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Special Report: Trump addresses Iran attack on U.S. bases in Iraq
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Iran strikes back at US with missile attack at bases in Iraq
Iran Strikes Back at U.S.With Missile Attack on Bases in Iraq | News 4 Now
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Donald Trump blames Barack Obama for giving Iran the cash to buy missiles flung at U.S. bases-as he offers to ’embrace peace’ and claims Tehran is ‘standing down’ but warns of ‘hypersonic weapons’ and ‘lethal and fast’ attacks
President said Iran can choose peace but warned of new weaponry that’s ready to strike
He blamed the Obama administration for unfreezing $150 billion and delivering $1.5 billion in cash to jump-start a nuclear nonproliferation deal that has since fallen apart
‘As long as I am president of the United States, Iran will never be be allowed have a nuclear weapon,’ he vowed, even before saying ‘Good morning’
‘Our missiles are big, powerful, accurate, lethal and fast,’ he said, sending a warning in nearly the same breath as an olive branch
‘Under construction are many hypersonic missiles,’ he warned, standing amid a tableau of stern-faced military leaders
Iran fired 22 ballistic missiles at two Iraqi bases housing American troops early Wednesday local time
Strikes are not thought to have killed any U.S. or Iraqi personnel, though extent of damage is being assessed
Ayatollah Khamenei said U.S. was given a ‘slap’ but strikes alone are ‘not enough’ and wants troops kicked out
There are still fears for U.S. troops after Iran-backed militias in Iraq threatened to carry out their own strikes
Donald Trump blamed Barack Obama on Wednesday for supplying Iran with the money to purchase a torrent of missiles fired at American military positions Tuesday night.
‘The missiles fired last night at us and our allies were paid for with the funds made available by the last administration,’ he said, citing $150 billion in frozen assets that the previous president released and $1.5 billion flown by the U.S. to Tehran.
He began his speech to the world on Wednesday with a familiar ultimatum, even before saying ‘Good morning.’
‘As long as I am president of the United States, Iran will never be be allowed have a nuclear weapon,’ he said.
And Trump backed up that vow with a threat:
‘Our missiles are big, powerful, accurate, lethal and fast,’ he said, sending a warning in nearly the same breath as an olive branch.
‘Under construction are many hypersonic missiles,’ he warned, standing amid a tableau of stern-faced military leaders.
Minutes later he offered an olive branch, urging European nations to make ‘a deal with Iran that makes the world a safer and more peaceful place’ and allows Iran to explore its ‘untapped potential’ as a mainstream trading partner.
‘We want you to have a future, and a great future,’ he told Iran’s people, claiming its military ‘appears to be standing down.’
President Donald Trump delivered a high-stakes address to the world on Wednesday, offering Iran peace if it abandons its nuclear ambitions but also threatening the use of hypersonic weapons if war follows
Talking peace and war: Donald Trump offered to ’embrace peace’ with Iran if it gives up its nuclear ambitions and its terrorism – but listed U.S. military capabilities
The president spoke in the Grand Foyer of the White House, speaking with the aid of a teleprompter in measured tones
Trump’s made-for-TV tableau included Secretary of Defense Mark Esper, Chairman of the Joint Chiefs of Staff Gen. Mark Milley and Vice President Mike Pence
Tightly-scripted: Donald Trump stuck to the teleprompter version of his address to the nation about Iran
No questions: Donald Trump left without taking any questions from reporters who had been brought into the room before his speech
Television entrance: Donald Trump enters to address the nation in the aftermath of missile strikes by Iran on a U.S. base in Iraq
The president’s audience-of-one was Iran Supreme Leader Ayatollah Ali Khamenei, the iron-fisted theocrat who is the mortal enemy of Israel and the United States
His remarks, watched live around the world, came after Tehran’s armies rained missiles down on Iraqi military installations where American troops have been stationed for more than 16 years.
‘No Americans were harmed in last night’s attack by the Iranian regime,’ the president said. ‘We suffered no casualties.’
Iranian state-run television claimed at least 20 U.S. servicemen and women were killed.
U.S. officials believe the missiles were deliberately fired into unpopulated areas, in what a senior official called a ‘heads-up bombing.’
The president spoke with the aid of tele-prompters in the Grand Foyer, the main entrance hall in the front of the White House.
He blasted Tehran’s ‘destructive and destabilizing behavior’ and said the days of Western patience ‘are over.’
Trump has long seen himself as a maverick loner on the world stage, unpredictable and unbothered by ruffling feathers overseas.
He boasts that his low approval ratings in foreign countries are an indication that he is focused on Americans’ welfare—not the priorities of real and nominal allies.
That approach could be tested as Iran and the U.S. creep toward what some, but not all, in the national security establishment see as an inevitable war.
The White House isn’t expecting one, the senior official said Wednesday: ‘This doesn’t have to end badly, and frankly right now we might be in the best position ever for diplomacy with Tehran.’
As he has in the past, the president trashed the Iran nuclear deal negotiated during the Obama administration along with Tehran and six other powers. He called the deal, which the administration already backed away from, ‘very defective’ noting that it ‘expires anyway.’
He called on other negotiating parties, including Great Britain, France, Germany, and Russia – to ‘break away from the remnants of the Iran deal.
At the same time, Trump did not completely foreclose negotiation. He called for a ‘deal with Iran that makes the world a more peaceful and safer place.’
Trump, who spoke to reporters but had yet to speak directly to the nation since ordering the killing of Soleimani, called the Iranian general ‘the world’s top terrorist,’ and said he was ‘personally responsible for some of the absolutely worst atrocities.’
‘Soleimani’s hands were drenched in both American and Iranian blood,’ Trump said. ‘He should have been terminated long ago. By removing Soleimani, we have sent a powerful message to terrorists: If you value your own life, you will not threaten the lives of our people,’ he added.
Trump announced that the U.S. would impose ‘powerful’ sanctions on the already heavily-sanctioned Iranian regime. But the White House did not immediately provide specifics. Treasury Secretary Steven Mnuchin was seen exiting the meeting Trump had with top military and security advisors moments before the speech.
‘The United States will immediately impose additional punishing economic sanctions on the Iranian regime. These powerful sanctions will remain until Iran changes its behavior,’ Trump said.
The Islamic Revolutionary Guard Corps fired on the Ain al-Asad airbase in western Iraq and Erbil International airport in the north in the early hours of Wednesday, but failed to kill a single US or Iraqi solider.
Ayatollah Ali Khamenei, speaking on Iranian TV shortly after the missiles were launched, described the strikes as ‘a slap’ and said they ‘are not sufficient (for revenge)’ while vowing further action to kick US troops out of the region.
But foreign minister Mohammad Javad Zarif said the attack was now ‘concluded,’ praising Iran’s ‘proportionate’ response and adding: ‘We do not seek escalation or war.’
Trump tweeted late Tuesday to say ‘so far so good’ as American forces assessed the damage and casualties.
Iranian television had tried to claim that 80 ‘American terrorists’ were killed, but that figure was quickly rubbished by Iraqi and US officials.
Images showed several missiles had either failed to explode on impact or else missed their targets. The remains of one was found near the town of Duhok, some 70 miles from Erbil air base, which was the intended target.
Tehran fired an ineffective missile strike at U.S. forces at Iraqi air bases after promising brutal revenge for Trump’s drone strike that killed General Qassem Soleimani (pictured), the architect of terror attacks that have killed hundreds of American servicemen and women
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Iran has fired 22 ballistic missiles at two Iraqi bases housing American troops in a revenge attack for the U.S. drone strike that killed top Iranian general Qassem Soleimani
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The Ain al-Asad airbase in western Iraq that was visited by Donald Trump in December 2018 and the Erbil base in Iraqi Kurdistan were both struck by the missiles on Tuesday at about 5.20pm EST (1.20am local time)
It is thought Iran used Fatteh-110 and Qaim-1 ballistic missiles during the attack, which failed to kill any US or Iraqi troops (pictured, one of the missiles is launched in Iran)
Ayatollah Ali Khamenei (left) said the attack it is ‘not enough’ for revenge against the US, before Iraqi militia commander Qais al-Khazali (right) vowed to exact his own revenge for the killing of Abu Mahdi al-Muhandis
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Iraqi security forces clear away pieces of shrapnel from the Ain al-Asad airbase after it was struck by ballistic missiles fired by Iran as part of operation ‘Martyr Soleimani’
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Initial reports indicate at least 15 missiles were fired at two American bases in Iraq, though officials said early warning systems sounded alarms at the Ain al-Asad base (pictured) allowing troops to scramble for cover
A man holds shrapnel from a missile launched by Iran on U.S.-led coalition forces on the outskirts of Duhok, in northern Iraq 70 miles from Erbil, following Iranian missile strikes
Wreckage of a missile that was fired at Ain al-Asad military base in western Iraq but failed to explode on impact
US officials said early warning systems sounded alarms at the Ain al-Asad base, allowing troops to scramble for cover
Iraq said 17 missiles were fired at the Ain al-Asad base, two of which failed to explode (pictured, unexploded wreckage)
In an attempt to talk-up the impact of the strikes, Iranian President Hassan Rouhani said they show ‘we don’t retreat in the face of America.’
‘If America has committed a crime… it should know that it will receive a decisive response,’ Rouhani said in a televised address. ‘If they are wise, they won’t take any other action at this juncture.’
It is thought Iran gave advanced warning of the strikes, after Iraq, Finland and Lithuania – which all had troops stationed at the bases which were targeted – all said they were informed in advance.
America said that ‘early warning systems’ detected the missile launches and sirens were sounded at the Asad base, allowing soldiers to seek shelter. It is not clear whether they were also informed by Iran.
Prominent analysts suggested Iran may have deliberately pulled its punches because they are fearful of the ‘disproportionate’ response threatened by Trump if US personnel were killed.
‘With the attacks, Tehran signalled its capacity and readiness to respond to US attacks, thus saving face, and yet they have been well targeted to avoid fatalities and thus avoid provoking Trump’s reaction,’ said Annalisa Perteghella of the Institute for International Political Studies in Milan.
President Donald Trump says ‘all is well’ and ‘so far so good’ as the damage and casualties continue to be assessed after Iran fired more than a dozen ballistic missiles at two Iraqi bases housing American troops
Iran’s foreign minister Javad Zarif called the attacks ‘self-defense’ but said they did ‘not seek escalation’ but would defend itself against further aggression
Hours after the launch, a Ukrainian Airlines Boeing 737 caught fire crashed near Tehran killing all 177 passengers and crew – including 63 Canadian and three Britons – amid fears it could have been caught up in the attack.
The Ukrainian embassy in Tehran initially stated that the crash had been caused by an engine failure rather than terrorism or a missile attack, but later deleted that claim.
Iran has blamed technical failure and an engine fire for the crash, after early saying the pilot had lost control during an engine fire.
If it emerges that Iran did shoot down the plane – either accidentally or on purpose – then it is likely to prompt a global response that will escalate tensions in the region even further.
Ukraine’s foreign ministry said of those killed, 82 were Iranian, 63 Canadian, 11 Ukrainian, three British, with the remainder hailing from Sweden, Afghanistan, and Germany.
