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1. “the backfire of low oil prices could undermine US policy assumptions and imperil US interests"... “The political reverberations of a sustained oil glut should not be underestimated" ... ”Without the salve of rising oil revenues, many of these nations can expect to see heightened political instability, social unrest, or even civil wars...” “The high probability of oil prices in the $1 2-$20 range over most of the next two decades will condemn to a perilous future the arc of instability along the southern rim of Eurasia...” Jaffe & Manning, "The Shocks of a World of Cheap Oil," Foreign Affairs J/F 2000

2. “One of the most important non-economic impacts on US interests could be a rise of political instability in a region whose leaders have largely based their legitimacy on promoting rapid economic growth and an expanding economic ‘pie’ to the benefit of their citizens.” - may see widening social class, ethnic, and religious fissures arise — or an opportunity for creative destruction." Richard Cronin, CRS Report 1/28/99 Asian Financial Crisis: An Analysis of US Foreign Policy Interests and Options

3. "wealth is usually needed to underpin military power, and military power is usually needed to acquire and protect wealth. If, however, too large a portion of the state’s resources is diverted from wealth creation and instead allocated to military purposes, then that is likely to lead to a weakening of national power over the longer term." Paul Kennedy, The Rise and Fall of the Great Powers,

4. “the liberal tradition’s stress on free trade, liberal democracy, and collective security as viable foundations for international peace have been incorporated into the national strategies of the United States and other great powers in the international arena. Considerable evidence has accumulated that democracies are, in David Lake’s apt phrase, “power pacifists” that never wage war against one another. Many defense analysts and policymakers have begun to take the so-called democratic peace seriously. Therefore, shouldn’t a forward-looking guide for security studies make the proposition that a democratic world would be a peaceful world--”the closest thing we have to an empirical law in international relations”

5. “[T]he natural effect of commerce is to lead to peace. Two nations that trade together become mutually dependent; if one has an interest in buying, the other has an interest in selling; and all unions are based on mutual needs."

6. “Fundamentally, the case for free trade is the case for the market system. The benefits come in the form of greater realization of the efficiencies available from specialization. ... Another set of arguments is political —having to do with the claim that economic integration engenders greater political stability and reduced potential for conflict.”

7. “In the long term, economic growth is likely to foster stable democratic middle-class societies around the world.”

8. “Security can be achieved more easily, if there is less reason to make war. More specifically, security can be attained if military expansion is no longer necessary to achieve economic goals.” .... Conquest, therefore, might not succeed in capturing and utilizing these factors of production to increase national power, as they cannot be kept.”

Air Force magazine — Jan 2000 — Gallup poll found Americans believe they lack information about military and national security matters — and not interested in learning

“Peaceful times are also superficial times, in which we concentrate on social imperfections because the political order appears secure... Such times never last. The end of the Cold war merely set the parameters for the next struggle for survival.” Robert Kaplan, “Kissinger, Metternich, and Realism,” The Atlantic Monthly June 199

“A breakthrough deal to bring China into the world trading system will cement President Clinton’s standing as the first US president to explicitly use global economics as the paramount force behind American national security.” Justin Brown, Christian Science Monitor, Nov 19, 1999 p1

“Implications of the Kosovo Crisis for Defense Planners.” Every country across Western Europe has begun to understand that peacemaking operations are the future course of conflict that Europe will be called upon to address.” = more rapid response

Perhaps the history of the nation state has come to a turning point after all. In future, it might be argued, it is the need for “mobility and communication” between economies, rather than within them, that will gain the upper hand.

“Security can be achieved more easily, if there is less reason to make war. More specifically, security can be attained if military expansion is no longer necessary to achieve economic goals.” .... Conquest, therefore, might not succeed in capturing and utilizing these factors of production to increase national power, as they cannot be kept.” Rosecrance “Economics and national security: the evolutionary process,” in Shultz, Godson, and Quester eds. Security Studies for the ₂₁5t Century 1997

“Thus in Kosovo, justice (as it is now understood) and the U.N. Charter seemed to collide.., the charter is grounded on a premise that is simply no longer valid — the assumption that the core threat to international security still comes from interstate violence. This assumption is no longer valid.” Glennon, “The new interventionism: The search for just international law,” Foreign Affairs M/J 1999 p 2

“Many states in the next 10 years will find it easier to obtain weapons of mass destruction and the means to deliver them.”

Impact of globalization and information flows — wrought changes in USSR, why not here?

Paul Kennedy’s Preparing for the 21~ Century hazards the guess that Malthus’s pessimism may not have been correct in the nineteenth century, but could become so in the twenty-first century. Kennedy imagines a world in which population outruns food supply

Fukuyama declared end of history — fall of communism bring about peaceful competition among democracies, others say it will be cultural divides, others say it will be markets to bring us together..

“He [Friedman] advances the “Golden Arches” theory of international relations, noting that no two countries with McDonald’s franchises have ever gone to war. he predicts that the 2l~~ century will be the century of civil wars between social forces favoring and opposing globalization and rightly warns that financial globalization makes poorly managed economies more susceptible to economic, financial, and political meltdowns. Eichengreen Foreign Affairs May 1999

national interests - was easy in the Truman Doctrine era - anything to stop communism and keep out insurgents - strange bedfellows. Reagan doctrine - “crusade for freedom” -. active support for guerillas

“America’s world” Economist cover story 10/23/99 . . . “nobody has spelled out what American interests are.”

“Although many of America’s interests remain undefined or not clearly identified, since 1949 they have been generally related to deterring nuclear war, maintaining the status quo, resisting Communist led aggression, and honoring commitments to allies. The direct bearing of these interests upon security, the welfare or purposes of American society have not, however, always been clear.”

“‘Vital interests,’ has become the handy clichd for politicians and defense planners. But who really determines what those interests are, and by what process and criteria are they identified? What makes an interest vital enough to be worth fighting and dying for?” - as cost of human life increases and the reason for loss is lower, we need to rethink the mix of capital and labor.

“william Perry and Ashton Carter have recently argued that we should rethink the way we understand risks to U.S. security. At the top of their hierarchy they put “A list” threats like that the Soviet Union once presented to our survival. The “B list” features imminent threats to U.S. interests — but not to our survival —such as North Korea or Iraq. The “C list” includes important “contingencies that indirectly affect U.S. security but do not directly threaten U.S. interests”: “the Kosovos, Bosnias, Somalias, Rwandas, and Haitis.” Nye, “Redefining the National Interest,” Foreign Affairs J/A 1999 p 26

“Nato’s military intervention in Kosovo dramatically raises a larger problem: how should the United States define its interests in today's world? . . . what are the limits of America’s concerns abroad?” Nye, “Redefining the National Interest,” Foreign Affairs J/A 1999 p 22

“Deterrence of nuclear war is still the primary goal and vital interest today.” Also include free access to overseeas markets and natural resources — global turbulence has been identified as a national threat. “Military action cannot solve the basic problems of people seeking food and freedom from oppression and exploitation.”

Importance of special interests — what they do to democracy — what they do to ability to suport / define national interests — increasing heterogeneity of the population — will weaken our consensus “poor elements of American society have different priorities than do powerful elite of media war hawks, the national security complex, and its supporting industries.” - diversity of population — more difficult to define natiuonal interests — what is worth dying for

“Economic welfare and the protection of national security are two goals that any properly constituted political state must aim to achieve. But one problem that confronts both the practice and study of economics and national security in the contemporary world is that the two objectives sometimes represent trade-offs: the achievement of one may diminish the realization of the other.” .“ Rosecrance “Economics and national security: the evolutionary process,” in Shultz, Godson, and Quester eds. Security Studies for the 21St Century 1997

“In a democracy, the national interest is simply the set of shared priorities regarding relations with the rest of the world. It is broader than strategic interests, though they are part of it.” Nye, “Redefining the National Interest,” Foreign Affairs J/A 1999 p 23

“The question is rather that loyalty to the state is being displaced because the state can no longer provide universal solutions to the citizen’s problems. This displaced loyalty does not lodge elsewhere, it simply dissipates. Individuals are thus less willing to sacrifice for any unit (national or other) in a less heroic age.” Rosecrance “Economics and national security: the evolutionary process,” in Shultz, Godson, and Quester eds. Security Studies for the 21st Century 1997

“Two concepts of sovereignty” Economist 9/18/99 “States are now widely understood to be instruments at the service of their people, and not vice versa.” what about humanitarian intervention?

“The national security of the US depends on a viable industrial base-consisting of manufacturing and repair facilities-which could produce and maintain weapons in the event of a major conflict.’ — want to see an industrial national guard

“The American involvement in Kosovo has started the most furious debate since the end of the cold war over what constitutes United states strategic interests.” ... “The $64,000 question is what areas of the world and causes are worth Americans fighting and dying for?” NYT April 24, 1999

“The American debate over East Tumor and Russia reveals a backlash against “Values-based” foreign policy. Instead, realpolitik may be back in vogue.” Economist 9/18/99

“This economic interdependence has produced a fundamental change in the way countries view their national objectives. Among developed countries, it is possible that economic competition will replace military conflict in the years ahead, and the traditional role of the state in shaping national strategy may be challenged by economic forces, particularly multinational firms. Economic welfare and the protection of national security are two goals that any properly constituted political state must aim to achieve. But one problem that confronts both the practice and study of economics and national security in the contemporary world is that the two objectives sometimes represent trade-offs; the achievement of one may diminish the realization of the other. One can list at least four major national objectives: territorial, military, ideological/religious, and material/economic goals... .Formerly, the conflict among those objectives was minimal” Rosecrance “Economics and National Security: the Evolutionary Process.”

“Strategists advise that interests should be defined in relation to power — but how would one describe the distribution of power in the information age? ... power today is distributed like a three-dimensional chess game. The top, military board is unipolar, with the United states far outstripping all other states. The middle, economic board, is multipolar, with the United States, Europe, and Japan accounting for two-thirds of world production. But the bottom — representing transnational relations that cross borders and lie outside the control of governments — has a more dispersed power structure... .It is equally important not to be misled into thinking that American power can always get its way in nonmilitary matters. Nye, “Redefining the National Interest,” Foreign Affairs J/A 1999 p 24

“Security policy is being refrained around a mix of national interests, with economic factors increasingly influencing defense decisions.~~ - “A strategy that links military requirements and economic reality is what the Defense Department (DoD) needs to guide future budget decisions.” “To cope with a rapidly changing world, America is reframing its view of national security around a new mix of national interests, with a much stronger economic influence added to the balance.”.. .This means that broad econopmiuc factors will significantly influence our overall national interest and, in mm, increasingly affect national security policy.” - shift from military confrontation to economic competition...

The United States has profound interests at stake in the health of the global economy. Our future prosperity depends upon a stable international financial system and robust global growth.

The 105th Congress currently has under consideration new sanctions legislation specifically relating to religious persecution, proliferation of weapons of mass destruction, conventional arms sales and transfers, export controls, terrorism, international narcotics control, travel restrictions, environment, workers rights (including issues of prison or forced labor and child labor), war crimes, torture, and human rights. Other, more routine, legislative initiatives (annual appropriations bills, for example) have become the means to target other countries for behavior of which the United States disapproves. Economic sanctions typically include measures such as trade embargoes; restrictions on particular exports or imports; denial of foreign assistance, loans, and investments, or control of foreign assets and economic transactions that involve U.S. citizens or businesses

“Another distinction to keep in mind is that between “hard power” (a country’s economic and military ability to coerce) and “soft power;” (the ability to attract through cultural and ideological appeal). Nye, “Redefining the National Interest,” Foreign Affairs J/A 1999 p 24

“Information-age psychological operations may provide the US with an increased capability to pursue its national interests without bloodshed.” Sun Tzu 2000+ years ago — “To subdue the enemy without fighting is the acme of skill” Clausewitz — “War is an act of violence whose objective is to compel the enemy to do our will” — important as increasing unwillingness for casualties

Should national interest or the UN determine the decision to send peacekeeping troops abroad?

Kissinger - “Whenever peace - conceived of as the avoidance of war - has been the primary objective of a power or a group of powers, the international system ahs been at the mercy of the most ruthless member of the international community.”

“States justify their existence, in large part, by securing their citizens’ well-being, whether by creating and maintaining jobs, providing a social safety net, or protecting the environment. A regime that must leave its people at the mercy of market forces is not likely to enhance its reputation in their eyes. Gaddis, “Living in Candlestick park.” The Atlantic Monthly April 1999 p 67

Impact of internet - rise of referenda as source of power - allows interactivity should we adopt a multilateral

“Now, as in revolutions past, technology is profoundly affecting the sovereignty of governments, the world economy, and military strategy. “Wriston, “Bits, Bytes, and Diplomacy,” Foreign Affairs S/0 1997 p172 Sovereignty, the power to stop others from interfering in its internal affairs, is rapidly eroding. ... The depth of the global market renders economic theory based on national markets suspect.. .The new economic powerhouses are masters not of huge material resources, but of ideas and technology” Wriston, “Bits, Bytes, and Diplomacy,” Foreign Affairs S/O 1997 p¹⁷²

Among the developments alleged to be limiting state autonomy and, consequently,, undermining the realist conception of the state, the process of economic globalization, is among the most important.

There are a number of reasons for this domestic ambivalence toward internationalist economic policies. The Cold War rationale for economic integration—that it was a necessary ingredient of building a power base to fight global communism—has been removed. The popularization of politics has also probably played a role. I doubt that anyone focus-grouped the Marshall Plan—or that it would have fared well if they had. (there is a reason it was not called the Truman plan.) The power of concentrated narrow interests relative to broad dispersed ones is also surely relevant. But I suspect that perhaps the most fundamental reason is the widespread sense the international integration interferes with the ability of government to deliver the benefits the citizenry want. That is why the development of approaches that can reconcile economic integration, correcting market failure and sovereignty—by economists and others inside and outside of government—is so profoundly important for the future.

“The social and political compromises that saved capitalism through an expansion of state authority early in the twentieth century no longer constrain it. And states now are as ill positioned as towns and villages were then to resist the buffeting of markets, or to relieve the dislocations they can produce.” Meanwhile, political fragmentation, by proliferating sovereignties, is diminishing sovereignty.” Gaddis, “Living in Candlestick park.” The Atlantic Monthly April 1999 p 67

"Tension is mounting between the fixed geography of nation-states and the nonterritorial nature of global problems and their solutions."

Future of the state, Economist: governments are confronted by two old enemies, stronger now than ever before: technology and ideology. The state is proving unequal to the challenge. Its power to rule is fading. Judged as propaganda, 1989 did for big government what 1929 did for laisse- faire.

“Governments are confronted by two old enemies, stronger now than ever before: technology and ideology... .Increasingly, these changes render governments mere servants of international markets. The fundamental question for the advanced industrial countries is not, as many suppose, whether democracy is compatible with globailzation, but whether democracy is compatible with liberty.” The future of the state, The Economist 9/20/97 problem is the inabilit to sqy no, the power of special interests — this can be seen in the rise of size of the government — and in transfers not investment — problem is in view of government as lacking self interest — middle-class capture — James Carville wanted to come back as the bond market since financial markets were more powerful than God

“First, the emerging paradigm can be contrasted with its predecessors by observing the transition, currently underway, from a state-centric system to one marked by a greater number of destabilizing substate and transstate actors.”

.elements of integration will coincide and compete with the forces of disintegration... Integration will be reflected in the communications revolution, economic and environmental interdependence, economic organizations leading to amalgamation (for example, the European Union), the permeability of state borders, international organizations, and greater flows of people, ideas, goods, and services. Simultaneously, policymakers will confront such forces of fragmentation as radical nationalism and religious extremism, international criminal organizations, weapons proliferation, societal breakdown and the breakup of states, and isolation owing to a preoccupation with domestic causes.~~

Future of the state, Economist “The fundamental question for the advanced industrial countries is not, as many suppose, whether democracy is compatible with globalisation, but whether democracy is compatible with liberty.”

Future of the state, Economist “Freedom and democracy are linked, of course--but so are freedom and capitalism. And, unfortunately, the pessimists are right to question whether capitalism can continue to get along happily with democracy.

Governments must match the scope of their activities with the political and economic forces.

Explosive growth in number of countries in last 50 years - “Yet this growth has taken place at a time when many parts of the world seem to be trying to band together to capture the advantages of scale...” What does that say about the costs and benefits of size?

Main force has been end of colonial rule, collapse of soviet union, big not mean prosperous, free trade has benefited countries — allows specialization, Small countries lose out with most-favored-nation concept — they cannot make a deal with big US since the deal must be given to all. — why like regional trading blocks. Communications advances have helped small countries, smaller states have bigger governments, greater homogeneity

Future of the state, Economist “Undeniably, the deregulation of capital flows and continuing advances in information technology have altered the way that changes in budget deficits and interest rates, the two levers of macroeconomic policy, affect the economy.”

Through taxes and public spending, they say, societies can use some of the extra income created by globalisation to cushion the losers. In principle, governments could go further, ensuring that everybody ended up better off. Which is very reassuring-unless it turns out that integration itself reduces the freedom of governments to act.

Today’s global capital market only rules out sooner what has always been impossible in the longer term-namely, treating interest rates and the value of the currency as entirely separate instruments matters.

What is future of liberal democracy - Mancur Olsen in 1965 - “The logic of collective action” - competition was key to success -and competition delined as societies aged and special interest groups formed. - rent seeking behavior

“The end of the Cold War was an earthquakelike event in that it revealed deep and hitherto hidden sources of geopolitical strain.. .First impressions were that the critical fracture lay between democracy and capitalism on the one hand, and authoritarianism on the other. . . .But the geopolitical map implied that democratization and marketization proceed in the same direction — that no fault exists between them.... States justify their existence, in large part, by securing their citizens’ well-being, whether by creating and maintaining jobs, providing a social safety net, or protecting the environment... The social and political compromises that saved capitalism through an expansion of state authority early in the twentieth century no longer constrain it. And states now are as ill positioned as towns and villages were then to resist the buffeting of markets, or to relieve the dislocations they can produce.” Gaddi “Living in candlestick Park,” Atlantic Monthly April 1999

“The democratic state must assume - even if it does not in every respect ensure - the equality of those subject to its rule. Empires, in contrast, require inequality: a powerful center asserts its authority over weaker peripheries.” Gaddis, “Living in Candlestick park.” The Atlantic Monthly April 1999 p 74

“While the hope that governments will practice self-discipline is fantasy, the global economy imposes new and more severe restraints on government. “Drucker, “The global economy and the nation state,” Foreign Affairs S/O 1997 p¹⁶³

“For Friedman [in The Lexus and the Olive Tree], the internet is the agent that renders inevitable a transparent, democratic, decentralized, and market-based society.” Eichengreen Foreign Affairs May 1999

“Over the past half century the United States and other economically advanced countries have made the shift into what has been called an information society, the information age, or the post-industrial era. The futurist Alan Toffler has labeled the transition the ‘Third Wave’ suggesting that it will ultimately be as consequential as the two previous waves in human history: from hunter-gather to agricultural societies, and from agricultural to industrial ones.

A society built around information tends to produce more of two things people value most in a modern democracy- freedom and equality. Was it simply an accident that these negative social trends [crime, divorce, confidence in institutions] which together represent a weakening of social bonds and common values in Western societies, occurred just as those economies were making the transition from the industrial to the information era? The hypothesis of this article is that the two were in fact intimately connected But broadly speaking, the technological change that brought about what the economist Joseph Schumpeter called ‘creative destruction’ in the marketplace caused similar disruptions in the world of social relationships. ... But there is a bright side, too: social order, once disrupted tends to get remade. “The Great Disruption Atlantic May 1999, Francis Fukuyama p 55

Win. Odom National Security Policymaking: The Kinds of things that must be decided for defense

The nature of new military weaponry is obviously changing the requirements for military manpower

“The Pentagon is locked in a budgetary death spiral simply because the way it thinks about the world has not caught up with the way it spends its money.” Hillen, “Defense’s Death Spiral: The increasing irrelevance of more spending,” Foreign Affairs. JIA 1999 p³

“To meet the challenges of the Cold War — America’s longest and most complex struggle — the United States created a set of institutions and societal relationships that let it prevail its way of life. As the new century approaches, those very institutions and relationships are at risk.” Sapoisky, Gholz, and Kaufman. “Security Lessons from the Cold War,” Foreign Affairs J/A 99 p 77

“Ultimate threat: US Nuclear Arsenal is Poised for War - Is it the Right One? WSJ

Defense Daily, Dec 16, 1999 “Pentagon planners remain wedded to the old Industrial Age priorities of mass and numbers, and political leaders have been reluctant to second guess the informed experts” retired admiral William Owen, former Vice Chairman of Joint Chiefs... “Even in an era of surplus, we will not be able to sustain the force we need and the pace of experimentation with the new technologies and operational concepts of the revolution in military affairs (RMA).

Remarks by Samuel Berger, Asst to Prez for National Security — talk on Jan 6, 2000

“this period in history has been a genuine changing of the times — a time of collapsing empires, expanding freedoms, eroding barriers and emerging threats... One critical question for the next generation and beyond is whether our former adversaries Russia and China will emerge as stable, prosperous, democratic partners of the United States.” - WTO for China — deepens economic reform and further moves them toward rule of law.

According to “New World Coming,” a report of the US Commission on National Security / ₂₁St Century (Hart-Rudman Commission) — US likely to be attacked with WOMD in next 25 years

John MacKinley review of ... “new wars are not the logical progression of conflict anticipated by Star Wars and RMA thinkers.” Mentions the monopoly of organized violence - new wars are ‘internal conflicts which pit state and non-state actors against one another in a process of violent interaction...’ Bosnia —process of economic and political collapse led to

“The pentagon has approved a large-scale reshaping of the Army’s budget for FY’01 to reflect the new vision for the service...”

“The Pentagon’s recent decision to approve a major restructuring of the Army procurement budget to build a lighter, more mobile force is expected to have limited impact on contractors.. .Included in the document

were a series of major shifts in programs to help achieve the Army leadership’s plans for a lighter, more

mobile equipment better suited to the type of rapid reaction and contingency operations expected in coming

“The Navy’s Shipbuilding and Conversion (SCN) budget for FY’01 sets the tone for some ‘radical’ changes...”

US Army Chief of Staff Gen Eric Shinseki plans to cut or scale back at least eight programmes to pay for

his plan to modernize the army and transform elements of it to a medium-weight combat force.

