Dudley on Debt and MMT

Doug Nolan

December’s market instability and resulting Fed capitulation to the marketplace continue to reverberate. At this point, markets basically assume the Fed is well into the process of terminating policy normalization. Only a couple of months since completing its almost $3.0 TN stimulus program, the markets now expect the ECB to move forward with some type of additional stimulus measures (likely akin to its long-term refinancing operations/LTRO). There’s even talk that the Bank of Japan could, once again, ramp up its interminable “money printing” operations (BOJ balance sheet $5.0 TN… and counting). Manic global markets have briskly moved way beyond a simple Fed “pause.”

There was the Thursday Reuters article (Howard Schneider and Jonathan Spicer): “A Fed Pivot, Born of Volatility, Missteps, and New Economic Reality: The Federal Reserve’s promise in January to be ‘patient’ about further interest rate hikes, putting a three-year-old process of policy tightening on hold, calmed markets after weeks of turmoil that wiped out trillions of dollars of household wealth. But interviews with more than half a dozen policymakers and others close to the process suggest it also marked a more fundamental shift that could define Chairman Jerome Powell’s tenure as the point where the Fed first fully embraced a world of stubbornly weak inflation, perennially slower growth and permanently lower interest rates.”

And then Friday from the Financial Times (Sam Fleming): “Slow-inflation Conundrum Prompts Rethink at the Federal Reserve: Ten years into the recovery and with unemployment near half-century lows, the Federal Reserve’s traditional models suggest inflation should be surging. Instead, officials are grappling with unexpectedly tepid price growth, prompting some to rethink their strategy for steering the US economy. John Williams, the New York Fed president, said on Friday that persistently soft inflation readings over recent years could damage the Fed’s ability to convince the general public it will hit its 2% goal. Central banks in other major economies are likely to face similar problems, he warned… Persistent shortfalls relative to the Fed’s 2% target have already helped prompt officials to shelve plans for further rate rises. But they are also thinking more broadly about the US central bank’s inflation mandate… Officials are debating new approaches which could sometimes lead them to deliberately aim for above-target inflation. Richard Clarida, the Fed’s vice-chairman, said on Friday the central bank will be open-minded about these new ideas…”

Markets are raging and crazy talk is proliferating – and it’s already time to commence another momentous election cycle. Bill Dudley must have felt compelled to opine:

“People from across the political spectrum are challenging a bit of long-held conventional wisdom: that if the U.S. government runs big, sustained budget deficits, its mounting debts will eventually cause grievous harm to the economy. They have a point — but it is important not to push that point too far. The arguments come in different forms. Some mainstream economists — such as Olivier Blanchard, former chief economist at the International Monetary Fund –- note that sovereign debt is more manageable in a world where economic growth exceeds governments’ very low borrowing costs. On the more extreme end, proponents of Modern Monetary Theory argue that because the U.S. borrows in its own currency, it can always just print more dollars to cover its obligations.” Bill Dudley, former President of the New York Federal Reserve Bank, Bloomberg Opinion, February 19, 2019

Mr. Dudley surely appreciates the precarious state of things. “Deficits don’t matter.” Rebuild infrastructure; universal healthcare; universal basic income; reverse climate change; free college tuition; strong military; and low taxes. Where’s all the money to come from? Borrow a ton of it for sure. And, depending on your political affiliation, soak the wealthy.

Dudley: “Turning first to Blanchard, I agree that deficit spending looks less problematic than in the past. The government’s debt burden, measured as a percentage of gross domestic product, remains stable as long as debt and GDP grow at the same rate. This is easier to do now because the long-run nominal growth rate (around 3.5-4.0%) is well above the U.S. government’s borrowing cost (around 2.5%). So the government has some leeway: The debt can grow at nearly 4% per year, or 1.0% to 1.5% net of interest expense, without increasing the debt-to-GDP ratio. The low level of interest rates might help explain why markets have proven more tolerant of large, persistent budget deficits around the world, with Japan the most notable example.”