The timing of the Iranian strikes – around 1.20am local time – occurred at the same time as the US drone strike which killed Soleimani.
Following the strikes, the Islamic Revolutionary Guard Corps warned any further strikes by America would be met with fresh attacks, and that any allied countries used as a base for such strikes would themselves become targets.
The Iraqi military said 22 missiles were fired in total – 17 at the Asad base, two of which failed to explode, and five more that struck Erbil International Airport. US officials put the total slightly lower at 15 – ten of which hit Asad, one which hit Erbil, four which failed in flight.
Iran said it had used Fatteh-110 ballistic missiles for the attack, though analysts said images of wreckage near the Aasd base also appears to show Qaim-1 ballistic missiles were used.
The Ain al-Asad airbase in western Iraq – visited by Trump in December 2018 – and Erbil base in Iraqi Kurdistan were struck by the missiles around 5.20pm EST Tuesday in an operation dubbed ‘Martyr Soleimani’ by Iran.
The Pentagon says the missiles were ‘clearly launched from Iran’ to target U.S. military and coalition forces in Iraq. A US official said there were no immediate reports of American casualties, though buildings were still being searched. Iraqi officials say there were no casualties among their forces either.
There are still fears for US forces in the region after Qais al-Khazali, a commander of Iran-backed Popular Mobilization Forces in Iraq, vowed to exact revenge for the killing of deputy-leader Abu Mahdi al-Muhandis.
‘The first Iranian response to the assassination of the martyr leader Soleimani took place,’ he tweeted. ‘Now is the time for the initial Iraqi response to the assassination of the martyr leader Muhandis.
‘And because the Iraqis are brave and zealous, their response will not be less than the size of the Iranian response, and this is a promise.’
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Supreme Leader Ayatollah Ali Khamenei said Iran had delivered a ‘slap in the face’ to American forces but added that missile strikes are ‘not enough’ and called for the US to be ‘uprooted’ from the region
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The Ayatollah spoke in a televised address early Wednesday during which he praised a ‘measured’ strike against the US, which he said embodied the spirit of slain general Soleimani
The Ain al-Asad airbase in western Iraq and the Erbil base in Iraqi Kurdistan were both struck by the missiles on Tuesday at about 5.30pm (EST)
President Trump and First Lady Melania visited the al-Asad airbase in western Iraq in December 2018. The airbase was targeted by Iran on Tuesday in a missile attack
Defense Secretary Mark Esper and Secretary of State Mike Pompeo were spotted arriving at the White House soon after news of the strikes broke
Iraqi security forces and citizens gather to inspect the site where missiles fired by Iran’s Revolutionary Guard Corps landed outside the Ain al-Asad airbase
Pieces of shrapnel are seen near the Ain al-Asad airbase after a missile strike by Iran
Members of Peshmerga fighters stand guard in center of Erbil in the aftermath of Iran’s launch of a number of missiles at bases in Iraq
Members of Kurdistan’s regional government attend a meeting to discuss security after Iranian missiles targeted Erbil International Airport early Wednesday
Britain, Australia, France, Poland, Denmark and Finland have confirmed that none of their troops stationed in Iraq were hurt in the attack, while calling for an end to hostilities and a return to talks.
European Commission President Ursula von der Leyen vowed the EU will ‘spare no effort’ in trying to save the nuclear deal that Iran signed with President Obama and was ripped up by Trump, sparking the current tensions.
China and Russia, both key Iranian allies, also warned against escalating strikes with Vladimir Dzhabarov, lawmaker with Russia’s upper house of parliament, warning the conflict could easily lead to a nuclear war.
The Syrian government, another key ally of Iran, has expressed full solidarity with Iran, saying Tehran has the right to defend itself ‘in the face of American threats and attacks.’
The foreign ministry said in a statement Wednesday that Syria holds the ‘American regime responsible for all the repercussions due to its reckless policy and arrogant mentality.’
Meanwhile Turkey, which is a NATO member but also has ties to Iran in Syria, said its foreign minister will visit Iraq on Thursday as part of diplomatic efforts to ‘alleviate the escalated tension’ in the region.
Iran’s Revolutionary Guards, which controls the country’s missile program, confirmed that they fired the rockets in retaliation for last week’s killing of Iranian general Qassem Soleimani.
They reported the operation’s name was ‘Martyr Soleimani’ and it took place just hours after the slain general’s funeral.
The rockets used in the attack, according to Iranian TV, were Fatteh-110 ballistic missiles, which have a range of 186 miles or 300km.
The Iranian air force has since deployed multiple fighter jets to patrol it airspace, according to reports – as Iran warned the U.S. and its allies in the region not to retaliate.
The Pentagon said it was still working to assess the damage.
Iranian missiles that blitzed Iraqi airbases can deliver a precision-guided 500lb warhead over a range of more than 180 miles
Two types of ballistic missiles were reportedly used to hit U.S. Military bases in Ain al-Asad in western Iraq and also around Erbil in Iraqi Kurdistan.
The majority of those used are believed to be the Fateh-110, which can travel 180 miles or 300km and have a payload of around 500lb.
Reports also suggest the Qiam-1 was also used, a short range ballistic missile produced by Iran which can travel 500 miles and carry 750lb warheads.
The Fateh-110 is an Iranian-designed, short-range, surface-to-surface ballistic missile that can be launched from any location.
While the Qiam-1 was specifically built to target U.S. bases in the Middle East, which have ‘encircled Iran’, according to Iranian sources.
When it was launched the Fateh-110 was described by Iranian defence minister Brigadier General Amir Hatami as ‘100-percent domestically made – agile, stealth, tactical (and) precision-guided’.
Both missiles are reported to have been fired from Tabriz and Kermanshah provinces in Iran.
‘In recent days and in response to Iranian threats and actions, the Department of Defense has taken all appropriate measures to safeguard our personnel and partners. These bases have been on high alert due to indications that the Iranian regime planned to attack our forces,’ a statement from the Pentagon read.
‘It is clear that these missiles were launched from Iran and targeted at least two Iraqi military bases hosting U.S. military and coalition personnel at al-Assad and Irbil. We are working on initial battle damage assessments.
‘As we evaluate the situation and our response, we will take all necessary measures to protect and defend U.S. personnel, partners, and allies in the region.’
The Islamic Revolutionary Guard Corps, a branch of the Iranian Armed Forces, reportedly said Iran’s supreme leader Ayatollah Khamenei was personally in the control center coordinating the attacks.
They also warned U.S. allies in the Middle East that they would face retaliation if America strikes back against any Iranian targets from their bases.
‘We are warning all American allies, who gave their bases to its terrorist army, that any territory that is the starting point of aggressive acts against Iran will be targeted,’ they said. It also threatened Israel.
Defense Secretary Mark Esper and Secretary of State Mike Pompeo were spotted arriving at the White House soon after news of the strikes broke.
South Carolina Senator Lindsey Graham said on Tuesday night that the missile strikes were an ‘act of war’ and said Trump had all the power he needed to act.
‘This is an act of war by any reasonable definition,’ Graham told Fox News’ Sean Hannity. ‘The President has all the authority he needs under Article II to respond.’
People stand near the wreckage after a Ukrainian plane carrying 177 passengers crashed near Imam Khomeini airport
Rescue workers in protective suits gather up the bodies of passengers who were killed in the Boeing 737 crash in Iran today
An aerial view of the crash site where rescuers searched the debris this morning with the cause of the crash still unclear
Mohammad Reza Kadkhoda-Zadeh (pictured), 40, has been named as the first British victim of the Ukrainian Airlines disaster
House Speaker Nancy Pelosi tweeted that the U.S., as well as the rest of the world, ‘cannot afford war’.
‘Closely monitoring the situation following bombings targeting U.S. troops in Iraq. We must ensure the safety of our servicemembers, including ending needless provocations from the Administration and demanding that Iran cease its violence. America & world cannot afford war,’ she tweeted.
After the strikes, Saeed Jalili – a former Iranian nuclear negotiator and foreign minister – posted a picture of the Islamic Republic’s flag on Twitter, appearing to mimic Trump who posted an American flag following the killing of Soleimani and others in the drone strike in Baghdad.
Ain al-Asad air base was first used by American forces after the 2003 U.S.-led invasion that toppled dictator Saddam Hussein, and later saw American troops stationed there amid the fight against the Islamic State group in Iraq and Syria. It houses about 1,500 U.S. and coalition forces.
About 70 Norwegian troops also were on the air base but no injuries were reported, Brynjar Stordal, a spokesperson for the Norwegian Armed Forces said.
The U.S. Federal Aviation Administration said on Tuesday it would ban U.S. carriers from operating in the airspace over Iraq, Iran, the Gulf of Oman and the waters between Iran and Saudi Arabia after the missile attack on U.S.-led forces.
Earlier on Tuesday, Defense Secretary Mark Esper said the United States should anticipate retaliation from Iran over the killing in Iraq of Soleimani.
‘I think we should expect that they will retaliate in some way, shape or form,’ Esper told a news briefing at the Pentagon, adding that such retaliation could be through Iran-backed proxy groups outside of Iran or ‘by their own hand.’
‘We’re prepared for any contingency. And then we will respond appropriately to whatever they do.’
Trump had also earlier told reporters about the prospect of an Iranian attack: ‘We’re totally prepared.’
‘They’re going to be suffering the consequences and very strongly,’ he said from the Oval Office during a meeting with Greek Prime Minister Kyriakos Mitsotakis.
Meanwhile, early reports of an attack at the al-Taji military base, just outside Baghdad, was later reported as a drill.
Local reports initially suggested that five rockets had struck the base after ‘shelter in place’ sirens were heard ringing out around the compound.
Sirens were also heard blaring out inside the U.S. consulate in Erbil, which was one of the bases struck in the missile attack.
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Iran said the attack, dubbed Operation Martyr Soleimani, was launched hours after the funeral service for General Qassem Soleimani (pictured) – who was killed in a US drone strike – had finished
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Mourners attend funeral and burial of General Soleimani in his hometown in Kerman early Wednesday morning
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People lower the coffin of Qassem Soleimani into his grave in the city of Kerman, central Iran
Mourners rush to lay their hands on the coffin of General Soleimani before it is lowered into a grave in the cit of Kerman
Was the Ukrainian jet brought down by an Iranian missile – or were the 176 people on board killed by a mechanical failure? Here are the five key theories
Theory one: Mechanical failure or pilot error
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Iranian authorities have said that initial investigations point to either an engine failure – or a catastrophic pilot error.
The three-year-old Boeing 737 jet came down just three minutes after take-off from Imam Khomeini International Airport.
Iranian officials said the pilot had lost control of the Boeing jet after a fire struck one of the plane’s engines, but said the crew had not reported an emergency and did not say what caused the fire.
Footage of the crash appears to show the plane streaking downwards with a small blaze on the wing, near its jet engines (pictured above on the ground).
But critics have questioned the Iranian account, calling it the ‘fastest investigation in aviation history’ – and said the Boeing 737 has a largely outstanding safety record with no recent history of an engine failure of this kind.
Ukrainian President Volodymyr Zelenskiy has instructed prosecutors to open criminal proceedings – a clear signal that he is unsure about Iran’s version of events.