“‘The budget decisions we made this year represent a strategy of transformational change for the Navy,’ a senior official said.” - but it includes an aircraft carrie

In the wake of the overwhelming victory of coalition forces in Operation Desert Stonn, a good deal of discussion took place whether the world had witnessed a Revolution in Military Affairs (RMA). The concept of an RMA itself, its constituent elements, and the timing of its occurrence, however, remain subjects of continuing debat

Although some commentators have identified as many as ten previous RMAs, the current term evolved from a Soviet concept, military technical revolution. Three basic conceptions -- and a number of permutations -- for the current RMA are identified. The first focuses primarily upon changes in the nation state and the role of an organized military in using force -- it highlights the political, social, and economic factors at play worldwide which might lead to the need for completely different types of military force and organizations to apply that force in the future. The second conception, and that most commonly assigned the term RMA, highlights the evolution of weapons, military organizations, and operational concepts among advanced powers -- it focuses on the changes made possible by advancing technology. The third conception is that a true revolution in military affairs is unlikely, but rather there will be continuing evolution in equipment, organizations, and tactics to adjust to changes in technology and the international environment.

How the Department of Defense and military services are attempting to deal with long term planning is important because many of the changes highlighted by the debate over the RMA are likely to occur in the relatively distant future. The Department of Defense has conducted an RMA Initiative, focusing upon examining future technology, organizations and doctrines needed to deal with revolutionary change. At present, the Army is farthest along in creating institutions to integrate potentially revolutionary technology, assessing the consequences of an RMA, and attempting to incorporate necessary changes into Army doctrine and organization. Through Spacecast 2020, Air Force 2025, and the Air Force Revolutionary Planning Process, the Air Force is attempting to undertake very long range planning. The Navy and Marine Corps are just beginning this process.

The main practical issue for Congress arising from the RMA debate is how to resolve the conflict between expenditures for current and near-term activities and any expenditures needed to deal with an RMA. Funds to support current operations will not be available for future procurement. Other issues involve determining the appropriate detail for congressional oversight, arranging for greater coordination of RMA-related activities in the Department of Defense, and determining how best to foster long-term innovation by the military services.

Notwithstanding the rapid decline in funding for U.S. armed services in the recent past, it is expected that Congress will authorize the expenditure of substantial sums for defense in the future. In order to make informed judgements on what should be funded, Congress seeks knowledge of the state of military technology and the likely environments American forces might face in future conflict.

activities in the Department of Defense, and determining how best to foster long-term innovation by the military services.

Following the overwhelming victory of coalition forces in Operation Desert Storm, a good deal of discussion took place whether the world had witnessed a Revolution in Military Affairs (RMA). However, active debate continues over whether in fact there is or will be an RMA, what are the constituent elements of such a revolution, when the revolution is to take place, and what steps would be needed to adapt to the revolution. This report consists of three parts: 1) A discussion of the debate over the definition and constituent elements of a Revolution in Military Affairs and the possible consequences for the American military; 2) A presentation of the steps that the Department of Defense and the military services are taking now to carry out long-term strategic planning and implementation; and 3) an examination of the major issues raised and what Congress and the Department of Defense might do to understand an RMA, guide U.S. policy, and as much as possible, guide the outcome.

The current term, “Revolution in Military Affairs’ has evolved from an earlier term -- military technical revolution -- used by Soviet military theorists.~ In the early 1970s the Soviets had identified two periods of fundamental military change in the 20th Century: one driven by the emergence of aircraft, motor vehicles and chemical warfare in World War I, and the second driven by the development of nuclear weapons, missiles and computers in World War II. The next “military-technical revolution” the Soviets thought, would involve advances in microelectronics, sensors, precision-guidance, automated control systems, and directed energy. By 1984, the Chief of the Soviet General Staff was expressing his concern that the emergence of “automated reconnaissance and strike complexes,” including new control systems and very accurate long-range precision weapons, would bring the destructive potential of conventional weapons closer to that of weapons of mass destruction. The success of allied forces in Operation Desert Storm convinced the Soviets that the integration of control, communications, electronic combat, and delivery of conventional fires had been realized for the first time.~

Ethics, Morality, and the Nontraditional Use of Military Force — more important after cold war “The future use of military power will likewise be influenced by what is referred to as the coming revolution in military affairs (RMA) and war in the information age... .Many believe we have already entered an era in which technology is fundamentally transforming the capabilities available for warfare.”

“Over the past half century the United states and other economically advanced countries have made the shift into what has been called an information society, the information age, or the post-industrial era. the futurist Alan Toffier has labeled this transition the “third Wave” suggesting that it will ultimately be as consequential as the previous two waves in human history: from hunter-gatherer to agricultural societies, and from agricultural societies to industrial ones.

A society built around information tends to produce more of two things people value most in a modern democracy — freedom and equality.” Francis Fukuyama, “The great disruption: human nature and the reconstitution of social order.” The Atlantic Monthly May 1999

Harpers dec 1999 "ar has become Operations Other than War, where there are no friends and no enemies, no victories and no defeats."

Richard Cronin, CRS Report 1/28/99 Asian Financial Crisis: An Analysis of US Foreign Policy Interests and Options

“One of the most important non-economic impacts on US interests could be a rise of political instability in a region whose leaders have largely based their legitimacy on promoting rapid economic growth and an expanding economic ‘pie’ to the benefit of their citizens.” - may see widening social class, ethnic, and religious fissures arise — or an opportunity for creative destruction

"National security must be broadly construed to include both economic and geoplolitical concerns. And in many circumstances, economic policies may prove the best instrument for achieving geoplolitical policies."

This economic interdependence has produced a fundamental change in the way countries view their national objectives. Among developed coutnries, it is possibile that economic competition will replace military conflict in the years ahead, and the traditional role of the state in shaping national strategy may be challenged by economic forces,, particulalry multinational firms.

Economic welfare and the protection of national security are two goals that any properly constituted political state must aim to achieve. But one problem that confronts both the practice and study of economics and national security in the contemporary world is that the two objectives sometimes represent trade-offs: the achievement of one may diminish the realization of the other.

One can list at least four major national objectives: territorial, military, ideological/religious, and material/economic goals.

At some point during the twentieth century, nations had to decide to expand their national frontiers through force or by improving their access to factors of production and markets located within other countries on an entirely peaceful basis. If they chose the second option, they gave up control for access. Smallness did not inhibit the latter choice. At the same time, however, small states were likely to be more vulnerable militarily than their larger brethren.

Security can be achieved more easily, if there is less reason to make war. More specifically, security can be attained if military expansion is no longer necessary to achieve economic goals. Military operations usually involve invading another’s territory. Such actions were consistent with economic goals so long as land was the preeminent factor of production, as it was from the sixteenth to the nineteenth centuries.

Because the factors of production critical to states are now mobile, they cannot seize them by military operations; rather, they must negotiate their presence within the national economy.

Given this outcome, major states will increasingly replace military strife with economic competitio

A norm of “transparency” is gradually gaining ascendancy in both the economic and military fields-to permit a country to demonstrate that it is fulfilling its international obligation.

The relationship between national security and economics is constantly changing. Economic variables have increased in importance relative to those of the military. The incentive to conquer has declined, as conquered peoples have become less governable. Simultaneously, economic conflicts have succeeded military conflicts as a major focus of attention.

Foreign Affairs J/F 2000 - Jaffe & Manning The Shocks of a World of Cheap Oil - danger is lower prices of oil - blurs the distinction between micro and macro “the backfire of low oil prices could undermine US policy assumptions and imperil US interests” p16 “The political reverberations of a sustained oil glut should not be underestimated.” p 17”Without the salve of rising oil revenues, many of these nations can expect to see heightened political instability, social unrest, or even civil wars...” “The high probability of

oil prices in the $1 2-$20 range over most of the next two decades will condemn to a perilous future the arc of instability along the southern rim of Eurasia...” - how will US deal with internal threats to oil supply?

Another set of arguments is more political—having to do with the claim that economic integration engenders greater political stability and reduced potential for conflict. This argument needs to be made with some care, since economic growth, in itself, does not necessarily imply stability.

“For the past fifty years, the central tenant of the United States military strategy has been to make war far too expensive a proposition for anyone who might dare to challenge us, which has worked at the macro level, superpower to superpower,. But history’s Goliaths have trouble remembering that stones are free and slingshots easily stolen.” Soldiers of Great Fortune harpers Dec 1999

“In the study of national security, there is no substitute for a solid grounding in economic theory and political economy. This need is heightened by the changes in the international economy Rosecrance identifies — changes that greatly complicate analysis and that necessitate better and more explicit theory.” david lake reaction to Rosecrance “Economics and national security: the evolutionary process,” in Shultz, Godson, and Quester eds. Security Studies for the ₂₁St Century 1997

“Fundamentally, the case for free trade is the case for the market system. The benefits come in the form of greater realization of the efficiencies available from specialization.. .Another set of arguments is political —having to do with the claim that economic integration engenders greater political stability and reduced potential for conflict.” Lawrence Summers “reflections on managing global integration,” JEP Spring 1999

““Economic declines inevitably translate into political instability and social unrest.” Speth “The plight of the poor: the United States must increase development aid,” Foreign Affairs M/J 1999 p¹³

.wealth is usually needed to underpin military power, and military power is usually needed to acquire and protect wealth. If, however, too large a portion of the state’s resources is diverted from wealth creation and instead allocated to military purposes, then that is likely to lead to a weakening of national power over the longer term. “Kennedy Rise and Fall of the Great Powers

“The triumph of any one Great Power in this period, or the collapse of another, has usually been the consequence of the more or less efficient utilization..., of the way in which the state’s economy has been rising or falling, relative to the other leading nations, in the decades preceding the actual conflict. For that reason, how a Great Power’s position steadily alters in peacetime is as important to this study as how it fights in wartime.” Kennedy Rise and Fall of the Great Powers

“The relative strengths of the leading nations in world affairs never remain constant, prinicipally because of the uneven rate of growth among different societies and of the technological and organizational breakthroughs which bring a greater advantage to one society than another.” Kennedy Rise and Fall of the Great Powers - example of steam and coal, long range gunned sailing ship - focuses on competition as means of Europe’s ascent over other empires

“National security and economic prosperity are inextricably interrelated... .Whatever enhances the commercial, financial, and industrial power of a state increase the military potential of the state.” Owens, “The Political economy of national defense” in Strategy and Force Planning p 213

“But never discount entirely the possibility of a troubled regime resorting to war as a means of unifying public support.” Assessing the potential for a China-Taiwan war” WSJ 8/10/99 George Melloan

“Long before NATO struck Yugpslavia, Mr. Milosevic’s monetary madness had destroyed the economy. Wreck an economy, then start a war: It’s an age-old power preservation ploy.” Hanke “Yugoslavia destroyed its own economy. Mr. Milosevic claimed that the Yugoslavs were victims. According to him,

hyperinflation and resulting hardships were caused by the embargoes imposed by the United Nations in May 1992 and April 1993. In reality Mr. Milosovic’s money machine was put into overdrive to finance his war machine. More than 80% of Yugoslavia’s budget was earmarked for military and political forces, and by December 1993 almost 95% of all government expenditures were being financed with freshly printed dinars” WSJ 4/28/99

“A business can’t survive without holding on to its tech officers; neither can an army... the military hasn’t kept pace with civilian pay...” Forbes 5/7/99 talk of brain drain result of war between techies and combat officers.

“For that reason, how a Great Power’s position steadily alters in peacetime is as important to this study as how it fights in wartime.” Kennedy Rise and Fall,

“The neo-fascist right, whose program constitutes one long scream-at immigrants, at unemployment...- did better still in the decayed industrial valley of the Upper Loire west of Lyons...” Judt “The social question redivivus”, Foreign Affairs. S/O 1997 p⁹⁶

“...enlistment into the US forces has been affected by the impact of the business cycle on unemployment, by regional variations in unemployment rates, by civilian earnings, by military pay and benefits. and by the recruitment effort.” Sandler & Hartley eds. The Economics of Defense.” p161

“Though incompatible, the global economy and total war are both children of this century. The strategic goal in traditional warfare, in Clausewitz’s famous phrase, was to destroy the enemies fighting forces.... But during this century’s first war,.. .the rule was changed. The goal of warfare was redefined as destroying the enemy’s potential for waging war, which meant destroying the enemy’s economy” Drucker, “The global economy and the nation state,” Foreign Affairs S/O 1997 p163

“Expanding wealth and opportunity in many Asia-Pacific countries have facilitated a transition to greater openness and freedom, in turn making the region more stable and secure.” (p. Foreword) US Pacific Command Asia-Pacific Economic Update, 1998

“Although economic and political in origin, the crisis carries important security implications, both for the region and for American interests. Economic hardship in countries accustomed to rapidly growing incomes could raise the specter of internal unrest; tensions in multi-ethnic societies—abundant in Asia—could be exacerbated; military procurement programs important to deterrence are being scaled back; and America’s allies could find themselves less able to provide critical host-nation support.” (p. Foreword) US Pacific Command Asia-Pacific Economic Update, 1998

“The events of 1997 demonstrated in graphic terms the linkages between economic development and regional security in the Asia Pacific region. What started as a collapse of investor confidence in Thailand during the early summer quickly took on a political and security dimension as the crisis rapidly spread to other parts of the region. The fallout from the crisis has raised a number of concerns for U.S. security and defense planners. (p.v) US Pacific Command Asia-Pacific Economic Update, 1998

· Many governments in the region derive political legitimacy from the rapid economic growth they have enjoyed over a period of decades. An end to that growth could raise the specter of political instability, particularly in Indonesia, where a period of leadership transition is already underway. Should the crisis spread to China, these concerns intensify dramatically.

· South Korea’s economic difficulties complicate reunification and could undercut Seoul’s ability to meet its financial obligations to the North under the agreement that ended Pyongyang’s nuclear program in 1994—possibly renewing tensions on the peninsula.

· America’s allies—particularly South Korea and Japan—will face tighter economic constraints in providing critical host nation support for forward deployed American troops.

Governments across the region may scale back military modernization programs and reduce new

procurement, hurting sales for U.S. defense contractors and possibly undermining critical capabilities.

Austerity programs also impact on military-to-military activities. (p.v) US Pacific Command Asia-Pacific

“Two years ago this week (7/3/99), Thailand set of East Asia’s financial troubles... Four months later, Thailand’s government became the first to collapse.. .“ The Economist 7/3/99 p³²

“For the two goals [economic prosperity and national security] to be achieved in tandem, military policy must become more efficient than it has been recently.” .“ Rosecrance “Economics and national security:

the evolutionary process,” in Shultz, Godson, and Quester eds. Security Studies for the 2l~ Century 1997

“It may be that the largest and most important difference between the globalization we have seen in recent decades and that of the 19”’ century is that the international economic integration of today impinges on the activities of government to a much greater degree than it did then — in large part because modern governments themselves are doing so much more.” Lawrence Summers “reflections on managing global integration,” JEP Spring 1999

.... .the dangers posed to human well-being by comprehensive economic sanctions are clear, present, and sometimes devastating, yet they have often been overlooked by scholars, policymakers, and the media It might help if severe economic sanctions were designated by the older label of “economic warfare.” Mueller & Mueller, “sanctions of mass destruction,” Foreign affairs MIJ 1999 p 48

“Grand strategy should provide clear concept of how economic, diplomatic, and military instruments of national power will be used to achieve national goals and policy.” Bartlett, “The Art and Strategy of Force Planning,

Economic instruments of national power include trade agreements, foreign aid, the money supply, taxes, government expenditures, subsidies.” Bartlett, “The Art and Strategy of Force Planning,

“In the long term, economic growth is likely to foster stable democratic middle-class societies around the world.” Nye, “Redefining the National Interest,” Foreign Affairs J/A 1999 p 29

Schultz, Introduction to International Security More important, the liberal tradition’s stress on free trade, liberal democracy, and collective security as viable foundations for international peace have been incorporated into the national strategies of the United States and other great powers in the international arena. Considerable evidence has accumulated that democracies are, in David Lake’s apt phrase, “power pacifists” that never wage war against one another. Many defense analysts and policymakers have begun to take the so-called democratic peace seriously. Therefore, shouldn’t a forward-looking guide for security studies make the proposition that a democratic world would be a peaceful world--”the closest thing we have to an empirical law in international relations”--a topic for examination?

For that reason, how a Great Power’s position steadily alters in peacetime is as important to this study as how it fights in wartime.

The relative strengths of the leading nations in world affairs never remain constant, principally because of the uneven rate of growth among different societies and of the technological and organizational breakthroughs which bring a greater advantage to one society than to another.

There is detectable a causal relationship between the shifts which have occurred over time in the general economic and productive balances and the position occupied by individual Powers in the international system.

Similarly, the historical record suggests that there is a very clear connection in the long run between an individual Great Power’s economic rise and fall and its growth and decline as an important military power (or world empire)

..... there is detectable a causal relationship between the shifts which have occurred over time in thegeneral economic and productive balances and the position occupied by individual Powers in the international system.” Kennedy Intro to the rise...

“The importance of the economic factor in strategic planning and force planning cannot be denied... .Any system of political economy must ultimately answer three questions: What goods will be produced? How will goods be produced? For whom will goods be produced? There are two predominant ways to organize economic activity in response to these three questions: a decentralized market mechanism; and a system of collective decision making.. ..Another form of decision making is mercantilism, defined by Robert Gilpin as “the subservience of the economy to the state and its interests..” Owens, “The political economy of national defense, Strategy and force planning, p 214-15

[T]he natural effect of commerce is to lead to peace. Two nations that trade together become mutually dependent; if one has an interest in buying, the other has an interest in selling; and all unions are based on mutual needs.” Montesque, de L’Esprit des Louis, XX. 1 in Oeuvres Completes (Paris: Editions du Seuil, 1964) p 651

depends upon goals nations have — 4 possible objectives territorial, military, ideological/religious, and material/economic, conflict used to be minimal before nation states — Rhodes serfs

“At some time during the twentieth century, nations had to decide whether to expand their national frontiers through force or by improving their access to factors of production and markets located within other countries on an entirely peaceful basis” .“ Rosecrance “Economics and national security: the evolutionary process,” in Shultz, Godson, and Quester eds. Security Studies for the ₂₁St Century 1997

~ week of course — objectives of nations —2”” week — decrease in size of state — why (access vs control)

“Every country and every supporter of integration faces the challenge of . . . reconciling as well as possible the three goals of greater economic integration, proper public economic management, and national soverignty — or the “economic integration trilemma.”” Lawrence Summers “reflections on managing global integration,” JEP Spring 1999

“America has wanted global leadership on the cheap. It was desperate for the developing world and post-communist economies to buy into its vision, in which globalization, private capital flows and washihingto advice would overcome the obstacles to shared prosperity, so that pressures on the rich countries to do more for the poorer countries could be contained by the dream of universal economic growth.” Sachs “Global Capitalism: making it work,” The Economist Sept. 12, 1998

“It is perhaps good that economic thinking has globalized, because the challenge of managing international economic integration may be the preeminent new challenge facing economic policymakers around the world, and as important as any other political challenge facing the world’s diplomats.” Lawrence summers “reflections on managing global integration,” JEP Spring 1999

“For all their good intentions and often impressive accomplishments, international organizations have a common problem: it is that of collective leadership commanding limited resources. As Clausewitz could have pointed ot, restraining violence, like unleashing it, requires both capabilities and resolve: these are hard to achieve when many are in charge and the instruments at hand are few.” Gaddis “Living in candlestick Park,” Atlantic Monthly April 1999 p⁷²

“Poor-country access to rich-country markets is crucial both for the long-term development and for pulling the hardest-hit emerging markets out of the current crisis.” Speth “The plight of the poor: the United States must increase development aid,” Foreign Affairs M/J 1999 p¹³

4. "wealth is usually needed to underpin military power, and military power is usually needed to acquire and protect wealth. If, however, too large a portion of the state’s resources is diverted from wealth creation and instead allocated to military purposes, then that is likely to lead to a weakening of national power over the longer term."

5. “The triumph of any one Great Power in this period, or the collapse of another, has usually been the consequence of the more or less efficient utilization..., of the way in which the state’s economy has been rising or falling, relative to the other leading nations, in the decades preceding the actual conflict. For that reason, how a Great Power’s position steadily alters in peacetime is as important to this study as how it fights in wartime."

6. “The relative strengths of the leading nations in world affairs never remain constant, principally because of the uneven rate of growth among different societies and of the technological and organizational breakthroughs which bring a greater advantage to one society than another.”

8. “It blurs national boundaries and erodes the power of nation-states, even as it extends their sovereignty into new areas. It changes regional and international power relationships, shifts the mixture of interests at stake, and redefines long-standing alliances and conflicts. It will greatly influence the shape, content, and legitimacy of the future global security order."

8a. “At some time during the twentieth century, nations had to decide whether to expand their national frontiers through force or by improving their access to factors of production and markets located within other countries on an entirely peaceful basis”.

8b. “the liberal tradition’s stress on free trade, liberal democracy, and collective security as viable foundations for international peace have been incorporated into the national strategies of the United States and other great powers in the international arena. Considerable evidence has accumulated that democracies are, in David Lake’s apt phrase, “power pacifists” that never wage war against one another. Many defense analysts and policymakers have begun to take the so-called democratic peace seriously. Therefore, shouldn’t a forward-looking guide for security studies make the proposition that a democratic world would be a peaceful world--”the closest thing we have to an empirical law in international relations”

8c. [T]he natural effect of commerce is to lead to peace. Two nations that trade together become mutually dependent; if one has an interest in buying, the other has an interest in selling; and all unions are based on mutual needs."

8d. “Fundamentally, the case for free trade is the case for the market system. The benefits come in the form of greater realization of the efficiencies available from specialization. ... Another set of arguments is political —having to do with the claim that economic integration engenders greater political stability and reduced potential for conflict.”

8e. “In the long term, economic growth is likely to foster stable democratic middle-class societies around the world.”

8f. “Security can be achieved more easily, if there is less reason to make war. More specifically, security can be attained if military expansion is no longer necessary to achieve economic goals.” .... Conquest, therefore, might not succeed in capturing and utilizing these factors of production to increase national power, as they cannot be kept.”

8g The more technologically interconnected and more economically interdependent we make the world, the lower are the chances for large-scale war."

8h "In effect, a new kind of social bargain was proposed. People couldn't cling to old ways. old jobs, and old patterns of doing things, and society agreed to bear the burden of enabling people to continuously learn and adapt. With the spreading prosperity, generous support would go to those genuinely unable to do so. …

9. States justify their existence, in large part, by securing their citizens’ well-being, whether by creating and maintaining jobs, providing a social safety net, or protecting the environment… A regime that must leave its people at the mercy of market forces is not likely to enhance its reputation in their eyes. … The social and political compromises that saved capitalism through an expansion of state authority early in the twentieth century no longer constrain it. And states now are as ill positioned as towns and villages were then to resist the buffeting of markets, or to relieve the dislocations they can produce.”

10. “Through taxes and public spending, they say, societies can use some of the extra income created by globalization to cushion the losers. In principle, governments could go further, ensuring that everybody ended up better off. Which is very reassuring-unless it turns out that integration itself reduces the freedom of governments to act.”

