Looking on the Bright Side

By John Mauldin



We haven’t had a lot of good news lately. Or, more precisely, we haven’t seen a lot of good news lately, though it does exist. We don’t see it because both regular media and social media usually focus on the bad.

 
That’s not entirely wrong. The survival imperative makes humans watch for threats, and sometimes threats are real. I write about them often, most recently in my Decade of Living Dangerously forecast (see Part 1 and Part 2).

Yet good things are happening, too, and will keep happening as we move through the 2020s. Occasionally I like to note them, and that’s what we will do today.
 
I often say I’m short-term bearish and long-term bullish, but I’m not short-term bearish on everything. Positive events are occurring right now, all over the world. Lives are being saved, living standards are rising, children are learning. Good and bad can happen concurrently, sometimes in the same place. It’s not either/or.
 
Looking on the bright side also helps us discern the future. Things that work are usually things that will sell. When someone solves an important problem, it might be an investment opportunity.
 
So, let’s review some good news.
 
But first, at one point I had a connection to Bridgewater and Ray Dalio, but that email seems to have stopped working. I want to invite Ray to speak at my conference and be part of a documentary series on how we address the problems he’s highlighted. If someone from Bridgewater (I know some of you read my letter) or elsewhere could connect us, please contact my staff. I don’t want to be a bother…

Disappearing Stuff
 
We’ll start with the man who literally wrote the book on optimism, Matt Ridley.

He explained in The Rational Optimist how history shows the world getting constantly better even as bad things happen. This shouldn’t surprise us. It’s actually quite normal.
 
In a Spectator column last month, Matt zeroed in on a common fallacy. Some people think all our technology and progress simply generate more “stuff” that harms the environment and eventually us, too. Certainly, some of our stuff is harmful. But the broader idea—that we consume too much—is simply wrong. We are consuming less

Here’s Ridley.
 
In 2011 Chris Goodall, an investor in electric vehicles, published research showing that the UK was now using not just relatively less ‘stuff’ every year, but absolutely less. Events have since vindicated his thesis. The quantity of all resources consumed per person in Britain (domestic extraction of biomass, metals, minerals and fossil fuels, plus imports minus exports) fell by a third between 2000 and 2017, from 12.5 tonnes to 8.5 tonnes. That’s a faster decline than the increase in the number of people, so it means fewer resources consumed overall.
 
If this doesn’t seem to make sense, then think about your own home. Mobile phones have the computing power of room-sized computers of the 1970s. I use mine instead of a camera, radio, torch, compass, map, calendar, watch, CD player, newspaper and pack of cards. LED light bulbs consume about a quarter as much electricity as incandescent bulbs for the same light. Modern buildings generally contain less steel and more of it is recycled. Offices are not yet paperless, but they use much less paper.
Even in cases when the use of stuff is not falling, it is rising more slowly than expected. For instance, experts in the 1970s forecast how much water the world would consume in the year 2000. In fact, the total usage that year was half as much as predicted. Not because there were fewer humans, but because human inventiveness allowed more efficient irrigation for agriculture, the biggest user of water.
 
Until recently, most economists assumed that these improvements were almost always in vain, because of rebound effects: if you cut the cost of something, people would just use more of it. Make lights less energy-hungry and people leave them on for longer. This is known as the Jevons paradox, after the 19th-century economist William Stanley Jevons, who first described it. But Andrew McAfee argues that the Jevons paradox doesn’t hold up. Suppose you switch from incandescent to LED bulbs in your house and save about three-quarters of your electricity bill for lighting. You might leave more lights on for longer, but surely not four times as long.

Efficiencies in agriculture mean the world is now approaching ‘peak farmland’—despite the growing number of people and their demand for more and better food, the productivity of agriculture is rising so fast that human needs can be supplied by a shrinking amount of land. In 2012, Jesse Ausubel of Rockefeller University and his colleagues argued that, thanks to modern technology, we use 65 per cent less land to produce a given quantity of food compared with 50 years ago. By 2050, it’s estimated that an area the size of India will have been released from the plough and the cow.
 
I’ve actually had a number of conversations personally with good friend and brilliant scientist Jesse Ausubel (mentioned above) about this. The late, great Andy Marshall of the Pentagon’s Net Assessment Office invited us both to his Naval War College gatherings where we brainstormed possible future scenarios. Great times. Jesse and I still meet occasionally when I’m in New York.
 
