presented of the Great Plains. It was on the pinnacle of that mountain that the words of this great poem began to take shape. As she later recalled:

“One day some of the other teachers and I decided to go on a trip to 14,000-foot Pikes Peak. We hired a prairie wagon. Near the top we had to leave the wagon and go the rest of the way on mules. I was very tired. But when I saw the view, I felt great joy. All the wonder of America seemed displayed there, with the sea-like expanse.”

A few years afterward, Samuel Augustus Ward (1847-1903) set the poem to music on the basis of his earlier hymn “Materna”. Bates and Ward never met, and Ward died not knowing the popularity the song “America the Beautiful” would achieve.


At the dawn of the Twentieth Century, America was seen in a very different light than at the opening of the Twenty-first. At that time, the physical splendor (“O beautiful for spacious skies”), revolutionary beginnings of a new people infused with a love of freedom (“O beautiful for pilgrim feet”), exceptional devotion to country beyond self (“O beautiful for heroes prov'd”), and material achievements and melding of a diverse people under God’s eye (“O beautiful for patriot dream“) were celebrated by all in word and song.

At that time, Americans accepted that the country occupied a special place among the nations of the world. Its position was defined not by the superiority of its people but by its unique origins, its drawing of the poor and dispossessed from across the globe, its abundance of natural resources, and its political and religious institutions, which at once acknowledged the supremacy of God and yet allowed each man and woman to be an equal and independent before his Creator and in the body politic. This nation was seen as different. It was beautiful. It was exceptional.

The idea of American exceptionalism is best set forth by Alexis de Tocqueville in his 1831 work Democracy in America:

“The position of the Americans is therefore quite exceptional, and it may be believed that no democratic people will ever be placed in a similar one. Their strictly Puritanical origin, their exclusively commercial habits, even the country they inhabit, which seems to divert their minds from the pursuit of science, literature, and the arts, the proximity of Europe, which allows them to neglect these pursuits without relapsing into barbarism, a thousand special causes, of which I have only been able to point out the most important, have singularly concurred to fix the mind of the American upon purely practical objects. His passions, his wants, his education, and everything about him seem to unite in drawing the native of the United States earthward; his religion alone bids him turn, from time to time, a transient and distracted glance to heaven. Let us cease, then, to view all democratic nations under the example of the American people.”

The liberties that at once gave rise to and sprang from American exceptionalism are, in Abraham Lincoln’s words of 1861, a gift from the Almighty to an “almost chosen people”. In Lincoln’s view, the defense of these liberties is a struggle he regarded as “even more [important] than National Independence” and their existence is “a great promise to all the people of the world to all time to come”. As Lincoln saw it, by virtue of God’s blessings, Americans are exceptional because they are instruments responsible for perpetuating and extending the cause of liberty as the very basis for society. In this task, the newly elected President called on all to support him as he extended liberty to the slave, even those opponents who, as he put it, “do not agree with my political sentiments”.

All Americans since the time of Lincoln, and indeed from the time of the founding of the republic, have sensed the cause of freedom and liberty is integral to what it means to be an American, that it transcends political differences, and that every American is an example and instrument for extending liberty. They also understand that the ultimate power of the United States in the world is not in its military or its economy or its debased culture. While elites abroad may envy our military power and position in the world, and in their lust for power may seek to remove the influence of our love of liberty, the mass of world’s men and women yearn for our freedom, understand the unearned nature of our exceptionalism, and wish us no ill.

Here at home, however, the notion of American exceptionalism is in decline today. The presumption of exceptionalism requires confidence in your history and self-assurance in your ideals when facing your future. Those on the Left see the United States today as a self-serving country that pursues narrow interests and struts on the world stage as a hegemon, without moral claim to its preeminence nor honor in its leadership. In their eyes, the United States is no different from any other country.

In this regard, the President recently told foreigners while on their soil, "I believe in American exceptionalism, just as I suspect that the Brits believe in British exceptionalism and the Greeks believe in Greek exceptionalism." To bring the point home, he indicted his own country for its past sins and its failure to live up to its putative ideals. In doing so, he reduced America the Beautiful to the United States and its institutions, a mere country of physical territory and questionable governance, one among many, large and small in size and good and bad in administration, devoid of its supreme ideals of liberty and individualism and religious sensibility, equal to others in all respects with none of the qualities that make America the Beautiful unique. To the Left, the age of American primacy is over and the values of America have lost their legitimacy.

The view that the United States is no longer America the Beautiful but a plain and ordinary secular state has an uncomfortable degree of truth to it. Today, the country is exhausted and depressed and overwhelmed by debt, confused in its policies and in decline morally and economically. In its present state it cannot serve as an example to the rest of the world. Its leadership at the highest levels has rejected its history and renounced any idea of its exceptionalism. In the view of its critics, which includes its present leadership, the United States is only one country among many and does not merit and cannot be trusted with global leadership.

The country is now at a crossroads. It can continue down the road it is now on and become merely another country with a secular state in an increasingly hostile world. Or it can decide to be the exceptional nation it was, acknowledging its blessings from Above and His mandate to live in harmony and peace in a manner tolerant to all. It can recognize that this nation is more than a country, its people are more than a citizenry, its order based on more than law, its character rooted in more than station. As John F. Kennedy said, it is the “elements of the American character which have made this nation great” and “the characteristics of the American people have ever been a deep sense of religion, a deep sense of idealism, a deep sense of patriotism, and a deep sense of individualism”.

Kennedy is right. These are the central ideas that give rise to the liberty at the core of American exceptionalism, and for that reason these are the ideas the Left rejects.

Religion, idealism, patriotism and individualism define what makes America beautiful and what it means to be an American. Without them the promise of our liberties as an independent and self-reliant people cannot be fulfilled and we as a people cannot survive.

It is to our ideas and ideals, then, that we must return. When we do, we will be able to say with Emerson,

To the mizzen, the main, and the fore
Up with it once more! -
The old tri-color,
The ribbon of power,
The white, blue and red which the nations adore!
It was down at half-mast For a grief- that is past!
To the emblem of glory no sorrow can last!