11. “governments are confronted by two old enemies, stronger now than ever before: technology and ideology. The state is proving unequal to the challenge. Its power to rule is fading. Judged as propaganda, 1989 did for big government what 1929 did for laisse- faire.”

12. "The political trilemma of the world economy is that international economic integration, the nation-state, and mass politics cannot co-exist."

13. "But equally important is the fact that the benefits of international economic integration comes with 'strings' attached: the 'price' of free trade in goods, services, and capital is that international markets get greater say about the way national economies are managed and their wealth is distributed."

14. As your country puts on the "Golden Straightjacket" two things happen: your economy grows and your politics shrinks… [the] Golden Straightjacket narrows the political and economic policy choices of those in power to relatively tight parameters. That is why it is increasingly difficult these days to find any real differences between ruling and opposition parties in those countries that have put on the Golden Straightjacket."

15. “There are a number of reasons for this domestic ambivalence toward internationalist economic policies. The Cold War rationale for economic integration—that it was a necessary ingredient of building a power base to fight global communism—has been removed. The popularization of politics has also probably played a role. I doubt that anyone focus-grouped the Marshall Plan—or that it would have fared well if they had. (there is a reason it was not called the Truman plan.) The power of concentrated narrow interests relative to broad dispersed ones is also surely relevant. But I suspect that perhaps the most fundamental reason is the widespread sense the international integration interferes with the ability of government to deliver the benefits the citizenry want. That is why the development of approaches that can reconcile economic integration, correcting market failure and sovereignty—by economists and others inside and outside of government—is so profoundly important for the future.”

15a. “Today’s global capital market only rules out sooner what has always been impossible in the longer term-namely, treating interest rates and the value of the currency as entirely separate instruments matters.”

15b. “While the hope that governments will practice self-discipline is fantasy, the global economy imposes new and more severe restraints on government. “

15d. “It may be that the largest and most important difference between the globalization we have seen in recent decades and that of the 19”’ century is that the international economic integration of today impinges on the activities of government to a much greater degree than it did then — in large part because modern governments themselves are doing so much more.”

16. “the internet is the agent that renders inevitable a transparent, democratic, decentralized, and market-based society.”

17. "thus a more accurate narrative of globalization experience in the decades prior to World War I would read like this: A spreading technology revolution and a transportation breakthrough led first to divergence of real wages and living standards between countries. The evolution of well-functioning global markets in goods and labor eventually brought about a convergence between nations. this factor-price convergence planted, however, seeds for its own destruction since it created rising inequality in labor scarce economies (like the United States) and falling inequality in labor-abundant economies (like those around the poor European periphery).

18a. “This economic interdependence has produced a fundamental change in the way countries view their national objectives. Among developed countries, it is possible that economic competition will replace military conflict in the years ahead, and the traditional role of the state in shaping national strategy may be challenged by economic forces, particularly multinational firms. Economic welfare and the protection of national security are two goals that any properly constituted political state must aim to achieve. But one problem that confronts both the practice and study of economics and national security in the contemporary world is that the two objectives sometimes represent trade-offs; the achievement of one may diminish the realization of the other. One can list at least four major national objectives: territorial, military, ideological/religious, and material/economic goals... .Formerly, the conflict among those objectives was minimal”

18b. “The United States has profound interests at stake in the health of the global economy. Our future prosperity depends upon a stable international financial system and robust global growth.”

18c. “Security policy is being reframed around a mix of national interests, with economic factors increasingly influencing defense decisions. … “A strategy that links military requirements and economic reality is what the Defense Department (DoD) needs to guide future budget decisions.” “To cope with a rapidly changing world, America is reframing its view of national security around a new mix of national interests, with a much stronger economic influence added to the balance.”..

18d. “National security and economic prosperity are inextricably interrelated... .Whatever enhances the commercial, financial, and industrial power of a state increase the military potential of the state.”

18e. "Grand strategy should provide clear concept of how economic, diplomatic, and military instruments of national power will be used to achieve national goals and policy.” objectives of strategists = survival of country and health of economy Economic instruments of national power include trade agreements, foreign aid, the money supply, taxes, government expenditures, subsidies.”

18f. “A breakthrough deal to bring China into the world trading system will cement President Clinton’s standing as the first US president to explicitly use global economics as the paramount force behind American national security.” Justin Brown, Christian Science Monitor, Nov 19, 1999 p1

18g. “The events of 1997 demonstrated in graphic terms the linkages between economic development and regional security in the Asia Pacific region. What started as a collapse of investor confidence in Thailand during the early summer quickly took on a political and security dimension as the crisis rapidly spread to other parts of the region. The fallout from the crisis has raised a number of concerns for U.S. security and defense planners.

· America’s allies—particularly South Korea and Japan—will face tighter economic constraints in providing critical host nation support for forward deployed American troops.

· Governments across the region may scale back military modernization programs and reduce new procurement, hurting sales for U.S. defense contractors and possibly undermining critical capabilities. Austerity programs also impact on military-to-military activities.

18h. “One of the most important non-economic impacts on US interests could be a rise of political instability in a region whose leaders have largely based their legitimacy on promoting rapid economic growth and an expanding economic ‘pie’ to the benefit of their citizens.”

18i. National security must be broadly construed to include both economic and geoplolitical concerns. And in many circumstances, economic policies may prove the best instrument for achieving geoplolitical policies."

18j. “the backfire of low oil prices could undermine US policy assumptions and imperil US interests” p16 “The political reverberations of a sustained oil glut should not be underestimated.” p 17”Without the salve of rising oil revenues, many of these nations can expect to see heightened political instability, social unrest, or even civil wars...” “The high probability of oil prices in the $1 2-$20 range over most of the next two decades will condemn to a perilous future the arc of instability along the southern rim of Eurasia...”

18k. “The neo-fascist right, whose program constitutes one long scream-at immigrants, at unemployment...- did better still in the decayed industrial valley of the Upper Loire west of Lyons...”

18l. “Economic declines inevitably translate into political instability and social unrest.”

18m. “One of the most important non-economic impacts on US interests could be a rise of political instability in a region whose leaders have largely based their legitimacy on promoting rapid economic growth and an expanding economic ‘pie’ to the benefit of their citizens.” - may see widening social class, ethnic, and religious fissures arise — or an opportunity for creative destruction."

18n. “Long before NATO struck Yugoslavia, Mr. Milosevic’s monetary madness had destroyed the economy. Wreck an economy, then start a war: It’s an age-old power preservation ploy."

18o. “Two years ago this week (7/3/99), Thailand set of East Asia’s financial troubles... Four months later, Thailand’s government became the first to collapse..

18p. “But never discount entirely the possibility of a troubled regime resorting to war as a means of unifying public support.”

19a. “Nato’s military intervention in Kosovo dramatically raises a larger problem: how should the United States define its interests in today's world? . . . what are the limits of America’s concerns abroad?”

19b. “Although many of America’s interests remain undefined or not clearly identified, since 1949 they have been generally related to deterring nuclear war, maintaining the status quo, resisting Communist led aggression, and honoring commitments to allies. The direct bearing of these interests upon security, the welfare or purposes of American society have not, however, always been clear.”

19d. The American involvement in Kosovo has started the most furious debate since the end of the cold war over what constitutes United States strategic interests. ... The $64,000 question is what areas of the world and causes are worth Americans fighting and dying for?

19e. “have recently argued that we should rethink the way we understand risks to U.S. security. At the top of their hierarchy they put “A list” threats like that the Soviet Union once presented to our survival. The “B list” features imminent threats to U.S. interests — but not to our survival —such as North Korea or Iraq. The “C list” includes important “contingencies that indirectly affect U.S. security but do not directly threaten U.S. interests”: “the Kosovos, Bosnias, Somalias, Rwandas, and Haitis.”

20a. “Thus in Kosovo, justice (as it is now understood) and the U.N. Charter seemed to collide.., the charter is grounded on a premise that is simply no longer valid — the assumption that the core threat to international security still comes from interstate violence. This assumption is no longer valid.”

20b. ”Every country across Western Europe has begun to understand that peacemaking operations are the future course of conflict that Europe will be called upon to address.

21a. “The nature of new military weaponry is obviously changing the requirements for military manpower.”

21b. “new wars are not the logical progression of conflict anticipated by Star Wars and RMA thinkers.”

21c. “The Pentagon is locked in a budgetary death spiral simply because the way it thinks about the world has not caught up with the way it spends its money.”

21d. “Pentagon planners remain wedded to the old Industrial Age priorities of mass and numbers, and political leaders have been reluctant to second guess the informed experts” retired admiral William Owen, former Vice Chairman of Joint Chiefs... “Even in an era of surplus, we will not be able to sustain the force we need and the pace of experimentation with the new technologies and operational concepts of the revolution in military affairs (RMA)."

21e. “The pentagon has approved a large-scale reshaping of the Army’s budget for FY’01 to reflect the new vision for the service...”

21f. “‘The budget decisions we made this year represent a strategy of transformational change for the Navy,’

21g. “In the wake of the overwhelming victory of coalition forces in Operation Desert Storm, a good deal of discussion took place whether the world had witnessed a Revolution in Military Affairs (RMA). The concept of an RMA itself, its constituent elements, and the timing of its occurrence, however, remain subjects of continuing debate.
Although some commentators have identified as many as ten previous RMAs, the current term evolved from a Soviet concept, military technical revolution. Three basic conceptions -- and a number of permutations -- for the current RMA are identified. The first focuses primarily upon changes in the nation state and the role of an organized military in using force -- it highlights the political, social, and economic factors at play worldwide which might lead to the need for completely different types of military force and organizations to apply that force in the future. The second conception, and that most commonly assigned the term RMA, highlights the evolution of weapons, military organizations, and operational concepts among advanced powers -- it focuses on the changes made possible by advancing technology. The third conception is that a true revolution in military affairs is unlikely, but rather there will be continuing evolution in equipment, organizations, and tactics to adjust to changes in technology and the international environment.”

22 “...enlistment into the US forces has been affected by the impact of the business cycle on unemployment, by regional variations in unemployment rates, by civilian earnings, by military pay and benefits. and by the recruitment effort

“The history of the twentieth century can be summarized--excessively briefly--in five propositions: First, that the history of the twentieth century was overwhelmingly economic history. Second, that the twentieth century saw the material wealth of humankind explode beyond all previous imagining. Third, that because of advances in technology, productivity, and organization--and the feelings of social dislocation and disquiet that these advances generated--the twentieth century’s tyrannies were the most brutal and barbaric in history. Fourth, that the twentieth century saw the relative economic gulf between different economies grow at a rapid pace. Fifth and last, that economic policy--the management of their economies by governments--in the twentieth century was at best inept. Little was known or learned about how to manage a market or a mixed economy

“There is now more concern about the market capitalization of a country than about the size of its army…’What counts is not the number of missiles that you have, but how many billions of dollars you have made from privatization.”

“The government allotted a fixed sum to armed services, on the basis not of Britain’s needs for defense but of what was left after domestic expenditures were taken care of.”

1. “In the study of national security, there is no substitute for a solid grounding in economic theory and political economy."

2. The language of public policy is increasingly the language of economics, and sophisticated policy formulation depends to an evergreater extent on an understanding of economic concepts.

a. “Some judge that the Japanese finance ministry has aggravated the problem [Asian crisis] with an expansionary monetary policy that generally kept the yen undervalued and exports and resultant dollar earnings at a high level. The problems of Southeast Asian countries likewise were exacerbated by growth differentials between the United States and Japan, which also has contributed to a year-long appreciation of the dollar against the yen.

b. “The mechanism by which the US macroeconomy is affected is through trade and capital flows.”

c. “Over the next five years ,the service is investing $1.5billion in research and development for carrier programs. Largely the funding is aimed at electric technology development and reducing the almost crew size of today’s most capable carriers. … Ultimately, the Navy wants to reduce crew size by about 1,500 on its carriers.”

d. Keynesian military spending helped to obviate unemployment, and with high tariffs all around, domestic and government consumption became the new motor of economic growth, replacing foreign trade.

e. A strategy for next century …Second, it must drive more of our limited resources into essential warfighting capabilities; and third, it must systematically reduce infrastructure.”

3. "Defense policy is entering a period of momentous change that necessitates the application of rigorous economic analysis if resources are to be allocated efficiently among competing goals in both the defense and civilian sectors."

“And whether countries attract investors will depend in turn on their willingness to don the “Golden Straightjacket: privatizing enterprises, balancing budgets, lowering tariffs, removing restrictions on foreign investment, and eliminating subsidies for state-owned finns.” Review of Lexus and the Olive Tree. Eichengreen Foreign Affairs May 1999

extent of globalization- not so great, return to past, but far from complete states vs countries

1994 - Clinton says Europe can go its own way - within NATO - interesting to read about the establishment

of nato commands - politics matters most - where to put commands Nato - sign on in 1949 US, Canada,

Since the miraculously peaceful fall of communism, Washington has aspired to stage-manage the transition to global capitalism.

America has wanted global leadership on the cheap. It was desperate for the developing world and post-communist economics to buy into its vision, in which globalisation, private capital flows and Washington advice would overcome the obstacles to shared prosperity, so that pressures on the rich countries to do more for the poorer countries could be contained by the dream of universal economic growth

Niemoller - wwi hero and pastor in church outside of Berlin "They came first for the Communists and I didn't speak up because I wasn't a Communist. Then they came for the Jews and I didn't speak up because I wasn't a Jew. Then they came for trade unionists and I didn't speak up because I wasn't a trade unionist. Then they came for Catholics and I didn';t speak up because I was a Protestant. Then they came for me - and by that time no one was left to speak up."

“…for a decade we have had a phony Washington consensus on how to achieve shared prosperity – and almost no real discussions between rich and poor countries on the challenges facing a world of greater income inequality than ever before in history.” Sachs Economist 9/12/98 wants a G-16

There are three kinds of economics: Greek-letter, up-and-down, and airport." Paul Krugman, The Age of Diminished Expectations p ix

"The same energy of character which renders a man a daring villain would have rendered him useful to society, had that society been well organized." Mary Wollstonecraft 1796 (in Canterbery - The Literate Economist

"Of all the forces that will change the world over the next generation, demography is probably the most important" Hamish McRae The World in 2020 p 97

"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. "Keynes

"Fashions in economic ideas come and go, like fashions in women's clothes....the history of economic thought is closer to the history of women's fashion than to the history of astronomy or physics. " Herbert Stein in Presidential Economics p 397

"All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. The sovereign is completely discharged from a duty, in the attempting to perform which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of society." Adam Smith, The wealth of nations. Book 4, Chapter 9

“As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market.” Adam Smith The Wealth of Nations, Vol. I Book I Chapter III p19

It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy...What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. Adam Smith The Wealth of Nations, Vol. I Book IV Chapter II p422

"'Wealth of Nations' shows how self interest, tamed by sympathy and constrained by economic rivalry, leads to a widespread prosperity known as 'universal opulence.'" introducing big government, Economist 12/31/99

"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages." Adam Smith, The Wealth of Nations, Book I Chapter II p16

The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity and judgement with which it is any where directed, or applied, seem to have been the effects of the division of labour. Adam Smith, The Wealth of Nations, Vol. I, Book I, Chapter I, p5

"corporatist economy is disequilibrium prone because it steers capital to industries viewed as prospective winners - while capitalism bets on diverse visions." WSJ -Edmund Phelps March 25, 1999

"What we may be witnessing is not just the end of the cold war, or the passing of a particular period of postwar history, but the end of history as such: that is, the end point of mankind's evolution and the universalization of Western liberal democracy as the final form of human government." Fukayama -

"The Powell Doctrine required that the deployment of troops be contingent upon the support of the American people, but irrationality - impulse buying, obsession with lotteries, addiction to sensational entertainments - often describes the unreliable emotions within the consumerist soul." Soldiers of Great Fortune - Harper's Dec 1999

"many disagreements about public policy boil down to one great disagreement between the anthropologist's and the economist's view of life. From the anthropological perspective, events are mainly determined by people's habits, tastes, and biases, which by their nature are irrational….To the economists, the world is a matrix of incentives and stimuli to which people respond in predictable ways." : James Fallows Atlantic Monthly Nov 1992 p 152

"In America, and to some degree throughout the world, we seem to have returned in the past thirty years to something from the last decades of the nineteenth century, that is, unconstrained laissez-faire capitalism. And just as the theory of Social Darwinism mirrored the strident capitalism of the late nineteenth century, so the rise of rational choice theory reflects the emergence of neo-laissez-faire capitalism in the last thirty years. Academe J/F 2000

"Similarly, the market based capitalist economic system that went hand in glove with political liberalism required only that people consult their long-term self -interest to achieve a socially optimal production and distribution of goods." Atlantic Monthly Fukayama May 1999

"The revival of liberal economics in both thought and deed during the past two decades is something most people take for granted. Seen in its historical context, however, it has been an extraordinary event."

Rational choice: James Fallows Atlantic Monthly Nov 1992 p 152 "many disagreements about public policy boil down to one great disagreement between the anthropologist's and the economist's view of life. From the anthropological perspective, events are mainly determined by people's habits, tastes, and biases, which by their nature are irrational…. To the economists, the world is a matrix of incentives and stimuli to which people respond in predictable ways."

rational choice May 1999 - Atlantic Monthly - The Great Disruption - a revolution now, but dust settling as we return to norms - two sources of order - a state or individual, decentralized actions - industrial revolution - replaced kinship with laws "Similarly, the market based capitalist economic system that went hand in glove with political liberalism required only that people consult their long-term self -interest to achieve a socially optimal production and distribution of goods." rational choice - needs a set of moral and social values - social capital - source of trust and wealth - individualism kills sense of community - there is linear pattern in political and economic order - cyclical movement in social and moral norms -

rational choice "The Powell Doctrine required that the deployment of troops be contingent upon the support of the American people, but irrationality - impulse buying, obsession with lotteries, addiction to sensational entertainments - often describes the unreliable emotions within the consumerist soul." Soldiers of Great misfortune - Harpers dec 1999 "ar has become Operations Other than War, where there are no friends and no enemies, no victories and no defeats."

Academe - rational choice theory - Rand - think tank - Arrow's Social Choice and Individual values 1951

1944 Theory of Games and Economic behavior - Von Neuman and Morganstern McNamara used it as Secretary of defense - not work in Vietnam - all behavior cannot be explained by it

"neither a state nor a bank ever has had unrestricted power of issuing paper money, without abusing that power; in all States, therefore, the issue of paper money ought to be under some check and control; and none seems so proper as that of subjecting the issuers of paper money to the obligation of paying their notes, either in gold coin or bullion." David Ricardo

WSJ -Edmund Phelps march 25, 1999 The Global Crisis of Corporatism" "corporatist economy is disequilibrium prone because it steers capital to industries viewed as prospective winners - while capitalism bets on diverse visions."

“One might even say that the dislocations and distributional consequences produced by trade are the flip side of the efficiency gains.” Dani Roderick, JEP Fall 1998 p6

"Instead, it was the herdlike behavior of other market players that rocked the markets in recent years." Asian crisis

“It took the crisis in Kosovo to smoke out the new competing foreign policy camps. At one end of the spectrum are the “Fortress America” advocates…[who] believe that the purpose of foreign policy is to have as little as possible. … At the opposite end are the “interventionists” or “hegemonists.” … They can be either liberal or conservative. Miller NYT April 24, 1999

"the great enemy of truth is very often not the lie - deliberate, contrived, and dishonest - but the myth, persistent, persuasive, and unrealistic." John F. Kennedy

"Major decisions about roles and missions seldom occur except as a response to a crisis, usually in wartime. The processes are so complex that arguments and technical analysis can be made to support the most parochial and reactionary views on solutions. Only the test of actual operations reveal the true nature of much of that kind of analysis."

“The two-MTW benchmark has been the sole constant of defense planning since the collapse of the Soviet empire.”

“In a very real sense, the Kosovo Intervention is likely to prove the wake-up call that will bridge the worlds of theory and reality.”

Fukayama - history comes to an end - " What we may be witnessing is not just the end of the cold war, or the passing of a particular period of postwar history, but the end of history as such: that is, the end point of mankind's evolution and the universalization of Western liberal democracy as the final form of human government."

“There seem to be two parallel processes at work. In the political and economic sphere history appears to be progressive and directional, and at the end of the twentieth century has culminated in liberal democracy as the only viable choice for technologically advanced societies. In the social and moral sphere, however, history appears to be cyclical with social order ebbing and flowing over the course of generations.” Francis Fukuyama, “The great disruption: human nature and the reconstitution of social order.” The Atlantic Monthly May 1999

“Closed-economy macroeconomics may have been well suited to a few decades in the middle of the 20^th century, but its relevance in other historical episodes—and in the globalized worlds of the present and future—seems inherently limited.” Basu & Taylor (p.65) Journal of Economic Perspectives

Schultz, Introduction to International Security “Finally, it is not a course on current events in defense and national security affairs. All too often, introductory-level courses focus attention on recent developments and events. Indeed, there may be a particular inclination to do so today, given the momentous developments of the late 1980s and early 1990s. To take such an approach is to ignore the historical roots, interdisciplinary scope, and evolution of security studies as a field within international relations. The course outlined in this essay does not assume that the past is of marginal importance to understanding the present and the future, but rather the opposite.”

"For economists, history not only represents the material against which to test theories and hypotheses, it also gives clues to the future." Miller, Walton, Sexton , Economic Issues and the American Past. 1985 p3 .

Academe J/F 2000 "In America, and to some degree throughout the world, we seem to have returned in the past thirty years to something from the last decades of the nineteenth century, that is, unconstrained laissez-faire capitalism. And just as the theory of Social Darwinism mirrored the strident capitalism of the late nineteenth century, so the rise of rational choice theory reflects the emergence of neo-laissez-faire capitalism in the last thirty years. McNamara used it as a basis for decision making in Vietnam -

“National interests change like fads and the political party in power. Who still cares about counterinsurgency and containment of aggressive “wars of national liberation” in Southeast Asia?”