Could it be that markets are “more tolerant of large, persistent deficits around the world” specifically because of historic and far-reaching changes in central bank doctrine and policies? A decade ago, no one contemplated central banks purchasing more than $16 TN of government debt securities. Only a nutcase would have pondered ten years of near zero – or even negative – interest rates (and $10 TN of negative-yielding bonds). “Whatever it takes” central banking? Crazy talk.

These days, markets believe that central banks will be able and willing to purchase unlimited quantities of government bonds to ensure that yields remain low and markets highly liquid. No crisis necessary. Indeed, markets have been convinced without a doubt that central bankers will do whatever it takes to ensure no crises, bear markets or recessions.

The reality is that global central banks have fundamentally inflated the price of government debt, while systematically altering market risk perceptions. And, yes, it has made deficit spending appear much less problematic. As illustrated most starkly in Japan, on an ongoing basis governments issue enormous quantities of debt instruments without markets demanding one iota of risk premium. Heck, the bigger the deficit (and heightened systemic risk) the lower risk premiums. It’s all astonishing, entertaining - and has turned almost comical. But it’s seriously become the greatest market distortion in history – today viewed as “business as usual.” And, importantly, with “risk free” sovereign debt the foundation of global finance, distortions in prices and risk perceptions encompass securities markets (and asset markets more generally) around the globe.

“The government’s debt burden, measured as a percentage of gross domestic product, remains stable as long as debt and GDP grow at the same rate.” Okay, except that for a decade now debt has been expanding more rapidly than GDP - for what is now among the longest expansions on record. And I strongly caution against extrapolating 3.5-4.0% economic growth into the future. A scenario of 5% to 7% debt growth, with zero to 2% real GDP expansion, is not only not unreasonable, it’s realistic. And let’s not disregard demographics and the projected surge in entitlement spending. Truth be told, we’re now a mere garden variety bear market and recession away from Fiscal Armageddon. At some point markets may even place a risk premium on Treasury debt. Interest payments on federal borrowings are projected at $364 billion in fiscal 2019. Factoring only a small increase in market yields, debt service is projected to more than double by 2018. In the event of a deep recession and another round of bailouts, annual deficits approaching $2.0 TN are not crazy talk.

Dudley: “How and when the government spends the money also matters. Infrastructure investment, for example, can actually pay for itself by boosting the economy’s productive capacity. This is particularly relevant in the U.S., where dilapidated roads, ports and other public works desperately need an upgrade. (Imagine the benefits of a second rail tunnel between New York City and New Jersey.) Deficit spending in recessions can also be self-funding, because it engages unused resources — for example, by employing people whose abilities and skills would otherwise be wasted.”

The past decade has seen an incredible expansion of federal debt. To come out of such a period with “dilapidated roads, ports and other public works” does not instill confidence that funds have been – or ever will be – spent wisely.

Dudley: “Yet Modern Monetary Theory goes one big step further. It suggests that a government like the U.S. needn’t worry about debt at all. As long as it borrows in its own currency, there is no risk of default or bankruptcy. It can spend as much as it wants on any projects, such as education and health care, and just create additional IOUs to cover the cost.”

Like Dudley, I have few kind words for Modern Monetary Theory (MMT). I basically liken it to crackpot theories that have haunted monetary stability throughout history. Every great monetary inflation is replete with deeply flawed notions, justifications and rationalizations. But that MMT seems even remotely reasonable these days is owed directly to “activist” central banking - and the perception that central bank manipulation of rates and the unlimited purchase of securities ensure forever low market yields and endless demand for government obligations.

It’s now been almost a decade since I began warning of the incipient “global government finance Bubble.” In true epic Bubble form, after a decade of unprecedented expansion of government and central bank Credit, there’s a deeply embedded market perception that basically no amount of supply will impact the price of so-called “risk free” debt. And it’s precisely this perilous delusion that ensures an eventual crisis of confidence.

