Fall of the American Empire

By Paul Krugman

CreditDoug Mills/The New York Times

The U.S. government is, as a matter of policy, literally ripping children from the arms of their parents and putting them in fenced enclosures (which officials insist aren’t cages, oh no). The U.S. president is demanding that law enforcement stop investigating his associates and go after his political enemies instead. He has been insulting democratic allies while praising murderous dictators. And a global trade war seems increasingly likely.

What do these stories have in common? Obviously they’re all tied to the character of the man occupying the White House, surely the worst human being ever to hold his position. But there’s also a larger context, and it’s not just about Donald Trump. What we’re witnessing is a systematic rejection of longstanding American values — the values that actually made America great.

America has long been a powerful nation. In particular, we emerged from World War II with a level of both economic and military dominance not seen since the heyday of ancient Rome. But our role in the world was always about more than money and guns. It was also about ideals: America stood for something larger than itself — for freedom, human rights and the rule of law as universal principles.

Of course, we often fell short of those ideals. But the ideals were real, and mattered. Many nations have pursued racist policies; but when the Swedish economist Gunnar Myrdal wrote his 1944 book about our “Negro problem,” he called it “An American Dilemma,” because he viewed us as a nation whose civilization had a “flavor of enlightenment” and whose citizens were aware at some level that our treatment of blacks was at odds with our principles.
And his belief that there was a core of decency — maybe even goodness — to America was eventually vindicated by the rise and success, incomplete as it was, of the civil rights movement.

But what does American goodness — all too often honored in the breach, but still real — have to do with American power, let alone world trade? The answer is that for 70 years, American goodness and American greatness went hand in hand. Our ideals, and the fact that other countries knew we held those ideals, made us a different kind of great power, one that inspired trust.

Think about it. By the end of World War II, we and our British allies had in effect conquered a large part of the world. We could have become permanent occupiers, and/or installed subservient puppet governments, the way the Soviet Union did in Eastern Europe. And yes, we did do that in some developing countries; our history with, say, Iran is not at all pretty.

But what we mainly did instead was help defeated enemies get back on their feet, establishing democratic regimes that shared our core values and became allies in protecting those values.
The Pax Americana was a sort of empire; certainly America was for a long time very much first among equals. But it was by historical standards a remarkably benign empire, held together by soft power and respect rather than force. (There are actually some parallels with the ancient Pax Romana, but that’s another story.)

And while you might be tempted to view international trade deals, which Trump says have turned us into a “piggy bank that everyone else is robbing,” as a completely separate story, they are anything but. Trade agreements were meant to (and did) make America richer, but they were also, from the beginning, about more than dollars and cents.

In fact, the modern world trading system was largely the brainchild not of economists or business interests, but of Cordell Hull, F.D.R.’s long-serving secretary of state, who believed that “prosperous trade among nations” was an essential element in building an “enduring peace.” So you want to think of the postwar creation of the General Agreement on Tariffs and Trade as part of the same strategy that more or less simultaneously gave rise to the Marshall Plan and the creation of NATO.

So all the things happening now are of a piece. Committing atrocities at the border, attacking the domestic rule of law, insulting democratic leaders while praising thugs, and breaking up trade agreements are all about ending American exceptionalism, turning our back on the ideals that made us different from other powerful nations.

And rejecting our ideals won’t make us stronger; it will make us weaker. We were the leader of the free world, a moral as well as financial and military force. But we’re throwing all that away.

What’s more, it won’t even serve our self-interest. America isn’t nearly as dominant a power as it was 70 years ago; Trump is delusional if he thinks that other countries will back down in the face of his threats. And if we are heading for a full-blown trade war, which seems increasingly likely, both he and those who voted for him will be shocked at how it goes: Some industries will gain, but millions of workers will be displaced.

So Trump isn’t making America great again; he’s trashing the things that made us great, turning us into just another bully — one whose bullying will be far less effective than he imagines.

The Social Benefits of Fossil Fuels Far Outweigh the Costs

Inexpensive power enables technological marvels, and even global warming has positive effects.

By Joseph L. Bast and Peter Ferrara

     An offshore oil platform in Huntington Beach, Calif. Photo: lucy nicholson/Reuters 

As several cities continue their suit against oil companies, The People of the State of California v. BP, Judge William Alsup has boiled the case down to its pivotal question. In March he ordered the legal counsels of both parties to help him weigh “the large benefits that have flowed from the use of fossil fuels” against the possibility that such fuels may be causing global warming.

We sent the judge, and posted online, a 24-page document that answers his question. The benefits of oil, coal and gas are rarely acknowledged by environmental activists, who seek to regulate and tax these fuel sources out of existence. But an honest accounting shows that fossil fuels produce enormous social value that far outweighs their costs. 
First, fossil fuels are lifting billions of people out of poverty, and in turn improving health. “The most fundamental attribute of modern society is simply this,” writes historian Vaclav Smil in his 2003 book on energy: “Ours is a high energy civilization based largely on combustion of fossil fuels.”