"If one is master of one thing and understands one thing well, one has at the same time, insight into and understanding of many things" -Vincent VanGogh

"Of all the forces that will change the world over the next generation, demography is probably the most important" Hamish McRae The World in 2020 p 97

"How can people, businesses, and institutions plan for the future when they do not know what tomorrow will bring? ...In this unpredictable context, freedom is the ability to act both with confidence and a full knowledge of uncertainty. ... Scenarios are a tool for helping us to take a long view in a world of great uncertainty. ... Scenario planning is about making choices today with an understanding of how they might turn out." Schwartz, "The art of the long view, Strategy and force planning, p 214-15

"There are three kinds of economics: Greek-letter, up-and-down, and airport." Paul Krugman, The Age of Diminished Expectations p ix

"I would advise you Sir, to study algebra, if you are not already an adept in it: your head would be less muddy, and you will leave off tormenting your neighbours about paper and packthread, while we all live together in a world that is bursting with sin and sorrow." Samuel Johnson

“There is the pleasurable orgasm, like a rising sales graph, and there is the unpleasurable orgasm, slumping ominously like the Dow Jones in 1929.” William Burroughs

When producers want to know what the public wants, they graph it as curves. When they want to tell the public what to get, they say it in curves. Marshall McLuhan

He uses statistics as a drunken man uses lamp-posts—for support rather than illumination. Andrew Lang (1844–1912), Scottish author

"The troposphere is where most of the air is found and where most of the weather occurs. Computer models predict that, if global warming is really happening, temperatures in the troposphere should rise along with those on the surface. Recorded surface temperatures are, indeed, rising. However, both data from weather balloons and observations made by satellites suggest that temperatures in the troposphere have remained constant since the 1970s. Over the tropics they may even have dropped. This counter-intuitive result has caused sceptics to question how much warming, if any, is actually going on."There are, of course, three possibilities. One is that the sceptics are right. A second is that the models are wrong. And the third is that there is something wrong with the data. Three papers published in this week's issue of Science suggest that the third possibility is the correct one."

The first of these studies, conducted by Steven Sherwood of Yale University and his colleagues, examined data from weather balloons. For the past 40 years, weather stations around the world have released these balloons twice a day at the same time—midday and midnight Greenwich Mean Time. Each balloon carries a small, expendable measuring device called a radiosonde that sends back information on atmospheric pressure, humidity and, most importantly for this study, temperature.

Unfortunately, data from radiosondes come with built-in inaccuracies. For example, their thermometers, which are supposed to be measuring the temperature of the air itself (that is, the temperature in the shade) are often exposed to, and thus heated by, the sun's rays. To compensate for this, a correction factor is routinely applied to the raw data. The question is, is that correction factor correct?

Dr Sherwood argues that it is not. In particular, changes in radiosonde design intended to reduce the original problem of over-heating have not always been accommodated by reductions in the correction factors for more recently collected data. Those data have thus been over-corrected, reducing the apparent temperature below the actual temperature.

Dr Sherwood and his colleagues hit on a ruse to test this idea. Because weather stations around the world release their balloons simultaneously, some of the measurements are taken in daylight and some in darkness. By comparing the raw data, the team was able to identify a trend: recorded night-time temperatures in the troposphere (night being the ultimate form of shade) have indeed risen. It is only daytime temperatures that seem to have dropped. Previous work, which has concentrated on average values, failed to highlight this distinction, which seems to have been caused by over-correction of the daytime figures. When the team corrected the erroneous corrections, the result agreed with the models of the troposphere and with records of the surface temperature. The improvement was particularly noticeable in the tropics, an area that had previously appeared to have high surface temperatures but far cooler tropospheric temperatures than had been expected.

The second piece of work looked at satellite measurements of tropospheric temperatures. For the past two decades, microwave detectors, placed on a series of satellites flying in orbits that take them over both poles, have been used to calculate the troposphere's temperature. (Microwaves radiated from the atmosphere contain a host of information about its temperature and humidity.) Here, too, the data are problematic. Because the satellites are looking down through the whole atmosphere, measuring the temperature of the troposphere requires subtracting the effects of the stratosphere—the atmospheric layer above it. But when this has been done, the result suggests, like the over-corrected data from the radiosondes, that the troposphere is cooling down relative to the surface.

However, Carl Mears and Frank Wentz of Remote Sensing Systems, a firm based in Santa Rosa, California, think that this trend, too, is an artefact. It is caused, they believe, because the orbital period of a satellite changes slowly over that satellite's lifetime, as its orbit decays due to friction with the outer reaches of the atmosphere. If due allowance is not made for such changes, spurious long-term trends can appear in the data. Dr Mears and Dr Wentz plugged this observation into a model, and the model suggested that the apparent cooling the satellites had observed is indeed such a spurious trend. Correct for orbital decay and you see not cooling, but warming.

Danny Hakim, "EPA Holds Back Report on Car Fuel Efficiency" NYT 7/28/2005 "with Congress toys for a final vote on the energy bill, the Environmental Protection Agency made an 11th hour decision Tuesday to delay the planned release of an annual report on fuel economy." "the executive summary of the copy of the report obtained by the Times acknowledges that "fuel economy is directly related to energy security" because consumer cars and trucks account for 40% of the nation's oil consumption. But trends highlighted in the report show that carmakers are not making progress in improving fuel economy, and environmentalists say the energy bill will do little to prod them

good day to question - how can the average fuel efficiency for vehicles produced by a car company decrease while the company official notes "car by car, we are improving fuel economy on every model in our range."

Richard Goodwin, Making the facts fit the case of war," NYT 2/8/2004 experience under Kennedy and Johnson assistant ( Bay of Pigs, Cuban Missile Crisis, Marines to Dominican republic) - all you needed to say was Communist - all we need today is say terrorist - group of experts convened to examine body count data

"Those now trying to figure out what went wrong before the war in Iraq should bear in mind a simple truth: we are more likely to 'know' what we want to know than what we don't want to know."

""...he presented a budget that that is so dazzlingly deceitful it does not even attempt to include the bills for our presence in Iraq."

Secretary O'neil wrote Bush included statement that Bush lied to session of Congress on budget

"But it's less nonsense to say 2+2 = 5 (Mr. Kerry) that to say 2+2=22 (Mr. Bush)."

"Here's how his bonus money was set: Each year a consultant would calculate the median pay for a CEOs in a select 'comparator group,' which included such highly paid CEOs as Sandy Weil at Citi and Maurice Greenbergat AIG. That figure would be discounted by 10% - a tiny nod to the enormous difference between the 'comparator' companies and the exchange. The resulting figure was then multiplied by an NYSE 'performance' score, which was set, in part, by Grasso himself." but the CEO pay was in options - and then retirement benefits

Why did Ireland succeed? "The Luck of teh Irish: A survey of Ireland," The Economisr 10/16/2004

"GDP is the more common measure of national income, to which GNP adds an item known as net transfers of factor incomes. This means adding the overseas profits of Irish companies that are repatriated to Ireland, and substracting the profits of foreign multinationals operating in Ireland that are sent abroad." because of high FDI and low corporate taxes, there is much profit in Ireland that returns home - so GNP will be smaller - almost 25% than GDP. Ireland's officials used this - when show off brilliant policies, used GDP, and when looking for EU money they used GNP

“’The President’s 2001 budget increases BA (budget authority) for National Defense by $12.1 billion from $293.3 billion in 2000 to $305.4 billion in 2001,’ according to the analysis. ‘This is a 4.1 percent nominal growth. It is 2.1 percent real growth, assuming the Office of Management and Budget’s projected 2 percent Gross Domestic Product Price index inflation in 2001.’”

“Playing the third standard deviation odds when you cannot afford to be wrong.” – danger of assuming that we will not be fighting two wars simultaneously

"using shares of GDP as a measure of military capability is both meaningless and misleading. If Clinton had not presided over such an extraordinary period of economic growth, his current defense budget might account for four, instead of three, percent of GDP"

"Most troubling is Rice's suggestion that the U.S. armed forces in 2000 resemble what they were in 1940. But 60 years ago, our military ranked 16^th in the world (between Portugal and Romania), was one-tenth the size of Germany's military, and had only 1.6 percent of the world's military personnel. The best way to measure the adequacy of defense spending is to compare it with that of other nations."

“‘According to a CBO analysis, the cost of readiness per soldier has been increasing per year at a historic average rate of about 2.5 percent.”’

             LIBRARY OF CONGRESS
NUMBER:   97-674 F
   0
TITLE:    Military Base Closures: Time for Another Round?

On May 19, 1997, Secretary of Defense William Cohen released a long awaited report, the Quadrennial Defense Review (QDR). In the report, a major review of military strategy and capabilities, he called for two additional rounds of military base closures, one in 1999 and the second in 2001. He explained that, in spite of four previous rounds of closing bases (1988, 1991, 1993, and 1995), the downsizing of DOD’s infrastructure had fallen behind the downsizing of its force structure [units and personnel). He pointed out that:

Since the first base closure round, force structure has come down by 33% and will have declined by a total of 36% when we finish the reductions under the QDR. During the same period, we will have reduced domestic infrastructure by 21%.... We must shed more weight.

He further explained that closing more bases was dictated not only by the desire to achieve a proper balance between infrastructure and force structure, but also by the need to secure significant savings that would allow DOD to fund adequately future readiness and weapons acquisition programs. He stated that without the savings from new rounds of closing, DOD would be hard-pressed to fulfill its missions and responsibilities in the future.

1. "There are three kinds of economics: Greek-letter, up-and-down, and airport."

a. “The Pentagon’s budget has dropped by 37 percent during the 10 years that have passed since the end of the Cold War. During that period, defense expenditures as a share of the gross national product (GDP) have dropped from 6 to 3 percent – the lowest GDP percentage spent on defense since 1950, the first year of the Korean War.”

b. ”The armed forces have shed some 700,000 active-duty troops since the fall of the Berlin Wall. This is a nearly 40 percent decline.”

c. “'The President’s 2001 budget increases BA (budget authority) for National Defense by $12.1 billion from $293.3 billion in 2000 to $305.4 billion in 2001,’ according to the analysis. ‘This is a 4.1 percent nominal growth. It is 2.1 percent real growth, assuming the Office of Management and Budget’s projected 2 percent Gross Domestic Product Price index inflation in 2001.’”

d. "using shares of GDP as a measure of military capability is both meaningless and misleading. If Clinton had not presided over such an extraordinary period of economic growth, his current defense budget might account for four, instead of three, percent of GDP

e. "Most troubling is Rice's suggestion that the U.S. armed forces in 2000 resemble what they were in 1940. But 60 years ago, our military ranked 16^th in the world (between Portugal and Romania), was one-tenth the size of Germany's military, and had only 1.6 percent of the world's military personnel. The best way to measure the adequacy of defense spending is to compare it with that of other nations."

f. “Playing the third standard deviation odds when you cannot afford to be wrong.” – danger of assuming that we will not be fighting two wars simultaneously

g. “According to a CBO analysis, the cost of readiness per soldier has been increasing per year at a historic average rate of about 2.5 percent.”

h. Permanent law provides that military compensation be adjusted upward at the same time and by the same percentage as the average overall percentage increase in federal civil service General Schedule (GS) pay rates. GS pay scales are, in turn, linked to the Bureau of Labor Statistics' Employment Cost Index (ECI) (before enactment of the Federal Pay Comparability Act of 1990, GS pay scales were linked to another index, which measures changes in the pay of private-sector non-farm workers. Congress has severed this linkage between military pay raises and increases in GS salary every year since 1980 -- except for 1982 -- sometimes to provide larger pay increases for military personnel than those granted GS civilians. The rationale for these larger increases has generally been to improve or maintain successes in recruiting and to retain a sufficient number of quality military personnel. Notably, as an indication of congressional concern over the pay issue, even when the percentage increase in military pay has been the same as that granted GS civilians -- as has been the case every year since 1987 -- the increase has been explicitly stated in law, rather than simply allowing the permanent statute to determine the percentage.

Justin Fox, "The War of the Majorities," Fortune October 18, 2004 about elections and Republicans and Democrats - importance of location - republican = rural, democrat = urban - suburban changes

Niall Ferguson and Laurence Kotlikoff, The Degeneration of EMU, Foreign Affairs M/A 2000"The euro's medium-term future will prove much shakier when Europe is hit by the fiscal crises looming for the majority of the eurozone's member countries…….fresh evidence, drawn from a recent, comprehensive calculation of 'generational accounts,' shows the full extent of the fiscal crisis facing the eurozone….The choice for nearly all EMU members is between tax hikes on a scale unprecedented in peacetime or drastic spending cuts."

"insurers have set premiums high because they know people who expect a long life will snap annuities up as a hedge against outliving their savings, while people who expect to die soon won't."

"Economists are starting to abandon their assumption that humans behave rationally, and instead are finally coming to grips with the crazy, mixed up creatures we really are." Rethinking thinking

Peter Elkind, "The fall of the house of Grasso," Fortune 10/18 "Among Grasso's senior staff, loyalty was an absolute requirement. And to Grasso, according to one insider, "loyalty was 'Yes Dick."

Marsh & McLennan AIG and ACE - all led by members of the Greenberg family - alleges "Fake bids, collusion, improper steering of business, payments of insurers to avoid solicitation of competing quotes, and outright threats.."

big issue is conflict of interest - "Insurers have been offering incentives to brokers in teh form of so-called 'contingent commissions" - money paid only if teh broker places a certain amount or business with a particular insurere." "Less commonly, the commissions are based on teh insurer's profit." ..."Marsh executives were rewarded for moving business to insureers paying high commissions and penalized when they did not. ...Marsh reached a deal that linked the size of its contingent commission to AIGs ability to maintain prices on policy renewals." ..." The complaint describes a series of schemes whereby AIG would submit an uncompetitive 'B Quote' against a rival's bid at a rate suggested by Marsh

Confronting Reality Fortune 10/18/2004 from book by Larry Bossidy and Ram Charan Their conclusion: "The greatest consistent damage to businesses and their owners is the result not of poor management technique but of failure, sometimes willful, to confront reality."

The end of Moore's Law -The Economist 10/23/04 "But it has now fallen victim to the law of diminishing returns."

"BMW ranks only 14yh among the world's automakers, ahead of Mazda and behind Mitsubishi in global unit sales, which severely limits its economies of scale."

"The theory was consolidation would let companies cut costs and build profits. The new radio empires could run multiple stations with thins staffs - for instance, by spreading around their DJs via voice tracking..."

"It was a mass-production, command model like that espoused for corporations by frederick taylor, a management theorist, early in this century. The Gulf War, by contrast, was waged with all the flexibility, horizontal structures and co-ordination that today's management gurus insist is the way of the future." Fareed Zakaria, The future of statecraft, The world in 1999, The Economist

History and the Internet 10/23/04 The economist will we see price discrimination on the internet - downloading music pay more?

"Where Dell is going Next," Fortune 10/18/2004 - move out of computers into servers and printers - "We don't go searching for technology as if it were some new compound on the element chart that hasn't been discovered... Instead, we listen to our customers."

"With a base price of about $25,300, the 1 Series costs about $5,000 less than BMW's current lowest priced sedan and makes club membership available to a whole kind of new customer."

Ebay's Secret, Fortune 10/18/2004 "Asia is Whitman's new focus, and the strategy is straightforward: Get in first and fast. She learned a tough lesson in Japan four years ago when eBay launched an online trading business there five months after Yahoo. Given the business's first-mover advantage (people want to trade on the platform that has the most buyers and sellers), eBay couln't compete."

"Import drugs from Canada and you make the US a free rider-in itself." "As long as these prices are higher than the drug companies' marginal production costs, the companies will go ahead and sell to these countries." Fortune Geoffrey Colvin 11/1/04

Mass customization - Lego's in 2005 - you build online your model and it will then package the material needed. system called the Digital Designer

"Since American won their independence from Great Britain, they have engaged in an ongoing debate over the size of their governments, what taxes should be raised to support them, what services those governments should provide, how much debt governments should issue, and which of these major levels of government - federal, state, or local-should do the taxing, spending, or borrowing." p61

"Between 1790 and 1990 the United States passed through three distinct systems of government finance." p61

"Reagan proved deficits don't matter." Dick Cheney (quoted in Suskind 2004, p291) in Levy Public Policy Brief

three potential stories of impact "Ricardian Effect," international effect (borrowing...), domestic effect (interest rates ...)

Amory Lovins, "How America can free itself of oil-profitably," Fortune 10/4/2004 "Our report, Winning the Oil Endgame, charts practical policies - market-oriented without taxes, and innovation-driven without mandates, supporting rather than distorting business logic - to speed the transition."

Amory Lovins "The most important innovation is 'freebates' for new cars and light trucks. Freebates combine fees on inefficient vehicles with rebates on efficient ones, to influence consumer choice." and national scrap-and-replace program to get clunkers off teh road, industry subsidies to auto industries, energy

international treaties work only if self-enforcing, free-rider problem with environment - everyone want it clean, no one want to do it "Because a treaty is made between soverign nations, it needs to include incentives to persuade countries to alter their behavior." Montreal - had it - trade sanctions against goods with CFCs - and very real and short-term benefits (skin cancer and cataracts) - the rish helped the poor

Ann Reilly Dowd, "Environmentalists are on the run," Fortune 9/19/1994 "Despite the waves of panic that roll over America each year, some 500 scientists surveyed by the American Council of Science and health have concluded that the threat to life from environmental hazards is 'negligible.' Smoking, drugs, and alcoho, they calculate, directly account for nearly 70% of teh roughly one million premature deaths in America each year."

"Big oil and its subsidies," The Economist, 3/10/2001 - oil is subsidized by not paying for national defense and cost to environment - let's look at $20 billion - and that was before the war -

Wasswerman, "The last hunting economy," Regional Review, 2001:1 use of tradable permits in Mid-ZAtlantic surf clam fishery - begun in 1970s - in 1988 established ITQs (Individual transferable quotas) - in place by 1990 - reduce capacity

"California's smog market: right to pollute," The Economist 10/30/1993 - in LA firms The Regional Clean Air Incentive Market (RECLAIM) - focuses on 390 companies - will reduce pollution over ten years

"Economic man, cleaner planet," The Economist, 9/29/2001 4 ways to use market forces - tradable permits, taxes and subsidies, information, eliminate implied subsidies in other laws

"The truth about the environment," The Economist, 8/4/2001 Club of Rome model - no energy shortages - solr power prices down, why is there so much confusion about the environment 1. scientific work favors problems - looks worse, 2. environmental groups need to be noticed, 3. attitude of meia - like bad news, 4. poor individual perception - faulty judgement - easily influenced

Allen Hershkowitz, "How garbage could meet its maker," The Atlantic Monthly 6/1993 "one should shuft responsibility to manufacturers and consumers, and dramatically promote recycling in teh process." "Municipal waste-management costs become internal to teh cost and pricing of consumer goods." Germany has the system since 1995

"Green dreams: Can Japan boost its economy by protecting nature?," The Economist 1/12/2002 "by developing cleaner, greener technologies, they say, Japanese firms can foster yet another world-beating industry and sell their innovations abroad."

Cait Murphy, "Hog wild for pollution trading," Fortune9/2/2002 - developed countries agreed to restrict GHGs - Europe working on cap-and-tade system for C)2 - also see it in England and

"Saving the rainforest," The Economist 7/24/2004 "Yet the deforestation that is optimal for Brazil is still likely to be greater than what would suit humanity as a whole." - the rest of the world should foot the bill - need to reward carbon sinks -

Thomas Friedman, "Shoulda, Woulda, Can," NYT 5/27/2004 "50-cents-a-gallon gasoline tax - the Patriot Tax"

"Peering at the future," The Economist June 19, 2004 - Mamiraua' reserve 4,300 sq miles - he had constitution - allocated fish rights to invidual villages - he got rid of teh commons problem - use a framework - goals - targets - threats - interventions

An injection of innovation," The Economist 6/5/2004 burping sheep - in Australia this methane = 13% of greenhouse gases

Nicholas Varchaver, "How to kick the oil habit," Fortune 8/23/2004 "The US is the Saudi Arabia of energy waste," says one energy thinker. But the profligacy offers us a massive and painless opportunity to use less."

Douglas McGray, "Earth Inc.'s Annual Report," Fast Company April 2003 look at balance sheet physical, natural, human, social capital - see what happened over the year

One by one, he goes through the "litany", as he calls it, of four big environmental fears:

In each case, he demonstrated that the doom and gloom is wildly exaggerated. Known reserves of fossil fuels and most metals have risen. Agricultural production per head has risen; the numbers facing starvation have declined. The threat of bio diversity loss is real but exaggerated, as is the problem of tropical deforestation. And pollution diminishes as countries grow richer and tackle it energetically.

"the ran for international assessment, which compiles reports on the reading and math skills of 15-year-olds, found that US ranked 24th of 29 nations survived in math literacy. The same result for the US - 24th of 29 - was found when the problem-solving abilities of 15-year-olds were tested."

"young low income and minority children are more likely to start school without having gained important school readiness skills, such as recognizing letters and counting.. By the fourth grade, low income students read about three grade levels behind nonpoor students. Across the nation, only 15% of low income fourth-graders achieve proficiency in reading in 2003, compared to 41% of nonpoor students."

Chain of Command: The Road from 9/11 to Abu Ghraib," Seymour Hersh reviewed in The Economist 10/23/04

Mr. Hersh portrays an administration whose top officials are not just duplicitous-a charge which can be laid against many of their predecessors - but gravely incompentent, blind to facts they dislike, determined to ignore advice they did not want to hear and lamentably ignorant about large chunks of teh world."

Why did Ireland succeed? "The Luck of teh Irish: A survey of Ireland," The Economisr 10/16/2004

Moreover, there seems to be every reason to fear that this “divergence” in living standards and productivity levels will continue to grow in the future. A number of factors have kept economic growth slow in today’s poor countries in the past: high rates of population growth that restrict growth in the capital-output ratio, high relative prices of capital goods that constrain investment, governments that (like most governments throughout history) take the short view in an attempt to maximize chances of survival and the perquisites of office, and traditional elites (religious and cultural) that fear what they will lose from a richer country more integrated into the twenty-first century world. These factors are still operating today, and likely to operate in the future as well.

Schell, "The unfinished twentieth century in Harper's. "On either side of it [short 20^th century] were the calmer seas of a predominately liberal civilization”

The history of the twentieth century can be summarized--excessively briefly--in five propositions: First, that the history of the twentieth century was overwhelmingly economic history. Second, that the twentieth century saw the material wealth of humankind explode beyond all previous imagining. Third, that because of advances in technology, productivity, and organization--and the feelings of social dislocation and disquiet that these advances generated--the twentieth century’s tyrannies were the most brutal and barbaric in history. Fourth, that the twentieth century saw the relative economic gulf between different economies grow at a rapid pace. Fifth and last, that economic policy--the management of their economies by governments--in the twentieth century was at best inept. Little was known or learned about how to manage a market or a mixed economy.

A thousand years hence history courses will spend as much time on the history of the twentieth century as we spend on the history of the tenth. Surveys will have at most one single two-hour session to spend on the entire twentieth century. In that one single session teachers will try to teach their students five ideas, and leave them with one single image.

· First, that the history of the twentieth century was overwhelmingly economic history: the economy was the dominant arena of events and change, and economic changes were the driving force behind changes in other areas of life in a way that had rarely been seen before.

· Second, that the twentieth century saw the material wealth of humankind explode beyond all previous imagining. We today--at least those of us who belong to the upper middle class and live in the industrial core of the world economy--are now far richer than the writers of previous centuries’ utopias could imagine.