Jesse wrote a very important report that I highlighted a few years ago (you can read it in our archives). He explains how things are getting better by almost every measurable statistic. We are using less water to grow the same amount of food. “Water withdrawals” for agricultural purposes have been flat since 1975 while production of corn and soybeans has grown 300%, wheat 60%, and potatoes 25%. The chart below shows that we are producing about five times the amount of corn per acre vs. 70 years ago. We are literally feeding a good portion of the world, and using less land to do so.
 
Interestingly, the use of fertilizer skyrocketed from 1940 to about 1970 and then plateaued and is actually beginning to fall. So we’re producing far more with less fertilizer.
 

Source: Jesse Ausubel


It’s not just corn. You can see the same in potatoes or any other crop. Jesse argues that the world is at “peak farmland,” and will be able to feed a growing world population using current acreage or less.
 
Forests and woodlands have expanded in the past 50 years, and are still doing so. It is hard for us to imagine that around 1900 Connecticut had almost no forest. Logging, farming, livestock, and other human activities had decimated the forests. Yet today you can fly over Connecticut and all over New England and see large, lush, forested areas. One reason is that humans are using 70% less wood for fuel. Wood used for paper is about the same, but comes from far more efficiently managed forests.
 
In fact, we have seen consumption of many basic commodities peak and begin to fall over the last 10–20 years.
 

Source: Jesse Ausubel


Air quality is improving all over the US and Europe, and actually most of the developed world and much of the developing world. In the US, despite dramatic population and GDP growth in the past 50 years, sulfur emissions dropped 50%.

That is absolutely stunning when you think about it.
 
The impact isn’t just on land. Here in the US, dolphins now inhabit the once-polluted Potomac River for the first time since the 1880s. The urbanization we sometimes decry (with good reasons) has a bright side. Concentrating most people in small areas reduces population density elsewhere, giving wildlife space to flourish.
 
Of course we have environmental challenges. But we’re learning to reduce our impact and share the planet with other creatures. I should note that, despite general optimism, Jesse Ausubel is extremely concerned for oceans and fish populations. As an example, Cape Cod’s total cod population today is a fraction of where it was two centuries ago. The pollution in the ocean is simply disgusting in many places. There are frankly some cities in Asia where I do not want to eat locally caught fish.

The concerns about mercury and tuna aren’t imaginary.
 
We have plenty of room to do better… but we’re doing a lot.

Saved Lives
 
You can find a treasure trove of positivity at Future Crunch’s Good News page.

They collect short snippets with links to the original sources. You can spend days clicking through to fascinating info. It’s really good therapy if you’re discouraged about the world. I look forward to getting their email every week or so.
 
Many of the stories are about medical breakthroughs. The number of diseases we are learning to control, cure, or even eliminate is staggering.
  • In the UK, most people diagnosed with late-stage melanoma 10 years ago would die within months. Only one in 20 lived five years. Now the five-year survival rate is 52%, or 10 times higher than it was a decade ago, thanks to new treatments.
  • The US Food & Drug Administration last year approved a new cystic fibrosis drug combination that shows amazing results. It doesn’t just relieve symptoms but attacks the disease’s genetic root. The Washington Post reports, “Patients who were unsure about whether they should bother attending college because they had always known they would die young are now being told they should think about planning for retirement.” (I am personally quite familiar with this drug as one of my biotech investments owns a significant chunk of it. With 2020 hindsight (pardon the pun), I wish I had bought a great deal more.)
  • In the US we think of pneumonia as an older-people condition, but worldwide it is a major child killer. As recently as the 1990s, pneumonia killed more than two million children a year. That number has since dropped by almost two-thirds, thanks to better treatments as well as wider vaccination against the pathogens that cause it. The death rates are still far too high, but science is saving millions of young lives.
  • The terrifying Ebola virus is on the run. The disease that once killed thousands of Africans and threatened to spread quickly through airports around the world is becoming treatable. A new triple-antibody cocktail developed by US scientists reduces the mortality rate from 70% to as low as 6% when administered early enough.
  • The number of malaria cases in India dropped 50% from 2017 to 2018, and mortality decreased among the smaller number of people who were infected. A lot of it comes from simple mosquito nets reaching people who never had them. Treatments improved as well.
  • The American Cancer Society just reported the largest-ever one-year drop in the US cancer death rate, driven mainly by lower lung cancer mortality. Newer drugs, better surgical techniques, and better diagnosis are all helping.
 