His Government also revealed the plane was inspected just two days ago.
Theory two: Accidentally hit by an Iranian missile
The plane came down shortly after Iran launched its missile attacks Iraq with tens of ballistic weapons fired from the rogue state.
Photographs of the downed Ukrainian airlines jet show that the fuselage appears to be peppered with shrapnel damage.
Experts have said that an engine fire or pilot error does not explain those holes (pictured).
Ilya Kusa, a Ukrainian international affairs expert, said amid the US-Iranian tensions and said: ‘It is difficult not to connect the plane crash with the US-Iran confrontation. The situation is very difficult. One must understand that this happened shortly after Iran’s missile attacks on US military facilities’.
Just hours before the crash, the US Federal Aviation Administration had banned US airlines from flying over Iran, Iraq and the waters of the Persian Gulf due to the Middle East crisis.
This was due to the possibility of missiles flying towards Iraq – and airlines are still skirting the region as they head to and from Asia.
Theory three: Jet was deliberately brought down by a missile
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Video footage tweeted by the BBC‘s Iran correspondent, Ali Hashem, appeared to show the plane already burning in the sky before it crashed in a massive explosion.
It sparked speculation that the jet could have been shot down accidentally by nervous Iranian air defence soldiers, hours after Iran fired 22 ballistic missiles at US bases in retaliation for the killing of general Qassem Soleimani.
But there is a major question mark over whether Iran would shoot down a plane with so many of its own citizens on board.
Many of the world’s major airlines have stopped flying through or even near Iranian airspace as they cross the globe amid safety fears after US/Iran tensions boiled over in the past week.
Iran is a key ally of Vladimir Putin’sRussia, which grabbed Crimea from Ukraine and has been involved in an on-off conflict with its neighbour since 2014.
Russia has denied shooting down the ill-fated MH17 jet five years ago – but experts say otherwise with three Russians arrested over the disaster.
Theory four: An accidental drone strike
Experts have speculated that the Ukrainian aircraft could have collided with a military drone before crashing.
The drone may have smashed into the engine – or been sucked in – with the pilot unsighted because it was after dark.
This could cause an explosion and the fire seen as the plane hit the ground (pictured).
Experts said Iranian were in the air at the time – in case the US decided to fight back – and not always picked up by radar.
Russian military pilot Vladimir Popov said: ‘It could have been an unmanned reconnaissance aircraft, which are small in size and poorly visible on radars. A plane in a collision could get significant damage and even catch fire in the air.’
Theory five: Sabotage or a terror attack
Aviation experts have urged investigators to rule out whether the plane was brought down by terrorists or as an act of sabotage.
They say that while a flaming engine is highly unusual, the sudden loss of data communications from the plane is even more so.
This could be caused by a bomb, that blew up after the 737 took to the air, wrecking its systems.
An electronic jammer weapon that knocked out the plane’s controls could also explain it.
British expert Julian Bray said it ‘could be an altitude triggered device set to detonate during take off. Unusual that engine seen to be on fire before crash, points to catastrophic incident’ or being ‘deliberately brought down’.
He added that based on the footage pilot error looks ‘unlikely’.
Experts have said that if the black box is not recovered by Iranian security officials (pictured) from the wreckage it could point to it being a deliberate act.
After the crash the Ukrainian embassy in Tehran reported that the crash had been caused by an engine failure rather than terrorism – but this was later deleted on social media.
The strikes by Iran were a major escalation of tensions that have been rising steadily across the Mideast following months of threats and attacks after Trump’s decision to unilaterally withdraw America from Tehran’s nuclear deal with world powers.
Soleimani’s killing and Iran’s missile strikes also marked the first time in recent years that Washington and Tehran have attacked each other directly rather than through proxies in the region.
After the strikes, Saeed Jalili – a former Iranian nuclear negotiator – posted a picture of the Islamic Republic’s flag on Twitter, appearing to mimic Trump who posted an American flag following the killing of Soleimani and others in the drone strike in Baghdad
It raised the chances of open conflict erupting between the two nations, which have been foes since the days immediately following Iran’s 1979 Islamic Revolution.
The revenge attack came a mere few hours after crowds in Iran mourned Soleimani and as the U.S. continued to reinforce its own positions in the region and warned of an unspecified threat to shipping from Iran in the region’s waterways, crucial routes for global energy supplies.
U.S. embassies and consulates from Asia to Africa and Europe issued security alerts for Americans. The U.S. Air Force launched a drill with 52 fighter jets in Utah on Monday, just days after Trump threatened to hit 52 sites in Iran.
Meanwhile a stampede broke out Tuesday at Soleimani’s funeral in his hometown of Kerman and at least 56 people were killed and more than 200 were injured as thousands thronged the procession, Iranian news reports said.
There was no information about what set off the crush in the packed streets. Online videos showed only its aftermath: people lying apparently lifeless, their faces covered by clothing, emergency crews performing CPR on the fallen and onlookers wailing and crying out to God.
A procession in Tehran on Monday drew over one million people in the Iranian capital, crowding both main avenues and side streets.
Hossein Salami, Soleimani’s successor as leader of the Revolutionary Guard, addressed a crowd of supporters gathered at the coffin in a central square in Kernan.
He vowed to avenge Soleimani, saying: ‘We tell our enemies that we will retaliate but if they take another action we will set ablaze the places that they like and are passionate about’.
The al-Asad base for American and coalition troops (pictured above in December) was struck by missiles ‘clearly launched from Iran’, U.S. officials say
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The Erbil base in Iraqi Kurdistan, which provides facilities and services to at least hundreds of coalition personnel and CIA operatives, was also hit in the missile attack
President Trump’s speech on Iran
As long as I am President of the United States, Iran will never be allowed to have a nuclear weapon.
Good morning. I’m pleased to inform you: The American people should be extremely grateful and happy no Americans were harmed in last night’s attack by the Iranian regime. We suffered no casualties, all of our soldiers are safe, and only minimal damage was sustained at our military bases.
Our great American forces are prepared for anything. Iran appears to be standing down, which is a good thing for all parties concerned and a very good thing for the world.
No American or Iraqi lives were lost because of the precautions taken, the dispersal of forces, and an early warning system that worked very well. I salute the incredible skill and courage of America’s men and women in uniform.
For far too long — all the way back to 1979, to be exact — nations have tolerated Iran’s destructive and destabilizing behavior in the Middle East and beyond. Those days are over. Iran has been the leading sponsor of terrorism, and their pursuit of nuclear weapons threatens the civilized world. We will never let that happen.
Last week, we took decisive action to stop a ruthless terrorist from threatening American lives. At my direction, the United States military eliminated the world’s top terrorist, Qasem Soleimani. As the head of the Quds Force, Soleimani was personally responsible for some of the absolutely worst atrocities.
He trained terrorist armies, including Hezbollah, launching terrorist strikes against civilian targets. He fueled bloody civil wars all across the region. He viciously wounded and murdered thousands of U.S. troops, including the planting of roadside bombs that maim and dismember their victims.
Soleimani directed the recent attacks on U.S. personnel in Iraq that badly wounded four service members and killed one American, and he orchestrated the violent assault on the U.S. embassy in Baghdad. In recent days, he was planning new attacks on American targets, but we stopped him.
Soleimani’s hands were drenched in both American and Iranian blood. He should have been terminated long ago. By removing Soleimani, we have sent a powerful message to terrorists: If you value your own life, you will not threaten the lives of our people.
As we continue to evaluate options in response to Iranian aggression, the United States will immediately impose additional punishing economic sanctions on the Iranian regime. These powerful sanctions will remain until Iran changes its behavior.
In recent months alone, Iran has seized ships in international waters, fired an unprovoked strike on Saudi Arabia, and shot down two U.S. drones.
Iran’s hostilities substantially increased after the foolish Iran nuclear deal was signed in 2013, and they were given $150 billion, not to mention $1.8 billion in cash. Instead of saying “thank you” to the United States, they chanted “death to America.” In fact, they chanted “death to America” the day the agreement was signed.
Then, Iran went on a terror spree, funded by the money from the deal, and created hell in Yemen, Syria, Lebanon, Afghanistan, and Iraq. The missiles fired last night at us and our allies were paid for with the funds made available by the last administration. The regime also greatly tightened the reins on their own country, even recently killing 1,500 people at the many protests that are taking place all throughout Iran.
The very defective JCPOA expires shortly anyway, and gives Iran a clear and quick path to nuclear breakout. Iran must abandon its nuclear ambitions and end its support for terrorism. The time has come for the United Kingdom, Germany, France, Russia, and China to recognize this reality.
They must now break away from the remnants of the Iran deal -– or JCPOA –- and we must all work together toward making a deal with Iran that makes the world a safer and more peaceful place. We must also make a deal that allows Iran to thrive and prosper, and take advantage of its enormous untapped potential. Iran can be a great country.
Peace and stability cannot prevail in the Middle East as long as Iran continues to foment violence, unrest, hatred, and war. The civilized world must send a clear and unified message to the Iranian regime: Your campaign of terror, murder, mayhem will not be tolerated any longer. It will not be allowed to go forward.
Today, I am going to ask NATO to become much more involved in the Middle East process. Over the last three years, under my leadership, our economy is stronger than ever before and America has achieved energy independence. These historic accompliments [accomplishments] changed our strategic priorities. These are accomplishments that nobody thought were possible. And options in the Middle East became available. We are now the number-one producer of oil and natural gas anywhere in the world. We are independent, and we do not need Middle East oil.
The American military has been completely rebuilt under my administration, at a cost of $2.5 trillion. U.S. Armed Forces are stronger than ever before. Our missiles are big, powerful, accurate, lethal, and fast. Under construction are many hypersonic missiles.
The fact that we have this great military and equipment, however, does not mean we have to use it. We do not want to use it. American strength, both military and economic, is the best deterrent.
Three months ago, after destroying 100 percent of ISIS and its territorial caliphate, we killed the savage leader of ISIS, al-Baghdadi, who was responsible for so much death, including the mass beheadings of Christians, Muslims, and all who stood in his way. He was a monster. Al-Baghdadi was trying again to rebuild the ISIS caliphate, and failed.
Tens of thousands of ISIS fighters have been killed or captured during my administration. ISIS is a natural enemy of Iran. The destruction of ISIS is good for Iran, and we should work together on this and other shared priorities.
Finally, to the people and leaders of Iran: We want you to have a future and a great future — one that you deserve, one of prosperity at home, and harmony with the nations of the world. The United States is ready to embrace peace with all who seek it.
I want to thank you, and God bless America. Thank you very much. Thank you. Thank you.
