Finance

China’s AIIB Recasts Development Finance — and U.S. Influence

Apr 16, 2015
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china

         
China’s success in securing 57 founding members for its new regional lending institution, the Asian Infrastructure Investment Bank (AIIB), signals the real limits of U.S. influence in the region in the post-Cold War era. As of the March 31 deadline for initial applications to join the AIIB, among major industrial powers only U.S. ally Japan, so far, has spurned Beijing’s plan.

Britain, Germany, France, Italy, Australia and South Korea are among the dozens of countries that have signaled their intention to be founding members of the new bank. China’s coup in economic diplomacy comes as negotiations for the U.S.-backed Trans-Pacific Partnership, or TPP, once again appear stalled, with little prospect for a consensus in coming months.

China’s plans call for setting the AIIB’s initial authorized capital at $100 billion, with China providing up to 50% of that amount. Subscribed capital is set at $50 billion. It is still too early to say if China’s new lending institution might supplant the International Monetary Fund (IMF) and World Bank as a major source of financing for infrastructure projects, analysts say.

The outcome will depend partly on the ground rules, or “articles of association,” for the AIIB Charter.  

What is certain is that the AIIB as envisaged so far dovetails with China’s own geopolitical and commercial interests in expanding its economic reach and trade networks in Southeast Asia, South Asia and Central Asia.

Japan Holds Out

Japan has so far hedged its bets, refraining from joining, but saying it is awaiting a reply from China to questions it has raised over how the AIIB will be run. A decision to not join in the long run could put a dent in Prime Minister Shinzo Abe’s effort to boost exports of major Japanese infrastructure services, products and technology. Japanese media have cited officials saying that Tokyo is still considering whether to sign on. But Japan lacks the ability to defy the U.S. in setting its own policy on such issues, says Kazuo Yukawa, an expert on contemporary China and professor at Asia University in Tokyo.

The AIIB is part of a grand scheme rolled out by President Xi Jinping beginning in 2014 for developing a modern “Silk Road Economic Belt” and 21st century Maritime Silk Road to finance construction of a network of highways, railways and other infrastructure linking China to Central and South Asia, the Middle East and Europe. At the annual APEC (Asia-Pacific Economic Cooperation free trade association) summit in Beijing in November, Chinese President Xi announced that China would contribute the entire $40 billion in its new Silk Road Fund to improve trade and transport links in Asia.

The AIIB is motivated by multiple factors, one is geopolitical and one is purely economic Twitter , because once this bank exists, combined with the Silk Road Fund, it will begin to finance a lot of infrastructure, particularly railway infrastructure, in Central Asia, Western Asia and South Asia and even in the Middle East,” says Pieter P. Bottelier, a former senior World Bank official. “If that works, it will enable the Chinese to export excess capacity of large industry, such as the state-owned railway manufacturing industry.”

While it is clearly in Beijing’s commercial interest, the plan also is presented as a way to bridge shortages of infrastructure financing across the region, ideally, enabling countries that lag behind to close their development gap. Given that strong selling point, experts say U.S. objections to the plan rang hollow and reinforced Chinese convictions that Washington is seeking to “contain” China.

“The probable explanation would be that U.S. did not want China to have such a very powerful instrument for foreign policy such as AIIB. Staying out and recommending allies to stay out — Japan, South Korea, Australia and European countries — in China’s eyes, that confirmed that [the U.S.] wants to limit the rise of China,” says Bottelier, who is now a senior professor of China studies at the School of Advanced International Studies at Johns Hopkins University in Baltimore.