Today’s crackpot theories hold that central banks can continue to suppress interest rates and stimulate financial markets so long as consumer price inflation remains muted. It’s the old “money” as a “medium of exchange” focus that has led to scores of fantastic booms followed certainly by devastating collapses. The infamous monetary theorist John Law and his experiment in paper money were celebrated in France – that is until the spectacular 1720 collapse of his scheme and the attendant Mississippi Bubble. It literally took generations for trust in banking to return. Contemporary central banking is both the architect and enabler of crackpot theories. The celebration, today seemingly everlasting, will prove tragically transitory.

“Money” as a “Store of Value.” It is delusional to believe that endless issuance of non-productive Credit will not at some point significantly impact the value of these instruments. And the more central bankers manipulate the debt markets, the greater the issuance. Arguably, one of the greatest costs associated with the ongoing experiment in “activist” monetary management is the bevy of market distortions that promote the rapid expansion of government and other non-productive debt.

Moreover, central banks injecting “money” directly into – and furthermore supporting – securities markets is an allocation of Credit predominantly benefitting the wealthy. Sure, there’s some “trickle down.” The unemployment rate is historically low and jobs are more plentiful. By now, however, it should be abundantly clear that employment gains do not abrogate a system that has evolved to distribute wealth so inequitably – and the perception that the system is rigged for the benefit of the wealthy.

Even with gainful employment, many see the system as hopelessly unfair. The Fed can now feign trepidation for CPI missing its 2% inflation objective. Yet tens of millions struggle making ends meet against constantly inflating costs (including housing, healthcare and tuition). We’re now clearly on a trajectory of risking a crisis of confidence in financial assets and our institutions more generally.

Dudley: “Alas, there is no free lunch. For one, the economy might not have enough resources — in the form of workers and industrial capacity — to meet the combined demand from the government and the private sector. The result would be inflation, as too much money chased too few goods and services.”

That it has the appearance of a “free lunch” is at the heart of the quandary. And it’s not that “the result would be inflation.” Indeed, the result is and has been inflation, just not the typical variety. The prevailing source of monetary inflation is central banks injecting new “money” into the securities markets, while essentially promising liquid and levitated markets. The upshot is too much “money” chasing financial market returns. Monetary Disorder. Booms and Busts. Unmanageable Speculation. Intractable Resources Misallocation. Economic Maladjustment and Global Imbalances

The dilemma today - as it’s been with great inflationary episodes throughout history – is that inflation becomes deeply ingrained and halting it too painful. Policymakers refuse to accept mistakes and change directions. Instead, there is denial and the irresistibility of rationalization and justification. Throughout the devastating Weimar hyperinflation, Germany’s central bank refused to accept that they were the party of primary responsibility – but instead rationalized they were being forced to respond to outside forces. Today’s great global inflation is characterized by contrasting dynamics, but some of the devastating consequences of failing to recognize the essence of the problem are all too similar. Markets. Social. Political. Economic. Geopolitical.

Gulf of Mexico developers get set for a black gold rush

Companies scramble to host giant oil tankers as US becomes net energy exporter

Gregory Meyer in New York

Imports wane as exports grow: the tanker Maria sails out of the Port of Corpus Christi after discharging crude oil at the Citgo refinery in Corpus Christi, Texas © FT montage; Bloomberg

Oil was more than $100 a barrel in 2008 when the pipeline company Enterprise Products Partners announced the Texas Offshore Port System. The $1.8bn “Tops” project would have unloaded foreign crude oil from supertankers and fed it to a country desperate for more.

Tops was never built. But Enterprise is now back with a project spelt in reverse. The Sea Port Oil Terminal — “Spot” — would be able to load a supertanker a day with US oil for export from the Texas coast.

Enterprise’s application for a federal permit to build Spot, filed last week, reflects more than executives’ sense of humour. It shows how the US has changed over the past decade from being the world’s biggest importer of oil to a leading supplier. Next year it will become a net energy exporter, government analysts predict, thanks to surging oil and gas production.

Companies are now laying the groundwork to sharply increase overseas crude oil sales. They are expanding docks, dredging channels to make them deeper, and proposing offshore loading stations in the Gulf of Mexico to lure the largest supertankers. The black gold rush comes three years after lawmakers allowed unrestricted crude oil exports. Shipments have quadrupled to 2.4m barrels per day, and oil executives foresee a further doubling of exports.