· Third, that because of advances in technology, productivity, and organization--and the feelings of social dislocation and disquiet that these advances generated--the twentieth century’s tyrannies were more brutal and more barbaric than in any previous century. Astonishingly, these tyrannies had their origins in economic discontents and found their expressions in economic ideologies. People killed each other by the millions over how economic life should be organized.

· Fourth, that the twentieth century saw the relative economic gulf between different economies grow at a rapid pace. Region by region and nation by nation, the world's material wealth became more unequally distributed in relative terms than ever before.

· Fifth and last, that economic policy--the management of their economies by governments--in the twentieth century was at best inept. Little was known about how to manage a market or a mixed economy. Lessons learned from experience were quickly forgotten. There was an extraordinary gap between the powerful social-calculating and behavior-conditioning mechanisms that were twentieth century economies, and the ineptness with which these economies were managed.

pre-industrial technological progress led to little improvement in the standard of living of the average human: improvements in technology and productive power by and large raised the numbers of the human race, not its material standard of living.

The magnitude of the growth in material wealth has been so great as to make it nearly impossible to measure.

This is the most important piece of the history of the twentieth century. As far as its ability to produce material goods is concerned, in the twentieth century the human race has passed through and left the realm of necessity—where providing basic food, clothing, and shelter took up the lion’s share of economic productive potential. We have emerged into the realm of freedom: in which our collective production is no longer made up largely of the necessities of survival but of conveniences and luxuries.

Call those political leaders whose followers and supporters have slaughtered more than ten million of their fellow humans “members of the Ten-Million Club.” All pre-twentieth century history may (but may not) have seen two members of the Ten-Million Club: Genghis Khan, ruler of the twelfth century Mongols, launcher of bloody invasions of Central Asia and China, and founder of China's Yuan Dynasty; and Hong Xiuquan, the mid-nineteenth-century Chinese intellectual whose visions convinced him that he was Jesus Christ’s younger brother and who launched the Taiping Rebellion that turned south-central China into a slaughterhouse for decades in the middle of the nineteenth century. Others do not make the list. Napoleon does not make it, and neither does Alexander the Great or Julius Caesar.

By contrast the twentieth century has seen perhaps five people join the Ten Million Club: Adolf Hitler, Chiang Kaishek, Vladimir Lenin, Joseph Stalin, and Mao Zedong. Hitler, Stalin, and Mao have credentials that may well make them the charter members of the Thirty Million Club as well—perhaps the Fifty Million Club. A regime whose hands are as bloody as those of the Suharto regime in Indonesia—with perhaps 450,000 communists, suspected communists, and others in the wrong place at the wrong time dead at its creation in 1965, and perhaps 150,000 inhabitants of East Timor dead since the Indonesian annexation in the mid-1970s—barely makes the twentieth century's top twenty list of civilian-massacring regimes.

The economies of the Soviet Union in the 1930s and of China in the 1960s cannot be understood without understanding how mass terror was used as a worker discipline device.

Third, the twentieth century is unique in that its wars, purges, massacres, and executions have been largely the result of economic ideologies.

Other twentieth century disasters had equally strong roots in economic ideology: it is hard to see World War II in the absence of Adolf Hitler's insane idee fixe that the Germans needed a better land-labor ratio—more “living space”—if they were to be a strong nation.

Odds are that by the middle of the twenty-first century the population explosion will be over. All save a very few countries--which may nevertheless have a substantial share of the world's population--will have completed or be on the verge of completing their demographic transitions, their attainment of a demographic regime of long life and low fertility. Thus it is unlikely that the world in the second half of the twenty-first century will feel "overcrowded"--although it may well feel "under resourced," or overly warm.

Odds are also that the world of the second half of the twenty-first century will appear to us to be remarkably, filthily rich. The problems of measurement that make us unsure today how much richer we are than our predecessors of a century ago will strike with equal force, and some things that we now take for granted--large houses within less than half an hour's commuting distance of metropolitan centers, for example--may become extravagant luxuries. But by 2050 a quarter (rather than a twentieth) of people in the world will have a material standard of living higher than that of the average citizen of Canada or the United States today; and by 2100 it is a good bet that half the world will live better than the average citizen of Canada or the United States today.

Odds are also that the world in 2100 will be, relatively, at least as unequal a place as the world today: the gap between rich and poor may even be an even greater multiple of the poor's income. To economists the growth of relative inequality in the world economy over the past century is astonishing, for the relative edge in productivity of the industrial core is due to its superior command of the technologies that have been invented since the start of the industrial revolution, and these technologies are by and large public goods open and accessible to all. Yet the relative technology gap between rich and poor continues to grow.

What remains to be determined is whether the largest income gaps are--as they are today--gaps between nations, or whether the "death of distance" will mean that gaps within nations and metropolitan areas will be of the same order of magnitude as gaps between national economies. What also remains to be determined is the collective use humanity will make of its wealth, and how--or if--the upward surge in wealth will transform human nature. And whether this relatively optimistic scenario that I have painted will be overturned by one of the several possible catastrophes--nuclear war, bioterrorism, ecological distress--that may take place in the next century or so.

The population explosion has carried us from a human population of 500 million in 1500 (in rough Malthusian steady-state) to a population of 750 million in 1750 (after the spread of New World food crops like maize and the potato) to a population of 1.6 billion in 1900 (by which time the industrialization of agriculture meant that the logic of Malthus's Essay on Population no longer applied) to a population of 6 billion today. Yet we can predict with confidence that the world's population has at most one more doubling to go through in the next couple of centuries.

We can make this prediction with such confidence because there are few regularities in social science stronger than the demographic transition: once the level of a country's agricultural technology progresses far enough that child labor no longer enables a large augmentation of the family's production--or once women learn to read, the exact causation in unclear--the high birth rates of 40 to 50 per thousand that generate rates natural increase in excess of one percent per year come to an end.

Standard estimates reported in the historical statistics compiled by national and international statistical agencies and academic scholars tell us that the rate of increase of economic output per capita in North America has averaged about 1.7 percent per year over the past century--a fivefold multiplication of material standards of living over the course of the past century.

But are these statistics accurate? William Nordhaus says not. He attempts to calculate the real price of illumination--not the price of a good, like, say, a light bulb, but the price of the service that the good is used for: casting light into dark corners. Nordhaus's conclusion is that traditional measures of economic growth that focus on falling prices of goods miss the extraordinary upward leaps in real incomes that take place whenever one good is succeeded by another

We take the numbers from the historical statistics that tell us of a fivefold increase over the century--from annual output per worker of perhaps $12,000 in today's dollars in 1900 to annual output per worker of $60,000 today--to mean that their average material standard of living then was about equivalent to what our material standard of living now would be if we had $12,000 per year per worker to spend. But that is not the situation people were in back in the past. The indices have a hard time figuring out how to include inventions: new goods and new kinds of goods. Perhaps a better way of thinking about it is that their average material standard of living then was about what we could obtain now if we had $12,000 to spend but were required to spend it all on commodities that have been around for more than a century: no modern entertainment or communications or transportation technologies; no modern appliances; buildings, roads, bridges, and other infrastructure built using century-old technologies. $12,000 that must be spent exclusively on commodities that were produced in the late nineteenth-century is, for all of us, worth a lot less than $12,000 without this peculiar restriction.

It is here that I think we can gain more insight by looking not at what economists look at but at what literary critics look at, in this case at one of the top ten best-selling novels of the 1890s, Looking Backward. Looking Backward is a wooden novel that sold extraordinary numbers of copies in the 1890s because it struck a utopian cord. In it the narrator, thrown forward in time from 1895 to 2000, is asked by his hosts in the year 2000--more than a century in his future--the question: "Would you like to hear some music?"

He expects his host to play the piano--a social accomplishment of upper-class women around 1900. To listen to music on demand then, you had to have in your house or nearby an instrument, and someone trained to play it. It would have cost the average worker some 2400 hours, roughly a year at a 50-hour workweek, to earn the money to buy a high-quality piano, and then there would be the expense and the time committed to piano lessons. Now the labor-time value of a Steinway piano has fallen in price from 2400 average worker-hours a century ago 1100 average worker-hours today. But if what you value is not the piano itself but the capability of listening to music at home, the cost has fallen from 2400 average worker-hours a century ago to 10 hours today (240 dollars for the boom-box plus 10 dollars for the CD).

"Early in the post-World War II period, the standard of living was typically conceived in purely material terms - the goods and services at one's disposal - called here the level of living, following Davis (1945). This conception led naturally to the use of real GDP per capita as the primary measure. Critics expressed concerns that GDP per capita failed to reflect a number of important aspects of human welfare, and pointed to some notable disparities in the ranking of countries based on GDP per capita compared with other possible indicators of well-being, such as length of life and education…

A recent product of this social indicators movement has been the United nations human development index (HDI), now reported on an annual basis… The HDI combines GDP per capita, life expectancy at birth, and a composite measure of education based on literacy and school enrollment into an overall index number. Some experimental work also seeks to include human rights in this broad measure of human development." p7-8

"The transformation of living levels has been qualitative as well as quantitative. By comparison with the conveniences and comforts widely available in developed economies at the end of the 20^th century, everyday life two centuries ago was most akin to what we would know today as 'camping out.' In the late 18^th century United States (which even then was a relatively rich society), for example, among the rural population, which comprised 95 percent of the total, housing consisted of '[one] story log houses and frame houses with one or two rooms and an attic under the rafters…Cellars and basements were practically unknown and frequently there was no flooring except the hard earth. The fireplace with the chimney provided heating and cooking…" water and wood had to be fetched, and it was outdoors for the toilet. some candles, but no glass. And let's talk about medicine - bleeding was in vogue in early 19^th century. p11

look at life expectancy, family circumstances (decline in number of children) - English working class situation 1890s - women have ten kids and 15 years is in a state of pregnancy and nursing - increase in freedom of women has been BIG

"It is noteworthy that the early spread of industrialization outward from England in the 19^th century was to areas where education, and thus the ability to learn new methods of production, was unusually high in the world." p19

political democracy - Quotes Alex Inkeles who writes "[D]emocratic systems give people a greater sense of freedom and, I would argue, more actual freedom, to influence the course of public events, express themselves, and realize their individual human potential." p 20

"Incumbent parties almost always keep the White House if inflation is moderate and the unemployment rate is falling in the year leading up to the election." Paul Krugman, The Age of Diminished Expectations p 1

"The electoral cycle causes substantial macroeconomic fluctuations. In the United States, the electoral-economic cycle from 1948 to 1976 (other than the Eisenhower years) has consisted of a four-year presidential cycle in the unemployment rate, with downturns in unemployment in the months before the presidential election and upturns in the unemployment rate usually beginning from twelve to eighteen months after the election. These patterns are consistent with the character of the economic tools..." Edward Tufte Political Control of the Economy p26

“Military action cannot solve the basic problems of people seeking food and freedom from oppression and exploitation.” Importance of special interests — what they do to democracy — what they do to ability to support / define national interests — increasing heterogeneity of the population — will weaken our consensus “poor elements of American society have different priorities than do powerful elite of media war hawks, the national security complex, and its supporting industries.” - diversity of population — more difficult to define natiuonal interests — what is worth dying for

Niall Ferguson and Laurence Kotlikoff, The Degenberation of EMU, Foreign Affairs M/A 2000"The euro's medium-term future will prove much shakier when Europe is hit by the fiscal crises looming for the majority of the eurozone's member countries…….fresh evidence, drawn from a recent, comprehensive calculation of 'generational accounts,' shows the full extent of the fiscal crisis facing the eurozone….The choice for nearly all EMU members is between tax hikes on a scale unprecedented in peacetime or drastic spending cuts."

"key global problem of the final years of the twentieth century: unbalanced wealth and resources, unbalanced demographic trends, and the relationship between them....we are heading into the twenty-first century in a world consisting of the most part of a relatively small number of rich, satiated, demographically stagnant societies and a large number of poverty-stricken, resource-depleted nations whose populations are doubling every twenty five years or less." Paul Kennedy Must it be the rest against the west

It is a great read for anyone, especially someone in Air Force – intertwining of countries will limit scope of wars – importance of demographics and personnel

Permanent law provides that military compensation be adjusted upward at the same time and by the same percentage as the average overall percentage increase in federal civil service General Schedule (GS) pay rates. GS pay scales are, in turn, linked to the Bureau of Labor Statistics' Employment Cost Index (ECI) (before enactment of the Federal Pay Comparability Act of 1990, GS pay scales were linked to another index, which measures changes in the pay of private-sector non-farm workers. Congress has severed this linkage between military pay raises and increases in GS salary every year since 1980 -- except for 1982 -- sometimes to provide larger pay increases for military personnel than those granted GS civilians. The rationale for these larger increases has generally been to improve or maintain successes in recruiting and to retain a sufficient number of quality military personnel. Notably, as an indication of congressional concern over the pay issue, even when the percentage increase in military pay has been the same as that granted GS civilians -- as has been the case every year since 1987 -- the increase has been explicitly stated in law, rather than simply allowing the permanent statute to determine the percentage.

“Macroeconomic variables have become slightly more stable and recessions have become slightly less severe in the postwar era because policy has systematically counteracted some shocks. Both monetary policy and automatic fiscal policy have served to moderate postwar recessions.” Christina Romer p. 38 Journal of Economic Perspectives

1. "The euro's medium-term future will prove much shakier when Europe is hit by the fiscal crises looming for the majority of the eurozone's member countries…….fresh evidence, drawn from a recent, comprehensive calculation of 'generational accounts,' shows the full extent of the fiscal crisis facing the eurozone….The choice for nearly all EMU members is between tax hikes on a scale unprecedented in peacetime or drastic spending cuts."

2. "key global problem of the final years of the twentieth century: unbalanced wealth and resources, unbalanced demographic trends, and the relationship between them....we are heading into the twenty-first century in a world consisting of the most part of a relatively small number of rich, satiated, demographically stagnant societies and a large number of poverty-stricken, resource-depleted nations whose populations are doubling every twenty five years or less

The language of public policy is increasingly the language of economics, and sophisticated policy formulation depends to an ever greater extent on an understanding of economic concepts.

Richard Cronin, CRS Report 1/28/99 Asian Financial Crisis: An Analysis of US Foreign Policy Interests and Options

“Some judge that the Japanese finance ministry has aggravated the problem [Asian crisis] with an expansionary monetary policy that generally kept the yen undervalued and exp[orts and resultant dollar earnings at a high level. The problems of Southeast Asian countries likewise were exacerbated by growth differentials between the United States and Japan, which also has contributed to a year-long appreciation of the dollar against the yen. “ also competition from China – in 1965 ethnic violence in Indonesia – 10K + dead

“The mechanism by which the US macroeconomy is affected is through trade and capital flows.”

“Over the next five years ,the service is investing $1.5billion in research and development for carrier programs. Largely the funding is aimed at electric technology development and reducing the almost crew size of today’s most capable carriers. … Ultimately, the Navy wants to reduce crew size by about 1,500 on its carriers.”

Richard Rosencranz. Economics and National Security. Cost disease of the service sector

Keynesian military spending helped to obviate unemployment, and with high tariffs all around, domestic and government consumption became the new motor of economic growth, replacing foreign trade. Keynesian economics

A strategy for next century ..Second, it must drive more of our limited resources into essential warfighting capabilities; and third, it must systematically reduce infrastructure.” - importance of productivity3

Macro policy

“The rise of such policy-induced recessions explains why output and related macroeconomic indicators have not stabilized dramatically over time.” Christina Romer (p. 38) Journal of Economic Perspectives

“The new economy” is not the inevitable result of structural changes globalization, or the information revolution; instead, it has emerged because we have had a steadier hand on the macroeconomic tiller in recent years than in the years before. Whether the management of aggregate demand has been steadier because of new economic theories, the skill of particular policymakers, or a new consensus about the goals of policy is hard to say. What is clear is that, replace that steady hand with an unsteady one, and the old economy could re-emerge in a flash.” Christina Romer (p.43) Journal of Economic Perspectives

“In this view, policymakers have wrestled with three basic macroeconomic challenges for over 100 years: a desire to have fixed exchange rates to avoid instability; a desire to have free capital mobility, to ensure efficient allocation and permit smoothing; and a desire to engage in activist monetary policy to address domestic policy goals.” Basu & Taylor (p.63) Journal of Economic Perspectives

" the great enemy of truth is very often not the lie - deliberate, contrived, and dishonest - but the myth, persistent, persuasive, and unrealistic." John F. Kennedy

"after the war the conditions necessary to the maintenance of the gold standard should be restored" [for it was the] "only effective remedy for an adverse balance of trade and an undue growth of credit." Cunliffe Committee's First Interim Report, Aug 15, 1918

"The Federal Reserve System is a system of productive credit. It is not a system of credit for either investment or speculative purposes." Fed’s 10th Annual Report

"when the Federal Reserve banks operate as investment banks, by buying investments, they force the member banks of the country to operate as investment banks by buying investments or loaning against investments …" Adolf Miller, Fed Board member 1914-1936

"Periods of internal panic and external demand for bullion commonly occur together … The holders of the reserve have, therefore, to treat two opposite maladies at once – one requiring stringent remedies, and especially a rapid rise in the rate of interest; and the other an alleviative treatment with large and ready loans." Walter Bagehot, Lombard Street 1873 p 56.

"close, regular, predictable relationship between the quantity of money, national income, and prices..." Milton Friedman

"the greatness of America has grown out of a political and social system and a method of control of economic forces distinctly its own - our American system - which has carried this great experiment in human welfare further than ever before in all history. We are nearer today to the ideal of the abolition of poverty and fear from the lives of men and women than ever before in any land" Herbert Hoover (future president) Oct 22, 1928

"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. … It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people." The Memoirs of Herbert Hoover: 1929-1941, The Great Depression p30

"the average man won't really do a day's work unless he is caught and cannot get out. There is plenty of work to do if people would do it. Henry Ford March 1931

"This is not an issue as too whether people shall go hungry or cold in then United States. It is solely a question of the best method by which hunger and cold shall be prevented. It is a question of whether the American people...will maintain the spirit of charity and mutual self-help... as distinguished ... from appropriations out of the Federal Treasury for such purposes... If we break down this sense of responsibility and individual generosity ... in times of national difficulty and if we start appropriations of this character we have ... impaired something infinitely valuable in the life of the American people... Once this has happened... we are faced with the abyss of reliance in future upon government charity in one form or another. I am confident that our people have the resources, the initiative, the courage, the stamina and the kindliness of spirit to meet this situation in the way they have met their problems over generations." Herbert Hoover February 193

"...in bringing back the virtues of old-fashioned capitalism, we have brought back some of its vices..." Paul Krugman. The return of depression

Read the attached passage from Herbert Hoover's memoirs concerning his belief in the importance of balancing the federal budget as the country slid into the Great Depression.

Write an essay to President Hoover--using concepts and models developed in this course--arguing that he should abandon his concern with balancing the budget and embrace deficits in times like the Great Depression. Be sure to use models and concepts developed in this course to try to ease Hoover's fears of the adverse consequences of a large federal budget deficit:

National stability required that we balance the [federal] budget [during the Great Depression]. To do so we had to increase taxes on one hand and, on the other, to reduce government expenditures. In reduction of expenditures we had to limit ourselves to ordinary government activities... I opened up the fight in my messages to Congress [in] December, 1931, saying:

The first requirement of confidence and of economic recovery is financial stability of the United States government.... I must at this time call attention to the magnitude of the deficits which have developed and the resulting necessity for determined and courageous policies.... We must have insistent and determined reduction in government expenses. We must face a temporary increase in taxes... Our fist duty as a nation is to put our governmental house in order.... With the return of prosperity the government can undertake constructive projects both of social character and in public improvement. We cannot squander ourselves into prosperity...

On April 1 the House finally passed a wholly inadequate [tax] bill.... [O]n May 5 I sent a stiff message to Congress devoted solely to the necessity for balancing the budget as the next item on the recovery program....

The most essential factor to economic recovery today is the restoration of [business] confidence.... Fear and alarm prevail in the country because of events in Washington which have greatly disturbed the public mind.... Nothing is more necessary at this time than balancing the budget. Nothing will put more heart into the country than prompt and courageous and united action...

The Senate took on a burst of speed, and I was [finally] able to sign a tax [increase] bill on June 6th [1932].... The bill was intended to produce about $1,250,000,000 additional revenue. But these additions to our income came too late....[O]ur deficit looked worse than might otherwise have been the case.

Humor never dies in America... [Democratic] candidate for Vice President... Garner, on October 17, 1932, said of [my administration]: "Their failure to balance the budget of a family of 120,000,000 people is at the very bottom of the economic troubles from which we are suffering."

1. "And then the dispossessed were drawn west … They streamed over the mountains, hungry and restless... The kids are hungry…. new waves were on the way, new waves of the dispossessed and the homeless, hardened, intent, and dangerous." Steinbeck The Grapes of Wrath

2. "This is not an issue as too whether people shall go hungry or cold in then United States. It is solely a question of the best method by which hunger and cold shall be prevented. It is a question of whether the American people...will maintain the spirit of charity and mutual self-help... as distinguished ... from appropriations out of the Federal Treasury for such purposes... If we break down this sense of responsibility and individual generosity ... in times of national difficulty and if we start appropriations of this character we have ... impaired something infinitely valuable in the life of the American people... Once this has happened... we are faced with the abyss of reliance in future upon government charity in one form or another. I am confident that our people have the resources, the initiative, the courage, the stamina and the kindliness of spirit to meet this situation in the way they have met their problems over generations." Herbert Hoover February 1931

3. "Now 'in the long run' this is probably true.... But this **long run** is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again." John Maynard Keynes, The General Theory of Employment Interest and Money.