Failed U.S. Strategy

The consensus in the field of international finance and Asian diplomacy is that the U.S. strategy toward AIIB so far has failed. “I think China has played this quite ably and the U.S. played it about as badly as it possibly could,” says one former senior official of a multinational development bank, who declined to be named. Franklin Allen, a Wharton professor of finance agrees. “America just looks so silly because the U.S. asked other countries not to go in, but now all those countries except Japan are going in. It has been a very successful Chinese move,” Allen says. Allen is also a professor at Imperial College in London and head of its Brevan Howard Centre.
“America just looks so silly because the U.S. asked other countries not to go in but now all those countries except Japan are going in.” 
–Franklin Allen
China has been seeking for years to gain a bigger role in existing institutions such as the International Monetary Fund, the World Bank and the Asian Development Bank (ADB). China has only a 4.2% stake in the World Bank while the U.S. has a 15.8% stake and Japan has a 6.8% stake. The U.S. and Japan have 15.6% and 15.7% stakes, respectively, in the ADB, while China’s is just 6.5%.

Customarily, a Japanese official chairs the ADB — Japan’s central bank governor, Haruhiko Kuroda, was president of the ADB before returning to Tokyo, when he was succeeded by a finance ministry official, Takehiko Nakao. “It is kind of strange that China is so underrepresented at the IMF and World Bank,” Allen says. “It is not surprising that China is doing this.”

Since the U.S. has so far failed to win approval by Congress for IMF reforms, it was in no position to oppose the AIIB, says the former senior official of a multinational development bank. “U.S. government officials could have just asked the question, ‘What is China’s vision for the new bank and how would it be different from the ADB and World Bank?’ and then sat back and seen how things developed. But they attacked it instead, lobbied others not to join and, having failed to stop the Brits from joining, committed the original sin of whining to the world about their failure. It’s embarrassing.”

“This is a huge mistake that the U.S. made and it cannot be corrected,” adds Bottelier. “Even if the U.S. applies for membership now, I think the damage has already been done. I do not understand it at all. Whoever recommended that President Obama do what he did should be fired. I think it was one of biggest foreign policy blunders that U.S. has made in years.”

In opting to back the AIIB, Britain and other major Western nations were not joining a “gold rush” but were acting on the premise that the American approach was mistaken, Bottelier adds. “Europeans want to do more business with China and they do not have security concerns about China,” says Allen. “I think that they realized that China is not a threat to them at all, so they are better off to join.
 
In fact, they would like to balance the Russians with the Chinese, so they are quite willing to do this.”

Another of Xi’s aims is to undermine President Barack Obama’s “pivot to Asia” and the push for the dozen-nation TPP, an Asia-Pacific rim trade zone that so far excludes China.

Awkwardly for the U.S., almost all of the countries participating in the TPP talks plan to join the AIIB, which is lacking the “high hurdles” laid out by the U.S. as a condition for joining the pan-Pacific trade bloc.

Apart from pushing ahead with its own trade pact, the Free Trade Area of the Asia Pacific, Beijing is tapping its $3.89 trillion in foreign exchange reserves to set up multinational bodies like the AIIB, the BRICS Bank and a bank for the Central Asian-oriented Shanghai Cooperation Organization Bank, while still seeking to increase its influence at the ADB and the World Bank. In July, the BRICS group, which also includes Brazil, Russia, India and South Africa, agreed to set up a bank to be based in Shanghai by 2016.

Questioning the need for yet another multilateral lender, Japan and the U.S. have raised concerns over whether the AIIB would have a transparent governance structure and adequate standards for project selection, preparations, procurement, and environmental impact and resettlement. After years of working to reform and improve standards at the World Bank and other lenders, the worry is that AIIB might undercut them for the sake of commercial or political expedience.
“This is a huge mistake that the U.S. made and it cannot be corrected.” 
–Pieter P. Bottelier
China Forgoes Veto Power

To assuage such concerns, China offered to forego veto power at the AIIB, in a move that helped win over major European countries, according to a March 23 report by The Asian Wall Street Journal. That would be a change from IMF practice, where the U.S. holds the right to nix big decisions despite holding less than 20% of voting shares, a structure that has long raised complaints.