I am personally following a private company (Bexion Pharmaceuticals) which is now in phase 2 trials for what looks like a “silver bullet” against all types of tumors. They are now focusing on brain tumors, pancreatic and recently colorectal cancer.
I truly believe we will see cancer become a treatable nuisance by 2030. (Disclosure: I have an investment in Bexion. I now think the greater risk to my investment isn’t whether the drug works, as the evidence is pretty strong that it does, but that other therapies may be better, faster, and less expensive.)
I could list dozens of similar stories. Many more breakthroughs are coming, too, some even more impressive. They will help you even if yours isn’t one of the lives saved. People and their brains are the most important natural resource. If not stopped by disease, they become workers, have families, and occasionally do things to change the world.
 
And that’s before the impact of new therapies on aging and what I believe will be actual age reversal by the end of this decade or the mid-2030s at the latest. Pat Cox and I are currently exploring the possibility of funding some of these ventures.

Unlocking the Door
 
We are making progress above the Earth, too. If all goes well, NASA could send astronauts back to space this year for the first time since the space shuttle retired in 2011. They’ve been relying on Russian rockets for manned flights.
 
Several countries will be launching Mars probes this year, including another US rover that will carry a small helicopter, Yes, a robot helicopter flying over Mars. Did you imagine living long enough to see such a thing?
 
Perhaps even more exciting, private companies could soon start taking private passengers to space—or at least the edge of it. Richard Branson’s Virgin Galactic and Blue Origin, founded by Jeff Bezos, are in advanced testing.
 
But the biggest breakthrough doesn’t involve sending anyone anywhere. Two companies, SpaceX and OneWeb, are building large networks of low-orbiting satellites to deliver seamless, fast internet service across the entire globe. That may seem like a small thing. It’s actually huge.
 
Depending on whose numbers you consult, something like half the world population still doesn’t have reliable web access. Often it’s because they live in remote areas where the infrastructure doesn’t exist and no one has a financial interest in building it. The new satellites could change the economics. Google’s high balloon project is making significant headway, too.
 
Getting the rest of the world online matters because among these disconnected billions are people whose ideas and talents could create even more breakthroughs. This vast, untapped resource will be a whole new market for today’s businesses and others that we can’t presently imagine. By 2030 I expect we will have unlocked that door and had a peek inside.

A Better World, by the Numbers
 
The late Swedish professor Hans Rosling’s book Factfulness: 10 Reasons Why We Are Wrong About the World and Why Things Are Better Than You Think is a masterpiece everyone should read.

He describes our evolutionary bias to think in dichotomies: good versus evil, heroes versus villains, my country versus yours.
 
Dividing the world into two distinct sides is simple and intuitive, and also dramatic because it implies conflict, and we do it without thinking, all the time.
 
Journalists know this. They set up their narratives as conflicts between two opposing people, views, or groups… Journalists are storytellers.
 

We evolved as a species sitting around fires, hearing other people tell stories. It created trust and had an evolutionary purpose. And we still love our stories and storytellers. But the constant reminders of conflict and negativity infect our brains and bias our views.

We extrapolate what we recently read or saw on the news to apply everywhere. It’s part of our dichotomous nature and called “recency bias.”
 
Rosling did a number of TED talks, but my favorite (and fun) is How Not to Be Ignorant About the World. He shows the enormous negative bias humans have about the world around them. We consistently assume things are worse than they actually are, while ignoring progress like the huge drop in global poverty.
 


Child mortality is down significantly, as is the number of people without an improved drinking water source. Life expectancy is up everywhere (except for middle-age white males in the US). Genocide and war deaths are down significantly. So is crime in the US. The number of deaths from natural disasters plummeted well over 90% in the last hundred years. Death rates from air pollution are down significantly in the last 25 years.
 
I could go on many more pages about the world getting better. In fact, I will do so in my next book. But I hope you get the point: Good things are happening and we should celebrate them. It doesn’t mean we should ignore less pleasant realities, nor does it excuse us from helping those who need it right now. Some problems can’t wait.
 
We should do what humans always have: Welcome good when we see it, and face problems head-on. That’s how we will get through the Decade of Living Dangerously.
 
And here’s one more piece of good news: This year, we have added even more value to our most exclusive Mauldin Economics club, the Alpha Society.
 
New members will receive complimentary access to the SIC 2020, which will take place at the iconic Phoenician in Scottsdale, AZ, from May 11–14. They are also invited to our brand-new members-only event, the Wealth Preservation Symposium on March 31 at the Yale Club in New York City.
 