Fossil fuels, and coal in particular, provided the energy that powered the Industrial Revolution.

Today, coal plants still produce most of the electricity that powers high-tech manufacturing equipment and charges mobile computing devices.

The alternative energy sources environmental activists favor are generally more expensive.

Energy economists Thomas Stacey and George Taylor calculate that wind power costs nearly three times as much as existing coal generation and 2.3 times as much as combined-cycle gas.

There is a negative correlation between energy prices and economic activity. A 2014 survey of economic literature by Roger Bezdek calculates that a 10% increase in U.S. electricity prices would eliminate approximately 1.3% of gross domestic product.

Cheap energy from fossil fuels also improves human well-being by powering labor-saving and life-protecting technologies, such as air-conditioning, modern medicine, and cars and trucks.

Environmental activists often claim that prosperity speeds the depletion of resources and destruction of nature, but the opposite is true. As Ronald Bailey writes in “The End of Doom”: “It is in rich democratic capitalist countries that the air and water are becoming cleaner, forests are expanding, food is abundant, education is universal, and women’s rights respected.”

Fossil fuels have increased the quantity of food humans produce and improved the reliability of the food supply. The availability of cheap energy revolutionized agriculture throughout the world, making it possible for an ever-smaller proportion of the labor force to raise food sufficient to feed a growing global population without devastating nature or polluting air or water.

Fossil-fuel emissions create additional benefits, contributing to the greening of the Earth. A 2017 study published in Nature magazine found that the global mass of land plants grew 31% during the 20th century. African deserts are blooming thanks to fossil fuels.

Finally, if fossil fuels are responsible for a significant part of the warming recorded during the second half of the 20th century, then they should also be credited with reducing deaths due to cold weather. Medical researchers William Richard Keatinge and Gavin Donaldson assessed this effect in a 2004 study. “Since heat-related deaths are generally much fewer than cold-related deaths, the overall effect of global warming on health can be expected to be a beneficial one.”

They estimate the predicted temperature rise in Britain over the next 50 years will reduce cold-related deaths by 10 times the number of increased heat-related deaths. Other research shows climate change has exerted only a minimal influence on recent trends in vector-borne diseases such as malaria, dengue fever and diseases spread by ticks.

Altogether, fossil fuels have produced huge benefits for mankind, many of which continue today. But advocates of alternative energy sources usually manage to omit or diminish many of these benefits when calculating fossil fuels’ “social cost.”

Thankfully, President Trump and congressional Republicans understand that the costs of fossil fuels must be weighed against their substantial benefits. They have decided wisely not to carry on the “war on fossil fuels” waged by the Obama administration, congressional Democrats and their Golden State allies.

Messrs. Bast and Ferrara are senior fellows at the Heartland Institute.

Thinking About the Balkans

By George Friedman


The week’s news from the Balkans has been ominous. Serbia is making demands on Kosovo and its supporter, Albania. Serbia continues to see Kosovo as a threat to its national interest. The Russians have gone out of their way to express their support not only for the Serbs but also for the Serbs living in Bosnia. Last month, Russian President Vladimir Putin hosted Serbia’s president in Moscow. Meanwhile, the U.S. friendship with Albania is deep, making the Serbian claim on Kosovo even more dangerous. Far less ominous but no less important, Turkish President Recep Tayyip Erdogan held a campaign rally last month in Sarajevo, the predominantly Muslim capital of Bosnia and home to a large number of Turkish expat voters, to win their support and to show voters at home that Turkish influence was spreading into the Balkans.

The Balkans are always caught between great powers. It’s also not unusual for the Balkans to seem to be on the edge of war. They usually avoid it. When they fail, the result is catastrophic. Eventually, that catastrophe will come, but rather than hazard a guess as to when that will be, the important thing is to understand the dynamics that led to this uncertainty – beginning with geography.

I think of the Balkans as having two parts, a north and a south. The north is generally a plain divided between Croatia, Serbia and Bosnia. Croatia, a predominantly Catholic country with historical ties to Hungary and current ties to Germany and the European Union, is entirely on this plain. Serbia, an Orthodox Christian country, is mostly on the plain. So is the northern part of Bosnia, an area dominated by Serbs. The southern part of the Balkans – southern Bosnia, Montenegro, southeast Serbia, Macedonia and Albania – is mostly mountainous. Southern Bosnia and Albania are primarily Muslim. Macedonia is a mix of Orthodox Christians and Muslim Albanians.