4. "We must act, and act quickly... If we are to go forward we must move as a trained and loyal army willing to sacrifice for the good of a common discipline, because, without such discipline, no progress is made, no leadership becomes effective... I am prepared under my constitutional duty to recommend the measures that a stricken nation in the midst of a stricken world may require.... I shall... wage war against the emergency as great as the power that should be given to me if we were in fact invaded by a foreign foe." Roosevelt - inaugural speech

5. "government, like any family, can for a year spend a little more than it earns. But you and I know that a continuance of that habit means the poorhouse." FDR July 30, 1932

6. "We can never insure one hundred percent of the population against one hundred percent of the hazards … of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty ridden old-age." FDR presidential statement on signing into law the Social Security Act Aug 14, 1935

7. "…can further deficits, which may prove disastrous, now be avoided? The experience of other nations indicates that it will require more fortitude and determination than politicians usually have. There are few instances in which government activities, once started, are relinquished. The whole tendency of government is to grow bigger and cost more. Lewis Douglas Atlantic Monthly 1935

8. Some of you... may have decided that, this year, you're going to celebrate it the old-fashioned way, with your family sitting around stringing cranberries and exchanging humble, handmade gifts, like on "The Waltons". Well, you can forget it. If everybody pulled that king of subversive stunt, the economy would collapse overnight. The government would have to intervene: it would form a cabinet-level Department of Holiday Gift-Giving, which would spend billions and billions of tax dollars to buy Barbie dolls and electronic games, which it would drop on the populace from Air Force jets, killing and maiming thousands. So, for the good of the nation, you should go along with the Holiday Program. This means you should get a large sum of money and go to a mall. -- Dave Barry, "Christmas Shopping: A Survivor's Guide"

9. "Construction teams still work around the clock in China's largest city...In a telling shift, however, construction workers are putting up fewer of the office and apartment buildings that had sprouted like weeds in the boom years...Instead they are working on municipal projects...part of China's enormous spending program aimed at preventing the economy from weakening too seriously." -- NYT April 3, 1999 pB3

“To complete his theory, Keynes tied these elements together. The market for money determined interest. Interest (together with the state of business confidence) determined investment. Investment, alongside consumption, determined effective demand for output. Demand for output determined output and employment. Consumption out of income determined savings. Employment determined real wages. Keynes, Einstein, and Scientific revolution, James K. Galbraith

"And then the dispossessed were drawn west - from Kansas, Oklahoma, Texas, New Mexico: from Nevada and Arkansas families, tribes, dusted out, tractored out. Carloads, caravans, homeless and hungry; twenty thousand and fifty thousand and two hundred thousand. They streamed over the mountains, hungry and restless... The kids are hungry. We got no place to live. Like ants scurrying for work, for food, and most of all for land... and the dispossessed, the migrants, flowed into California, two hundred and fifty thousand, and three hundred thousand. Behind them ... [other] tenants were being forced off [their lands]. And new waves were on the way, new waves of the dispossessed and the homeless, hardened, intent, and dangerous." Steinbeck The Grapes of Wrath

"The place is …a collection of shanty hamlets. …from 150 to 200 men live in the shanties. The place is called by its inhabitants – Hooverville. … the inhabitants were not, as one might expect, outcasts or ‘untouchables,’ or even hoboes. …They were men without jobs. This pitiable village would be of little significance if it existed only in Youngstown, but nearly every town in the United states had its shanty town for the unemployed, and the same instinct has named them all ‘Hooverville.’" Charles Walker, journalist describing Youngstown, OH 1932

"We must act, and act quickly... If we are to go forward we must move as a trained and loyal army willing to sacrifice for the good of a common discipline, because, without such discipline, no progress is made, no leadership becomes effective... I am prepared under my constitutional duty to recommend the measures that a stricken nation in the midst of a stricken world may require.... I shall... wage war against the emergency as great as the power that should be given to me if we were in fact invaded by a foreign foe." Roosevelt - inaugural speech

"government, like any family, can for a year spend a little more than it earns. But you and I know that a continuance of that habit means the poorhouse." FDR July 30, 1932

"We can never insure one hundred percent of the population against one hundred percent of the hazards … of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty ridden old-age." FDR presidential statement on signing into law the Social Security Act Aug 14, 1935

"We [the Republican opposition] propose instead leadership and authority in government within the moral and economic framework of the economic system... We propose to demobilize and decentralize all this spending upon which vast personal power is being built... The New Dealers say that all this that we propose is a worn-out system; that this machine age requires new measures for which we must sacrifice some part of the freedom of men. Men have lost their way with a confused idea that governments should run machines" Hoover election campaign in 1936 in support of Alf Landon

"Now 'in the long run' this is probably true.... But this **long run** is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again." John Maynard Keynes, The General Theory of Employment Interest and Money.

"I must not encumber this letter with technical suggestions for reviving the capital market. this is important. But not so important as the revival of sources of demand." Keynes letter to FDR in 1938

"...the Spend-Your-Way-Out theory is only superficially plausible. Its fallacy lies in its failure to recognize two important facts. ... The second is that savings do not represent sterile, locked-up funds, but funds which go into immediate circulation through some medium of investment." Lewis Douglas Atlantic Monthly 1935

"..can further deficits, which may prove disastrous, now be avoided? The experience of other nations indicates that it will require more fortitude and determination than politicians usually have. There are few instances in which government activities, once started, are relinquished. The whole tendency of government is to grow bigger and cost more. Lewis Douglas Atlantic Monthly 1935

"When the panic of 1929 suddenly wiped out the whole value of many stocks and sharply reduced the values of others, a great number of people who had though themselves rich, or at least well-off, found themselves with much less than they had thought they had, or with nothing at all. By [the] millions they quit buying anything except what they had to save to stay alive. This drop in spending threw the stores into trouble, and they quit ordering [new products] and discharged clerks. When orders stopped the factories shut down, and factory workers had no jobs" Historian Gerald Johnson

"Japan's experience shows not only that advanced modern economies can get into a liquidity trap, but that the easy assumption that fiscal policy can get an economy out of that trap is far too optimistic" Paul Krugman. The return of depression

"In short, the reason Depression economics has now reemerged as a real concern is not that governments did not do the right thing, but that they did. Truly, no good deed goes unpunished." Paul Krugman. The return of depression

Some of you... may have decided that, this year, you're going to celebrate it the old-fashioned way, with your family sitting around stringing cranberries and exchanging humble, handmade gifts, like on "The Waltons". Well, you can forget it. If everybody pulled that king of subversive stunt, the economy would collapse overnight. The government would have to intervene: it would form a cabinet-level Department of Holiday Gift-Giving, which would spend billions and billions of tax dollars to buy Barbie dolls and electronic games, which it would drop on the populace from Air Force jets, killing and maiming thousands. So, for the good of the nation, you should go along with the Holiday Program. This means you should get a large sum of money and go to a mall. -- Dave Barry, "Christmas Shopping: A Survivor's Guide"

"Construction teams still work around the clock in China's largest city...In a telling shift, however, construction workers are putting up fewer of the office and apartment buildings that had sprouted like weeds in the boom years...Instead they are working on municipal projects...part of China's enormous spending program aimed at preventing the economy from weakening too seriously." -- NYT April 3, 1999 pB3

“If mass imprisonment is what the urban scholar Mike Davis, in his book Ecology of Fear, terms “carceral Keynesianism” – using prison building and maintenance as an enormous public-works program to shore up an economy in which blue-collar jobs have been exported to the Third World – then mass release may well prove its undoing.” Sasha Abramsky, “When they get out,” Atlantic Monthly June 1999

1. "The Congress hereby declares that it is the continuing policy and responsibility of the Federal Government to . . . promote maximum employment, production and purchasing power." 1946 Full Employment Act

2. "Involuntary unemployment is the most dramatic sign and disheartening consequence of underutilization of productive capacity…. We cannot afford to settle for any prescribed level of unemployment…." JFK De Long "America's Only Peacetime Inflation: The 1970s" p8

3. "Until we restore full prosperity and the budget-balancing revenues it generates, our practical choice is not between deficit and surplus but between two kinds of deficits: between deficits born of waste and weakness and deficits incurred as we build our strength... 1962 Economic Report of the President January 1963

4. "The tax bill before you, ... seems on balance to be a bad piece of legislation. ... The country cannot afford economic experiments which are almost certain at some time or other to weaken confidence in the dollar, both internally and externally.... [D]eficit spending...was tried and presumably discredited in the 1930s.... Not only is a large tax reduction foolhardy, it is also likely to be futile in dealing with the most serious aspects of our very real problem of unemployment. In recent months there has been increasing recognition of the fact that unemployment is concentrated in particular groups of the population... Monetary and fiscal measures cannot solve the problems of structural ... unemployment... This discrimination makes our tax system commensurately more progressive..." Dan Throop Smith, former Assistant Secretary of the Treasury for Tax policy (Eisenhower), Testimony before Senate Finance Committee, October 1963

5. "Economics has come of age in the 1960s.... The paralyzing grip of economic myth and false fears on policy has been loosened, perhaps even broken. We at last accept in fact what was accepted in law 20 years ago in the Employment Act of 1946, namely, that the federal government has an overarching responsibility for the nation's economic stability and growth. And we have at last unleashed fiscal and monetary policy for the aggressive pursuit of those objectives.

6. These are profound changes. What they have wrought is not the creation of a 'new economics,' but the completion of the Keynesian revolution - 30 years after John Maynard Keynes fired the opening salvo." Walter Heller, New Dimensions of Political Economy, 1966 (1-2)

7. "[T]he postwar idea that taxing and spending could be used, in a precisely targeted way, to control the pace of economic growth and the level of employment. The problem with this fine tuning is simple: lack of knowledge." Freedom's Journey, Economist 9/11/99 (insert) p19

8. "The trouble is that fiscal policy is horribly asymetrical." Freedom's Journey, Economist 9/11/99 (insert) p20

9. "This generated a gradual rise in inflation, which the Vietnam war and the 1973 oil-price hike turned into a rapid one. This, combined with a political unwillingness to sacrifice domestic goals for international ones, led to the collapse of the Bretton Woods fixed rates, and the use of floating rates instead. From then on, capital controls became hard to sustain - especially given that governments' fiscal policies veered between deficits and very large deficits for more than twenty years, forcing many to borrow internationally as well as from domestic lenders." ." Freedom's Journey, Economist 9/11/99 (insert) p19

10. "The success or failure of any country over the next thirty years hinges on growth." _{Hamish McRae The World in 2020 p 3}

11. "Productivity isn't everything, but in the long run its almost everything." _{Paul Krugman, The
Age of Diminished Expectations p 9}

1. "the great enemy of truth is very often not the lie - deliberate, contrived, and dishonest - but the myth, persistent, persuasive, and unrealistic." John F. Kennedy

“Nor will the next generation of Americans be able to do what the present generation has done: compensate for the failure of real wages – and therefore family living standards – to rise by increasing female participation in the workforce.” Hamish McRae 1995

"Involuntary unemployment is the most dramatic sign and disheartening consequence of underutilization of productive capacity…. We cannot afford to settle for any prescribed level of unemployment…." JFK De Long "America's Only Peacetime Inflation: The 1970s" p8

"The Congress hereby declares that it is the continuing policy and responsibility of the Federal Government to . . . promote maximum employment, production and purchasing power." 1946 Full Employment Act

"Until we restore full prosperity and the budget-balancing revenues it generates, our practical choice is not between deficit and surplus but between two kinds of deficits: between deficits born of waste and weakness and deficits incurred as we build our strength... 1962 Economic Report of the President January 1963

"the great enemy of truth is very often not the lie - deliberate, contrived, and dishonest - but the myth, persistent, persuasive, and unrealistic." John F. Kennedy

"I say that the time-tested rules of financial policy still apply. Spending for spending's sake is patently a false theory... In effect we are stealing from our grandchildren in order to satisfy our desires of today....Imagine how much better the country would feel if it had no debt at all but a healthy surplus." Eisenhower, Saturday Evening Post May 18, 1963 (15-16)

"The tax bill before you, ... seems on balance to be a bad piece of legislation. ... The country cannot afford economic experiments which are almost certain at some time or other to weaken confidence in the dollar, both internally and externally.... [D]eficit spending...was tried and presumably discredited in the 1930s.... Not only is a large tax reduction foolhardy, it is also likely to be futile in dealing with the most serious aspects of our very real problem of unemployment. In recent months there has been increasing recognition of the fact that unemployment is concentrated in particular groups of the population...

Monetary and fiscal measures cannot solve the problems of structural ... unemployment...

This discrimination makes our tax system commensurately more progressive..." Dan Throop Smith, former Assistant Secretary of the Treasury for Tax policy (Eisenhower), Testimony before Senate Finance Committee, October 1963

"Economics has come of age in the 1960s.... The paralyzing grip of economic myth and false fears on policy has been loosened, perhaps even broken. We at last accept in fact what was accepted in law 20 years ago in the Employment Act of 1946, namely, that the federal government has an overarching responsibility for the nation's economic stability and growth. And we have at last unleashed fiscal and monetary policy for the aggressive pursuit of those objectives.

These are profound changes. What they have wrought is not the creation of a 'new economics,' but the completion of the Keynesian revolution - 30 years after John Maynard Keynes fired the opening salvo." Walter Heller, New Dimensions of Political Economy, 1966 (1-2)

"[T]he postwar idea that taxing and spending could be used, in a precisely targeted way, to control the pace of economic growth and the level of employment. The problem with this fine-tuning is simple: lack of knowledge." Freedom's Journey, Economist 9/11/99 (insert) p19

"This generated a gradual rise in inflation, which the Vietnam war and the 1973 oil-price hike turned into a rapid one. This, combined with a political unwillingness to sacrifice domestic goals for international ones, led to the collapse of the Bretton Woods fixed rates, and the use of floating rates instead. From then on, capital controls became hard to sustain - especially given that governments' fiscal policies veered between deficits and very large deficits for more than twenty years, forcing many to borrow internationally as well as from domestic lenders." ." Freedom's Journey, Economist 9/11/99 (insert) p19

"The trouble is that fiscal policy is horribly asymetrical." Freedom's Journey, Economist 9/11/99 (insert) p20

" Monetarism achieved its moment of apogee with both intellectual and policy triumph in the late 1970s. Its intellectual triumph came as the NAIRU grew very large and the multipliers grew very small in both journals and textbooks. Its policy triumph came as both the Bank of England and the Federal Reserve declared in the late 1970s that henceforth monetary policy would be made not by targeting interest rates but by targeting quantitative measures of the aggregate money stock." De Long JEP Winter 2000

"At the beginning of the year (1981), short-term rates were higher than long-term rates, which is typical during periods of restraint…" Rukstad p81

"The Fed could either accommodate the increased government spending by abandoning its monetary targets in future years and supplying additional credit, or it could meet its targets and thereby increase interest rates as federal credit demands compete with private demands for credit." Rukstad p 81

"By the beginning of 1969, the US had already finished its experiment: was it possible to have unemployment rates of four percent or below without accelerating inflation?" De Long "America's Only Peacetime Inflation: The 1970s" p 15

"In a world organized in accordance with Keynes' specifications, there would be a constant race between the printing press and the business agents of trade unions, with the problem of unemployment largely solved if the printing press could maintain a constant lead…" Jacob Viner 1936 in De Long "America's Only Peacetime Inflation: The 1970s"

"Two other developments occurred before the convention, however, which were to have far more effect on the election outcome…

Early in march [1960], Dr. Arthur Burns…called on me… [he] expressed great concern about the way the economy was then acting…. Burn's conclusion was that unless some decisive government action were taken, and taken soon, we were heading for another economic dip which would hit its low point in October, just before the elections…

The matter was thoroughly discussed by the cabinet….[S]everal of the Administration's economic experts who attended the meeting did not share his bearish prognosis…

In supporting Burn's point of view, I must admit that I was more sensitive politically than some of the others around the cabinet table. I knew from bitter experience how, in both 1954 and 1958, slumps which hit bottom early in October contributed to substantial Republican losses in the House and Senate…" De Long "America's Only Peacetime Inflation: The 1970s" p 18

"How were economic advisors to deal with a situation in which they found the Phelps-Friedman argument - that reducing unemployment would require a period during which inflation would have to be above its natural rate - convincing, and yet in which their political superiors did not authorize such a policy." De Long "America's Only Peacetime Inflation: The 1970s" p 19

Burns had expresses skepticism about ability to fight inflation with monetary policy

Burns 1959 address to the American Economic Association " during the postwar recessions the average level of prices in wholesale and consumer markets has declined little or not at all. The advances in prices that customarily occur during periods of business expansion have therefor been cumulative…. All these appear to be symptoms of a continuation of inflationary expectations or pressures. " De Long "America's Only Peacetime Inflation: The 1970s" p21

Humphrey Hawkins Bill - in trough of recession attempt to require govt to move economy to 3 percent - bill signed in 1977 - it

· called for the reduction of federal spending to the lowest level consistent with national needs

I know there's the myth of the autonomous Fed…[short sigh] and when you go up for confirmation some senator may ask you about your friendship with the president. Appearances are going to be important, so you can call Ehrlichman to get messages to me, and he'll call you." Richard Nixon to Arthur Burns in Ehrlichman 1982) " in De Long "America's Only Peacetime Inflation: The 1970s"

"But it is difficult to see how the Federal Reserve could have acquired such freedom of action in the absence of an unpleasant object lesson like the inflation of the 1970s.

Thus the memory of the Great Depression meant that the US was highly likely to suffer an inflationary episode like the 1970s in the post-World war II period-maybe not as long, and maybe not exactly when it occurred, but nevertheless a similar episode." De Long "America's Only Peacetime Inflation: The 1970s" p 1

"At the surface level, the United States had a burst of inflation in the 1970s because no one - until Paul Volcker took office as Chairman of the Federal Reserve - in a position to make anti-inflation policy placed a sufficiently high priority on stopping inflation." …

At a somewhat deeper level, the United States had a burst of inflation in the 1970s because economic policy makers during the 1960s dealt their successors a very bad hand. … And bad luck coupled with bad cards made the lack of success at inflation control in the 1970s worse than anyone had imagined ex ante." p 6-7

"can you imagine [the plan's] chances of passage in an election year in a Republican congress if it is named for Truman not Marshall?" Harry S. Truman, October 1947 in De Long and Eichengreen "The Marshall plan… p 1 - the gist of article is that the Marshall Plan worked because it fostered the development of institutions - money was tied . - it altered the environment in which policy was made. - moved Europe away from controls

"All of the legislation in the world can't fix what's wrong with America. It is a crisis in confidence. It is a crisis that strikes at the very heart, soul, and spirit of a national will ... and it is threatening to destroy the social and political fabric of America." Jimmy Carter August, 1979

"This year, as in 1932, our country is divided, our people are out of work, and our national leaders do not lead. Roosevelt's opponent in that year was also an incumbent president, a decent and well-intentioned man who sincerely believed our government could and should not with bold action try to correct the economic ills of our nation. " Jimmy Carter in his Labor Day speech in 1976

"Especially in emerging markets, exchange rate regimes are the hemlines of macroeconomics - ideas about what looks best change all the time, at the whim of fashion." p88 "Especially in emerging markets, exchange rate regimes are the hemlines of macroeconomics - ideas about what looks best change all the time, at the whim of fashion." p88 Floating with an anchor, Economisr 1/29-00

"I have directed [Treasury] Secretary Connally to suspend temporarily the convertibility of the dollar into gold. " Richard Nixon speech August 15, 1971

"...the 'recycling of the petro-dolars' put them in a position to dictate exchange rates. Those countries that received capital inflows from OPEC greater than their current account deficits with OPEC experienced upward pressure on their currencies in the foreign exchange market, while those countries receiving capital inflows less than their current account deficits experienced downward pressure on the value of their currencies. " R. M Williams, The Politics of Boom and Bust in Twentieth-Century America 1994

“The competition for most misunderstood economic statistic is hard-fought, but there is a clear winner: the trade deficit. No other number is interpreted so differently by professional economists and the general public….Along with most economists, I believe that the attempt to reduce global trade is both impractical and unproductive. But it would be especially foolish, verging on surreal, if America were to make the mistake of turning its back on free trade because of a lack of basic economic literacy about what a trade deficit is and what it means.” Taylor (p.237) Journal of Economic Perspectives

"Money connected human in a more extensive and efficient way than any other known medium. It created more social ties, but in making them faster and more transitory, it weakened the traditional ties based on kinship and political power." Weatherford

The use of counting and numbers, of calculating and figuring, propelled a tendency toward rationalization in human thought that shows in no human culture without the use of money. Money did not make people smarter; it made them think in new ways, in numbers and their equivalencies. It made thinking far less personalized and much more abstract." Weatherford

"The decimal system, and its twin, metric measurement, not only changed the way people handled money and numbers but also transformed the way people thought. A new empiricism in thought, coupled with money's strict discipline in the use of numbers and categories [emerged]. ... the new class of intellectuals no longer sought to discover knowledge only through studying the works of ancient scholars and religious writers. They themselves could create knowledge through observation and the recording of events around them." Weatherford p 149

"It is no accident that the intellectual formulations of science, the technical changes of industry, and the economic and political domination of capitalism would grow and flourish together at the same times and the same places. "J. D. Bernal

"the war arrested and ultimately broke up this unprecedented monetary cosmopolitanism... At the close of the war the practical monetary solidarity of the world had disappeared, and the overprinting of money continued." Weatherford

“to master inflation, proper monetary discipline is essential, with [the WW’s] publicly stated targets for the growth of the money supply.” Conservative manifesto 1978

“Let there be no doubt; the XX is determined to make every reasonable effort to work toward reducing monetary growth from the levels of recent years, not just in yy, but in the years ahead.”

“The ZZ announced that it would henceforth focus on monetary control instead of interest rate control as the intermediate target of its monetary policy.”

"close, regular, predictable relationship between the quantity of money, national income, and prices..." Milton Friedman

"long after the Pope is gone, you'll remember this." Fed Public Affairs Director statement to the media on the announcement of the Fed's policy shift on October 6, 1979

"I agonized over what to do with these ...money numbers. In fact, it was very hard to determine whether we were implementing a very tight monetary policy or a rather accommodative one." Lyle Gramley, Fed governor 1982

"monetarism's powerful simplicity easily and quickly won legions of converts.... After all, orthodox Keynesian precepts, which guided the economy relatively well in the 1950s and much of the 1960s, could neither explain nor cure the complex disease of stagflation." Robert Giordano, Financial Market Perspectives, September-October 1991

"The coining of the first money in Lydia unleashed a revolution that began in commerce but spread almost simultaneously to urban design, politics, religion, and intellectual pursuits. It created a whole new way of organizing human life. After nearly five hundred years of rapid social change, all of these forces came to focus in the rise of a new type of empire centered in Rome." Weatherford p45

1. "Prosperity without war requires action on three fronts. We must create more and better jobs; we must stop the cost of living; we must protect the dollar from the attacks of international money speculators."

2. "Monetarism achieved its moment of apogee with both intellectual and policy triumph in the late 1970s. Its intellectual triumph came as the NAIRU grew very large and the multipliers grew very small in both journals and textbooks. Its policy triumph came as both the Bank of England and the Federal Reserve declared in the late 1970s that henceforth monetary policy would be made not by targeting interest rates but by targeting quantitative measures of the aggregate money stock."

1. "How were economic advisors to deal with a situation in which they found the Phelps-Friedman argument - that reducing unemployment would require a period during which inflation would have to be above its natural rate - convincing, and yet in which their political superiors did not authorize such a policy."

2. "Thatcherism' can only be avoided if the initial economic policy package simultaneously spurs the output side of the economy and elicits a swift downward revision of inflationary expectations in the financial markets...President Reagan should declare a national economic emergency soon after inauguration. He should tell the Congress and the nation that the economic, financial, budget, energy, and regulatory conditions he inherited are far worse than anyone imagined. He should request that Congress organize quickly and clear the decks for exclusive action during the next 100 days on an Emergency Economic Stabilization and Recovery Program he would soon announce."

