Aussie rules

What the world can learn from Australia

It is perhaps the most successful rich economy

WHAT IS THE biggest problem facing America? Or Japan? Or Britain? Or France? Opinions vary, naturally, but some worries crop up again and again. Those of a materialist bent point to decades of slow growth in median incomes, which has bred disillusion and anger among working people. Fiscal hawks decry huge public debts, destined to grow even vaster as ageing populations rack up ever bigger bills for health care and pensions. Then there is immigration, which has prompted a furious populist backlash in the United States and all over Europe. That hints at what, for many, is the most alarming trend of all: the lack of any semblance of a political consensus about how to handle these swelling crises.

Rising incomes, low public debt, an affordable welfare state, popular support for mass immigration and a broad consensus on the policies underpinning these things—that is a distant dream in most rich countries. Many Western politicians could scarcely imagine a place that combined them all. Happily, they do not have to, because such a country already exists: Australia.

Perhaps because it is far away from everywhere, or has only 25m inhabitants, or is seen mainly as a habitat for cuddly marsupials, it attracts relatively little attention. But its economy is arguably the most successful in the rich world. It has been growing for 27 years without a recession—a record for a developed country. Its cumulative growth over that period is almost three times what Germany has managed. The median income has risen four times faster than in America. Public debt, at 41% of GDP, is less than half Britain’s.

Luck has had a hand in these feats, to be sure. Australia is blessed with lots of iron ore and natural gas, and is relatively close to China, which hoovers up such things. But sound policymaking has helped, too. After the last recession, in 1991, the government of the day reformed the health-care and pensions systems, requiring the middle class to pay more of its own way. The result is that Australia’s government spends just half the OECD average on pensions as a share of GDP—and the gap will only widen in the years ahead.

Even more remarkable is Australia’s enthusiasm for immigration. Some 29% of its inhabitants were born in another country—twice the proportion in the United States. Half of Australians are either immigrants themselves or children of immigrants. And the biggest source of immigrants is Asia, which is fast changing the country’s racial mix. Compare that with America or Britain or Italy, where far smaller inflows have generated hostility among a big portion of the electorate—or Japan, where allowing foreigners to settle in any numbers is a political taboo. In Australia both main parties argue that admitting lots of skilled migrants is essential to the health of the economy.

These achievements are not without their flaws. The private investment funds through which Australians are obliged to save for their retirement have been charging excessive fees, leaving pensioners poorer than they should be. And as welcoming as Australia is to immigrants arriving through normal channels, it treats those who try to come by boat without the proper paperwork with unnecessary severity, packing them off to remote islands in the Pacific where even legitimate refugees have been left to rot for years.

Moreover, there are reforms that Australia should be undertaking and is not. Aboriginal Australians suffer from enormous disadvantages, which a succession of governments has barely dented. Global warming is clearly causing grave damage—droughts have become more frequent and more severe, among other dismal consequences—yet Australia has done almost nothing to curb its emissions of greenhouse gases.

Nonetheless, Australia’s example shows that reforms considered impossible elsewhere are perfectly achievable. Democrats in America assail most proposals to restrain the rising costs of public pensions or health care as tantamount to throwing grannies off a cliff; in Australia it was the left that pioneered such policies. The Labor Party sold obligatory private pensions to unions as an increase in benefits, since it is technically employers who are required to make regular payments into investment funds on their workers’ behalf. The party also made sure to retain a basic public pension, which is paid only to those who have not managed to build up adequate personal savings.

By the same token, it is quite possible to maintain popular support for mass immigration, even from culturally dissimilar places. But it is essential to give voters the sense that their borders are properly policed and that there is no free-for-all. Again, bipartisanship is important. It was a right-wing government that first allowed immigration from Asia on a big scale, admitting lots of refugees from Vietnam in the 1970s.

Australia’s political system rewards centrism. All eligible citizens must vote, by law, and those who might not bother to turn out otherwise tend to plump for mainstream parties. There is no need to rally supporters to the polls by pandering to their prejudices. Since everyone has to show up, politicians focus instead on winning over the wavering middle. The system of preferential voting, whereby Australians rank candidates in order of choice, rather than picking just one, also exerts a moderating influence.