Add to that lifetime access to all of our best research, and you have an unbeatable package. However, we can only accept 100 new members at this time, so please apply now.

Miami and New York
 
I will make a quick trip to Miami next week to meet with Dr. Mike West of AgeX (where I am currently on the Board of Directors) to discuss some of the latest developments in the age reversal space. Stay tuned. And I still have to get to New York sooner rather than later.
 
Many readers know I use software called Dragon to dictate these letters straight into Microsoft Word. Sometimes, words get mixed up in strange ways. We call them Dragon errors and this letter had an amusing one.
 
Late last night when I said corn production was up 300%, Dragon heard it as “porn production.” My editor Patrick Watson noticed this and told me, “No, John, porn production is actually up more like 50X.” Anyway, he fixed it and I saw again why we still need human editors and proofers, even with the best technology.
 
This whole letter has felt like my personal section, because I truly am an optimist. I feel like I am letting that side of me out to share with my friends. I am really looking forward to 2020 and I’m glad you are with me.
 
And with that I will hit the send button and wish you a great week!
 
Your walking on the sunny side of the street analyst,

 
John Mauldin
Co-Founder, Mauldin Economics

Russia’s oligarchs must soon decide how to pass on their empires

Succession and shareholdings critical to questions of corporate governance and economic growth

Henry Foy in Moscow


Russian President Vladimir Putin (L) and founder of USM Holdings Alisher Usmanov (R) look on at the control center of the new workshop producing hot briquetted iron at Lebedinsky Mining and Processing Combine (Metalloinvest MC LLC) in the Belgorod Region on July 14, 2017. / AFP PHOTO / Sputnik / Michael Klimentyev (Photo credit should read MICHAEL KLIMENTYEV/AFP via Getty Images)
Russia's president Vladimir Putin, left, with Alisher Usmanov, the Uzbek-born Russian billionaire © AFP via Getty Images


Ask any Russian oligarch how he made his fortune, and you will almost certainly get a well-rehearsed, rags-to-riches story of a plucky self-made entrepreneur who took advantage of a lucky opportunity that came his way.

But ask him how he plans to give it away, and you are likely to get a blank stare.

Tycoons whose wealth depends on how successfully they snapped up plum industrial assets in the 1990s through controversial rigged auctions, murky bank loans or straightforward theft, and then how deftly they protected their gains through political manoeuvring and relations with the Kremlin, must soon contemplate how to pass on their empires.

The looming transition will be critical. A single generation of oligarchs in their late sixties or early seventies control vast swaths of Russia’s $1.7tn economy. All grew up in a country that saw private property banned for 70 years under Soviet rule and where regulations safeguarding corporate ownership since 1991 have flexed to suit those in power.

Just as many are keenly watching the Kremlin for clues as to what President Vladimir Putin may do as the end of his fourth term approaches in 2024, the future of many of Russia’s largest business groups — and thus control of the country’s most important economic assets — is also up for question.

“Life is not forever. Life is a gift. You must squeeze sweetness from this gift from God. Some businessmen, like Warren Buffett, find sweetness in working every day. I think we have a much more interesting time in our life doing things other than making money,” said Alisher Usmanov, who controls the USM industrial group, last week.

He said he had already drawn up plans as to how his $16.5bn empire would be divided, including lists of names of who would be offered shares.

“Many people have helped me. So I want to help my management and my relatives by giving them my shares,” he said. “Fifty per cent to family, 50 per cent to management, who deserve this, in my view.” The shares would be sold “at a friends and family price”, he added.

Mr Usmanov’s public admission of a plan to step down from his businesses is rare among Russian tycoons who have sought to make themselves indispensable to their companies, or have built a reporting system where even the smallest decisions must be signed off by them. In one case, this included signing off on cleaners’ overtime in the company headquarters.

Aside from some form of advisory board or nominal group of directors, typically created on the advice of a London-based public relations company and stuffed with friends or retired western politicians, many lack any form of solid corporate governance structure that could take over in the event of an unforeseen change of ownership.

But they will soon need to explain to others just how to run conglomerates that have been, by and large, built and controlled by one man for more than two decades, sprawling across industries and sectors as a testament to their fluctuating whims.

Some have made tentative steps. Vladimir Yevtushenkov, 71, in 2018 gave 5 per cent of his Sistema holding company to his son.

Others have little idea who will run their empires when they are gone. Vagit Alekperov, the 69-year-old who controls Lukoil, Russia’s second-largest oil producer, has admitted he expects to run the company into his seventies and cannot imagine his son taking over in the future.