Coastal infrastructure is critical to that growth. The US today has the capacity to export 8m b/d of crude from the Gulf coast, and another eight projects under development would raise it above 12m b/d, according to Lipow Oil Associates, a Houston-based consultancy.

The prospect of overcapacity has sparked a race to be first.

“We believe that only three get built,” says Tom Ramsey, chief executive of Jupiter Energy Group. He hopes his project, a 1m b/d terminal off Brownsville, Texas, will be one of them.

The prize is the ability to fully load a Very Large Crude Carrier, a supertanker big enough to transport oil profitably to Asia. The channels at the ports of Corpus Christi and Houston are currently too shallow to fill a VLCC without it getting stuck. Partially loading VLCCs adds time and 50-75 cents per barrel to the cost of transport as they must be topped up offshore by smaller vessels, according to a report from Katherine Spector of Columbia University’s Center on Global Energy Policy.

Jockeying among developers has become intense. A subsidiary of Swiss-based commodities trader Trafigura, for example, has sought regulatory approval to build a VLCC loading terminal at a buoy about 15 miles offshore near Corpus Christi.

The Corpus Christi port authority has begun its own $409m dredging project to allow larger tankers to sail in and has also proposed a $1bn new oil export terminal with Carlyle Group, the private equity investor, that would further deepen the channel to enable VLCCs to depart full.

The port authority has asked federal regulators to deny the company’s application. Its lawyer invoked a 12-year-old criminal case against Trafigura and its recent entanglement with Brazil’s biggest corruption case, known as Operation Car Wash.

“These guys aren’t Boy Scouts,” says Sean Strawbridge, the port’s chief executive.

The port has threatened to sue the US Maritime Administration if Trafigura’s project is permitted to proceed. In September, the port hired lobbyists in the Texas state capital to work on “offshore oil terminals”, records showed. “The governor can veto it for any reason or no reason at all,” Mr Strawbridge says.

Trafigura declines to comment on the port’s claims about legal matters. With respect to Brazil, which in December charged two former Trafigura executives with bribery, the company referred to an earlier statement saying that it has a “zero tolerance policy on bribery and corruption”.

“We think a deepwater port is the most efficient, effective, safe way to get the Texas producers’ oil to market,” says Corey Prologo, Trafigura’s director of North American oil trading.

The export terminals proposed across Texas and Louisiana would handle a quickening flow of American oil. After cutting back during the recent oil price rout, drillers in shale regions have propelled US crude production to nearly 12m b/d, more than Russia or Saudi Arabia.

Output might have been higher but for a shortage of pipelines in inland basins. As new pipelines open, oil could instead back up in coastal terminals without further exports. In Houston, energy shippers are worried that a new fleet of giant container vessels will crowd their tankers and barges and have formed a group called the Coalition for a Fair and Open Port to protect access.

Offshore terminals skirt port congestion by loading crude from underwater pipelines on to supertankers moored at sea. Only one terminal can currently load a 2m-barrel VLCC: the Louisiana Offshore Oil Port (Loop), which was modified last year to handle exports as well as imports. In December three full VLCCS left Loop in a single week.

More terminals are in the race. The same day Enterprise submitted paperwork to build Spot, a joint venture named Texas Colt filed its own application to build a competing offshore facility outside Freeport, Texas.

Buckeye GP, a midstream energy company which handles crude exports through an onshore terminal in Corpus Christi, is now developing another.

“The US is going to play an increasingly important role in global energy supply,” says Khalid Muslih, executive vice-president at the company.

China’s Difficult Balancing Act

China needs to keep growth high enough to maintain social stability, but also must preserve external stability via the renminbi’s exchange rate. How China manages its currency during its economic policy shift could have important global consequences.