Killing the goose

The irony is that, just as the benefits of this set-up are becoming so obvious, Australians appear to be growing disenchanted with it. Voters express growing doubts about the effectiveness of government. It has not cost the two main parties many seats, thanks to the electoral system, but their vote-share has fallen by 20 percentage points since the 1980s. Politicians, conscious of voters’ disgruntlement, have also become increasingly febrile. They are constantly turfing out prime ministers, in the hope that a new face will boost their party’s standing with the electorate. Some in the ruling Liberal Party, although not the current prime minister, have begun to call for a reduction in immigration, undermining decades of consensus. Ambitious reforms have become rare. The rest of the world could learn a lot from Australia—and Australians could do with a refresher course, too.

Inaction over climate change is shameful

We need to shift the world on to a different investment and growth path immediately

Martin Wolf

It is five minutes to midnight on climate change. We will have to alter our trajectory very quickly if we wish to have a good chance of limiting the global average temperature rise to less than 1.5C above pre-industrial levels. That was a goal of the Paris agreement of 2015.

Achieving it means drastic reductions in emissions from now. This is very unlikely to happen.

That is no longer because it is technically impossible. It is because it is politically painful. We are instead set on running an irreversible bet on our ability to manage the consequences of a far bigger rise even than 2C. Our progeny will see this as a crime.

The latest report from the Intergovernmental Panel on Climate Change is on the implications of warming of just 1.5C and also on the means by which that might be achieved. It reads like a reductio ad absurdum — a demonstration of the implausibility of its premise. But it makes plain, too, the risks the world runs if this limit is ignored: life will survive, but not life as we know it.

Underlying this report is the idea of the Anthropocene — an era in which human activity has become a dominant influence on the planet. The report notes that the rise in global concentrations of carbon dioxide is 20 parts per million per decade. This is up to 10 times faster than any sustained rise in CO2 in the past 800,000 years. The previous epoch with similar CO2 concentrations to today’s was the Pliocene, 3m-3.3m years ago. We are the shapers of the planet now. This ought to transform how we think. Unfortunately, it has not.

The starting point of any analysis has to be the overwhelming theoretical and empirical arguments for man-made climate change. Not so long ago, people talked about a “pause” in global warming. But that was an artefact of a comparison between an El Niño year (the warming of the eastern equatorial Pacific) in 1997-98 with the normal (albeit hot) years that followed. But the El Niño of 2014-16 far surpassed the previous record. The rise in average temperatures above the pre-industrial average is already about 1C. That shows how hard it will be to keep the final increase below 1.5C, or even 2C. Under the “nationally determined contributions”, we are in fact on a track towards warming of 3-4C by 2100. Donald Trump has already repudiated the US pledge. Other countries may fail, too.

So what needs to change if we are to have a high chance of keeping the ultimate temperature rise to below 1.5C? Net global CO2 emissions would need to fall to zero not long after 2040, and other sources of climate change — emissions of methane and nitrous oxide, for example — would also need to fall from 2030. A fall in net CO2 emissions to zero by 2055 only makes it likely that the temperature rise will be below 2C. A difference of a half a degree is surprisingly important. The IPCC states that “limiting global warming to 1.5C is projected to reduce risks to marine biodiversity, fisheries, and ecosystems, and their functions and services to humans, as illustrated by recent changes to Arctic sea ice and warm water coral reef ecosystems”. This matters.

The report discusses a number of different paths to the huge fall in emissions the 1.5C goal requires. Emissions from industry would need to fall by 75-90 per cent by 2050, relative to 2010. This would need a combination of electrification, hydrogen, sustainable bio-based feedstocks and product substitution.

These options are technically proven, but their deployment on a planetary scale is another matter. Emissions reductions by efficiency improvement — vital though that is, as Amory Lovins of the Rocky Mountain Institute argues — will be inadequate. Also necessary will be big changes in urban infrastructure and planning. Agriculture will need to shift to production of energy crops on a huge scale. Also necessary will be carbon capture and storage on a large scale.