Russia has much to gain from a situation where control of many of the country’s largest business groups is passed from one man to a group of shareholders.

Diversified shareholdings should mean more transparent operations and stronger corporate governance. Passing on shares to trusted lieutenants would also signal confidence in safeguards protecting private property, the lack of which has damaged Russia’s standing among foreign investors over the past two decades.

Russia’s crony capitalism, where political influence reigns and the Kremlin-controlled security services and bureaucrats wield more power than the market economy, relies heavily on a tiny group of men controlling the country’s biggest businesses.

The starkest illustration of this can be seen every December when Mr Putin summons about 50 businessmen to the Kremlin for an annual get-together. The men who control all the biggest businesses in Russia fit around one meeting table.

Many of them have been reluctant to share their wealth, but soon will be forced to.

If every oligarch left their shares to a few dozen people, Mr Putin would be likely to find he does not have a room big enough to host them all.

When it comes to reforming Russia’s economy, that would be a welcome sign.

Not just a first-world problem

Emerging economies are experiencing a prolonged productivity slowdown

They seem doomed to lag behind rich countries for longer than had been hoped




How do modern innovations stack up with those of the past? Some economists, such as Robert Gordon of Northwestern University, argue that driverless cars, 3d printers and so on pale into insignificance compared with the fruits of previous industrial revolutions, such as mass production.

That, they think, explains a prolonged productivity slowdown in America and other rich economies that the financial crisis deepened.

But what about everywhere else? Developing countries are, by definition, some distance from the technological frontier. One consolation of their position is the vast backlog of past innovations that remain for them to exploit more fully.

Their growth depends more on imitation than innovation. A country where most people still ride scooters does not have to worry if the next Tesla fails to arrive on schedule.




And yet they too have suffered a productivity let-down.

According to a new World Bank report, the slowdown is the “steepest, longest and broadest yet”, based on data going back four decades (see chart 1).

The GDP per worker of developing economies is almost 14% lower than it would have been had productivity not lost momentum.

The Institute of International Finance, a think-tank, believes that emerging markets now suffer from a variant of the “secular stagnation” that haunts the rich world. Oxford Economics, a consultancy, argues that emerging markets have lost both volatility and vigour, consigning them to “grating stability”.

Capital Economics, another consultancy, predicts that in the coming decade, “the widespread emerging-market catch-up growth of the past two decades will come to an end”.

In most of the emerging markets it tracks, GDP per person grew less quickly last year than in America. Imitation is supposed to be easier than innovation.

But even as leading economies are finding it harder to break a path, many of their followers have lost their way entirely.

How did this happen? When they look at the rich world, some economists worry that big firms have it too easy. Without stiff competition, they have little incentive to innovate or invest. But when they look at the poor world, some worry that big firms now have it too hard. In a survey of over 15,000 companies, the World Bank shows that large firms in poor countries tend to be more productive and more likely to export than their smaller rivals.

In the past, these firms have been important conduits for improved know-how and technologies acquired from partners and rivals abroad and passed on to suppliers and imitators at home. But the “routes to technology transfer are narrowing”, the bank points out, thanks to rising protectionism and the halt in the expansion of global value chains.

A lack of technology transfer is only part of the problem, however. Half of the slowdown in labour-productivity growth in recent years reflects not a failure to imitate but a failure to accumulate: weak investment has left labour with too little capital to work with. This shortfall in investment explains all the productivity slowdown in South Asia, the Middle East and north Africa, and two-thirds of that in Europe and Central Asia.

That is a serious problem, but also a reassuringly conventional one. Insofar as low capital spending stems from a lack of credit or confidence, it is easy enough to imagine a reversal once financial wounds heal and animal spirits revive.




Reluctance to mobilise capital has been matched by labour’s sluggishness in moving. In any country, some parts of the economy (such as manufacturing) are more productive than others (such as agriculture).

But this gap is unusually large in developing countries, where the modern and the medieval often coexist. In principle, therefore, emerging economies have much to gain from moving workers between sectors, even if productivity within each sector does not improve.

In the typical developing country, this movement contributed about 1.1 percentage points to growth in the years before the global financial crisis. That contribution has dropped to just 0.5 points in more recent years (see chart 2).

In Latin America and the Middle East, the contribution was negative: workers moved the wrong way, to where they were less productive.

Perhaps the simplest explanation for the productivity bust lies in the boom that preceded it.