“My understanding is that the Chinese have agreed that they will not have similar clauses in the charter of the AIIB, which is being drawn up,” Bottelier says. “By giving up veto power, China is teaching the U.S. a lesson on multilateralism.”

The AIIB is bound to give strong voting rights to Asia, says Rajiv Biswas, Singapore-based chief Asia Pacific economist at IHS Economics. “China will have a big role as they are putting up half of the money and they are going to need reasonable voting rights. They will not want a situation where the U.S. and Europe will hold most of votes. But we do not know. A lot of discussion has to take place about how to distribute the voting rights. So far, it is not clear what the rules of governance will be.”

One reason many European countries joined the AIIB from the outset is to have a say in how it is structured and governed. “If they wait until later on, it may be too late to change the structure. Now is the time to join, before it is established, if you want to have influence,” Biswas says.

A team in Beijing, led by AIIB Secretary General Jin Liqun, a veteran of the Chinese central bank, China’s sovereign investment fund, the China Investment Corp., the World Bank and ADB, with help from several Chinese and American retired World Bank staffers, is drafting Articles of Association that will have to be approved by the AIIB’s founding members before the Bank can formally open for business, says Bottelier. “All these concerns are expressed without any knowledge of what the final charter of this bank will look like,” he says. “So the criticism is premature. Once we know the charter, it will be time to express our opinions.

“I don’t think we know yet on what terms the newly established Silk Road Fund will make available funds for infrastructure financing outside China. It could be tied loans; it could also be untied loans and/or grants,” Bottelier adds. “The AIIB has not yet been formally established.”

Politics and governance aside, the need for infrastructure investment and financing is massive not only in Asia, but also other parts of the developing world. The Asian Development Bank estimated its region alone faces an annual financing shortfall of $800 billion. McKinsey & Co. estimates the global infrastructure investment requirement through 2030 at $57 trillion to $67 trillion. “The reality is Asia needs a lot of money for infrastructure development and the ADB does not have enough money to provide that kind of funding,” Biswas says. “Asia needs trillions of dollars over the next 10 years. The AIIB is only $100 billion, but it helps.”

The ADB has adopted a neutral attitude toward the AIIB plan. ADB President Takehiko Nakao said in a statement after a March 24 meeting with Chinese Premier Li Keqiang, “When the Asian Infrastructure Investment Bank (AIIB) is formally established, adhering to international best practices in procurement and environmental and social safeguard standards on its projects and programs, ADB will be happy to consider appropriate ways of cooperation.”

On March 24, Obama’s administration, seeing that all America’s allies except Japan are applying to be founding members of the AIIB, proposed that the AIIB work in partnership with the World Bank and ADB. “The U.S. would welcome a new multilateral institution that strengthens the international financial architecture,” said Nathan Sheets, the U.S. Treasury’s undersecretary of international affairs. “Co-financing projects with existing institutions like the World Bank or the Asian Development Bank will help ensure that high quality, time-tested standards are maintained.”

Said the former senior official of a multinational development bank: “I had also heard that the U.S. was encouraging the ADB and AIIB to co-finance projects in the near term until AIIB has some staff and experience. That’s a great idea and I hope it happens. I do not know how Japan’s [Ministry of Finance] feels about it, but I would guess Nakao is open to it.”

Environmental and governance issues actually are hindering financing for infrastructure development in developing countries, “so to a certain degree what China is saying is true, that there is a big need to provide infrastructure investment in the developing countries,” the official notes.
“The reality is Asia needs a lot of money for infrastructure development and the ADB does not have enough money to provide that kind of funding.”–Rajiv Biswas
Environmental Work-around?

But U.S. officials worry that China may provide money to some countries with dictatorships or may ignore environmental issues and lend the money, said a China expert who declined to be named.

“Initially, there was concern because people thought it will be mainly an organization controlled by China, with many developing countries as members.”

Now, however, it looks like a lot of European countries will be members as well. So the standards will be set according to the agreement of all these countries, says Biswas. “The chances are high that the standards will be set high.” Much will become clear in the next several months as the organization negotiates over voting rights, governance and lending standards.