3. "The edifice [Supply-side Economics] was delicately balanced on a set of simultaneous policy actions and a set of equations describing the effects of the policy actions on the economy."

4. "Reaganism was the rejection of traditional Republican policies of "austerity" - sometimes called castor-oil economics or deep-root-canal economics. But it was more than that. It was an assertion these policies could be rejected without also rejecting many conservative objectives or totems. "

5. "To become more prosperous, Britain must become more productive and the British people must be given more incentive."

6. "This plan is aimed at reducing the growth in government spending and taxing, reforming and eliminating regulations which are unnecessary and counterproductive, and encouraging a consistent monetary policy aimed at maintaining the value of the currency."

7. "Let's tell the truth. Mr. Reagan will raise taxes, and so will I. He won't tell you. I just did."

1. "If the amendment takes effect with the deficit still in the hundreds of billions of dollars, the Congress would be faced with the Hobson's choice of enforcing the new rule and inducing a deep recession or waiving the rule from the start, which would clearly be an inauspicious beginning for the new era."

2. "There was no magic to coordinating the economic efforts of a president and Congress with the Federal Reserve. But there was a crucial new reality. The short-term rates the Fed controlled were at about the right level. The critical interest rates were the long-term rates, the rates that mattered to businesses with large debts and to people paying mortgages. Lower long-term rates would leave businesses and people with more money to spend, causing the economy to grow. Perhaps no single overall event than a drop in long-term rates would do more to help the economy, businesses, and society as a whole. The long-term rates were also the most sensitive to the federal budget deficit. Credible evidence that the federal deficit was going to be controlled could cause long-term interest rates to drop."

3. "[h]istory showed that with such vast federal expenditures, inflation would inevitably soar at some point. The double digit inflation of the late 1970s had been induced by the budget deficits from the Vietnam War. Investors were now wary and demanding a higher long-term return because of the expectations on the federal deficit.... if the new administration removed or altered that expectation...the market expectations would change. Bond traders would have more faith that inflation would stay under control. Long term rates would drop, galvanizing demand... In addition, as inflation expectations dropped, investors would get smaller returns on bonds. As a result, they would shift their money to the stock market. The stock market would climb - another payoff."

4. "[d]efict reduction of this magnitude could be 'costless... Three events could offset the contraction from cutting the deficit. First, traders could buy and sell bonds at lower long-term rates...Second, the Federal Reserve could lower short-term interest rates...Third, increased foreign buying from more trade could provide a boost to the American economy."

5. "You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders."

6. “Roosevelt was trying to help people. Here we help the bond market, and we hurt the people who voted us in.”

7. “If we do all this and blleed all over the floor, and Greenspan doesn’t help, we’re screwed.”

9. "a three-pronged fiscal strategy: (1) a short-term stimulus package to boost economic growth and create jobs, a long-term public investment program to increase productivity and growth and create jobs, and (3) a long-term deficit reduction package composed of both spending cuts and tax increases to reduce long-term interest rates and stimulate private investment."5

"The success or failure of any country over the next thirty years hinges on growth." Hamish McRae The World in 2020 p 3

"To raise the nation's capacity to produce ... we must invest, and we must grow.... As a first step we have already provided important new tax incentives for productive investment." Kennedy's economic report to congress Jan 21, 1963

"...a cut in income taxes (which directly helps only those with earned income) will not go largely into savings instead of consumption;" Sorensen memo to President Kennedy July 12, 1962

"Productivity isn't everything, but in the long run it’s almost everything." Paul Krugman, The Age of Diminished Expectations p 9

"The general perception that the US economy is in relatively good shape, then, reflects a kind of revolution in what Americans expect of their economy - a revolution of falling expectations. Paul Krugman. The age of diminished expectations p4

“Republicans acknowledge, in a back-handed way, that this is what they would like to accomplish [with the tax cut]. They want the surplus money off the table, they say, so that it can’t be spent on government programs.” Sieb, Stockman Redux: Do tax trims cut government? WSJ 8/11/99

"I regret to say that we are in the worst economic mess since the Great Depression." Ronald Reagan New York Times Feb 6, 1981

"Can you look at the record of this administration and say, 'Well done'? Can anyone compare the state of the economy when the Carter administration took office with where you are today and say, 'Keep up the good work'? Can you look at our reduced standing in the world and say, 'Let's have four more years of this'?" Ronald Reagan, presidential campaign

"The federal government is, in general, too big, taxing too much of the wealth of Americans, doing too many unnecessary and often counterproductive things that get in the way of economic growth, to say nothing of personal liberty." "Conservatism at Century's End in Policy Review Apr/ May 1999 p 3

"'Thatcherism' can only be avoided if the initial economic policy package simultaneously spurs the output side of the economy and elicits a swift downward revision of inflationary expectations in the financial markets...

President Reagan should declare a national economic emergency soon after inauguration. He should tell the Congress and the nation that the economic, financial, budget, energy, and regulatory conditions he inherited are far worse than anyone imagined. He should request that Congress organize quickly and clear the decks for exclusive action during the next 100 days on an Emergency Economic Stabilization and Recovery Program he would soon announce." Stockman-Kemp paper "Avoiding a GOP Economic Dunkirk"

"This plan is aimed at reducing the growth in government spending and taxing, reforming and eliminating regulations which are unnecessary and counterproductive, and encouraging a consistent monetary policy aimed at maintaining the value of the currency." Ronald Reagan State of the Union Message Feb 18, 1981

"The edifice [Supply-side Economics] was delicately balanced on a set of simultaneous policy actions and a set of equations describing the effects of the policy actions on the economy." Herbert Stein in Presidential Economics p 267

"Reaganism was the rejection of traditional Republican policies of "austerity" - sometimes called castor-oil economics or deep-root-canal economics. But it was more than that. It was an assertion that these policies could be rejected without also rejecting many conservative objectives or totems. " Herbert Stein in Presidential Economics p 236

"Let's tell the truth. Mr. Reagan will raise taxes, and so will I. He won't tell you. I just did." Walter Mondale in 1984 presidential campaign

""The success or failure of any country over the next thirty years hinges on growth." Hamish McRae The World in 2020 p 3

"Of all the forces that will change the world over the next generation, demography is probably the most important" Hamish McRae The World in 2020 p 97

"Productivity isn't everything, but in the long run its almost everything." Paul Krugman, The Age of Diminished Expectations p 9

"I regret to say that we are in the worst economic mess since the Great depression." Ronald Reagan New York Times Feb 6, 1981

Trade

"Some of the most contentious issues in the debate on globalization have to do with constraints. Can nations pursue independent monetary and fiscal policies in the presence of high levels of capital mobility? Have governments lost the ability to tax internationally mobile factors of production, physical capital in particular? Do trade and investment flows undercut labor standards and social insurance programs at home?" Dani Roderik "Symposium on Globalization in Perspective: An Introduction JEP Fall 1998 p 5.

"I don't know much about the tariff. But I know this much. ... When we buy the manufactured goods abroad we get the goods and the foreigners get the money. When we buy the manufactured goods at home, we get both goods and money." Abraham Lincoln in Dani Roderik "Symposium on Globalization in Perspective: An Introduction JEP Fall 1998

"Governments cannot maintain fixed exchange rates and run independent monetary policies. They cannot liberalize their capital accounts without leaving their fiscal policies open to scrutiny by international financial mark. "compensating public goods and other benefits Dani Roderik "Symposium on Globalization in Perspective: An Introduction JEP Fall 1998 p 7

10. "If the amendment takes effect with the deficit still in the hundreds of billions of dollars, the Congress would be faced with the Hobson's choice of enforcing the new rule and inducing a deep recession or waiving the rule from the start, which would clearly be an inauspicious beginning for the new era."

11. "There was no magic to coordinating the economic efforts of a president and Congress with the Federal Reserve. But there was a crucial new reality. The short-term rates the Fed controlled were at about the right level. The critical interest rates were the long-term rates, the rates that mattered to businesses with large debts and to people paying mortgages. Lower long-term rates would leave businesses and people with more money to spend, causing the economy to grow. Perhaps no single overall event than a drop in long-term rates would do more to help the economy, businesses, and society as a whole. The long-term rates were also the most sensitive to the federal budget deficit. Credible evidence that the federal deficit was going to be controlled could cause long-term interest rates to drop."

12. "[h]istory showed that with such vast federal expenditures, inflation would inevitably soar at some point. The double digit inflation of the late 1970s had been induced by the budget deficits from the Vietnam War. Investors were now wary and demanding a higher long-term return because of the expectations on the federal deficit.... if the new administration removed or altered that expectation...the market expectations would change. Bond traders would have more faith that inflation would stay under control. Long term rates would drop, galvanizing demand... In addition, as inflation expectations dropped, investors would get smaller returns on bonds. As a result, they would shift their money to the stock market. The stock market would climb - another payoff."

13. "[d]efict reduction of this magnitude could be 'costless... Three events could offset the contraction from cutting the deficit. First, traders could buy and sell bonds at lower long-term rates...Second, the Federal Reserve could lower short-term interest rates...Third, increased foreign buying from more trade could provide a boost to the American economy."

14. "You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders."

15. “Roosevelt was trying to help people. Here we help the bond market, and we hurt the people who voted us in.”

16. “If we do all this and bleed all over the floor, and Greenspan doesn’t help, we’re screwed.”

18. "a three-pronged fiscal strategy: (1) a short-term stimulus package to boost economic growth and create jobs, a long-term public investment program to increase productivity and growth and create jobs, and (3) a long-term deficit reduction package composed of both spending cuts and tax increases to reduce long-term interest rates and stimulate private investment."5

1970s Trade

"The principle of comparative advantage is one of the crown jewels of the economics profession." p3

Abraham Lincoln - "When we buy the manufactured goods abroad, we get the goods and the foreigners get the money. When we buy the manufactured goods at home, we get both the goods and the money." p3

"But equally important is the fact that the benefits of international economic integration comes with 'strings' attached: the 'price' of free trade in goods, services, and capital is that international markets get greater say about the way national economies are managed and their wealth is distributed." p 4

"The story Williamson tells about the earlier era is sobering: national governments eventually chose to deal with the distributional consequences of globalization by tightening immigration restrictions (in the New World) and increasing import tariffs (in continental Europe). There is a sense of a backlash today as well, as illustrated for example by President Clinton's inability late in 1997 to renew his fast-track trade negotiating authority." p7

"An open capital market immediately confronts national authorities with a decision over controlling either interest rates or exchange rates." p18

"When capital can move freely across national borders, it will flee countries where it is taxed heavily to production locations where taxes are lower. … Scandinavian countries have already moved toward a 'dual' income tax, with lower taxation of income from capital than of labor earnings." Obstfeld JEP1998p19

"Two important features of the world economy since 1970 also characterized the economy in the late 19^th century. First, the earlier period was one of rapid globalization: capital and labor flowed across national frontiers in unprecedented quantities, and commodity trade boomed as transport costs dropped sharply. Second, the late 19^th century underwent an impressive convergence in living standards, at least within most of what we would now call the OECD club, but what historians call the Atlantic economy." … The new historical research shows that these forces of globalization had a significant distributional impact within participating countries. It also suggests that these distributional events helped create a globalization backlash which caused a drift towards more restrictive immigration and tariff policy prior to World War I. p51

"land-abundant New World economies became increasingly integrated with labor-abundant European economies in the late 19^th century. While the distributional impact of the this shock varied from country to country, there is broad support for the Hecksher-Ohlin prediction that European land and American labor suffered." p 66

"The literature which seeks to explain tariff responses [in Europe] to grain invasions begins with Charles Kindelberger (1951) and Ronald Rogowski (1989)." p67

"thus a more accurate narrative of globalization experience in the decades prior to World War I would read like this: A spreading technology revolution and a transportation breakthrough led first to divergence of real wages and living standards between countries. The evolution of well-functioning global markets in goods and labor eventually brought about a convergence between nations. This factor-price convergence planted, however, seeds for its own destruction since it created rising inequality in labor scarce economies (like the United States) and falling inequality in labor-abundant economies (like those around the poor European periphery). p69

New economy, future

"The United States has long enjoyed a unique position of economic supremacy. … By the early 1990s, however, almost everyone believed that the age of US supremacy was nearing its end." countries catching up - are we ready for a second American century?

New Paradigm starts showing up in mid 1990s - we have been lucky - substantial productivity growth and less inflation-prone labor market. info technology (now because of connectivity) - not know about labor market

"The upshot of the favorable news about the US economy is this: whereas in 1995 a conventional view would have put the rate of growth of US potential output at slightly more than two percent, and estimated the natural rate of unemployment at not much less than 6 percent, it now seems plausible that the rate of potential growth is around 3 and the natural rate below 5 percent." p171

looking back from 2050… "We will have gone from an economy driven by the production of tangible things to one driven by intangible ideas. They will see the forty year period from 1980-2020 as encompassing a critical shift from an Industrial Age economy to an Information Age economy, or a Knowledge economy, or what we simply call the new economy." p 5

"the more technologically interconnected and more economically interdependent we make the world, the lower are the chances for large-scale war." p 6

"Historically, the biggest constraints on growth have come mainly from three sources: political conflict rooted in a clash of interests or ideologies; social stress arising from economic disparities that produce misery amid wealth; and, finally, and increasingly in the future, ecological constraints on growth." p10

"In effect, a new kind of social bargain was proposed. People couldn't cling to old ways. old jobs, and old patterns of doing things, and society agreed to bear the burden of enabling people to continuously learn and adapt. With the spreading prosperity, generous support would go to those genuinely unable to do so." p78

"Self-correcting systems also work best when all the moving parts of the system can be seen by all. the more exposed the system, the earlier problems can be detected and the more people can suggest solutions. p 113

"Shorn of all ideological overtones, stripped down to its essence, we will need this: adaptable units, working in self-correcting systems, moving into a flexible future." p 114

"The new form of education will have much more to do with preparing young people with successful work habits for the New Economy. Young people will have to become veritable learning animals." p832

McKinley Tariff Act of 1890 - hurt farmers as terms-of-trade moved against them - their products were exported while bought manufactured goods at higher prices. -

1834 mint rate at 16-1 321.25 g silver for 23.22 grams gold for $1. If you showed up with gold or silver you would get $s. This is how the money supply increased. This works as long as supply of metal increases. A problem is that the market also sets a price through market forces - and when the two prices differ, we have one of the metals disappearing as a currency. After 1834, there were gold discoveries and the supply of gold pushed down its market price. People would never turn in silver because it was worth more as silver than as $s.

1873 - Congress passes a law indicating what coins could be minted and there were no silver coins on the list-not a big problem since silver was not currently circulating as money. But within a few years, in the aftermath of some new silver discoveries, silver was worth more as money, but it was impossible to bring in silver because of Act of 1873. The Act became known as "crime of 1873" and viewed as conspiracy of Wall Street sorts. In late 1880s, the supply of gold was maintained in the US by high agricultural products, bad foreign harvests, and foreign capital inflows to finance the railroad expansion and cattle ranching. Things changed as result of drought in 1887 - and the gold inflow stopped and was reversed. As a political move, to gain western support for the McKinley Tariff, the Sherman Silver Purchase Act was passed. It committed the Treasury to buy 4.5 million ounces of silver each month at market price redeemable in either gold or silver at the mint price. With a lower price of silver in market, no one showed up with silver to turn into currency. By early 1890s they we joined by farmers who were being hammered by declining prices. The slow down in production of gold and new countries adapting the gold standard had reduced gold supply that leads to less currency. Also, as US minted silver investors became worried about inflation and US staying on gold standard, and began to move gold out of US. By summer of 1873 the panic was on as gold flowed out, banks shut down, and unemployment rose substantially.

Cleveland blamed the panic on the minting of silver, and managed to get the Sherman Act repealed in October of 1893. It did not, and the outflow of gold continued. The Democrats were divided, and at the convention in 1896 Williams Jennings Bryan delivered an impassioned speech which included the statement:

" You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind on a cross of gold."

He would lose to republican McKinley who promptly raised tariffs - Dingley Tariff in 1897, and the closer he came to be elected the more the money supply decreased. The decline of prices ended in 1896 as new gold discoveries increased the supply of gold.

Also an interesting period in sugar politics. Eliminate cent duty on sugar when McKinley tariff of 1890 was passed, but give domestic producers a 2 cent subsidy - not to Hawaiian companies. Got hammered in 1897 after spectacular growth - and led to overthrow of government. Undone to some extent in 1894 Wilson-Gorman Act reimposed sugar tariff, but lowered manufacturing tariffs. This hammered Cuba's new sugar industry - political uprisings against Spain - 1898 Maine explodes in Havana - launch the Spanish American War and it carried McKinley to office in 1900 election when Bryan lost again. Theodore Roosevelt was vice president until assassination. Roosevelt wanted a canal, and after a revolt in Panama established an independent nation, the US and Panama agreed on a canal and by 1913 the canal was completed.

Once in office, Roosevelt launches campaign against Big Business with Sherman Act. In 1895 the Act had been used against Sugar trust, but sugar was manufacturing and not commerce so it was ignored. Now the Act was upheld , and helped him win 1904 election. He favored a stronger hand of government and the stock market turned against him helping push economy into depression in 1907.

Actually, the seeds of the depression were sown in the McKinley expansion as bank notes increased faster than gold and legal tender (US $s) so the banking system was ripe for a speculative run. England and Germany raised their interest rates in fall of 1906 and this triggered outflow of gold and higher US rates. As banks and people tried to rebuild currency holdings, they sold stock, which pushed its price downward and sales slowed. Things improved quickly, and the Republicans re-elected Howard Taft who beat William Jennings Bryan again. But he was unpopular with his constituency - he kept up heat on trusts and he did not lower tariffs. Prompted Roosevelt to re-enter in 1912 as independent - an election won by Woodrow Wilson. Two of accomplishments of Wilson were the Underwood Act and Federal reserve Acts of 1913. In the first tariffs were lowered, from an average of 26 % and in the second, the multiple bank plan emerged as the model for the Fed - a testament to the anti Wall Street felt on Main Street, USA.

The Fed was borne in crisis of 1907, but US stayed on gold standard and Fed required to keep gold as backing for notes. With outbreak of war, financial panic set in as investors attempted to turn assets into gold - sell off in stocks pushed stock prices down and forced NYSE to close from July 31, 1914 to April 1, 1915. It also caused a sharp recession as workers and farmers could not sell their 'stuff." See this in sharp drop in price of cotton. We started to produce war "stuff" for England and this brought in gold that sent up money supply and prices.

In 1916US trade with allies boomed and gold supply and money increased - increased wholesale prices

America enters war at right time - Allies were running out of gold to finance materials from US - now were financed directly by US government

1916 initiate income tax - puts most of burden for war on wealthy - all income <4K exempted - all other income at 2% except above 4210,000 the rate rose to 13% for those above $2m. 1917 excess corporate profit tax

govt. raised 1/3 of war expense by taxes - borrowed 2/3 through bonds - made it attractive to banks - put pressure on Fed to keep interest rates low - so the lenders did not lose with rising rates. - money supply increased in 1917-18 as fed purchased the bonds - had some price controls on inputs - none on outputs - raise corporate profits.

In early 1919 the economy declined, but then rose - military kept spending, higher tax revenue (bracket creep) - exports to Europe rose - rebuilding plus agriculture, and housing - 1919-1920 - M was increasing at 15+% a year - inflation - banks borrowed from Fed to finance boom - 1919 was filled with strikes - labor had kept wages down as prices rose Wilson pissed not get passage of Treaty of Versailles - workers decline began when Coolidge, Gov. of MA broke the police strike in Boston - would ride it to Harding's VP - steel workers out - twelve hour days - 7 day weeks - Oct/Nov coal miners out - shortened working hours - public believed the strikes were radical left-wing support - a Special General Intelligence division of justice department set up to watch radicals - leader was j. Edgar Hoover

In May 1920 economy plunges into a recession - result of tight monetary policy in late 1919 - gold / currency ratio was near limit

Harding winds 1920 election - bad vibes about the war and felt bad about war hysteria and suppression of civil rights, real recession in 1920 dramatic drop in prices and wages - but real wages rise and labor scared - end of strikes

big turnaround by mid 1923 - in part result of income tax cuts pushed by Andrew Mellon (3^rd richest man in US) Mellon launches a supply-side campaign - if lower taxes on rich, income will expand and this will increase revenue. Harding presidency marred by scandals - a few shoot themselves - oil reserves - Harding dies and Coolidge assumes power . Coolidge decides to push for more tax cuts

Fed began to experiment with OMO in 1922, but the Fed was basically passive - it supplied funds needed by banks. - actually invoked countercycilcal polices in slump of 1924. Harding reelected, but Democrats beat up on themselves - a BIG issue was rising influence of KKK - Dems lead by Al Smith of NY seen as victims of KKK

1924 income taxes slashed by 25% - in 1926 slashed further taxes on wealthy by 50% - gift taxes repealed, tax cuts and easy money fueled expansion 1924-26 Coolidge prosperity - boom in autos - carried steel, oil, glass, rubber… refrigerators appeared in 20s and expansion of credit to accommodate the purchase of durables. - reductions in tax rates - wealthy moved assets to stocks from tax exempt bonds - fueled stock market gains - BIG productivity gains and corporate earnings - another BIG speculative game was the rise in FLA real estate - this was when Miami burst on scene - between 1924 and 1925 Miami population increased 2/3^rd. Boom so fast that food not fast enough - prices on real estate more expensive than NYC - bankers uneasy - and bad weather hurt them - by 1925 the Fed had begun to squeeze economy - in 1926 Miami hit by hurricane - the boom was over by 1928

Marxism-Leninism- and socialism in general – embodied the basic fallacy that people do their best work in a vast collective, rather than in pursuit of their self-interest, and that government or bureaucrats can run an efficient, egalitarian economy.” Henry Grunwald, “The Year 2000,” Time March 30, 1992

We must remember what gave birth to communism in the first place: the social upheavals and new poverty brought about by the industrial revolution, troubles that preceded the immense benefits.” Henry Grunwald, “The Year 2000,” Time March 30, 1992

“we have still not solved its [ capitalism] basic contradiction. This is not, as Marx thought., economic but psychological: on the one hand capitalism requires the engine of self-interest – or greed, if you will – while on the other hand, society requires attention to the general interest – the taming of greed. Ewe are still pulled back and forth between these two poles.” Henry Grunwald, “The Year 2000,” Time March 30, 1992

Basically we like the free market only as long as the trend is up. As soon as the inevitable downturn occurs, we complain bitterly and expect the government to fix things. We want to have it both ways – the energy and dynamism of capitalism, plus stability and security. It is simply impossible to square the circle completely.” Henry Grunwald, “The Year 2000,” Time March 30, 1992

“The most successful economies in the world are, more than anything else, the expressions of a people’s spirit, will and intelligence. We will need a new sense of drive, less emphasis on ‘rights’ and more on responsibility – in short, we must create a new psychological climate.” Henry Grunwald, “The Year 2000,” Time March 30, 1992

“All of us are paying for the mistakes of the past decade. As it turned out, the 1980s were a bit like Alices’s decent into Wonderland. The border between economic reality and fantasy was blurred. To differing degrees this is true of the “Roaring Eighties” of America, the wave of “Europhoria” that swept the European Community, and the “Bubble Economy” in Japan.” Akio Morita, “Toward a New World Economic Order.” The Atlantic Monthly June 1993

“Today’s US current account deficit, unlike those during the 1980s, is a reflection of economic strength, rather than economic weakness, but it is something that over time will inevitably adjust.” Larry Summers quoted in Michael Phillips, WSJ 4/11/2000 pa28

example of the laser invented in mid 1960s – Bell Labs not see any future for it in telephone – 1966 best phone line between US and Europe 138 conversations – 1988 first fibre optic cable – 40,000 conversations – 1994 1.5 million conversations

marconi invented radio – saw it used where no wires – called wireless in British

Tend to define innovations in terms of existing technology – look at RR – seen as feeders for canals – look at St Louis vs Chicago.