For five extraordinary years, punctuated by the global financial crisis, China enjoyed exceptional growth that pulled commodity-exporters behind it. That very success left the Asian giant with less room for further catch-up growth, contributing to its inevitable slowdown.

Its growth has also become more self-contained and less commodity-intensive.

The changing pace and pattern of China’s growth proved a disaster for the many developing economies that export commodities, especially in Latin America and the Middle East. Their productivity growth has collapsed.

But in other developing economies, claims of secular stagnation and the end of catch-up growth seem exaggerated. Their productivity growth is close to its 25-year average and still comfortably above that of the rich world. It is slow only in comparison with a handful of years before and after the global financial crisis.

In a World Bank publication 25 years ago Lant Pritchett, now at Oxford University, emphasised that catch-up growth was historically quite rare. Yes, imitation should be easier than innovation (and returns to investment should be high where capital is scarce). But other factors often got in the way.

After all, if poor countries reliably grew faster than rich ones, there would not be so many poor countries still around. The “dominant feature” of modern economic history was not convergence between rich and poor countries, wrote Mr Pritchett, but “divergence, big time”.

The past decade, for all its disappointments, has bucked that historical trend, if less impressively than the decade before it. For emerging economies, the 2010s were a let-down. But they were still the second-best decade of the past 50 years.

The UAE’s Bipolar Foreign Policy

By: Hilal Khashan



When the United Arab Emirates formed in 1971, its first president, Sheikh Zayed bin Sultan Al Nahyan, ruler of Abu Dhabi, the most significant and wealthiest constituent emirate, wanted a neutral and low-profile foreign policy, one that championed pan-Arabism and pan-Islamism.

Things haven’t quite worked out that way.

Not only did the UAE’s mere existence rankle Saudi Arabia, which sees itself as the de facto leader of Sunni Arabs in the Middle East and so tried to stop it from forming, but Riyadh also foiled Abu Dhabi’s efforts to include Qatar and Bahrain in its fledgling nation.

Even after the creation of the Gulf Cooperation Council, which includes the UAE, Kuwait, Qatar, Bahrain and Oman, Emirati rulers have always been suspicious of Saudi intentions.

So when current leader Sheikh Mohammed bin Zayed Al Nahyan took over after the death of Sheikh Zayed in the mid-2000s, he made a point to free his country from Saudi domination.

Unencumbered by the austerity of Wahhabism and nationalism, he overhauled his country’s military and sought to foster a close strategic relationship with the United States. His approach worked well, earning him the trust of the U.S. as a reliable ally in the Middle East.

The rise of the UAE under MBZ, as he is known, coincided with the decline of Saudi influence in Washington, especially after 9/11.

In fact, as Mohammad bin Salman came to power during Saudi Arabia’s succession crisis, he looked to MBZ for help in lobbying Washington for support. It’s rumored that he doesn’t make a political move without first consulting MBZ.


Gulf Cooperation Council Members


Yet Saudi and Emirati foreign policies are hardly uniform. The UAE’s is actually pretty bipolar. It is aggressive in the Middle East but subservient vis-a-vis the U.S. and Israel.

Abu Dhabi has clashed with Oman over its relations with Iran, has soured its relations with Kuwait, has launched a ferocious media campaign against Turkey, and has urged MBS to blockade Qatar, which the UAE sees a natural competitor.

In fact, MBZ refuses to accept competitors in the Middle East, North Africa and the Horn of Africa, but he never misses an opportunity to let American officials know how much he values working with them.

Therein lies the problem. MBZ believes he has carved out a niche in the international world order. As he engages with influential leaders of powerful countries, he forgets that the economy of his country depends on global peace and stability.

Abu Dhabi’s principal foreign policy flaw, then, is the climb to regional prominence.

A Useful Proxy

More than anything else, the Iraqi invasion of Kuwait in 1990 changed the strategic thinking of Abu Dhabi. That year, it learned that it had to fear the Arab states as much as it fears Iran. Concerns about domination by Saudi Arabia compelled MBZ to modernize the UAE’s armed forces, especially the air force, immediately after his appointment as deputy supreme commander of the armed forces in 2005.

Abu Dhabi, then, has three foreign policy objectives: spread its influence throughout the Middle East, either directly or through alliances; destroy Islamists, whose ideology directly threatens the monarchy, or at least exclude them from public life; and form a permanent alliance with the United States and Israel. These objectives put the UAE directly at odds with Qatar, Turkey and the Muslim Brotherhood.