Bonner was a director of MoneyWeek from 2003 to 2009.[4]
Works
Bonner co-authored Financial Reckoning Day: Surviving The Soft Depression of The 21st Century and Empire of Debt with Addison Wiggin. He also co-authored Mobs, Messiahs and Marketswith Lila Rajiva. The latter publication won the GetAbstract International Book Award for 2008.[5] He has previously co-authored two short pamphlets with British media historian, John Campbell, and with The Times former editor, Lord William Rees-Mogg, and has co-edited a book of essays with intellectual historian, Pierre Lemieux.[6]
In his two financial books, as well as in The Daily Reckoning, Bonner has argued that the financial future of the United States is in peril because of various economic and demographic trends, not the least of which is America’s large trade deficit. He claims that America’s foreign policy exploits are tantamount to the establishment of an empire, and that the cost of maintaining such an empire could accelerate America’s eventual decline. Bonner argues in his latest book that mob and mass delusions are part of the human condition.[citation needed]
Bonner warned in 2015 that the credit system, which has been the essential basis of the US economy since the 1950s, will inevitably fail, leading to catastrophic failure of the banking system.[7][8]
In June 2016, Bill Bonner, via his company Agora, paid for an advertisement on Reuters describing a new law that would not allow Americans to take money out of their own USA accounts. The ad reads: “New Law Cracks Down on Right to Use Cash. Americans are reporting problems taking their own money out of US banks.” The advertisement does not cite the law (the Foreign Account Tax Compliance Act or FATCA[9]) to which it refers.
The national debt exceeded $21 trillion for the first time on Thursday, a little more than six months after it hit first $20 trillion on Sept. 8.
The national debt was $21.031 trillion on Thursday. The government releases total debt figures each business day, but it lags by one day.
Federal borrowing has been on the rise again since February, when Congress passed legislation to suspend the debt ceiling. That move allowed the government to borrow as much as it needs to fund the activities approved by Congress.
Under the law passed in February, the government will not face any borrowing limit until March 1, 2019. At its current pace, the government is on track to add at least $1 trillion to the national debt by then.
For example, the debt grew by more than half a trillion dollars in the six weeks since the debt ceiling was lifted on Feb. 9.
A large part of the national debt reflects the federal budget deficit, or the amount of spending above the revenues collected by the government. But the debt is rising faster than the amount of the budget deficit, as it also reflects things like federal lending for student loans and mortgage programs.
Peter G. Peterson Foundation President Michael Peterson said the milemarker is just the beginning, as Congress has just agreed to spend even more.
“Our national debt reached a staggering $21 trillion today, having grown by $1 trillion in just the past six months,” he said. “Worse yet, this unfortunate milestone has only just begun to include the effects of the recent fiscally irresponsible tax and spending legislation, which added more debt on top of an already unsustainable trajectory.”
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Yellen Calms Fears Fed’s Policy Trigger Finger Is Getting Itchy
by Rich Miller, Christopher Condon , and Jeanna Smialek
March 15, 2017, 1:00 PM CDT March 15, 2017, 5:02 PM CDT
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Federal Reserve Chair Janet Yellen sought to reassure investors that the central bank’s latest interest-rate increase wasn’t a paradigm shift to a trigger-happy policy driven by fears of faster inflation.
Speaking to reporters after the Fed’s quarter percentage-point move on Wednesday, Yellen said the central bank was willing to tolerate inflation temporarily overshootingits 2 percent goal and that it intended to keep its policy accommodative for “some time.”
“The simple message is the economy’s doing well. We have confidence in the robustness of the economy and its resilience to shocks,” she said.
As a result, the Fed is sticking with its policy of gradually raising interest rates, Yellen said. In their first forecasts in three months, Fed policy makers penciled in two more quarter-point rate increases this year and three in 2018, unchanged from their projections in December.
Today’s decision “does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy,” the Fed chief said.
Speculation of a more aggressive Fed had mounted in recent days after a host of central bank officials, including Yellen herself, went out of their way to telegraph to financial markets that a rate hike was imminent. The expectations were further fueled by news of rising inflation.
Stocks Advance
Stocks rose and bond yields fell as investors viewed the statement from the Federal Open Market Committee and Yellen’s remarks afterward as a sign that the Fed isn’t in a hurry to remove monetary stimulus. The FOMC raised the target range for the federal funds rate to 0.75 percent to 1 percent, as expected, but Yellen’s lack of urgency to snuff out inflation was a surprise.
R.J. Gallo, a fixed-income investment manager at Federated Investors in Pittsburgh, said the chorus of Fed speakers before this meeting led investors to expect a move up in the number of projected rate hikes this year, and even upgrades by Fed officials in the levels of inflation and growth they anticipated.
None of that materialized.
“You didn’t get any of those things,” Gallo said, which explains why Treasury yields quickly dropped after the Fed released the FOMC statement and a new set of economic projections. “The expectation that Fed was getting more hawkish had to come out of the market.”
The U.S. economy has mostly met the central bank’s goals of full employment and stable prices, and may get further support if President Donald Trump delivers promised fiscal stimulus. Investor and business confidence has soared since Trump won the presidency in November, buoyed by his vows to cut taxes, lift infrastructure spending and ease regulations.
Still, the data don’t show an economy that’s heating up rapidly — a point Yellen herself made after the third rate hike since the 2007-2009 recession ended. In fact, the economy may have “more room to run,” she said.
Stronger business and consumer confidence hasn’t yet translated into increased investment and spending, said Yellen.
“It’s uncertain just how much sentiment actually impacts spending decisions, and I wouldn’t say at this point that I have seen hard evidence of any change in spending decisions,” said the Fed Chair. “Most of the business people that we’ve talked to also have a wait-and-see attitude.”
Retail sales in February grew at the slowest pace since August, a government report showed earlier Wednesday. The Atlanta Fed’s model for GDP predicts an expansion of 0.9 percent in the first quarter, less than a third the pace Trump is aiming for.
Fiscal Stimulus
Asked about the potential for a fiscal boost, Yellen made clear the Fed is still waiting for more concrete policy plans to emerge from the Trump administration before adapting monetary policy in reaction.
“There is great uncertainty about the timing, the size and the character of policy changes that may be put in place,” Yellen said. “I don’t think that’s a decision or set of decisions that we need to make until we know more about what policy changes will go into effect.”
Yellen disputed suggestions that the Fed was on a collision course with the Trump administration over its plans to foster faster economic growth through tax cuts and deregulation. “We would welcome stronger economic growth in the context of price stability,” she said.
She said she had met Trump briefly and had gotten together a couple of times with Treasury Secretary Steven Mnuchin to discuss the economy and financial regulation.
Further underscoring their lack of urgency, Fed officials repeated a commitment to maintain their balance-sheet reinvestment policy until rate increases were well under way. Yellen said officials had discussed the process of reducing the balance sheet gradually, but had made no decisions and would continue to debate the topic.
Policy makers forecast inflation will reach 1.9 percent in the fourth quarter this year, and 2 percent in both 2018 and 2019, according to quarterly median estimates released with the FOMC statement. The Fed’s preferred measure of inflation rose 1.9 percent in the 12 months through January, just shy of its target.
Yellen pointed out, though, that core inflation continues to run somewhat further below 2 percent. That rate, which strips out food and energy costs, stood at 1.7 percent in January. The Fed’s new forecast for the core rate at the end of this year edged up to 1.9 percent, from 1.8 percent in December.
“The committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal,” the Fed said. Discussing the word symmetric in the statement, Yellen said during her press conference that the Fed was not shooting to push inflation over 2 percent but recognized that it could temporarily go above it. Two percent is a target, she reiterated, not a ceiling.
By Evan Tarver | Updated March 10, 2017 — 3:35 PM EST
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Changes in the federal funds rate will always affect the U.S. dollar. When the Federal Reserve increases the federal funds rate, it normally reduces inflationary pressure and works to appreciate the dollar.
Since June 2006, however, the Fed has maintained a federal funds rate of close to 0%. In the wake of the 2008 financial crisis, the federal funds rate fluctuated between 0-0.25%, and is now 0.75%.
The Fed used this monetary policy to help achieve maximum employment and stable prices. Now that the 2008 financial crisis has largely subsided, the Fed will look to increase interest rates to continue to achieve employment and to stabilize prices.
Inflation of the U.S. Dollar
The best way to achieve full employment and stable prices is to set the inflation rate of the dollar at 2%. In 2011, the Fed officially adopted a 2% annual increase in the price index for personal consumption expenditures as its target. When the economy is weak, inflation naturally falls; when the economy is strong, rising wages increase inflation. Keeping inflation at a growth rate of 2% helps the economy grow at a healthy rate.
Adjustments to the federal funds rate can also affect inflation in the United States. The Fed controls the economy by increasing interest rates when the economy is growing too fast. This encourages people to save more and spend less, reducing inflationary pressure. Conversely, when the economy is in a recession or growing too slowly, the Fed reduces interest rates to stimulate spending, which increases inflation.
During the 2008 financial crisis, the low federal funds rate should have increased inflation. Over this period, the federal funds rate was set near 0%, which encouraged spending and would normally increase inflation.
However, inflation is still well below the 2% target, which is contrary to the normal effects of low interest rates. The Fed cites one-off factors, such as falling oil prices and the strengthening dollar, as the reasons why inflation has remained low in a low interest environment.
The Fed believes that these factors will eventually fade and that inflation will increase above the target 2%. To prevent this eventual increase in inflation, hiking the federal funds rate reduces inflationary pressure and cause inflation of the dollar to remain around 2%.
Appreciation of the U.S. Dollar
Increases in the federal funds rate also result in a strengthening of the U.S. dollar. Other ways that the dollar can appreciate include increases in average wages and increases in overall consumption. However, although jobs are being created, wage rates are stagnant.
Without an increase in wage rates to go along with a strengthening job market, consumption won’t increase enough to sustain economic growth. Additionally, consumption remains subdued due to the fact that the labor force participation rate was close to its 35-year low in 2015. The Fed has kept interest rates low because a lower federal funds rate supports business expansions, which leads to more jobs and higher consumption. This has all worked to keep appreciation of the U.S. dollar low.
However, the U.S. is ahead of the other developed markets in terms of its economic recovery. Although the Fed raises rates cautiously, the U.S. could see higher interest rates before the other developed economies.
Overall, under normal economic conditions, increases in the federal funds rate reduce inflation and increase the appreciation of the U.S. dollar.
Not to be confused with economic repression, a type of political repression.
Financial repression refers to “policies that result in savers earning returns below the rate of inflation” in order to allow banks to “provide cheap loans to companies and governments, reducing the burden of repayments”.[1] It can be particularly effective at liquidating government debtdenominated in domestic currency.[2] It can also lead to a large expansions in debt “to levels evoking comparisons with the excesses that generated Japan’s lost decade and the Asian financial crisis” in 1997.[1]
Creation or maintenance of a captive domestic market for government debt, achieved by requiring banks to hold government debt via capital requirements, or by prohibiting or disincentivising alternatives.
Government restrictions on the transfer of assets abroad through the imposition of capital controls.