In all, we need to shift the world on to a different investment and growth path right now. This is more technically possible than we used to think. But it is politically highly challenging. Above all, climate change involves huge distributional issues — between rich countries and poor ones, between countries that caused the problem and those that did not, between countries that matter for the solution and those that do not and, not least, between people today, who make the decisions, and people tomorrow, who suffer the results. The natural tendencies are either to do nothing, while insisting there is no problem, or to agree there is a problem, while merely pretending to act. It is not clear which form of obfuscation is worse.

One line of argument against action is that we do not know how costly climate change will prove to be. But this argument evidently cuts both ways. The scale of the uncertainty is an argument for action, not inaction. Nobody really knows what risks humanity will ultimately find it has run by continuing on its present course. But we do know that our descendants are quite likely to end up on a different planet, with no way back to our own. The bet that our descendants will then cope might be correct. But it might also be disastrously wrong. The sane choice must surely be to preserve the planet we have.

Yet doing that, as is by now quite clear, requires co-operative effort on a planetary scale. It will not be achieved by nibbling around the edges. This is a scale of challenge human beings have historically only met in times of war, and then only against one another. The chances of co-operative action seem near zero in today’s nationalistic world. One need only consider the response to this report from the IPCC — essentially a collective yawn— to realise that. Yet let us not fool ourselves: we are risking a world of runaway — and unmanageable — climate chaos. We could do far better than that.

Is China the Next AI Superpower?

China AI

The U.S. has long been seen as the global leader in innovation, including in the field of artificial intelligence (AI). China, in contrast, has been viewed as a technology copycat. This, however, may not be the case anymore. China may soon take the lead in AI, according to Kai-Fu Lee, former president of Google China and an AI expert. He said China’s national focus on AI, its large data pool and massive market, as well as the presence of hard-working and ambitious entrepreneurs could help it overtake the U.S.

Lee is the CEO of Sinovation Ventures, an early stage venture capital firm that seeks to develop the next generation of high-tech Chinese companies. He is the author of AI Superpowers: China, Silicon Valley, and the New World Order. Lee was a recent guest on the Knowledge@Wharton radio show on Sirius XM, where he discussed these and other issues. (Listen to the podcast using the player above.) Next month, Lee is speaking at the AI Frontiers conference in San Jose, Calif., where Knowledge@Wharton is a media partner.

An edited transcript of the conversation follows.

Knowledge@Wharton: Where are we in the race for AI technology between the United States and China?

Kai-Fu Lee: Well, it’s not really a race. It’s two parallel universes, each making progress. U.S. is still way ahead in the core technologies from research labs and universities. But China is now taking the lead in implementation and creating value by using AI in all kinds of applications and industries.

Knowledge@Wharton: You write in your book that the skillful application of AI will be China’s greatest opportunity to catch up with and maybe surpass the U.S. But more importantly, it’ll help people rediscover what it means to be human. Can you explain what you mean?

Lee: I think the whole job market will change. We currently see narrow AI — not the science fiction, AI human intelligence — but specific AI engines that solve one problem at a time. For instance, [we see] engines that can make loan decisions for banks, customer service for large companies, simple robotics like fruit-picking and dish-washing. These vertical applications of AI are exceeding human capabilities. This means that routine jobs will be replaced by AI. But AI is also very good at producing tools for the creatives and professionals. I can see scientists, CEOs, writers, columnists, using AI as a tool.

All this will result in a significant job transformation. People in creative and strategic jobs will get their capabilities amplified and people in routine jobs will need to transform and transition to new jobs. Probably the only job category that’s large enough to accommodate that many people in routine work are service jobs. These are jobs that require a human touch, compassion and empathy, so it will be a very difficult transformation. But when it’s done, it will lead to many our population engaging in empathetic and compassionate jobs like that of nannies, teachers, doctors and caretakers for the elderly. This will create a positive energy and help us rediscover our humanity.

Knowledge@Wharton: We’re already starting to see that a little.