Gene Frieda

china construction site

LONDON – After a long period of investment-driven growth, China is finally changing its policy playbook. Having recognized the costs of relying on excessive credit growth in the medium term, now it is emphasizing tax cuts, further market opening, and incentives to boost consumption over investment. This means accepting lower growth rates in the future.

Yet, seven months into this shift, it is clear that these new policy measures alone will not be enough to stabilize growth at a sufficiently high rate. The targeted nature of the fiscal stimulus announced so far, together with regulatory efforts to limit the adverse side effects of earlier policy easing, suggest that the stabilization process will be longer and more arduous than expected.

There will be strong temptations to return to the old model as the economy adapts. But China’s leaders seem to accept that unless there are major negative shocks, they should not open the credit floodgates again to address cyclical weakness.

As a result, China must perform a difficult balancing act. It needs to keep growth high enough to maintain social stability, while also maintaining external stability, as reflected in the renminbi’s exchange rate. How China manages its currency during the policy shift could have important global consequences.

Other Asian economies faced a similar problem two decades ago. A central lesson from the 1997-1998 Asian crisis was that rigid exchange rates were incompatible with rapid, debt-driven growth. Fueled by cheap debt, fast-growing Asian economies tried to maintain high investment rates for far too long. Their current accounts deteriorated, and growth slowed as their currencies remained pegged to a sharply appreciating dollar. Eventually they were forced to devalue their currencies as capital fled and foreign reserves dwindled.

In the wake of the global financial crisis, China managed to maintain high rates of investment growth only through rapid credit expansion. As a result, aggregate debt levels surged to around 270% of GDP in 2018 from approximately 150% in 2008. Over the same period, China’s current-account surplus fell from 9% of GDP to less than 1%.

Because these high debt levels limit China’s policy options, the renminbi’s exchange rate could play a more important role in stabilizing growth than in the past. But the perceived political constraint on depreciating the currency to support growth, and the increasing role of the state sector in the economy, are adding to cyclical headwinds and making stabilization more difficult.

There are also uncertainties regarding China’s future growth model, stemming from Western challenges to Chinese participation in the global trading system and the inconsistencies between the old and new policy playbooks.

These uncertainties, in turn, create negative feedback loops. Risk-averse lenders shun private-sector borrowers because of a lack of good collateral and the implicit guarantees on loans to the state sector. The role of the state naturally strengthens as the government tries to stabilize growth rates at lower levels. A lack of alternative financial assets channels savings into the property market, but high-real estate prices force consumers to borrow more to buy property, crowding out consumption. And the bias toward infrastructure investment limits investment in services spending on education, health care, and financial inclusion, preventing the economy from producing what consumers want.

To be clear, the near-term risk of a Chinese crash or crisis remains low. Despite higher debt levels, China retains plenty of fiscal and regulatory tools to stabilize its economy. But, as with any major policy shift, the risk of accidents is substantial. The greatest risk concerns exchange-rate management, which is currently preventing China from using monetary policy to help stimulate the economy.

China currently is unwilling to ease monetary policy because it doesn’t want the renminbi to depreciate, in part for geopolitical reasons but also due to its bad experience with currency flexibility in August 2015. But, following the sharp rise in debt over the last decade, debt-service costs are now equivalent to 70% of the total monthly flow of credit. Interest-rate cuts have become imperative.

If China fails to ease monetary policy to complement the fiscal stimulus, it risks falling into a trap similar to the one that ensnared its Asian peers in the 1990s. The best way for China to avoid a sharper, more destabilizing currency devaluation is to stabilize growth quickly, before doubts deepen about the economy’s longer-term trajectory.

China has embarked on a huge policy shift aimed at putting the economy on a lower-growth but more sustainable trajectory. How its leaders manage this transition is crucial for China’s future, and how well it performs its balancing act will have major implications for global stability.

Gene Frieda is an executive vice president and global strategist for PIMCO.

An Afghan Peace Deal for Our Time?

The U.S. and the Taliban seem ready to make a peace deal. But they’ll need others at the table to make it last.