These measures allow governments to issue debt at lower interest rates. A low nominal interest rate can reduce debt servicing costs, while negative real interest rates erodes the real value of government debt.[5] Thus, financial repression is most successful in liquidating debts when accompanied by inflation and can be considered a form of taxation,[6] or alternatively a form of debasement.[7]
The size of the financial repression tax for 24 emerging markets from 1974 to 1987. Their results showed that financial repression exceeded 2% of GDP for seven countries, and greater than 3% for five countries. For five countries (India, Mexico, Pakistan, Sri Lanka, and Zimbabwe) it represented approximately 20% of tax revenue. In the case of Mexico financial repression was 6% of GDP, or 40% of tax revenue.[8]
Financial repression is categorized as “macroprudential regulation“—i.e., government efforts to “ensure the health of an entire financial system.[2]
Examples
After World War II
Financial repression “played an important role in reducing debt-to-GDP ratios after World War II” by keeping real interest rates for government debt below 1% for two-thirds of the time between 1945 and 1980, the United States was able to “inflate away” the large debt (122% of GDP) left over from the Great Depression and World War II.[2] In the UK, government debt declined from 216% of GDP in 1945 to 138% ten years later in 1955.[9]
China
China‘s economic growth has been attributed to financial repression thanks to “low returns on savings and the cheap loans that it makes possible”. This has allowed China to rely on savings-financed investments for economic growth. However, because low returns also dampens consumer spending, household expenditures account for “a smaller share of GDP in China than in any other major economy”.[1] However, as of December 2014, the People’s Bank of China “started to undo decades of financial repression” and the government now allows Chinese savers to collect up to a 3.3% return on one-year deposits. At China’s 1.6% inflation rate, this is a “high real-interest rate compared to other major economies”.[1]
After the 2008 economic recession
In a 2011 NBER working paper, Carmen Reinhart and Maria Belen Sbrancia speculate on a possible return by governments to this form of debt reduction in order to deal with high debt levels following the 2008 economic crisis.[5]
Critics[who?] argue that if this view was true, investors (i.e., capital-seeking parties) would be inclined to demand capital in large quantities and would be buying capital goods from this capital. This high demand for capital goods would certainly lead to inflation and thus the central banks would be forced to raise interest rates again. As a boom pepped by low interest rates fails to appear these days in industrialized countries, this is a sign that the low interest rates seem to be necessary to ensure an equilibrium on the capital market, thus to balance capital-supply—i.e., savers—on one side and capital-demand—i.e., investors and the government—on the other. This view argues that interest rates would be even lower if it were not for the high government debt ratio (i.e., capital demand from the government).
Free-market economists argue that financial repression crowds out private-sector investment, thus undermining growth. On the other hand, “postwar politicians clearly decided this was a price worth paying to cut debt and avoid outright default or draconian spending cuts. And the longer the gridlock over fiscal reform rumbles on, the greater the chance that ‘repression’ comes to be seen as the least of all evils”.[11]
Also, financial repression has been called a “stealth tax” that “rewards debtors and punishes savers—especially retirees” because their investments will no longer generate the expected return, which is income for retirees.[10][12] “One of the main goals of financial repression is to keep nominal interest rates lower than they would be in more competitive markets. Other things equal, this reduces the government’s interest expenses for a given stock of debt and contributes to deficit reduction. However, when financial repression produces negative real interest rates (nominal rates below the inflation rate), it reduces or liquidates existing debts and becomes the equivalent of a tax—a transfer from creditors (savers) to borrowers, including the government.”[2]
The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate.
The federal funds target rate is determined by a meeting of the members of the Federal Open Market Committee which normally occurs eight times a year about seven weeks apart. The committee may also hold additional meetings and implement target rate changes outside of its normal schedule.
Financial Institutions are obligated by law to maintain certain levels of reserves, either as reserves with the Fed or as vault cash. The level of these reserves is determined by the outstanding assets and liabilities of each depository institution, as well as by the Fed itself, but is typically 10%[4] of the total value of the bank’s demand accounts (depending on bank size). In the range of $9.3 million to $43.9 million, for transaction deposits (checking accounts, NOWs, and other deposits that can be used to make payments) the reserve requirement in 2007-2008 was 3 percent of the end-of-the-day daily average amount held over a two-week period. Transaction deposits over $43.9 million held at the same depository institution carried a 10 percent reserve requirement.
For example, assume a particular U.S. depository institution, in the normal course of business, issues a loan. This dispenses money and decreases the ratio of bank reserves to money loaned. If its reserve ratio drops below the legally required minimum, it must add to its reserves to remain compliant with Federal Reserve regulations. The bank can borrow the requisite funds from another bank that has a surplus in its account with the Fed. The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate.
The nominal rate is a target set by the governors of the Federal Reserve, which they enforce by open market operations and adjusting the interest paid on required and excess reserve balances. That nominal rate is almost always what is meant by the media referring to the Federal Reserve “changing interest rates.” The actual federal funds rate generally lies within a range of that target rate, as the Federal Reserve cannot set an exact value through open market operations.
Another way banks can borrow funds to keep up their required reserves is by taking a loan from the Federal Reserve itself at the discount window. These loans are subject to audit by the Fed, and the discount rate is usually higher than the federal funds rate. Confusion between these two kinds of loans often leads to confusion between the federal funds rate and the discount rate. Another difference is that while the Fed cannot set an exact federal funds rate, it does set the specific discount rate.
The federal funds rate target is decided by the governors at Federal Open Market Committee (FOMC) meetings. The FOMC members will either increase, decrease, or leave the rate unchanged depending on the meeting’s agenda and the economic conditions of the U.S. It is possible to infer the market expectations of the FOMC decisions at future meetings from the Chicago Board of Trade (CBOT) Fed Funds futures contracts, and these probabilities are widely reported in the financial media.
Applications
Interbank borrowing is essentially a way for banks to quickly raise money. For example, a bank may want to finance a major industrial effort but may not have the time to wait for deposits or interest (on loan payments) to come in. In such cases the bank will quickly raise this amount from other banks at an interest rate equal to or higher than the Federal funds rate.
Raising the federal funds rate will dissuade banks from taking out such inter-bank loans, which in turn will make cash that much harder to procure. Conversely, dropping the interest rates will encourage banks to borrow money and therefore invest more freely.[5] This interest rate is used as a regulatory tool to control how freely the U.S. economy operates.
By setting a higher discount rate the Federal Bank discourages banks from requisitioning funds from the Federal Bank, yet positions itself as a lender of last resort.
Comparison with LIBOR
Though the London Interbank Offered Rate (LIBOR) and the federal funds rate are concerned with the same action, i.e. interbank loans, they are distinct from one another, as follows:
The target federal funds rate is a target interest rate that is set by the FOMC for implementing U.S. monetary policies.
The (effective) federal funds rate is achieved through open market operations at the Domestic Trading Desk at the Federal Reserve Bank of New York which deals primarily in domestic securities (U.S. Treasury and federal agencies’ securities).[6]
LIBOR is based on a questionnaire where a selection of banks guess the rates at which they could borrow money from other banks.
LIBOR may or may not be used to derive business terms. It is not fixed beforehand and is not meant to have macroeconomic ramifications.[7]
Predictions by the market
Considering the wide impact a change in the federal funds rate can have on the value of the dollar and the amount of lending going to new economic activity, the Federal Reserve is closely watched by the market. The prices of Option contracts on fed funds futures (traded on the Chicago Board of Trade) can be used to infer the market’s expectations of future Fed policy changes. Based on CME Group 30-Day Fed Fund futures prices, which have long been used to express the market’s views on the likelihood of changes in U.S. monetary policy, the CME Group FedWatch tool allows market participants to view the probability of an upcoming Fed Rate hike. One set of such implied probabilities is published by the Cleveland Fed.
As of December 16, 2008, the most recent change the FOMC has made to the funds target rate is a 75 to 100 basis point cut from 1.0% to a range of zero to 0.25%. According to Jack A. Ablin, chief investment officer at Harris Private Bank, one reason for this unprecedented move of having a range, rather than a specific rate, was because a rate of 0% could have had problematic implications for money market funds, whose fees could then outpace yields.[8] This followed the 50 basis point cut on October 29, 2008, and the unusually large 75 basis point cut made during a special January 22, 2008 meeting, as well as a 50 basis point cut on January 30, 2008, a 75 basis point cut on March 18, 2008, and a 50 basis point cut on October 8, 2008.[9]
Explanation of federal funds rate decisions
When the Federal Open Market Committee wishes to reduce interest rates they will increase the supply of money by buying government securities. When additional supply is added and everything else remains constant, price normally falls. The price here is the interest rate (cost of money) and specifically refers to the Federal Funds Rate. Conversely, when the Committee wishes to increase the Fed Funds Rate, they will instruct the Desk Manager to sell government securities, thereby taking the money they earn on the proceeds of those sales out of circulation and reducing the money supply. When supply is taken away and everything else remains constant, price (or in this case interest rates) will normally rise.[10]
The Federal Reserve has responded to a potential slow-down by lowering the target federal funds rate during recessions and other periods of lower growth. In fact, the Committee’s lowering has recently predated recessions,[9] in order to stimulate the economy and cushion the fall. Reducing the Fed Funds Rate makes money cheaper, allowing an influx of credit into the economy through all types of loans.
The charts linked below show the relation between S&P 500 and interest rates.
Bill Gross of PIMCO suggested that in the prior 15 years ending in 2007, in each instance where the fed funds rate was higher than the nominal GDP growth rate, assets such as stocks and/or housing fell.[24]
This article’s lead section may not adequately summarize key points of its contents. Please consider expanding the lead to provide an accessible overview of all important aspects of the article. Please discuss this issue on the article’s talk page.(September 2010)
Monetary policy concerns the actions of a central bank or other regulatory authorities that determine the size and rate of growth of the money supply.
In the United States, the Federal Reserve is in charge of monetary policy, and implements it primarily by performing operations that influence short-term interest rates.
The money supply has different components, generally broken down into “narrow” and “broad” money, reflecting the different degrees of liquidity (‘spendability’) of each different type, as broader forms of money can be converted into narrow forms of money (or may be readily accepted as money by others, such as personal checks).[1]
For example, demand deposits are technically promises to pay on demand, while savings deposits are promises to pay subject to some withdrawal restrictions, and Certificates of Deposit are promises to pay only at certain specified dates; each can be converted into money, but “narrow” forms of money can be converted more readily. The Federal Reserve directly controls only the most narrow form of money, physical cash outstanding along with the reserves of banks throughout the country (known as M0 or the monetary base); the Federal Reserve indirectly influences the supply of other types of money.[1]
Broad money includes money held in deposit balances in banks and other forms created in the financial system. Basic economics also teaches that the money supply shrinks when loans are repaid;[2][3] however, the money supply will not necessarily decrease depending on the creation of new loans and other effects. Other than loans, investment activities of commercial banks and the Federal Reserve also increase and decrease the money supply.[4] Discussion of “money” often confuses the different measures and may lead to misguided commentary on monetary policy and misunderstandings of policy discussions.[5]
Monetary policy in the US is determined and implemented by the US Federal Reserve System, commonly referred to as the Federal Reserve. Established in 1913 by the Federal Reserve Act to provide central banking functions,[6] the Federal Reserve System is a quasi-public institution. Ostensibly, the Federal Reserve Banks are 12 private banking corporations;[7][8][9] they are independent in their day-to-day operations, but legislatively accountable to Congress through the auspices of Federal Reserve Board of Governors.