Toshiya Tsugami, a China expert and managing director of Tsugami Workshop Co., a consulting company, says that if China tries to use AIIB in tandem with the Silk Road Fund to pursue Beijing’s “One Belt and One Road” investment strategy, it could lead to conflicts of interest.

China has been clear about its other motives: opening up new markets for domestic industries troubled by excessive production capacity; growing the outbound investment of its state enterprises, and diversifying the use of huge foreign currency reserves.

China has serious excess capacity problems in heavy equipment manufacturing (including train and locomotive manufacturing) and in construction, Bottelier points out, so the motivation for setting up the AIIB may well be partly related to that. “Wouldn’t you try to do something like that if you had China’s excess capacity problem and nearly $4 trillion in forex reserves that earn almost nothing?” he asks.

But he expects that despite the obvious self-interest, contracts for AIIB loans will likely be based on international competitive bidding, as is the case for the ADB and the World Bank.

“Otherwise, the 57 other founding shareholder countries would not agree to its articles,” Bottelier says.

Still, China is maneuvering from a position of strength, having already set up the $40 billion Silk Road Fund, which is financed and completely controlled by Beijing.

“China is a big player in providing development finance for other Asian countries and that may mean that those countries are using the money to buy Chinese railways, or using Chinese engineering companies to build the railways,” Biswas says. “China wants to play a greater leadership role in the Asia Pacific region and in emerging markets around the world. In Asia, China is a big lender and that will increase its influence in the region.”


Wall Street's Best Minds

Europe Needs to Keep Greece in Euro Zone

Fiscal toughness will create bigger problems for Europe if it leads to Greek exit from unión.

By Marc Chandler

April 22, 2015

 
There is an element that links the terrible human tragedy in the Mediterranean Sea and the ongoing Greek crisis. It is Europe’s overemphasis on moral hazard.

Moral hazard is the idea that people will act irresponsibly if they do not have to bear the consequences. No doubt, the concept offers valuable insight, up to a point. The problem lies with its excessive reliance.
 
The European Council will hold an extraordinary meeting on Thursday following what appears to be among the most deadly accident in the Mediterranean. Illegal human trafficking has risen in recent years as the political instability in Northern Africa and the Middle East has increased. Unsafe, overcrowded vessels have resulted in thousands of deaths and rising. An estimated 3,500 people died in passage last year though an estimated 219k were successful.

Due to Italy’s proximity and the initial destination of choice, it has taken the lead. However, its Mare Nostrum Operation (October 2013) was expensive (estimated cost 9.5 mln euro a month) and was criticized for offering a near taxi service for refugees. An overcrowded boat, often with no captain, would set sail and then call for help. Italy’s navy would help ensure the safety of the refugees.

However, many European officials argued that the rescues were encouraging the refugees. So they replaced Mare Nostrum with Operation Triton. Minimize rescue efforts in the Mediterranean to discourage such immigration. Estimates suggest Operation Triton costs a third of Mare Nostrum. Don’t make it so easy to cross the Mediterranean by making it more dangerous. Reduce the number of coast guard ships. That will teach them not to expect European countries to save them from the consequences of their own decisions.

In contrast, the U.S. has moved in the opposite direction. It is not that the U.S. immigration policy is not without its flaws and challenges. However, the U.S. has increased its patrol of the U.S.-Mexican borders and has made it much easier for refugees to call for help. Last year the number of Mexicans dying trying to cross into the U.S. fell to 15-year lows (307 in fiscal year 2014 after 445 in FY2013).

This week’s Mediterranean tragedy that has taken the lives of 700-950 people is spurring European officials to rethink their policy. Teaching the lessons of moral hazard is recognized as an inadequate response. Not only will the policy be reformed, but the costs have to be shared. Italy and Malta and Greece cannot bear the financial burdens alone.