Following the eruption of the Arab uprisings, Abu Dhabi restructured its national security apparatus, calling for the adoption of an aggressive and preemptive foreign policy employing a combination of soft and hard power.

Abu Dhabi has openly supported counterrevolutionary forces in Egypt, Libya, Yemen and Tunisia and has empathized with the Syrian regime. Despite the UAE alliance with Saudi Arabia in Yemen, its air force killed more than 4,000 soldiers from the government supported by Saudi Arabia. (MBZ also played a significant role in Turkey’s failed military coup in July 2016.)

Its strategy led to expansion in and around the Horn of Africa. The UAE has established military bases in Yemen, one in Eritrea and another in Somaliland, and it operates two air bases in Libya. But interestingly, the UAE depends on U.S., French, British and Italian military bases, in addition to a South Korean contingent, for its protection.

The militarization and interventionism under MBZ’s rule has made the UAE a natural proxy for the U.S. (Former U.S. Secretary of Defense James Mattis described the UAE as “Little Sparta.”) In this role, Abu Dhabi has served as a U.S. police force in the region, even as it has an embassy in Damascus and enthusiastically endorsed the ill-fated Deal of the Century between Israel and the Palestinian Authority.

But for all of its usefulness, the UAE, somewhat ironically, is no good to the U.S. as a counter to Iran. Despite some past grievances, especially over disputed islands, Iran and the UAE have found ways to work together.

Dubai is vitally important to Iranian commerce, especially at a time of such crippling U.S. sanctions, and there are lots of Iranian private investors in Dubai.

Around 8 percent of the population is of Iranian descent, and about half a million Iranian expatriates live in the country.

Emirati officials may dislike Iran, but geographic proximity and demography compel them to accommodate their larger neighbor.

A Pioneering Country?

MBZ’s foreign policy efforts are beginning to tarnish the image of the UAE and its economy as an oasis of stability and modernity in the restive Middle East. It has also created tension among the UAE’s members, especially Dubai, which would be devastated by any retaliation to such an aggressive posture, reliant as it is on services and foreign investment.

If, say, Iran launched a missile at Dubai, it could bring its economy to a standstill and drive out badly needed Asian laborers. Dubai Port World operates more than 70 seaports worldwide in countries such as Pakistan, France, Canada, Senegal, Australia, Argentina, the United Kingdom, Egypt and Mozambique.

Dubai’s ruler, Sheikh Mohammed bin Rashid Al Maktoum, has expressed concern that prolonged military adventurism could eventually hurt business – and indeed already has. Djibouti and Somaliland canceled agreements with Dubai Port World to manage the Doraleh Container Terminal and the Port of Berbera.

All seven rulers of the UAE gathered in an emergency meeting after Iran shot down a U.S. drone and Donald Trump decided to back off from launching retaliatory strikes.

During the meeting, MBR told MBZ that the time had come for the emirates to revisit their foreign policy. He argued that their interventionism costs them too much without gaining anything from meddling in the affairs of other countries.    


According to MBR, investing in Libya’s Khalifa Haftar against the internationally recognized government is a vain endeavor, and regime change in Libya and Sudan would neither harm nor benefit the UAE.

Most of the Emirati fatalities in Yemen, which exceed 100 troops, come from the five poor emirates, especially Fujairah. Complaints by their rulers played a crucial role in the decision of MBZ to pull out most of the soldiers from Yemen and redeploy the rest.

The rulers of the poor emirates are dissatisfied with the gross imbalance in the quality of life between Abu Dhabi and Dubai on the one hand and the five northern emirates on the other. For example, per capita income in Abu Dhabi is six times higher than in Ajman. All rulers disagree with the policy of MBZ in the Arab region.

The social contract that ensures a reasonably good quality of life in exchange for unquestioned fealty no longer satisfies the majority of Emiratis who want greater political representation. Abu Dhabi’s advertisement of its Louvre museum as a window on humanity in a new light sits well with the introduction of a Cabinet portfolio for tolerance.

It is thus easy to create the impression that the UAE of the MBZ administration, a third of whose Cabinet is composed of women, is a pioneering Arab country.
 
 The fact that Abu Dhabi operates 18 secret prisons in Yemen, where torture is the order of the day, dims its liberal outlook.


MBZ seems secure in the foreseeable future, but he risks the erosion of his power unless he adapts his regional policies to make them consistent with the aspirations of the people of the UAE.