By Allison Fedirka


By all accounts, the United States and Afghan Taliban are on track to reach a deal by year’s end. Both parties need to wrap up this conflict – and that imperative outweighs the obstacles that arise along the way. The U.S. and the Taliban are the major players in the current negotiations, but a bevy of others will try to influence the final agreement. Their power to do so is limited. But their buy-in is requisite for a deal to stick and to prevent immediate disruption once the U.S. withdraws its forces.

Afghanistan’s strategic location means that its stability is often fleeting. Outside powers periodically make forays into this buffer area, seeking to expand their sphere of control or influence; their efforts have been met with varying degrees of success. Afghanistan’s strategic value is derived from its position at the crossroads of the Middle East, South Asia and Russia, and its vast natural resources add to its appeal. But its terrain – desert in the west and high altitudes in the east – often frustrates efforts at sustained military campaigns. Its people are a hodgepodge of ethnic groups, often isolated from one another by a strong tribal culture and geographic barriers, and not easily united under a single ruler.

These features make conquering and consolidating control over Afghanistan particularly difficult. The U.S. is by no means the first power to get bogged down in military operations there, and likely will not be the last. Both sides of this conflict – the U.S. and the Taliban – have been drained of resources in a nearly two-decade war that has essentially reached a stalemate. The U.S. needs to prioritize its military commitments elsewhere (and it’s pivoting to address conflicts with economic means, rather than military intervention). Further, Russia and China – not Islamic extremists – are its key geopolitical foes, and it needs to allocate resources accordingly. On the other side of the table, the Taliban’s successful offensive, resulting in significant territorial gains, has earned it substantial leverage in the negotiations. Rather than let the war drag on any further, both parties have an interest in cutting their losses and ending the fighting – that’s what is driving the current peace talks, and it’s why they should be taken seriously.
A Crowded Table
The U.S. government and the Afghan Taliban will be the primary brokers of a peace agreement. The Afghan government, for all its rhetoric, derives its power from the U.S., and it’s not strong enough to stand on its own and dictate terms. Other regional players have expressed interest in the peace process, but there’s little they can do to influence the outcome.

The U.S. and the Taliban must now face the dilemma of how to broker a peace deal with honor. Having spent billions of dollars and sacrificed thousands of lives, they must reach an agreement without blatantly admitting to a draw. At a late-January meeting in Qatar, the parties agreed to a general framework for a deal. The Taliban reportedly agreed not to allow any groups to use Afghanistan as a base to launch attacks on any other countries and to keep al-Qaida and the Islamic State out of the country. In exchange, the U.S. would withdraw its troops, save for a minimal force. Once a withdrawal timetable is established, the Afghan government will be brought in to discuss issues like a cease-fire, the release of prisoners and the future of the government itself.

Complicating matters, Afghanistan’s geopolitical position means that its neighbors will have to, at minimum, buy into the basic terms of the agreement if it is to have any chance at lasting. Its neighbors – and others with an interest in the country – want stability in Afghanistan, but they also want the chance to influence the peace process. Given Afghanistan’s propensity for chaos, Washington has engaged in a concerted effort to secure their buy-in, but they hold no real power in the negotiations. All of these parties – including Pakistan, India, Saudi Arabia, the United Arab Emirates, Qatar, Iran, China and Russia – have their own set of threats to deal with; achieving some degree of stability in Afghanistan checks one major item off their lists.

Russia, which has a complex history with Afghanistan, is primarily concerned with preventing the Afghan conflict from spilling over and with staunching the regional spread of Islamic extremism. Moscow is none too eager to strengthen the extremist parts of the Taliban, particularly as the organization’s more radical branches threaten to spread its extremist brand of Islam in Central Asia. Its concern is not misplaced: Bomb threats in Moscow (and even across Russia) and arrests of extremists in Central Asia are becoming more frequent.