The time to teach the refugees that the human traffickers are dangerous is not when they are in the middle of the Mediterranean. The time to teach that playing with matches is dangerous is not while their house is on fire.

The same general point applies to the official creditors stance toward Greece. Greece is guilty purely by being a debtor. After all, in German and Dutch, the word for guilt and debt is the same (schuld). If an ounce of forbearance is shown to Greece, it is feared, profligate behavior will be encouraged. Trying to teach Greece a lesson is taking precedence over facilitating an economic recovery and rehabilitation. It could wreck the larger [European] monetary union.

Understandably, Europe does not want its monetary union to be forged with blood, but it needs to demonstrate its resolve to keep the union together. A Greek exit, intentional or accidental (whatever that really means) would settle the issue for ever more, with serious financial and political repercussions. Moreover, a Greece outside of EMU and the EU would likely create further challenges for Europe, including exacerbating its immigration challenge.

Perhaps the largest deficit in Europe is not about money but in its vision. It cannot see yet that moral hazard is not the end all and be all. It cannot be the sole guiding principle without disastrous outcomes. Greater union is part of the solution to both European migration and Greek challenges. There is little to be achieved in either case with stressing the moral hazards.
With a 25% contraction in the economy and a threefold increase in unemployment, the Greek ship is sinking. Now is not the time to insist on swimming lessons.


Chandler is global head of markets strategy for Brown Brothers Harriman.

Oil slump may deepen as US shale fights Opec to a standstill

Continental's Harold Hamm says US shale industry has 'only begun to scratch the surface' of vast and cheap reserves, driving growth for years to come

By Ambrose Evans-Pritchard, in Houston

8:59PM BST 22 Apr 2015
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55-gallon oil barrels stacked up outside a Chevron Gas station in Santa Barbara, California
Scotland's oil industry can expect potential ruin unless taxes are cut drastically Photo: Alam6y
 
 
The US shale industry has failed to crack as expected. North Sea oil drillers and high-cost producers off the coast of Africa are in dire straits, but America's "flexi-frackers" remain largely unruffled.

One starts to glimpse the extraordinary possibility that the US oil industry could be the last one standing in a long and bitter price war for global market share, or may at least emerge as an energy superpower with greater political staying-power than Opec.
 
It is 10 months since the global crude market buckled, turning into a full-blown rout in November when Saudi Arabia abandoned its role as the oil world's "Federal Reserve" and opted instead to drive out competitors.
 
If the purpose was to choke the US "tight oil" industry before it becomes an existential threat - and to choke solar power in the process - it risks going badly awry, though perhaps they had no choice.

 "There was a strong expectation that the US system would crash. It hasn't," said Atul Arya, from IHS.
 
"The freight train of North American tight oil has just kept on coming. This is a classic price discovery exercise," said Rex Tillerson, head of Exxon Mobil, the big brother of the Western oil industry.
 
Mr Tillerson said shale producers are more agile than critics expected, which means that the price war will go on. "This is going to last for a while," he said, warning that any rallies are likely to prove false dawns.



The US "rig count" - suddenly the most-watched indicator in global energy - has fallen from 1,608 in October to 747 last week. Yet output has to continued to rise, stabilizing only over the past five weeks.

Mr Tillerson said this is more or less what happened in the sister market for US shale gas. In 2009, some 1,200 rigs produced 5.5bn cubic feet (bcf) of gas per day at a market price near $8.
Today the price is just $2.50. Nobody would have believed back then that the industry would continue boosting supply to 7.3 bcf, and be able to do so with just 280 rigs.



"Will we see the same phenomenon in five years in tight oil? I don't know, but this is a very resilient industry. I think people will be surprised,” Mr Tillerson said, speaking at the IHS CERAWeek forum in Houston.

"We've really only begun to scratch the surface. Shale can keep growing by 500,000 to 700,000 b/d easily," said Harold Hamm, founder of Continental Resources. His company has cut costs by 20pc to 25pc over the past four months.