Lee: Yes. We are now seeing the beginnings of job displacements in the routine jobs. We see tellers, cashiers, starting to disappear, even without AI. With AI, more of these jobs will be gone. We’re also seeing a larger number of openings in jobs like elderly care. They’re currently not filled, perhaps because they do not pay enough or are not well-known as a job category. There’s not yet significant recognition in society that service jobs deserve respect and [good] pay. But hopefully, over time, we’ll see the need and then the pay and social status will increase to create an equilibrium.

Knowledge@Wharton: What is happening at present in China regarding AI that is different from what we are seeing here in the United States, to potentially put China in the lead in the next few years?

Lee: A couple of things are unique about China. First, Chinese entrepreneurs are much hungrier, they work much harder, and they are also much more tenacious. They are looking for all kinds of business models in which AI can help. AI in retail. AI in education. They are also working out operational excellence in applying AI to changing the way people eat, disrupting autonomous stores and autonomous fast food restaurants. So it’s displacing traditional industries faster.

Imagine convenience stores without people [manning the store]. Imagine fast food restaurants without people. AI is also being used in a lot of white-collar job displacement, which will impact the U.S. and China equally. I think China is moving faster because entrepreneurs are emboldened by the national priority on AI, funded by larger amounts of money. They see this as the hottest area.

The second reason, I think, is that the use of AI is no longer such a mystery. We think of AI as very advanced technologies that very few people possess. But actually, that is not true. AI is now open-source. New grads from college in a year’s time can start using AI in engineering and building these products. China has an army of new graduates who are all hungry to jump into AI as the new hot area.

Also, China has more data than anybody — and AI gets better with data. If you train an AI for, let’s say, an advertising engine or an ads-targeting engine, or a bank using AI for determining loans, the more data you have, the more accurate AI becomes. China has more users and more usage per user, because the use of digital services is pervasive. For example, China has almost no credit cards and no cash. Everyone’s using mobile pay. That’s fuel to make rocket fuel for AI to work better.

And finally, the Chinese government is very supportive of AI. Last July, it declared AI to be one of the most important areas to focus on. Provincial and city governments are building out cities the size of Chicago with autonomous vehicles in mind. There are two layers of roads. One layer is for pedestrians and the second is for cars, thereby limiting the possible accidents and casualties to the pedestrians. Highways are adding sensors to enable autonomous vehicles. These high-spend infrastructure projects are just what the AI industry needs, because private companies can’t possibly afford to build cities and highways.

Knowledge@Wharton: We talk a lot about the startup culture here in the United States, and the role that Silicon Valley has played in that. What does the startup culture look like in China?

Lee: The culture in China is different from Silicon Valley in a couple of ways. I think Silicon Valley tends to be more creative, innovative, wanting to be out of box, invent something no one has seen before. It frowns upon copycats, and it likes lightweight technologies. Instagram with 11 engineers gets acquired for a billion dollars. That’s the kind of story that Silicon Valley celebrates.

China is into incredibly hard work. Companies work 9 a.m. to 9 p.m. six or seven days a week without exception. Entrepreneurs are usually very strong, top down. A single person makes all the decisions. It’s data driven — so the decisions are very fast. There isn’t too much of consensus-building. It’s all about moving on and executing.

Chinese companies are better at raising large amounts of money because there’s a large market that can test ideas and scale them. Chinese companies are also willing to go heavy. That is, you build something that is incredibly messy and ugly and complex. But once you build it, it becomes a moat around your business.

For example, in the U.S., we have Yelp and Groupon, very lightweight companies. In China, there is Meituan, which has built a 600,000-person delivery engine, riding electrical mopeds with batteries that run out pretty quickly and have to be replaced. And yet, they run it to enable every Chinese consumer to order food on their way home and have it delivered to them by the time they reach their homes. The consumers don’t have to wait. The delivery time is 30 minutes and it costs about 70 cents. It’s the hard work that is shaving away a few cents a month, eventually getting to 70 cents per order. Then, they can break even. It is taking a large leap and a large bet and a large risk, because if they don’t succeed at 25 million orders a day, there’s a huge los.