With its military already engaged in Ukraine and Syria, opening a third front in Afghanistan is not a desirable option for Russia; instead, Moscow will look to less resource-intensive options. Still, Russian Foreign Minister Sergey Lavrov’s Central Asian tour to Kyrgyzstan, Tajikistan and Turkmenistan shows that Russia wants to increase its military influence in the region. Negotiations for a second Russian military base in Kyrgyzstan are underway, and the combat capabilities of Russia’s 201st Military Base in Tajikistan have been significantly increased. It’s also providing support to local security forces (including those of Tajikistan, the Taliban and Afghanistan) to go after extremist threats like the Islamic State’s branch in Khorasan province. Politically, Russia is working to cement its strong ties with Central Asian states; though Russia has little hope of influencing the U.S.-backed Afghan government, it can invite opposition members and Taliban representatives to talks in Moscow. (It’s no coincidence the meetings coincided with Lavrov’s regional tour.) Those talks won’t produce a deal, but they will help Moscow build foundational relationships with Afghanistan’s future political forces.

To the west, Iran wants influence over a post-deal Afghanistan, though it faces some major constraints. Afghanistan serves as an important buffer between Iran and Pakistan and a key source of water for eastern Iran. The southwestern Helmand River basin – one of five in Afghanistan – is an essential source of fresh water for Iran’s border region. Just beyond the Helmand basin lies desert terrain, making that water source even more valuable for Iran, which is experiencing a water shortage. But Tehran’s engagement with the Taliban is limited, and its resources have been stretched thin since its involvement in Syria and Iraq. And amid U.S. efforts to combat Iranian influence, Afghan and Taliban officials find it more prudent to work with the U.S. – and even Russia – rather than with a sanctioned regime in the middle of an economic crisis.


Any discussion of Afghanistan’s future must include Pakistan, which seeks a stable neighbor and a friendly, collaborative government in Kabul. In 2001, Islamabad didn’t want the Taliban ousted from power in Kabul. Since then, its relationship with Washington has become only more fraught. The U.S. has relied on Pakistani cooperation to maintain its supply routes, but Washington has accused Islamabad of sheltering Taliban and other extremist fighters responsible for attacks in Afghanistan. The Pakistani government says its influence over these groups is vastly overestimated, and Islamabad has not been particularly cooperative with the U.S. in the peace process. But Pakistan has changed a lot since 2001. It no longer benefits much from supporting the Afghan Taliban and runs a lower risk for going after it. It has worked to reduce domestic terrorism, and its economy is struggling. Iran and India have replaced Pakistan as Afghanistan’s main trade partners. Pakistan is vulnerable, and incentives offered by the U.S. and its allies at this moment may be sufficient to coax Pakistan into supporting a peace deal. The U.S. has floated the possibility of trade agreements, and Saudi Arabia and the UAE have provided billions in loans to help ease Pakistan’s debt. It’s yet to be seen if that’s enough to bring Pakistan on board.
Closing the Deal
The window of opportunity to finalize an agreement is open but won’t be forever, and there’s a sense of urgency to strike a deal. The fighting has eased over the winter months, but spring is on the horizon, and that could give the Taliban leverage in the talks. In addition, presidential elections in Afghanistan are scheduled for July, giving the U.S. and Taliban an opportunity to ensure that the next Afghan government buys into a peace deal. Both have some influence over candidate selection, so it’s likely the next president will be on board with a U.S.-Taliban agreement. The elections, therefore, serve as something of an informal deadline. (Notably, just after the U.S. and Taliban began talks in late December, the elections were rescheduled from April to July, extending the window of opportunity.) A post-election deal is not impossible – but such a deal could make buy-in more difficult to secure and fighting more difficult to end.

In the meantime, there’s more to negotiate, and the negotiators will need to bring the Afghan government back into the fold. Efforts to carefully involve Afghanistan’s neighbors will continue. And as the U.S. special representative for Afghanistan reconciliation put it: “Nothing is agreed until everything is agreed.”

Who’s Afraid of Socialism?

The new Democratic agenda sure looks like government control over the means of production.