If this sounds complicated, that’s because it is. Nationalism in the region is so intense because it is so fragile. The nation-states are ethnically heterogeneous and have long-held grievances against each other. The various states fear their neighbors, so they use these ethnic divisions to weaken them, which begets more fear. Apart from this, the Serbians and Croatians speak similar, mutually understandable languages. But one is part of the Catholic world and the other part of the Orthodox world. One is oriented toward Germany, the other toward Russia. And they fought one another savagely during World War II – Croatia alongside Germany, Serbia with the Allies.

This explains how the Balkans is, but it doesn’t explain how it got this way. It must be understood that these countries and ethnic groups are the result of millennia of conflict between Europe and the Middle East, a conflict predating Christianity and Islam but one that continued after their emergence. Alexander forged an empire as far as Afghanistan. The Romans passed through the Balkans on their way to creating a land route to Egypt, the source of grain for Rome. The Christian Crusaders passed through here, as did the Turkish Ottomans when they were going north to take Budapest and nearly Vienna. And the Russians, always seeking to contain the European Peninsula and the Ottomans, were instrumental (along with the Greeks) in spreading Orthodoxy. Catholicism, Orthodoxy and Islam engaged in a three-way struggle after the 15th century, all making alliances with each other to defeat the one left out. Theology did not drive the great powers. It did define the small ones.

The Balkans were a highway to empire and a buffer against rising empires. In themselves they had little of value, but they were indispensable for anyone seeking to dominate the Mediterranean or project force from north or south. The rugged hills and valleys created refuge for different groups that survived invasions from either direction because the effort of rooting them out wasn’t worth it. The result was villages surrounded by mountains that preserved their identity even in the face of great power. But great powers did implant themselves on the plains and on some of the less remote valleys. The Catholic and Orthodox churches and the mosques speak to that.

But even within regions that share a religion, the reality is more complex. Over in the next village, the past perseveres, and the anger with it. In the Balkans, nothing is forgotten, and nothing is forgiven. It is an essential and abysmal reality. Sometimes the fights between the villages draw in other villages, draw in capitals, draw in great powers. Sometimes the great powers competing with each other draw in the Balkan capitals and the villages. Either way, there are countless local feuds and endless powers seeking hegemony over a continent, and together they open the door to all the malice in the region. Today, the Russians whisper to the Serbs, the Americans whisper to the Albanians, the Germans whisper to the Croatians, and each whispers back. The villages hear rumors of great goings-on, and it starts.

The Balkans are not the only place in the world where this goes on, but there is no other place that is so important to so many great powers. Therefore, it is not surprising that there are always rumors and that the rumors are frequently of war. And it is not surprising that the rumors are usually wrong. It just assures that we will be surprised the time they turn out to be right. It’s only a matter of time. And this is a region that expects war, making it all the more likely.

The Other Yield Curve Investors Should Watch as Trouble Mounts

The Treasury yield curve is in focus. Here’s the other curve investors should keep an eye on

By Richard Barley

Gap between spread on short-dated and long-dated U.S. corporate bonds over Treasurys

Note: Based on one-to-three year and 10-year-plus corporate bond indexes

Source: ICE BofAML index via FactSet

Escalating trade tensions have helped push the U.S. Treasury yield curve to its flattest in more than a decade. This flattening is watched closely by investors as an indicator of economic trouble ahead. But another curve deserves attention too—and it is getting steeper.

That is the corporate-bond spread curve, which measures how much extra compensation investors are demanding to take credit risk at different time horizons. The U.S. curve has steepened, as spreads versus Treasurys have widened more on long-maturity bonds than they have on short-maturity bonds. 
Investors now get 1.7 percentage points more yield than Treasurys for corporate debt maturing in 10 years or more, versus 0.68 point for one-to-three-year debt, according to ICE BofAML indexes. Three months ago, the gap was roughly one-fifth tighter.

The message this sends is that while investors have become more uncertain about the longer-term outlook, they are relaxed about the near term. The longer a corporate bond’s maturity, the more credit risk it bears, since the underlying issuer’s business or balance sheet can face more challenges over time. In good times, that risk seems distant; when investors start to focus on it again, it is a sign of a changing environment.

Gap between two- and 10-year U.S. Treasury yields

Source: FactSet

Some think ultraloose global monetary policy has distorted the Treasury curve, potentially generating a false signal. So another indicator for investors to watch is valuable. For now, the credit curve only seems likely to get steeper, in particular because companies have issued a lot of risky long-dated debt. The size of the U.S. triple-B-rated 10-year-plus index has surged to $878 billion, from $235 billion 10 years ago.

Size of U.S. triple-B 10-year-plus corporate bond index

Source: ICE BofAML index via FactSet

The danger point is a combination of wider credit spreads and a flatter credit curve, which would signal deeper concerns about company balance sheets. The good news is this isn’t something corporate-bond investors are betting on—yet.