So it is a winner-take-all, gladiatorial, no-holds-barred kind of environment. It’s especially suitable for building powerful companies, or even monopolies. This is particularly so for AI because as you build a large customer base, you have a large amount of data, which gives you tremendous advantage.

Knowledge@Wharton: With the changes you expect to happen because of artificial intelligence, how is the economy going to be different in the United States in, say, 30 or 40 years? How is China adapting already to some of these changes?

Lee: The big benefits will be that AI will make companies more efficient and lower-cost. Existing processes running through AI can be made more profitable. By plugging in AI, Amazon gets more ad dollars. Google gets more revenue. Facebook gets more revenue. Microsoft gets more revenue and sales. When that starts to happen with banks, insurance companies and hospitals and so on, basically anyone adopting AI will see their P&L (profit and loss) improve. In some cases, AI will displace people and save on costs. In others, it will increase efficiency or deliver at higher margin.

PwC and McKinsey both estimate that by 2030, the world GDP will increase by about $12 trillion to $17 trillion, purely as net additional GDP, because of AI. This will make the U.S. and China wealthier. The wealth will go into the hands of a smaller number of people, those who take advantage of AI, so the wealth inequality will increase. One issue that’s raised is how does that redistribution of income happen? And, does it need to happen? This is because many people will be displaced from jobs. That’s one big question. The U.S. may need to look at ultra-high tax for ultra-wealthy people or companies. Whether that’s likely to pass through the system remains to be seen. China will face the same issue. But I think China will find it relatively easier to increase taxes.

The second big issue is how will new jobs be created? I think over a longer period of time — perhaps over 30 or 50 years — AI will create a lot of jobs and we may also be working less. We may be working three or four days a week. Some people may not need to work at all. So a lot of things could change. But in the meantime, people expect to work, and they need to be paid. How can we create those jobs so that the unemployment rate doesn’t suddenly increase? Unemployment rates are at an all-time low right now. That’s primarily because AI hasn’t yet started the displacement process. We will see that happen in the next two to five years.

Knowledge@Wharton: You mentioned the alternate universe that China is working on, especially with their internet. What was it that drove them towards this?

Lee: In developing a different internet ecosystem?

Knowledge@Wharton: Correct.

Lee: I think just entrepreneurship. In the beginning, a lot of American companies didn’t go to China either due to regulations that they didn’t want to accept, or because they felt it was too tough a market. So the Chinese entrepreneurs started copying the American ideas. This was not IP violation, but just copying the general idea of a search engine, a portal, an e-commerce site, and so on.

Over time, because of their consumer base and their entrepreneurship, they started to innovate. In the last three to five years, we’ve seen a lot of Chinese innovations that aren’t seen in the U.S. For example, for the young people in China, social media is dominated by a video-oriented social media system very different from Snapchat, Instagram, or Facebook in the U.S. And the payments system in China has grown to take over cash and credit cards.

Imagine a parallel universe in which everything is paid for by giant software companies, and young people are in video social networks. The rest of the apps plug into a very different large piece of the puzzle in China. Think of China as one puzzle, with little pieces plugged in and the U.S. as another big puzzle. You can’t just take a piece from one and plug it into the other. That’s what I mean by the parallel universe.

Knowledge@Wharton: You can throw in WeChat as well, which has developed incredibly in the last few years.

Lee: Absolutely. WeChat is a giant Swiss Army app. It does everything. Think of this as Facebook plus WhatsApp plus Visa plus Mastercard plus everything. All the services you have, paying bills, and Uber and Airbnb — all these are part of this ecosystem. In the U.S., it would probably be subject to antitrust issues. But in China, it’s allowed to run. Half of my day is spent on WeChat. And I think for many people, like my wife, it’s even more than half.

Knowledge@Wharton: What lessons can we learn from the strategy of WeChat’s owner Tencent?

Lee: U.S. companies tend to focus and do one thing really well. Tencent strategically decided to build an empire for world domination. I think that is the difference. It had the ambition of Microsoft before the Department of Justice reined it in and said, “You can’t do that.”