Isn’t a Wealth Tax Common Sense?

The wealth-tax proposals being advanced by Democratic US presidential primary contenders clearly meets the public-finance standard for an ideal form of revenue generation. So why have these plans drawn such vehement criticism from so many who should be supporting them?

J. Bradford DeLong

delong216_Win McNameeGetty Images_IRSstoplight


BERKELEY – I was not surprised when leading Democratic primary contenders began endorsing a “wealth tax” along the lines of what has been proposed by my University of California, Berkeley, colleagues Gabriel Zucman and Emmanuel Saez. What has surprised me is the level of pushback these candidates have received, particularly from those who should be in favor of anything that moves the United States toward a more progressive tax system.

When I first began studying public finance, I was taught that there were three principles of taxation, all stemming from the seventeenth-century French politician Jean-Baptiste Colbert’s dictum to “so [pluck] the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

The first principle is always to broaden the tax base, so that you can hit your revenue target with the lowest possible (the least hiss-inducing) tax rates. The second is to tax items with inelastic demand, in order to minimize the tax system’s distortive effects on broader patterns of economic activity. Finally, the actors who should be taxed the most are those for whom the utility costs of paying taxes are the least – that is, the rich.

Keeping all three principles in mind, what is the broadest possible tax base upon which to tax the rich? It is their wealth, of course. And what good are the rich least willing to sacrifice in order to reduce their tax burden? Their wealth, of course.

Given these basic principles, it is obvious from a technocratic perspective that the tax system should contain a substantial wealth-tax component. Even those drawing on the work of economists Christophe Chamley and Ken Judd to argue that one should tax labor income in the long run seem to accept that establishing some level of wealth taxation should be a high priority in the immediate term.

That is why I was surprised to hear smart, sensible, public-spirited people opposing the wealth-tax proposals advanced by Elizabeth Warren, Bernie Sanders, and others. According to Alan D. Viard of the American Enterprise Institute, it would be “simpler and more prudent” to reform “the income tax and estate and gift taxes” than to pursue a wealth tax.

Likewise, William Gale of the Brookings Institution supports higher taxes on the wealthy, but then says that he is “not ready to buy [in] to the wealth tax yet for a lot of reasons.” And Karl W. Smith of the Tax Foundation believes a wealth tax would “undermine a central animating idea of American capitalism.”

Moreover, when Saez and Zucman presented their wealth-tax proposal for a Brookings Institution conference, they were met by a chorus of naysayers, with many fearing that the policy would reduce Americans’ willingness to make risky investments. Even my former co-author Dean Baker of the Center for Economic Policy Research worries that a wealth tax would strengthen the incentive for the rich to “hire accountants, lawyers, and other people engaged in the tax avoidance/evasion industry.”

Similarly, my good friend and long-time patron Lawrence H. Summers warns that a wealth tax could actually increase the influence of money in politics and policymaking, arguing that if the rich cannot keep their wealth to pass down to future generations, they will instead spend it shaping society in the here and now.

Summers sees the push for a wealth tax as a distraction: “For progressives to invest their energy in a proposal that the Supreme Court has a better-than-50% chance of declaring unconstitutional … seems to me to potentially sacrifice an immense opportunity.”

Finally, the Tax Policy Center’s Janet Holtzblatt – who, as I learned back in 1993, is better at public finance than I am – notes that a wealth tax could come with “grave implementation and administrative challenges.”

Summers’s point about a potential wasted opportunity seems cogent. For an effective wealth tax to prove lasting, the US would also need a government committed to doubling the size of the Supreme Court. Between Bush v. Gore(2000), Citizens United v. Federal Election Commission (2011), and Senate Republicans’ refusal even to hold hearings on Merrick Garland’s nomination, such a move is more than justified.

The concerns about administrative and enforcement problems are also understandable. Defining and assigning a value to the wealth (and incomes) of the rich would be an immense and difficult undertaking. To simplify matters, the Internal Revenue Service perhaps should be given just one task: either to tax all income, or to tax wealth and labor income.

Yet looking beyond these details, I cannot help but think that the discussion has gone badly wrong. A basic public-finance point seems to have been lost. It should be a settled technocratic doctrine that a wealth tax is the ideal way to tax the wealthy.

As such, shouldn’t the burden of proof lie not with proponents of a wealth tax, but with all who would defend a status quo that departs from that ideal benchmark?

I am genuinely puzzled, and would love to hear a convincing response on that question.


J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.