US shale will "roll over" to some degree as producers exhaust their one-year hedges and face the full shock of lower prices. But it is hazardous to bet too heavily on this assumption.

IHS said an astonishing thing is happening as frackers keep discovering cleverer ways to extract oil, and switch tactically to better wells. Costs may plummet by 45pc this year, and by 60pc to 70pc before the end of 2016. "Break-even prices are going down across the board," said the group's Raoul LeBlanc.

Shale bosses have been lining up at this year's "Energy Davos" to proclaim the fracking Gospel. "We have just drilled an 18,000 ft well in 16 days in the Permian Basis. Last year it took 30 days," said Scott Sheffield, head of Pioneer Natural Resources.




"We've cut spud-to-spud time to 19 days," said Hess Corporation's John Hess, referring to the turnaround time between drilling. This is half the level in 2012. "We've driven down drilling costs by 50pc, and we can see another 30pc ahead," he said.

IHS said shale is so competitive that it may "take off" again early next year after troughing in the fourth quarter, adding 500,000 b/d in 2016. "It could crowd out other parts of the world. In the long run the US could get a bigger share of the pie," said Mr LeBlanc.

Scotland's oil industry can expect a smaller share and potential ruin, unless taxes are cut drastically, blowing apart the Conservatives' fiscal plans. "We're going to see massive restructuring. The North Sea is a very high cost basin," said BP's Bob Dudley.

Mr Dudley is resigned to a long drought for oil prices as shale refuses to yield, with Iran poised to add a further 500,000 b/d in short order if the nuclear deal goes through.

The International Monetary Fund listed a hierarchy of losers in a report last week. The North Sea is deemed the most vulnerable but Brazil, Australia, Gabon, Nigeria and Colombia, among others, are all less competitive than the US.



Few of the oil barons in Houston believe market chatter about a V-shaped rally ahead. "Prices are not going to snap back. People are in denial," said Prince Nawaf Al-Sabah, head of Kuwait's explorer, KUFPEC.

US oil inventories have risen to a record 480m barrels. The Chinese have filled their strategic petroleum reserves. The "Li Keqiang index" of Chinese GDP - rail freight, electricity use and bank loans - implies an industrial recession in the world's marginal consumer of oil.

The Chinese have also taken advantage of the price slump to cut fuel subisidies and have raised the fuel consumption tax three times in two months (by 50pc in total). This is a pattern replicated across much of the emerging world. Recovery will run smack into a new headwind.

"There is a lot of whistling past the graveyard," said Stephen Chazen, head of Occidental Petroleum. "We're preparing for $60 oil and perhaps less, and we can cover all dividends and costs in this range."
Mr Chazen is sitting on a colossal find in the Permian Basin in West Texas. "We paid $3.8bn and thought we were getting 1bn barrels. People said we paid too much. Well, we got 7bn to 8bn barrels," he said.



There is a dawning realisation in the energy industry that US shale output might double yet again before the end of this decade, even if prices never come close to $100. This would demolish the assumptions behind a long string of projects in the ultra-deep waters of the oceans, often below layers of salt and blind to seismic imaging.

The cost of production for the Gulf's Opec core is far lower than anything shale can offer, but what matters for them is the "fiscal" cost needed to balance their budgets and sustain rentier regimes sitting on social and political powder kegs.

Mr Hess said global oil producers may indeed face a deficit of $100bn a year to cover dividends and investment, but Opec faces a $500bn deficit to cover social costs and military spending.

The risk for the Saudis is that the fight against US shale turns into a destructive stalemate, eroding its foreign reserves and inflicting so much damage on Iraq, Algeria and Libya that its own political neighbourhood spins further out of control.

It is lashing out incoherently. The disastrous attack on Yemen's Houthi rebels has allowed Al-Qaeda to free its prisoners and take the country's fifth biggest city. France's Total has had to declare force majeure at its operations and evacuate 800 staff, cutting off revenues that fund 30pc of Yemen's budget.