Most of the practices are standard. Build a strong platform, add on top of that. Make smart investments in areas where you don’t have the competency. Keep building out and make big bets. They’ve spent billions getting their payments accepted. And, I think, a refusal to accept [defeat]. Four years ago, it seemed as if Alipay had won the payment wars in China. There were credit card companies and then there was Alipay, sort of like Visa/Mastercard in the U.S., and then Paypal.

But Tencent, as the Facebook of China, decided they were going to win in payments. They threw billions and billions at it. They subsidized people and created opportunities where people felt it was fun to connect their social network to their bank card. This tenacity, and never feeling that you are in X-industry so you can’t go into Y-industry, helped Tencent to totally disrupt the payment market. From zero market share it now has half the payments market.

Knowledge@Wharton: Are we at a point now where companies in the United States could learn from what is going on in China?

Lee: I think China is definitely worth learning from. Most of Silicon Valley still frowns upon China as merely a copycat. That’s a terrible mistake. Every Chinese entrepreneur is learning from China and from the U.S. They religiously read all the tech media — Wired, TechCrunch, and everything. If American entrepreneurs only learn from the U.S. but not China, they’re missing out on half of the opportunities, lessons and case studies.

Knowledge@Wharton: Based on some of the insights you have into AI and deep learning that’s going on in both Silicon Valley and China, which companies do you think — either in the United States or in China — are most advanced in their ability to transform business through the power of AI and data analytics?

Lee: Google, or Alphabet, is clearly by far the most advanced. If there is a disruption that completely changes everything that I stated in my book, it would probably come from Google. They have a phenomenal system from the hardware chips up to the platform level, and they apply it to many, many areas. I think they’re by far the most ahead in the core technologies.
In a very clever implementation, with maybe some Chinese spirit, is Amazon. I think their technology team is elementary compared to Google’s technology team. Yet they are able to find the applications, and they are willing to make big bets. I think these two companies are leading in the U.S. Facebook is very good, but they need to recover. They have a strong AI team, but we don’t really see the benefit as yet. Theoretically, AI should help them fix a lot of the newsfeed problems and the PR issues they face.

In China, I think Tencent is by far the most powerful company. Their use of AI has been modest. I guess one could see that as a potential upside. Alibaba is applying AI much more rapidly, because they’ve been in payments and commerce, and they can see money coming out of AI. They’re probably leading in that. Baidu is the Google of China. They probably have the most AI scientists in China, but they haven’t done as much to create value. So that remains to be seen.

Knowledge@Wharton: What are the biggest breakthroughs that you see on the horizon for AI?

Lee: Actually, I don’t. I think AI is like electricity. Based on what has been invented plus the incremental improvements, we’re going to see amazing things, including autonomous vehicles, which I don’t view as requiring a lot of new technologies. It’s just a matter of gluing everything we know, and incrementally applying it to the application. We are in the midst of AI application, taking what is known and creating value in things like autonomous vehicles, autonomous airplanes, and smart robots. I think that will happen without any fundamental breakthrough.

Some of the big issues that are ahead are, can AI learn from a few examples? Can AI learn to have common sense and to learn multi-domain? Can AI learn by itself? And can AI start to have common sense? Another big question is, can an average engineer learn to use AI with just hours of training? I think these are interesting problems that we may or may not have solutions for in a couple of years.

China, Japan, and Trump’s America

Joseph S. Nye  

Japan's anxieties about Donald Trump's "America First" orientation and protectionist policies are not surprising. When two allies’ defense capacities are not symmetrical, the more dependent party is bound to worry more about the partnership.

CAMBRIDGE – The key strategic issue in East Asia is the rise of Chinese power. Some analysts believe that China will seek a form of hegemony in East Asia that will lead to conflict. Unlike Europe, East Asia never fully came to terms with the 1930s, and Cold War divisions subsequently limited reconciliation.