By The Editorial Board

Lawmakers attend President Donald Trump's State of the Union address at the U.S. Capitol in Washington, D.C., Feb. 5.
Lawmakers attend President Donald Trump's State of the Union address at the U.S. Capitol in Washington, D.C., Feb. 5. Photo: Mandel Ngan/Agence France-Presse/Getty Images

Now that Donald Trump has criticized the “new calls to adopt socialism in this country,” Democrats and the media are already protesting that the socialist label doesn’t apply to them. But what are they afraid of—the label or their own ideas? The biggest political story of 2019 is that Democrats are embracing policies that include government control of ever-larger chunks of the private American economy.

Merriam-Webster defines socialism as “any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods.”

The U.S. may not be Venezuela, but consider the Democratic agenda that is emerging from Congress and the party’s presidential contenders. You decide if the proposals meet the definition of socialism.

Medicare for All. Bernie Sanders’ plan, which has been endorsed by 16 other Senators, would replace all private health insurance in the U.S. with a federally administered single-payer health-care program. Government would decide what care to deliver, which drugs to pay for, and how much to pay doctors and hospitals. Private insurance would be banned.

As Senator Kamala Harris put it recently on CNN, “the idea is that everyone gets access to medical care, and you don’t have to go through the process of going through an insurance company, having them give you approval, going through the paperwork, all of the delay that may require. Who of us has not had that situation, where you’ve got to wait for approval, and the doctor says, well, I don’t know if your insurance company is going to cover this? Let’s eliminate all of that. Let’s move on.”

If replacing private insurance with government control isn’t socialism, what is?

The Green New Deal. This idea, endorsed by 40 House Democrats and several Democratic presidential candidates, would require that the U.S. be carbon neutral within 10 years. Non-carbon sources provide only 11% of U.S. energy today, so this would mean a complete remake of American electric power, transportation and manufacturing.

Oh, and as imagined by Rep. Alexandria Ocasio-Cortez, all of this would be planned by a Select Committee For a Green New Deal. Soviet five-year plans were more modest.
A guaranteed government job for all. To assist in this 10-year transformation of society, the Green New Deal’s authors would “provide all members of our society, across all regions and all communities, the opportunity, training and education to be a full and equal participant in the transition, including through a job guarantee program to assure a living wage job to every person who wants one.”

This is no longer a fringe idea. The Center for American Progress, Barack Obama’s think tank, supports a government job for everyone “to counter the effects of reduced bargaining power, technical change, globalization,” and presidential candidate Kirsten Gillibrand tweeted her support for it as an alternative to tax reform.

A new system for corporate control. Senator Elizabeth Warren wants a new federal charter for businesses with more than $1 billion in annual revenue that would make companies answer to more than shareholders. Employees would elect 40% of directors, who would be obliged to consider “benefits” beyond returns to the owners. This radical redesign of corporate governance would give politicians and their interest groups new influence over private business decisions and assets.

Vastly higher taxes. These ideas would require much more government revenue, and Democrats are eagerly proposing ways to raise it. Mr. Sanders wants to raise the top death tax rate to 77%. Ms. Ocasio-Cortez wants a new 70% tax rate on high incomes, which is supported by the Democratic intelligentsia. The House Ways and Means Committee is working on a plan to raise the payroll tax to 14.8% from 12.4% on incomes above $400,000.

Never to be outdone on the left, Ms. Warren wants a new 2% “wealth tax” on assets above $50 million and 3% above $1 billion, including assets held abroad. France recently junked its wealth tax because it was so counterproductive, and such a tax has never been levied in America. This is government confiscation merely because someone has earned or saved more money than someone else. Socialism?

These are merely the most prominent proposals. There are many others, such as Ms. Warren’s plan to set up a government-owned generic drug maker that would inevitably put private companies out of business because its cost of capital would be zero.


Some readers might think this is all so extreme it could never happen. But presidential candidates don’t propose ideas they think will hurt them politically. The leftward lurch of Democratic voters, especially the young, means the party could nominate the most left-wing presidential candidate in U.S. history. If other Democratic candidates oppose any or all of this, we’d like to hear them.

The American public deserves to have a debate about all this, lest it sleepwalk into a socialist future it doesn’t want. Credit to Mr. Trump for teeing it up.