"It is turning into a Sunni-Shia war and risks destabilizing the whole region," said Patrick Pouyanne, Total's chief. The Saudis risk sectarian "blow-back" into their own Eastern Province, where a restive Shia minority is sitting on the Kingdom's oil reserves.

Caution is in order. The paradox of today's oil markets is that global spare capacity is down to half its historical average. The Saudis have their foot to the floor, boosting output by 660,000 b/d over the past month to 10.3m.

PIRA Energy estimates that Saudi spare capacity is falling to 1.7m b/d, a wafer-thin buffer for the world. The market is primed for a sudden spike in prices if anything goes wrong. It is more than ever at the mercy of geopolitical events.

One thing is for sure. If and when prices rebound, US shale is ready to sweep in with lightning speed to snatch yet more market share. Opec has met its match.

What’s Wrong With the Golden Goose?

‘Secular stagnation’ isn’t to blame for lousy U.S. growth rates. Obama’s higher taxes and regulatory assault are.

By Phil Gramm

April 20, 2015 8:17 p.m. ET

   Photo: Getty Images

Since the Obama recovery began in the second quarter of 2009, public and private projections of economic growth have consistently overestimated actual performance. Six years later, projections of prosperity being just around the corner have given way to a debate over whether the U.S. has fallen into “secular stagnation,” a fancy phrase for the chronic low growth seen in much of Europe.

This is just another in a long line of excuses. America’s historic ability to outperform Europe is well documented; we call it American exceptionalism. It has always been based on the fact that the U.S has had better, more market-driven economic policies and our economy therefore worked better. But, as the U.S. economy is Europeanized through higher taxes and greater regulatory burdens, American exceptionalism is fading away, taking economic growth with it.

How bad is the Obama recovery? Compared with the average postwar recovery, the economy in the past six years has created 12.1 million fewer jobs and $6,175 less income on average for every man, woman and child in the country. Had this recovery been as strong as previous postwar recoveries, some 1.6 million more Americans would have been lifted out of poverty and middle-income families would have a stunning $11,629 more annual income. At the present rate of growth in per capita GDP, it will take another 31 years for this recovery to match the per capita income growth already achieved at this point in previous postwar recoveries.

When the recession ended, the Federal Reserve projected future real GDP growth would average between 3.8% and 5% in 2011-14. Based on America’s past economic resilience, these projections were well within the norm for a postwar recovery. Even though the economy never came close to those projections in 2011-13, the Fed continued to predict a strong recovery, projecting a 2014 growth rate in excess of 4%. Yet the economy underperformed for the sixth year in a row, growing at only 2.4%.

Implicit in these projections and in the headlines of most economic news stories—which to this day blame cold winters, wet springs, strikes, hiccups and blips for America’s failed recovery—is the belief that there has been no fundamental change in the U.S. economy. Underlying this belief is the assumption that either the economic policies of the Obama administration are not fundamentally different from the policies America has followed in the postwar period or that economic policy doesn’t really matter.

And yet we know that the Obama program represents the most dramatic change in U.S. economic policy in over three-quarters of a century. We also know from the experience of our individual states and the historic performance of other nations that policy choices have profound effects on economic outcomes.

The literature on economic development shows that U.S. states and nations tend to prosper when tax rates are low, regulatory burden is restrained by the rule of law, government debt is limited, labor markets are flexible and capital markets are dominated by private decision making. While many other factors are important, economists generally agree on these fundamental conditions.

As measured by virtually every economic policy known historically to promote growth, the structure of the U.S. economy is less conducive to growth today than it was when Mr. Obama became president in 2009.

Marginal tax rates on ordinary income are up 24%, a burden that falls directly on small businesses. Tax rates on capital gains and dividends are up 59%, and the estate-tax rate is up 14%. While tax reform has languished in the U.S., other nations have cut corporate tax rates. The U.S. now has the highest corporate rate in the world and the most punitive treatment of foreign earnings.