Now US President Donald Trump has launched a trade war with China and negotiations with Japan that take aim at Japan’s trade surplus with the United States. While the recent announcement of bilateral talks postpones Trump’s threat of auto tariffs against Japan, critics worry that Trump may push Japan closer to China, whose president, Xi Jinping, is scheduled to hold a summit with Prime Minister Shinzo Abe later this month.

The balance of power between Japan and China has shifted markedly in recent decades. In 2010, China’s GDP surpassed Japan’s as measured in dollars (though it remains far behind Japan in per capita terms). It is difficult to remember that a little over two decades ago, many Americans feared being overtaken by Japan, not China. Books predicted a Japanese-led Pacific bloc that would exclude the US, and even an eventual war with Japan. Instead, during President Bill Clinton’s administration, the US reaffirmed its security alliance with Japan at the same time that it accepted the rise of China and supported its admission to the World Trade Organization.

In the early 1990s, many observers believed that the US-Japan alliance would be discarded as a Cold War relic. Trade tensions were high. Senator Paul Tsongas campaigned for president in 1992 on the slogan, “The Cold War is over and Japan has won.” The Clinton administration began with Japan-bashing, but after a two-year process of negotiation, Clinton and then-Prime Minister Ryutaro Hashimoto issued a declaration in 1996 that proclaimed the alliance to be the bedrock of stability for post-Cold War East Asia.

There was a deeper level of malaise, however, and although it was rarely expressed openly, it related to the Japanese concern that it would be marginalized as the US turned toward China. When I was involved in negotiating the reaffirmation of the alliance in the mid-1990s, my Japanese counterparts, seated across a table festooned with national flags rarely discussed China formally. But later, over drinks, they would ask whether America would shift its focus from Japan to China as the latter grew in strength.

Such anxieties are not surprising: when two allies’ defense capacities are not symmetrical, the more dependent party is bound to worry more about the partnership. Over the years, some Japanese have argued that Japan should become a “normal” country with a fuller panoply of military capabilities. Some experts have even suggested that Japan drop some of its anti-nuclear principles and develop nuclear weapons. But such measures would raise more problems than they would solve. Even if Japan took steps to become a “normal” country (whatever that term may imply), it would still not equal the power of the US or China.

Today, Japan has a new set of concerns about American abandonment. Trump’s “America First” orientation and protectionist policies pose a new risk to the alliance. Trump’s withdrawal from the Trans-Pacific Partnership was a blow to Japan. While Abe has skillfully played to Trump’s ego to deflect conflict, acute differences remain. The Trump administration’s imposition of steel and aluminum tariffs on national security grounds surprised Abe and has fueled disquiet in Japan.

The Trump administration has also suggested that US allies in Asia should do more to defend themselves and openly questioned the value of forward deployed US forces. Some analysts wonder whether Trump’s actions will force Japan to hedge its bets and edge toward China. But that is unlikely at this stage. While such options may be explored, they will remain limited, given Japanese concerns about Chinese domination. The US alliance remains the best option – unless Trump goes much further.

Thus far, the alliance remains remarkably strong. Abe reached out early to President-elect Trump, meeting him first at Trump Tower in New York and then during visits to Washington, DC, and Mar-a-Lago, Trump’s Florida residence. The Abe-Trump relationship allowed the Pentagon to maintain close cooperation on security matters. North Korea helped focus the alliance’s attention and provided an opportunity for Trump to assure Japan that the US was behind Japan “100%.”

Abe and Trump both supported the “maximum pressure” strategy against North Korea, working hard to build international support for United Nations sanctions. Meanwhile, Japan announced a major new investment in ballistic missile defense and cooperated in its joint development. On the other hand, Trump’s surprising reversal in attitude toward North Korean leader Kim Jong-un after their Singapore summit in June raised Japanese concerns about a US deal focusing on intercontinental missiles and ignoring the medium-range missiles that could reach Japan.

Trump’s rhetoric about burden sharing has also raised concern. While Japan’s defense expenditure is little above 1% of GDP, it contributes significant host-country support. The US Department of Defense estimates suggest that the Japanese government pays roughly 75% of the cost of supporting US forces in Japan. This year alone, the Japanese government budgeted ¥197 billion ($1.7 billion) for cost sharing, ¥226 billion ($2 billion) for the realignment of US forces, and ¥266 billion ($2.3 billion) in various types of community support, among other alliance-related expenditures.