The Board of Governors is an independent governmental agency consisting of seven officials and their support staff of over 1800 employees headquartered in Washington, D.C.[10] It is independent in the sense that the Board currently operates without official obligation to accept the requests or advice of any elected official with regard to actions on the money supply,[11]and its methods of funding also preserve independence. The Governors are nominated by the President of the United States, and nominations must be confirmed by the U.S. Senate.[12]
The presidents of the Federal Reserve Banks are nominated by each bank’s respective Board of Directors, but must also be approved by the Board of Governors of the Federal Reserve. The Chairman of the Federal Reserve Board is generally considered to have the most important position, followed by the president of the Federal Reserve Bank of New York.[12] The Federal Reserve System is primarily funded by interest collected on their portfolio of securities from the US Treasury, and the Fed has broad discretion in drafting its own budget,[13] but, historically, nearly all the interest the Federal Reserve collects is rebated to the government each year.[14]
The Federal Reserve has three main mechanisms for manipulating the money supply. It can buy or sell treasury securities. Selling securities has the effect of reducing the monetary base (because it accepts money in return for purchase of securities), taking that money out of circulation. Purchasing treasury securities increases the monetary base (because it pays out hard currency in exchange for accepting securities). Secondly, the discount rate can be changed. And finally, the Federal Reserve can adjust the reserve requirement, which can affect the money multiplier; the reserve requirement is adjusted only infrequently, and was last adjusted in 1992.[15]
In practice, the Federal Reserve uses open market operations to influence short-term interest rates, which is the primary tool of monetary policy. The federal funds rate, for which the Federal Open Market Committee announces a target on a regular basis, reflects one of the key rates for interbank lending. Open market operations change the supply of reserve balances, and the federal funds rate is sensitive to these operations.[16]
In theory, the Federal Reserve has unlimited capacity to influence this rate, and although the federal funds rate is set by banks borrowing and lending funds to each other, the federal funds rate generally stays within a limited range above and below the target (as participants are aware of the Fed’s power to influence this rate).
Assuming a closed economy, where foreign capital or trade does not affect the money supply, when money supply increases, interest rates go down. Businesses and consumers have a lower cost of capital and can increase spending and capital improvement projects. This encourages short-term growth. Conversely, when the money supply falls, interest rates go up, increasing the cost of capital and leading to more conservative spending and investment. The Federal reserve increases interest rates to combat Inflation.
When money is deposited in a bank, it can then be lent out to another person. If the initial deposit was $100 and the bank lends out $100 to another customer the money supply has increased by $100. However, because the depositor can ask for the money back, banks have to maintain minimum reserves to service customer needs. If the reserve requirement is 10% then, in the earlier example, the bank can lend $90 and thus the money supply increases by only $90. The reserve requirement therefore acts as a limit on this multiplier effect. Because the reserve requirement only applies to the more narrow forms of money creation (corresponding to M1), but does not apply to certain types of deposits (such as time deposits), reserve requirements play a limited role in monetary policy.[17]
Currently, the US government maintains over US$800 billion in cash money (primarily Federal Reserve Notes) in circulation throughout the world,[18][19] up from a sum of less than $30 billion in 1959. Below is an outline of the process which is currently used to control the amount of money in the economy. The amount of money in circulation generally increases to accommodate money demanded by the growth of the country’s production. The process of money creation usually goes as follows:
Banks go through their daily transactions. Of the total money deposited at banks, significant and predictable proportions often remain deposited, and may be referred to as “core deposits.” Banks use the bulk of “non-moving” money (their stable or “core” deposit base) by loaning it out.[20] Banks have a legal obligation to keep a certain fraction of bank deposit money on-hand at all times.[21]
In order to raise additional money to cover excess spending, Congress increases the size of the National Debt by issuing securities typically in the form of a Treasury Bond[22] (see United States Treasury security). It offers the Treasury security for sale, and someone pays cash to the government in exchange. Banks are often the purchasers of these securities, and these securities currently play a crucial role in the process.
The 12-person Federal Open Market Committee, which consists of the heads of the Federal Reserve System (the seven Federal governors and five bank presidents), meets eight times a year to determine how they would like to influence the economy.[23] They create a plan called the country’s “monetary policy” which sets targets for things such as interest rates.[24]
Every business day, the Federal Reserve System engages in Open market operations.[25] If the Federal Reserve wants to increase the money supply, it will buy securities (such as U.S. Treasury Bonds) anonymously from banks in exchange for dollars. If the Federal Reserve wants to decrease the money supply, it will sell securities to the banks in exchange for dollars, taking those dollars out of circulation.[26][27] When the Federal Reserve makes a purchase, it credits the seller’s reserve account (with the Federal Reserve). The money that it deposits into the seller’s account is not transferred from any existing funds, therefore it is at this point that the Federal Reserve has created High-powered money.
By means of open market operations, the Federal Reserve affects the free reserves of commercial banks in the country.[28] Anna Schwartz explains that “if the Federal Reserve increases reserves, a single bank can make loans up to the amount of its excess reserves, creating an equal amount of deposits”.[26][27][29]
Since banks have more free reserves, they may loan out the money, because holding the money would amount to accepting the cost of foregone interest[28][30] When a loan is granted, a person is generally granted the money by adding to the balance on their bank account.[31]
This is how the Federal Reserve’s high-powered money is multiplied into a larger amount of broad money, through bank loans; as written in a particular case study, “as banks increase or decrease loans, the nation’s (broad) money supply increases or decreases.”[3] Once granted these additional funds, the recipient has the option to withdraw physical currency (dollar bills and coins) from the bank, which will reduce the amount of money available for further on-lending (and money creation) in the banking system.[32]
In many cases, account-holders will request cash withdrawals, so banks must keep a supply of cash handy. When they believe they need more cash than they have on hand, banks can make requests for cash with the Federal Reserve. In turn, the Federal Reserve examines these requests and places an order for printed money with the US Treasury Department.[33] The Treasury Department sends these requests to the Bureau of Engraving and Printing (to make dollar bills) and the Bureau of the Mint (to stamp the coins).
The U.S. Treasury sells this newly printed money to the Federal Reserve for the cost of printing.[citation needed] This is about 6 cents per bill for any denomination.[34] Aside from printing costs, the Federal Reserve must pledge collateral (typically government securities such as Treasury bonds) to put new money, which does not replace old notes, into circulation.[35]This printed cash can then be distributed to banks, as needed.
Though the Federal Reserve authorizes and distributes the currency printed by the Treasury (the primary component of the narrow monetary base), the broad money supply is primarily created by commercial banks through the money multiplier mechanism.[29][31][36][37] One textbook summarizes the process as follows:
“The Fed” controls the money supply in the United States by controlling the amount of loans made by commercial banks. New loans are usually in the form of increased checking account balances, and since checkable deposits are part of the money supply, the money supply increases when new loans are made …[38]
This type of money is convertible into cash when depositors request cash withdrawals, which will require banks to limit or reduce their lending.[39][32] The vast majority of the broad money supply throughout the world represents current outstanding loans of banks to various debtors.[38][40][41] A very small amount of U.S. currency still exists as “United States Notes“, which have no meaningful economic difference from Federal Reserve notes in their usage, although they departed significantly in their method of issuance into circulation. The currency distributed by the Federal Reserve has been given the official designation of “Federal Reserve Notes.”[42]
In 2005, the Federal Reserve held approximately 9% of the national debt[43] as assets against the liability of printed money. In previous periods, the Federal Reserve has used other debt instruments, such as debt securities issued by private corporations. During periods when the national debt of the United States has declined significantly (such as happened in fiscal years 1999 and 2000), monetary policy and financial markets experts have studied the practical implications of having “too little” government debt: both the Federal Reserve and financial markets use the price information, yield curve and the so-called risk free rate extensively.[44]
Experts are hopeful that other assets could take the place of National Debt as the base asset to back Federal Reserve notes, and Alan Greenspan, long the head of the Federal Reserve, has been quoted as saying, “I am confident that U.S. financial markets, which are the most innovative and efficient in the world, can readily adapt to a paydown of Treasury debt by creating private alternatives with many of the attributes that market participants value in Treasury securities.”[45] In principle, the government could still issue debt securities in significant quantities while having no net debt, and significant quantities of government debt securities are also held by other government agencies.
Although the U.S. government receives income overall from seigniorage, there are costs associated with maintaining the money supply.[41][46] Leading ecological economist and steady-state theoristHerman Daly, claims that “over 95% of our [broad] money supply [in the United States] is created by the private banking system (demand deposits) and bears interest as a condition of its existence,”[41] a conclusion drawn from the Federal Reserve’s ultimate dependence on increased activity in fractional reserve lending when it exercises open market operations.[47]Economist Eric Miller criticizes Daly’s logic because money is created in the banking system in response to demand for the money,[48] which justifies cost.[citation needed]
Thus, use of expansionary open market operations typically generates more debt in the private sector of society (in the form of additional bank deposits).[49] The private banking system charges interest to borrowers as a cost to borrow the money.[3][31][50] The interest costs are borne by those that have borrowed,[3][31] and without this borrowing, open market operations would be unsuccessful in maintaining the broad money supply,[30] though alternative implementations of monetary policy could be used. Depositors of funds in the banking system are paid interest on their savings (or provided other services, such as checking account privileges or physical security for their “cash”), as compensation for “lending” their funds to the bank.
Increases (or contractions) of the money supply corresponds to growth (or contraction) in interest-bearing debt in the country.[3][30][41] The concepts involved in monetary policy may be widely misunderstood in the general public, as evidenced by the volume of literature on topics such as “Federal Reserve conspiracy” and “Federal Reserve fraud.”[51]
Uncertainties
A few of the uncertainties involved in monetary policy decision making are described by the federal reserve:[52]
While these policy choices seem reasonably straightforward, monetary policy makers routinely face certain notable uncertainties. First, the actual position of the economy and growth in aggregate demand at any time are only partially known, as key information on spending, production, and prices becomes available only with a lag. Therefore, policy makers must rely on estimates of these economic variables when assessing the appropriate course of policy, aware that they could act on the basis of misleading information. Second, exactly how a given adjustment in the federal funds rate will affect growth in aggregate demand—in terms of both the overall magnitude and the timing of its impact—is never certain. Economic models can provide rules of thumb for how the economy will respond, but these rules of thumb are subject to statistical error. Third, the growth in aggregate supply, often called the growth in potential output, cannot be measured with certainty.
In practice, as previously noted, monetary policy makers do not have up-to-the-minute information on the state of the economy and prices. Useful information is limited not only by lags in the collection and availability of key data but also by later revisions, which can alter the picture considerably. Therefore, although monetary policy makers will eventually be able to offset the effects that adverse demand shocks have on the economy, it will be some time before the shock is fully recognized and—given the lag between a policy action and the effect of the action on aggregate demand—an even longer time before it is countered. Add to this the uncertainty about how the economy will respond to an easing or tightening of policy of a given magnitude, and it is not hard to see how the economy and prices can depart from a desired path for a period of time.
The statutory goals of maximum employment and stable prices are easier to achieve if the public understands those goals and believes that the Federal Reserve will take effective measures to achieve them.
Although the goals of monetary policy are clearly spelled out in law, the means to achieve those goals are not. Changes in the FOMC’s target federal funds rate take some time to affect the economy and prices, and it is often far from obvious whether a selected level of the federal funds rate will achieve those goals.