Meanwhile, federal debt held by the public has doubled, so a return of interest rates to their postwar norms, roughly 5% on a five-year Treasury note, will send the cost of servicing the debt up by $439 billion, almost doubling the current deficit.

Large banks, under aggressive interpretation of the 2010 Dodd-Frank financial law, are regulated as if they were public utilities. Federal bureaucrats are embedded in their executive offices like political officers in the old Soviet Union. Across the financial sector the rule of law is in tatters as tens of billions of dollars are extorted from large banks in legal settlements; insurance companies and money managers are subject to regulations set by international bodies; and the Consumer Financial Protection Bureau, formed in 2011, faces few checks, balances or restraints.

With ObamaCare the government now effectively controls the health-care market—one seventh of the economy. The administration’s anti-carbon policies hamstring the energy market, distort investment and lower efficiency. Despite the extraordinary bounty that has flowed to America from an unfettered Internet, Mr. Obama has dictated that the Web be regulated as a 1930s monopoly, bringing the cold dead hand of government down on what was once called the “new economy.”

During Mr. Obama’s presidency, the number of Americans receiving food stamps has risen by two-thirds and the number of people drawing disability insurance is up more than 20%. Not surprisingly, labor-force participation has plummeted. Crony capitalism and artificially low interest rates have distorted the capital markets, misallocating capital, overpricing assets and underpricing debt.

Despite the largest fiscal stimulus program in history and the most expansive monetary policy in more than 150 years, the U.S. economy is underperforming today because we have bad economic policies. America succeeded in the Reagan and post-Reagan era because of good economic policies. Economic policies have consequences.

With better economic policies America was like the fabled farmer with the goose that laid golden eggs. He kept the pond clean and full, he erected a nice coop, threw out corn for the goose and every day the goose laid a golden egg. Mr. Obama has drained the pond, burned down the coop and let the dogs loose to chase the goose around the barnyard. Now that the goose has stopped laying golden eggs, the administration’s apologists—arguing that we are now in “secular stagnation”—add insult to injury by suggesting that something is wrong with the goose.


Mr. Gramm, a former Republican senator from Texas, is a visiting scholar at the American Enterprise Institute.

Editorial

Spain’s Ominous Gag Law

By THE EDITORIAL BOARD

APRIL 22, 2015

 
The law on public security — dubbed the “ley mordaza” or “gag law” — would define public protest by actual persons in front of Parliament and other government buildings as a “disturbance of public safety” punishable by a fine of 30,000 euros. People who join in spontaneous protests near utilities, transportation hubs, nuclear power plants or similar facilities would risk a jaw-dropping fine of €600,000. The “unauthorized use” of images of law enforcement authorities or police — presumably aimed at photojournalists or ordinary citizens with cameras taking pictures of cops or soldiers — would also draw a €30,000 fine, making it hard to document abuses.
 
The law was introduced in 2013 by the government of Prime Minister Mariano Rajoy, whose conservative party enjoys a majority in both houses of Parliament. The lower house approved the law in December, and, despite pleas from rights groups and the United Nations, the Senate approved it last month.
 
The law’s main purpose, it appears, is to help the ruling party maintain its hold on power by discouraging the anti-austerity protests that have snowballed into widespread support for the populist Podemos party. Podemos looks set to make major gains in elections this year.
 
The European Commission should act swiftly to condemn the new law. Maina Kiai, the special rapporteur at the United Nations on the rights to freedom of peaceful assembly, has urged Spanish lawmakers to reject the measure, arguing: “The rights to peaceful protest and to collectively express an opinion are fundamental to the existence of a free and democratic society.” Spain’s new gag law disturbingly harkens back to the dark days of the Franco regime.

It has no place in a democratic nation, where Spaniards, as citizens of the European Union, have more than a virtual right to peaceful, collective protest.