As the Clinton administration recognized a quarter-century ago, China’s rise created a three-country balance of power in East Asia. If the US and Japan maintain their alliance, they can shape the environment that China faces and help moderate its rising power. But that will depend on whether the Trump administration successfully maintains the US-Japan Alliance.

Joseph S. Nye, Jr., is a professor at Harvard University and author of Is the American Century Over?

The Election’s Finally Over. Now Things Can Go Back To “Normal”: Rising Interest Rates, Rising Debt, Rising Volatility  

As contentious as the US midterm elections were, there was never a scenario in which they mattered. Any possible configuration of Republicans and Democrats in the House and Senate would have yielded pretty much the same economy going forward: Ever-higher debt, upward trending interest rates and (through the combination of those two) rising volatility.

So with the sideshow now in the rear view mirror, we can get back to our new normal. From this morning’s media reports:

U.S. three-month LIBOR climbs to decade high
(Reuters) – A key gauge of what banks charge each other to borrow dollars for three months increased to its highest level in a decade on Wednesday ahead of the U.S. Federal Reserve’s two-day policy meeting that will begin later in the day. 
The London interbank offered rate to borrow three-month dollars climbed nearly 1 basis point to 2.60113 percent following a 0.2 basis point gain on Tuesday. 
Three-month LIBOR has risen in 15 of the last 16 sessions, prompted by the Fed’s rate hikes, rising U.S. government borrowing and a shrinking Federal Reserve balance sheet. 
LIBOR is the benchmark rate for $200 trillion of dollar-denominated financial products, mainly interest rate swaps and floating-rate loans.
Mortgage applications drop to 4-year low as interest rates hit 8-year high 
(CNBC) – Total mortgage application volume fell 4 percent last week from the previous week. Volume was 16 percent lower than a year ago. 
Rising interest rates are now clearly taking their toll on potential homebuyers.  
Total mortgage application volume fell 4 percent last week from a week earlier and plunged 16 percent from a year ago, according to the Mortgage Bankers Association’s seasonally adjusted index.

Mortgage interest rate election
Mortgage applications to purchase a home led the volume lower, falling 5 percent for the week to the lowest level in two years. Purchase applications were 0.2 percent lower than a year ago. 

Mortgage applications to refinance a home loan have been falling for more than a year and fell 3 percent more last week. Volume was 33 percent lower than a year ago.
Dow climbs as midterm elections fall in line with forecasts 
(MarketWatch) – U.S. stocks rose in early Wednesday trade, following closely watched midterm elections that delivered no major surprises, and will lead to divided government in Washington come January. 
The Dow Jones Industrial Average gained 160 points, or 0.6%, to 25,790, while the S&P 500 index ESZ8, +1.21% climbed nearly 24 points, or 0.9%, to 2,779. The Nasdaq Composite Index NQZ8, +2.01% jumped 94 points, or 1.3%, to 7,470. DJIA, +0.99%. 
U.S. midterm election results largely fell in line with forecasters’ prediction, with Democrats set to take control of the House and Republicans on track to strengthen their grip on the Senate.

Notice the seeming contradiction? Interest rates are rising on pretty much everything everywhere, but stocks jump on the prospect of a “divided government” which guarantees a continuation of the status quo.

The reality of the situation is the same as it was in October: As long as unemployment stays low and wages keep rising, interest rates will have to go up, either because the Fed feels compelled to boost short-term rates or bond investors demand higher long-term yields to offset rising wage inflation, or both.

History teaches that this late-cycle dynamic continues until it breaks a major piece of the leveraged speculating community, the collapse of which shifts the dominant mindset to “risk off” (i.e., from BTFD to STFR).

Then the rollercoaster heads down the other side of the mountain. This exact thing would have happened had the Republicans held the House or had the Democrats won both House and Senate. The system is on autopilot and it matters exactly not at all which party or which configuration of inmates is running the asylum.