Conclusion – government stay out of position of picking technology. Nathan Rosenberg, “Inventions: Their Unfathomable future.” NYT 8/7/94

“The old economy rewarded hierarchical organizations; the new economy rewards webs.”

“The microchip drives the new economy as powerfully as the internal combustion engine drove the old one.’ John Huuey, “Waking Up To The New Economy,” Fortune June 27, 1994

Joel Kotkin – world is vast network crisscrossed by labor and capital, markets and ideas, goods and services. This network makes a shambles of national borders. And the people who best negotiate the complicated web are ethnic groups dispersed around world

“The catch is that the United states can no longer afford Pax Americana. The America of Ronald Reagan, like Queen Victoria’s Britain, suffers “Imperial overstretch…“Is America in Decline.” Evan Thomas, Newsweek 2/22/88

“The central event of the 20^th century is the overthrow of matter. In technology, economics, and the politics of nations, wealth in the physical resources is steadily declining in value and significance. The powers of the mind are everywhere ascendant over the brute force of things.…. Today, the ascendant nations and corporations are masters not of land and material resources but of ideas and technologies.” Fortune 8/28/89 Review of Gilder’s book

globalization – been there before – also listened to the plus side Tge Great Illusion by Norman Angell – 1910 – interdependence reduces possibility of war

Was it the American Century - let's look what happened in 100 years. What is likely to happen again. confidence abounds based on WSJ poll 9/16/99 - we may be leader in creating a multiracial society - look at freedom - were a rarity at 1900, now it is on rise

asked highlights of 20^th century [president, athlete, accomplishment, scientific discovery, business leader, movie) - by age, gender, race, ideology - were differences - common denominator - Michael Jordan , Presidents (JFK, Roosevelt, Reagan)

Roosevelt's four freedoms - from fear and want, of belief and expression - more available today

Leninism and maoism - rose from discontent - bad war and galvanized by fascism which grew out of WWI

fundamental conflict - top down, or bottom up system 1961 Nikita Kruschev says they will bury capitalism

decline of agriculture (28% in US, 41% in Fr, 60% in Japan to less than 12% Economist 9/11/99

"Inequality diminished [in 20^th century] sharply, thanks to mass education, higher wages, progressive taxation and increasing value, particularly for the poor, of public services and job protection." p 11 Economist 9/11/99 due to education,

freedom and equality - equality under the law or equality of outcome - lose incentives in the lateter over time

net OM from southern NE in the 1990s - relied on immigrationFlynn, patricia, Ross Gittell, and Norman Sedgley, "New England as the Twenty-First CenturyApproaches: No Time for Complacency" NEER N/D 1999

communism, nationalism, and fasciism are gone - isms threatened by internet - nationalism and protetctionism

"Economic growth is a process of economic change." The road to riches, Economist 12/31/99

Free-market utopia: "For many Americans the danger of tyranny lies not in government but in employers or insurance companies or health-maintenance organizations." p109

"The Wall came down, communism collapsed, and capitalism triumphed. But that raises the bigger question: Just what kind of capitalism won? pr5 - Bernard Wysocki, Overview: Where we standTen Years later WSJ 9/27/99 began with battle between cozy capitlism and survival of the fittest - moved from 1^st to 2^nd during the decade of 90s as japan slide and Asian nations fell in 1997.

"'market failures' were the paramount economic concern of the 1960s and 1970s… [and] 'government failure' became the preoccupation of the 1980s and 1990s. Of course, communism was the greates 'government failure' of them all. And with that failure, the markets inexorably rose to take control of the 'high economic ground' on the world stage, and in the battle of ideas." Daniel Yergin and Joseph Stanislow, The Commanding Heights: The Battle Between Government and the Marketplace That is Remaking the Modern World, 1998

"The one trend that is sure to dominate the coming year, decade, and even quarter centuryis the decline of thepower of the state.." pFareed Zakaria, The future of statecraft, The world in 1999, The Economist

In particular, MP3 technology permits the compression and transmission of "near" CD-quality sound (Dabeau, 2000) music files over the Internet. MP3 was developed by the Motion Pictures Expert Group (MPEG) of the International Standards Organization (ISO). MP3's origin in itself is significant, as the development of the technology occurred externally to the music industry. Also of note is that the technology was not developed specifically for the compression of music files - this is an unintended application of MP3 (the technology was actually developed to facilitate the development of the interactive television industry; see Leyshon, 2001). First Monday

In the context of information, globalization has been used in reference to the growing ease of information flow across borders or, perhaps, without regard to borders. Cate (1998) points out that the growth of digital information both draws from and contributes to globalization: "Digital information is the ultimate example, and a significant cause, of globalization ... Information, particularly electronic information, is ubiquitous: it respects no boundaries".

In the Anglo-American legal framework, intellectual property rights generally are understood to consist in the categories of copyrights, patents, trademarks, industrial design, and trade secrets. The intellectual property rights most relevant to globalization of information issues are copyrights and patents. In this article intellectual property rights are discussed without reference to specific laws governing one or another of the categories. It will be seen, however, that frequent reference is made to copyright, as it is this area that has seen considerable activity in the domestic and international arenas. General understandings of the nature of copyright protection and a brief overview of the laws and agreements governing it are presented here.

"The IMF, the World Bank, structural adjustment programmes, General Agreement on Tariffs and Trade (GATT), are just a few of the organisations, schemes, projects which under the guise of developing the Third World, plunder it. Trade agreements and commodity price-fixing, patents and intellectual property rights, they lock them into paralytic dependency" (Asian Dub Foundation, 2000).

"Central to the neoliberal vision is a strict split between the 'public sphere' (the state) and the 'private sphere' (the market), with the latter privileged and the former strictly cabined. This is an ideological claim analogous to a situation in which someone says, It's not the money, it's the principle.' However, more often than not, it is the money" (Aoki, 1998b).

Aoki (1998b) suggests that agreements such as TRIPs raise questions about international political economy, and about who in fact benefits from free trade in intellectual property:

"In particular, as between the developed nations of the North and the less developed countries of the South, increasing numbers of scholars have been questioning whether the flow of benefits of international intellectual property protection, which are part of the whole 'free trade' package, may be skewed to the advantage of the economies, cultures, and nations of the North. To the extent that the countries of the North have developed bifurcated economies with large wealth gaps between rich and poor, the concerns of the nations of the South fold into pockets of Third World-like immiseration within the First World."

Aoki's view of GATT and the TRIPs component is that the choice it put to developing nations is this:

"If you want to export your goods, agricultural and otherwise, you must protect the intellectual properties of other nations. Thus, the cotton that passes out of Malaysia at one dollar per pound returns as a t-shirt bearing the trademarked image of Mickey Mouse or Bart Simpson selling for twenty-five dollars. Under the ideological banner of 'free trade,' the intellectual property regimes of the developed nations were given expanded reach - in other words, rules that purportedly were meant to encourage and protect creative expression and scientific innovation were now put in place, giving owners the legal means to reach extraterritorially into Third World countries to prevent unauthorized use."

“The Berlin Wall came down, after all, not because it was demolished with tanks or armies from the west but because television and radio coupled with the diffusion of computer technology robbed communist governments of their information monopolies and thus their ability to hold the allegiance of their peoples” Litan & Niskanen, Going Digital 1998 Brookings & Cato

“…just as the steam engine, used first to pump out coal mines, evolved into ways of generating electricity, so the new communications technologies will increasingly provide completely new services. In time too, the virtual elimination of the costs of communicating will transform many aspects of life: where people work, how they are entertained, how they learn, how they shop.” “Let the digital age bloom”, Economist 2/25/1995 p 13

Schwartz, Leyden, & Hyatt, The Long Boom: A Vision of Coming Prosperity, Perseus Books 1999

“These megatrends-technological change, economic innovation, global integration, and spreading democratization – have picked up momentum since the early 1980s…” p 2

technology – biotechnology, fuel cell, nanotechnology

“they [ people in 2050] will see the forty year period from 1980 to 2020 as encompassing a critical shift from an Industrial Age economy to an Information Age economy, or a Knowledge Economy, or what we will simply call the New Economy.” P 5

“The more technologically interconnected and more economically interdependent we make the world, the lower are chances for large-scale war.” P 6

“The Long Boom is based on the idea that the growth potential of the world is increasing rapidly because of several major drivers of change, most notably globalization and technological innovation. …Historically the biggest constraints on growth have come from three sources: political conflict rooted in a clash of interests or ideologies; social stress arising from economic disparities that produce misery amid wealth; and finally, and increasingly in the future, ecological constraints on growth.” P 11

the great enabler – computer and telecommunications technology

inconsistency in liberal and conservative – conservative wants little govt but it can tell you not to have an abortion – liberal want big govt but want privacy..

“In effect, a new kind of social bargain was proposed. People couldn’t cling to old ways, old jobs, and old patterns of doing things, an=d society agreed to bear the burden of enabling people to continuously learn and adapt. With the spreading prosperity, generous support would go to those genuinely unable to do so.” P 78

“The new form of education will have much more to do with preparing young people with successful work habits for the New Economy. Young people will have to become veritable learning animals. They will need to become adaptable, innovative people who can continuously move confidently within an economic environment that is constantly in flux.” P83-84

“The nation-states are now getting their just deserts. Over the centuries, national identities have been foisted on the local subcultures and regions of Europe. In a forced march toward greater centralization, the core cities of Europe literally conquered the surrounding countryside…Now, as they respond to global forces that are prompting a reorganization of the world, Europeans are both returning to their local identities and redefining themselves as a larger culture, a European one.” P 97

“on an even deeper level, the cultural split between northa nd south is rooted in the Protestant and Catholic divide that bedevilked Europe for much of its history. Since the time of max Weber’s classic nineteeth century analysis of religion’s impact on economic development, The Protestant Ethic and the Spirit of Capitalism, many have studied the phenomenon. The most recent is Davis Landes, a Harvard historian and author of The Wealth and Poverty of Nations, who clearly sees the differences between people within the two religious cultures as playing a big part in their lopsided developmental success. The Catholic culture of South America…tended to reinforce more hierarchical social organizations that the individualistic Protestant culture of North America. This difference in culture has had a subtle but pervasive influence on the mental habits nurtured in a more rigid, hierarchical environment are not the ones best suited to the more innovative, freewheeling environment of the New Economy.” P 100

“The West had grown increasingly powerful through the invention and development of capitalism and industrialization – two increadibly dynamic forces that overpowered any competing systems… That was Act I.. The twentieth century brought Act II. The twentieth century saw a great global struggle between two competing sets of ideas…. It took the entire century to work out the debate between these two camps, but by the 1990s, the winning combination was clear. Free markets and democracy overwhelmingly won out.” P 110-11

“Elders may be best suited to lead in static societies.” P 122

“Environmental impact = Population * Affluence * Technology

Naisitt, High Tech, High Touch Broadway Books, 1999

“Over time, America has transformed from a technologically comfortable place into a technologically Intoxicated Zone.” P 2

“ The Intoxicated Zone is spiritually empty, dissatisfying and dangerous, and impossible to climb out of unless we recognize we’re in it.” P 3

symptoms of high tech intoxification

we favor the quick fix, from religion to nutrition, we fear and worship technology, we blur the distinction between real and fake, we accept violence as normal, we love technology as a toy, and we live our lives distanced and distracted.

Kevin Kelly, New Rules for the New Economy Penguin 1998

“But while the fast-forward technological revolution gets all the headlines these days, something much larger is slowly turning beneath it. ..an emerging new economic order. The geography of wealth is being reshaped by our tools. We live in a new economy created by shrinking computers and expanding communications.” P 1

“This new economy has three distinguishing characteristics: It is global. It favors intangible things – ideas, information, relationships. And it is intensely interlinked. These three attributes produce a new type of marketplace and society, one that is rooted in ubiquitous electronic networks.” P 2

talks about models of success – GM in the 1950s – Microsoft in the 1990s

Brad DeLong – history of US can be seen as parade of heroic industries.

“The new economy is about communication, deep an wide. All the transformations suggested in this book stem from the fundamental way we are revolutionizing communications. … because its cultural, technological, and conceptual impacts reverberate at the root of our lives.” P 5

“As tremendous as the influence of financial inventions have been, the influence of network inventions will be as great, or greater.” P 6

“Our industrial age has required each customer or company

“the dynamic of our society, and particularly our new economy, will increasingly obey the logic of networks. Understanding how networks work will be the key to understanding how the economy works.” P 9-10

networks contain nodes and connections – size of nodes collapsing and quality of connections is exploding.”

Chips are becoming cheap and small enough to fit in all objects – jelly beans – single purpose –

“When we permit any object to transmit a small amount of data and to receive input from its neighborhood, we change an inert object into an animated node.” P 12

examples of where info technology changes things

mass customization

embrace the swarm

increasing returns – self reinforcing success – math of networks – p 23 “In the industrial economy success was self-limiting; it obeyed the law of decreasing returns. In the network economy, success is self-reinforcing; it obeys the law of increasing returns.” P 25 network externalities – lead to monopolies?

“according to Brian Arthur, “If a product or a company or a technology – one of many competing in the market – gets ahead by chance or clever strategy, increasing returns can magnify this advantage, and the product or company can go on to lock in the market.” P 29 Ex. QWERTY, Apple, VHS vs betamax,

Metcalf’s LAW – VALUE OF THE NETWORK = N*N. Microsoft is good example of law, Fed Ex, fax machines, internet, Microsoft,

“The compounded success of Microsoft, FedEx, fax machines, and the internet all hinge on the prime law of networks: Value explodes exponentially with membership, and this heightened value acts like gravity drawing in yet more mebers.” P 31

linear growth – approximation if it is slow

“In the network economy, the more plentiful things become, the more valuable they become.”

This notion directly contradicts two of the most fundamental axioms we inherited from theindustrial age.

First hoary axiom: Value comes from scarcity. Take the icons of wealth from the industrial age – diamonds, gold, oil, and college degrees. These were deemed precious because they were scarce.

Second hoary axiom: When things are made plentiful, they become devalued…” p 40

“Whenever the expense of churning out another copy becomes trivial (and this is happening in more than software), the value of standards and the network booms.” P 41 p 41 – example of ATMs and Citibank, example of Apple vs PC

Moores’s law – computer chips power doubling in 18 months – costs cut in half in 18 months.

Gilder’s law – bandwidth will triple every 12 months for ten years

“Technology creates an opportunity for a demand, and then fills it.” P 55

Krugman says “you can reduce the entire idea of the network economy down to the observation that ‘in the Network Economy, supply curves slope down instead of up and demand curves slope up instead of down.” P 55-56

The accelerating expansion of knowledge and technology simultaneously pushes up the demand curve while pushing down the supply curve. One very potent force shifts both curves.” P 56

“The task, then, is to create new things to send down the slide – in short, to invent items and services faster than they are commoditized.” P 57

“The only factor becoming scarce in a world of abundance is human attention.” P 59

a wealth of information creates a poverty of attention

triumph of the commons – get out the product and let people improve on it

“The three great currents of the network economy: vast globalization, steady dematerialization into knowledge, and deep ubiquitous networking… Their encroachment is steady, and self-reinforcing. Their combined effect can be rendered simply: The net wins.” P 79

creative destruction

disintermediation – downsizing – lose middle management

Come up with two important terms and a one paragraph summary

“productivity, however, is exactly the wrong thing to care about in the new economy.” P 147

Importance of religion

Litan & Niskanen, Going Digital 1998 Brookings & Cato p v

“we are now at the dawn of the third industrial revolution, in this case one based on the dramatic reduction of the cost of storing, retrieving, processing, and transmitting information made possible by digital technology. The potential effect of this technology is a virtual revolution in the way we work, how we shop, where we live, our health care, our entertainment, our cultural attitudes, and even our politics.” Litan & Niskanen, Going Digital 1998 Brookings & Cato p v

“The Berlin Wall came down, after all, not because it was demolished with tanks or armies from the west but because television and radio coupled with the diffusion of computer technology robbed communist governments of their information monopolies and thus their ability to hold the allegiance of their peoples” .” Litan & Niskanen, Going Digital 1998 Brookings & Cato p 2

devises two scenarios – digital optimists and digital pessimists

optimists

Workplace
Marketplace – reduce number of agents
Home – less specialized functions
Culture – revenge of the nerds “This nascent ideology, fuzzy and difficult to define, suggests a blend of some of the best values rescued from the tired old dogmas – the humanism of liberalism, the economic opportunity of conservatism, an a passion for freedom. Some of their common values are clear: they tend to be libertarian, materialistic, tolerant, rational, technologically adept, disconnected from conventional political organizations…” from Katz “The birth of a digital nation” Wired, April 1997ip16
Politics – Orwell of…
- “First, it is important to avoid embracing too quickly and form of technological determinism. Three technologies associated with the rise of the West in the sixteenth century, for example, were gunpowder, the magnetic compass, and the printing press. But the Chinese had developed each of these technologies a century or more earlier before withdrawing from most foreign contacts.
- Second, the differential availability of technology has had a powerful effect on who governs, but a much smaller effect on the nature of government. Inventions such as the stirrup, which in retrospect seems so simple, led to the rise and fall of major civilizations without much changing the relations between the average person and the state.
- Third, some technologies nonetheless see to have had general effects on the form of government. Gunpowder contributed to the to the rise of the nation-state because it reduced the effectiveness of point defense relative to area defense. The nuclear weapon, in contrast, has had a decentralizing effect, because it gives small nations the potential for a devastating attack on much larger nations. The printing press, radio, and television have clearly reduced the power of all types of imperial ideology.” P 18
“The essential feature of government is a monopoly of the legal right of coercion in some defined space.” P 18

skeptics and pessimists

skeptics – focus attention on digital commerce and its growth potential

security – personal security and information systems vulnerability to hacking
privacy – Privacy Directive of EU – may prohibit transactions with “lax” countries
taxation – limited ability to tax internet
intellectual property protection – watermarking techniques
customer acceptance

pessimists

controversial content – pornography Communications Decency Act 1996 – successfully challenged in 1997 – censurship ?
information overload – creates stress – e-mail overload..- contributes to fragmentation of society
decline of the city – improvements in communication and transportation reduce value of proximity – hard for cities – telecommuting
digitally induced unemployment –
electronic redlining – digital divide –
productivity paradox – economic data are misleading,

what are the key pieces of the revolution – digitization of communication – telephone and television

what does digital mean? Why is it important?

1984 George Orwell – saw Big Brother and power of the state –

two drivers – demographics and technology

tough to forecast the future uses of technology – IBM, steam engine

issues

diffusion process

productivity puzzle

Comment

What does “Info Rules” mean?

· Rules to understand what is happening

· Information rules the earthCo

1: Introduction / Overview

“Thesis of this book is that durable economic principles can guide you in today’s frenetic business environment.” P1

“the underlying economic forces that determine success and failure.” P2

“The information economy is about both information and associated technology.” P 9— we do not have more, we have infrastructure to use it better

“The dependence of information technology on systems means that firms must focus not only on their competitors but also on their collaborators. Forming alliances, cultivating partners, and ensuring compatibility (or lack of compatibility) are critical business decisions.” P 10

“As a result [of network externalities }‘ growth is a strategic imperitive, not just to achieve the usual production side economices of scale but to achieve the demand side ecdonomies of scale generated by network effects.” P 14

Introduce concepts and strategies

· Interconnection

· Complements

· Experience goods — consumers must experience it to value it — discuss issue of experience goods — how branding and reputation help solve the experience good problem

· Economics of attention — “a wealth of information creates a poverty of attention” p 6

“Thre Internet, a hybrid between a broadcast medium and a point-to-point medium, offers exciting new potentials for matching up customers and suppliers.” P7

· Ex: Hotmail offers “free” e-mail, grocery stores offer discounts to card holders

· Lock-in and switching costs

· Network externalities (network effect) — growth is imperitive

“Anything that can be digitized — encoded as a stream of bits — is information” p3

“Consumers differ greatly in how they value particular information goods.” P 3

“The cost structure of an information supplier is rather unusual... [linformation is costly

to produce but cheap to reproduce.” P 3

· High FC, low MC = implications for pricing (cost-based or value based) — rather latter which leads to differential pricing

2-3: Strategies for differential pricing — made possible by the net

2: ways to sell information good to identifiable markets

· to find your natural allies, you must determine how a proposed standard will affect competition. standards alter competition in several predictable ways

· standards tend to benefit consumers and suppliers of complements at the expense of incumbents and sellers of substitutes

· formal standard setting is now being used to develop more standards than ever before

· find your natural allies and negotiate to gain their support for your technology

· before you engage in a standards battle, try to negotiate a truce and form an alliance

· try to retain limited control over your technology even when establishing an open standard

· strength in the standards game is determined by ownership of seven critical assets

· competition policy is intended to ensure a fair fight, not to punish winners or protect losers

· mergers and acquisitions involving direct competitors are subject to careful review

· don’t be afraid of cooperating with other companies to set standards and develop new technologies, so long as your efforts are designed to bring benefits to consumers

· if you are fortunate to gain a leading share of the market, be sure to conduct an audit of your practices

· don’t expect govt. regulation in telecommunications to diminish any time soon.

Introduction to Economics	Macro intro
Data Analysis	Macro Measure
Opportunity Cost and S&D	Pre 1930s
Investing and elasticity	1930s-1940s
Demographics	1950s - 1960s
Individual choice	1970s international
Financial data / firms	1970s Money
Production & Cost & Choice	1980s
Inputs	1990s
Imperfect competition
Visible Hand Budget deficits	China
Antitrust & Regulation	Election History
Externalities	National security
Inequality	Technology
Bush/Election	Bush/election macro
National Security	Jokes
	My examples/stories/articles RI