Opinions of the Federal Reserve
The Federal Reserve is lauded by some economists, while being the target of scathing criticism by other economists, legislators, and sometimes members of the general public. The former Chairman of the Federal Reserve Board, Ben Bernanke, is one of the leading academic critics of the Federal Reserve’s policies during the Great Depression.[53]
Achievements
One of the functions of a central bank is to facilitate the transfer of funds through the economy, and the Federal Reserve System is largely responsible for the efficiency in the banking sector. There have also been specific instances which put the Federal Reserve in the spotlight of public attention. For instance, after the stock market crash in 1987, the actions of the Fed are generally believed to have aided in recovery. Also, the Federal Reserve is credited for easing tensions in the business sector with the reassurances given following the 9/11 terrorist attacks on the United States.[54]
Criticisms
The Federal Reserve has been the target of various criticisms, involving: accountability, effectiveness, opacity, inadequate banking regulation, and potential market distortion. Federal Reserve policy has also been criticized for directly and indirectly benefiting large banks instead of consumers. For example, regarding the Federal Reserve’s response to the 2007–2010 financial crisis, Nobel laureate Joseph Stiglitz explained how the U.S. Federal Reserve was implementing another monetary policy —creating currency— as a method to combat the liquidity trap.[55]
By creating $600 billion and inserting this directly into banks the Federal Reserve intended to spur banks to finance more domestic loans and refinance mortgages. However, banks instead were spending the money in more profitable areas by investing internationally in emerging markets. Banks were also investing in foreign currencies which Stiglitz and others point out may lead to currency wars while China redirects its currency holdings away from the United States.[56]
Auditing
The Federal Reserve is subject to different requirements for transparency and audits than other government agencies, which its supporters claim is another element of the Fed’s independence. Although the Federal Reserve has been required by law to publish independently auditedfinancial statements since 1999, the Federal Reserve is not audited in the same way as other government agencies. Some confusion can arise because there are many types of audits, including: investigative or fraud audits; and financial audits, which are audits of accounting statements; there are also compliance, operational, and information system audits.
The Federal Reserve’s annual financial statements are audited by an outside auditor. Similar to other government agencies, the Federal Reserve maintains an Office of the Inspector General, whose mandate includes conducting and supervising “independent and objective audits, investigations, inspections, evaluations, and other reviews of Board programs and operations.”[57] The Inspector General’s audits and reviews are available on the Federal Reserve’s website.[58][59]
The Government Accountability Office (GAO) has the power to conduct audits, subject to certain areas of operations that are excluded from GAO audits; other areas may be audited at specific Congressional request, and have included bank supervision, government securities activities, and payment system activities.[60][61] The GAO is specifically restricted any authority over monetary policy transactions;[60] the New York Times reported in 1989 that “such transactions are now shielded from outside audit, although the Fed influences interest rates through the purchase of hundreds of billions of dollars in Treasury securities.”[62] As mentioned above, it was in 1999 that the law governing the Federal Reserve was amended to formalize the already-existing annual practice of ordering independent audits of financial statements for the Federal Reserve Banks and the Board;[63] the GAO’s restrictions on auditing monetary policy continued, however.[61]
Congressional oversight on monetary policy operations, foreign transactions, and the FOMC operations is exercised through the requirement for reports and through semi-annual monetary policy hearings.[61] Scholars have conceded that the hearings did not prove an effective means of increasing oversight of the Federal Reserve, perhaps because “Congresspersons prefer to bash an autonomous and secretive Fed for economic misfortune rather than to share the responsibility for that misfortune with a fully accountable Central Bank,” although the Federal Reserve has also consistently lobbied to maintain its independence and freedom of operation.[64]
Fulfillment of wider economic goals
By law, the goals of the Fed’s monetary policy are: high employment, sustainable growth, and stable prices.[65]
Critics say that monetary policy in the United States has not achieved consistent success in meeting the goals that have been delegated to the Federal Reserve System by Congress. Congress began to review more options with regard to macroeconomic influence beginning in 1946 (after World War II), with the Federal Reserve receiving specific mandates in 1977 (after the country suffered a period of stagflation).
Throughout the period of the Federal Reserve following the mandates, the relative weight given to each of these goals has changed, depending on political developments.[citation needed] In particular, the theories of Keynesianism and monetarism have had great influence on both the theory and implementation of monetary policy, and the “prevailing wisdom” or consensus view of the economic and financial communities has changed over the years.[66]
Elastic currency (magnitude of the money multiplier): the success of monetary policy is dependent on the ability to strongly influence the supply of money available to the citizens. If a currency is highly “elastic” (that is, has a higher money multiplier, corresponding to a tendency of the financial system to create more broad money for a given quantity of base money), plans to expand the money supply and accommodate growth are easier to implement. Low elasticity was one of many factors that contributed to the depth of the Great Depression: as banks cut lending, the money multiplier fell, and at the same time the Federal Reserve constricted the monetary base. The depression of the late 1920s is generally regarded as being the worst in the country’s history, and the Federal Reserve has been criticized for monetary policy which worsened the depression.[67] Partly to alleviate problems related to the depression, the United States transitioned from a gold standard and now uses a fiat currency; elasticity is believed to have been increased greatly.[68]
Stable prices – While some economists would regard any consistent inflation as a sign of unstable prices,[71] policymakers could be satisfied with 1 or 2%;[72] the consensus of “price stability” constituting long-run inflation of 1-2% is, however, a relatively recent development, and a change that has occurred at other central banks throughout the world. Inflation has averaged a 4.22% increase annually following the mandates applied in 1977; historic inflation since the establishment of the Federal Reserve in 1913 has averaged 3.4%.[73] In contrast, some research indicates that average inflation for the 250 years before the system was near zero percent, though there were likely sharper upward and downward spikes in that timeframe as compared with more recent times.[74] Central banks in some other countries, notably the German Bundesbank, had considerably better records of achieving price stability drawing on experience from the two episodes of hyperinflation and economic collapse under the country’s previous central bank.
Inflation worldwide has fallen significantly since former Federal Reserve Chairman Paul Volcker began his tenure in 1979, a period which has been called the Great Moderation; some commentators attribute this to improved monetary policy worldwide, particularly in the Organisation for Economic Co-operation and Development.[75][76]BusinessWeek notes that inflation has been relatively low since mid-1980s[77] and it was during this time that Volcker wrote (in 1995), “It is a sobering fact that the prominence of central banks [such as the Federal Reserve] in this century has coincided with a general tendency towards more inflation, not less. By and large, if the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with ‘free banking.'”.
Sustainable growth – The growth of the economy may not be sustainable as the ability for households to save money has been on an overall decline[78] and household debt is consistently rising.[79]
Monetarists who believe that the Great Depression started as an ordinary recession but significant policy mistakes by monetary authorities (especially the Federal Reserve) caused a shrinking of the money supply which greatly exacerbated the economic situation, causing a recession to descend into the Great Depression.
Public confusion
The Federal Reserve has established a library of information on their websites, however, many experts have spoken about the general level of public confusion that still exists on the subject of the economy; this lack of understanding of macroeconomic questions and monetary policy, however, exists in other countries as well. Critics of the Fed widely regard the system as being “opaque“, and one of the Fed’s most vehement opponents of his time, Congressman Louis T. McFadden, even went so far as to say that “Every effort has been made by the Federal Reserve Board to conceal its powers….”[80]
There are, on the other hand, many economists who support the need for an independent central banking authority, and some have established websites that aim to clear up confusion about the economy and the Federal Reserve’s operations. The Federal Reserve website itself publishes various information and instructional materials for a variety of audiences.
Briefly, the theory holds that an artificial injection of credit, from a source such as a central bank like the Federal Reserve, sends false signals to entrepreneurs to engage in long-term investments due to a favorably low interest rate. However, the surge of investments undertaken represents an artificial boom, or bubble, because the low interest rate was achieved by an artificial expansion of the money supply and not by savings. Hence, the pool of real savings and resources have not increased and do not justify the investments undertaken.
These investments, which are more appropriately called “malinvestments”, are realized to be unsustainable when the artificial credit spigot is shut off and interest rates rise. The malinvestments and unsustainable projects are liquidated, which is the recession. The theory demonstrates that the problem is the artificial boom which causes the malinvestments in the first place, made possible by an artificial injection of credit not from savings.
According to Austrian economics, without government intervention, interest rates will always be an equilibrium between the time-preferences of borrowers and savers, and this equilibrium is simply distorted by government intervention. This distortion, in their view, is the cause of the business cycle. Some Austrian economists—but by no means all—also support full reserve banking, a hypothetical financial/banking system where banks may not lend deposits. Others may advocate free banking, whereby the government abstains from any interference in what individuals may choose to use as money or the extent to which banks create money through the deposit and lending cycle.
Reserve requirement
The Federal Reserve regulates banking, and one regulation under its direct control is the reserve requirement which dictates how much money banks must keep in reserves, as compared to its demand deposits. Banks use their observation that the majority of deposits are not requested by the account holders at the same time.
Currently, the Federal Reserve requires that banks keep 10% of their deposits on hand.[81] Some countries have no nationally mandated reserve requirements—banks use their own resources to determine what to hold in reserve, however their lending is typically constrained by other regulations.[82] Other factors being equal, lower reserve percentages increases the possibility of Bank runs, such as the widespread runs of 1931. Low reserve requirements also allow for larger expansions of the money supply by actions of commercial banks—currently the private banking system has created much of the broad money supply of US dollars through lending activity. Monetary policy reform calling for 100% reserves has been advocated by economists such as: Irving Fisher,[83]Frank Knight,[84] many ecological economists along with economists of the Chicago School and Austrian School. Despite calls for reform, the nearly universal practice of fractional-reserve banking has remained in the United States.
Criticism of private sector involvement
Historically and to the present day, various social and political movements (such as social credit) have criticized the involvement of the private sector in “creating money”, claiming that only the government should have the power to “make money”. Some proponents also support full reserve banking or other non-orthodox approaches to monetary policy. Various terminology may be used, including “debt money”, which may have emotive or political connotations. These are generally considered to be akin to conspiracy theories by mainstream economists and ignored in academic literature on monetary policy.
Infographics on the distribution of wealth in America, highlighting both the inequality and the difference between our perception of inequality and the actual numbers. The reality is often not what we think it is.
In 2013, 138.3 million taxpayers reported earning $9.03 trillion in adjusted gross income and paid $1.23 trillion in income taxes.
Every income group besides the top 1 percent of taxpayers reported higher income in 2013 than the previous year. All income groups paid higher taxes in 2013 than the previous year.
The share of income earned by the top 1 percent of taxpayers fell to 19.0 percent in 2013. Their share of federal income taxes fell slightly to 37.8 percent.
In 2012, the top 50 percent of all taxpayers (69.2 million filers) paid 97.2 percent of all income taxes while the bottom 50 percent paid the remaining 2.8 percent.
The top 1 percent (1.3 million filers) paid a greater share of income taxes (37.8 percent) than the bottom 90 percent (124.5 million filers) combined (30.2 percent).
The top 1 percent of taxpayers paid a higher effective income tax rate than any other group, at 27.1 percent, which is over 8 times higher than taxpayers in the bottom 50 percent (3.3 percent).
Reported Income Decreased in 2013, but Taxes Increase
Taxpayers reported $9.03 trillion in adjusted gross income (AGI) on 138.3 million tax returns in 2013. While the U.S. economy grew in 2013, total AGI fell by $8 billion from 2012 levels. Furthermore, there were 2.2 million more returns filed in 2013 than 2012, meaning that average AGI fell by $1,131 per return. The most likely explanation behind lower AGI in 2013 is unusually high capital gains realizations in 2012.[2] Because the top tax rate on long-term capital gains and qualified dividends was set to rise from 15 percent to 23.8 percent in 2013, many high-income Americans realized their capital gains in 2012, to take advantage of low tax rates. As capital gains realizations fell to normal levels in 2013, overall AGI decreased. Accordingly, only the top 1 percent of taxpayers saw a decrease in income in 2013; all other groups saw their income increase. Despite the decrease in overall income reported, taxes paid increased by $46 billion to $1.232 trillion in 2013. Taxes paid increased for all income groups. The share of income earned by the top 1 percent fell to 19.04 percent of total AGI, down from 21.86 percent in 2012. The share of the income tax burden for the top 1 percent also fell slightly, from 38.09 percent in 2012 to 37.80 percent in 2013.
Table 1. Summary of Federal Income Tax Data, 2013
Number of Returns*
AGI ($ millions)
Income Taxes Paid ($ millions)
Group’s Share of Total AGI
Group’s Share of Income Taxes
Income Split Point
Average Tax Rate
Does not include dependent filers.
Source: Internal Revenue Service.
All Taxpayers
138,313,155
$9,033,840
$1,231,911
100.00%
100.00%
Top 1%
1,383,132
$1,719,794
$465,705
19.04%
37.80%
$428,713
27.08%
1-5%
5,532,526
$1,389,594
$255,537
15.38%
20.74%
18.39%
Top 5%
6,915,658
$3,109,388
$721,242
34.42%
58.55%
$179,760
23.20%
5-10%
6,915,658
$1,034,110
$138,621
11.45%
11.25%
13.40%
Top 10%
13,831,316
$4,143,498
$859,863
45.87%
69.80%
$127,695
20.75%
10-25%
20,746,973
$2,008,180
$202,935
22.23%
16.47%
10.11%
Top 25%
34,578,289
$6,151,678
$1,062,798
68.10%
86.27%
$74,955
17.28%
25-50%
34,578,289
$1,843,925
$134,805
20.41%
10.94%
7.31%
Top 50%
69,156,578
$7,995,603
$1,197,603
88.51%
97.22%
$36,841
14.98%
Bottom 50%
69,156,578
$1,038,237
$34,307
11.49%
2.78%
$36,841
3.30%
High-Income Americans Paid the Majority of Federal Taxes
In 2013, the bottom 50 percent of taxpayers (those with AGIs below $36,841) earned 11.49 percent of total AGI. This group of taxpayers paid approximately $34 billion in taxes, or 2.78 percent of all income taxes in 2013. In contrast, the top 1 percent of all taxpayers (taxpayers with AGIs of $428,713 and above), earned 19.04 percent of all AGI in 2013, but paid 37.80 percent of all federal income taxes. In 2013, the top 1 percent of taxpayers accounted for more income taxes paid than the bottom 90 percent combined. The top 1 percent of taxpayers paid $465 billion, or 37.80 percent of all income taxes, while the bottom 90 percent paid $372 billion, or 30.20 percent of all income taxes.
High-Income Taxpayers Pay the Highest Average Tax Rates The 2013 IRS data shows that taxpayers with higher incomes pay much higher average income tax rates than lower-income taxpayers. The bottom 50 percent of taxpayers (taxpayers with AGIs below $36,841) faced an average income tax rate of 3.3 percent. Other taxpayers face much higher rates: for example, taxpayers with AGIs between the 10th and 5th percentile ($127,695 and $179,760) pay an average effective rate of 13.4 percent – four times the rate paid by those in the bottom 50 percent. The top 1 percent of taxpayers (AGI of $428,713 and above) paid the highest effective income tax rate at 27.1 percent, 8.19 times the rate faced by the bottom 50 percent of taxpayers.
Taxpayers at the very top of the income distribution, the top 0.1 percent (with AGIs over $1.86 million), paid an even higher average tax rate, of 27.9 percent. The average tax rate of the top 1 percent of taxpayers rose significantly in 2013, from 21.9 percent in 2012 to 27.1 percent in 2013. This increase in the average tax rate of the 1 percent was largely due to several changes to the federal tax code, imposed at the end of 2012 as part of the “fiscal cliff” tax deal: a new 39.6 percent income tax bracket, a higher top rate on capital gains and dividends, and the reintroduction of the Pease limitation on itemized deductions.[3]
Appendix
Table 2. Number of Federal Individual Income Tax Returns Filed, 1980–2013 (in thousands)
Year
Total
Top 0.1%
Top 1%
Top 5%
Between 5% & 10%
Top 10%
Between 10% & 25%
Top 25%
Between 25% & 50%
Top 50%
Bottom 50%
Source: Internal Revenue Service.
1980
93,239
932
4,662
4,662
9,324
13,986
23,310
23,310
46,619
46,619
1981
94,587
946
4,729
4,729
9,459
14,188
23,647
23,647
47,293
47,293
1982
94,426
944
4,721
4,721
9,443
14,164
23,607
23,607
47,213
47,213
1983
95,331
953
4,767
4,767
9,533
14,300
23,833
23,833
47,665
47,665
1984
98,436
984
4,922
4,922
9,844
14,765
24,609
24,609
49,218
49,219
1985
100,625
1,006
5,031
5,031
10,063
15,094
25,156
25,156
50,313
50,313
1986
102,088
1,021
5,104
5,104
10,209
15,313
25,522
25,522
51,044
51,044
The Tax Reform Act of 1986 changed the definition of AGI, so data above and below this line are not strictly comparable.
1987
106,155
1,062
5,308
5,308
10,615
15,923
26,539
26,539
53,077
53,077
1988
108,873
1,089
5,444
5,444
10,887
16,331
27,218
27,218
54,436
54,436
1989
111,313
1,113
5,566
5,566
11,131
16,697
27,828
27,828
55,656
55,656
1990
112,812
1,128
5,641
5,641
11,281
16,922
28,203
28,203
56,406
56,406
1991
113,804
1,138
5,690
5,690
11,380
17,071
28,451
28,451
56,902
56,902
1992
112,653
1,127
5,633
5,633
11,265
16,898
28,163
28,163
56,326
56,326
1993
113,681
1,137
5,684
5,684
11,368
17,052
28,420
28,420
56,841
56,841
1994
114,990
1,150
5,749
5,749
11,499
17,248
28,747
28,747
57,495
57,495
1995
117,274
1,173
5,864
5,864
11,727
17,591
29,319
29,319
58,637
58,637
1996
119,442
1,194
5,972
5,972
11,944
17,916
29,860
29,860
59,721
59,721
1997
121,503
1,215
6,075
6,075
12,150
18,225
30,376
30,376
60,752
60,752
1998
123,776
1,238
6,189
6,189
12,378
18,566
30,944
30,944
61,888
61,888
1999
126,009
1,260
6,300
6,300
12,601
18,901
31,502
31,502
63,004
63,004
2000
128,227
1,282
6,411
6,411
12,823
19,234
32,057
32,057
64,114
64,114
The IRS changed methodology, so data above and below this line are not strictly comparable.
2001
119,371
119
1,194
5,969
5,969
11,937
17,906
29,843
29,843
59,685
59,685
2002
119,851
120
1,199
5,993
5,993
11,985
17,978
29,963
29,963
59,925
59,925
2003
120,759
121
1,208
6,038
6,038
12,076
18,114
30,190
30,190
60,379
60,379
2004
122,510
123
1,225
6,125
6,125
12,251
18,376
30,627
30,627
61,255
61,255
2005
124,673
125
1,247
6,234
6,234
12,467
18,701
31,168
31,168
62,337
62,337
2006
128,441
128
1,284
6,422
6,422
12,844
19,266
32,110
32,110
64,221
64,221
2007
132,655
133
1,327
6,633
6,633
13,265
19,898
33,164
33,164
66,327
66,327
2008
132,892
133
1,329
6,645
6,645
13,289
19,934
33,223
33,223
66,446
66,446
2009
132,620
133
1,326
6,631
6,631
13,262
19,893
33,155
33,155
66,310
66,310
2010
135,033
135
1,350
6,752
6,752
13,503
20,255
33,758
33,758
67,517
67,517
2011
136,586
137
1,366
6,829
6,829
13,659
20,488
34,146
34,146
68,293
68,293
2012
136,080
136
1,361
6,804
6,804
13,608
20,412
34,020
34,020
68,040
68,040
2013
138,313
138
1,383
6,916
6,916
13,831
20,747
34,578
34,578
69,157
69,157
Table 3. Adjusted Gross Income of Taxpayers in Various Income Brackets, 1980–2013 (in Billions of Dollars)
Year
Total
Top 0.1%
Top 1%
Top 5%
Between 5% & 10%
Top 10%
Between 10% & 25%
Top 25%
Between 25% & 50%
Top 50%
Bottom 50%
Source: Internal Revenue Service.
1980
$1,627
$138
$342
$181
$523
$400
$922
$417
$1,339
$288
1981
$1,791
$149
$372
$201
$573
$442
$1,015
$458
$1,473
$318
1982
$1,876
$167
$398
$207
$605
$460
$1,065
$478
$1,544
$332
1983
$1,970
$183
$428
$217
$646
$481
$1,127
$498
$1,625
$344
1984
$2,173
$210
$482
$240
$723
$528
$1,251
$543
$1,794
$379
1985
$2,344
$235
$531
$260
$791
$567
$1,359
$580
$1,939
$405
1986
$2,524
$285
$608
$278
$887
$604
$1,490
$613
$2,104
$421
The Tax Reform Act of 1986 changed the definition of AGI, so data above and below this line are not strictly comparable.
1987
$2,814
$347
$722
$316
$1,038
$671
$1,709
$664
$2,374
$440
1988
$3,124
$474
$891
$342
$1,233
$718
$1,951
$707
$2,658
$466
1989
$3,299
$468
$918
$368
$1,287
$768
$2,054
$751
$2,805
$494
1990
$3,451
$483
$953
$385
$1,338
$806
$2,144
$788
$2,933
$519
1991
$3,516
$457
$943
$400
$1,343
$832
$2,175
$809
$2,984
$532
1992
$3,681
$524
$1,031
$413
$1,444
$856
$2,299
$832
$3,131
$549
1993
$3,776
$521
$1,048
$426
$1,474
$883
$2,358
$854
$3,212
$563
1994
$3,961
$547
$1,103
$449
$1,552
$929
$2,481
$890
$3,371
$590
1995
$4,245
$620
$1,223
$482
$1,705
$985
$2,690
$938
$3,628
$617
1996
$4,591
$737
$1,394
$515
$1,909
$1,043
$2,953
$992
$3,944
$646
1997
$5,023
$873
$1,597
$554
$2,151
$1,116
$3,268
$1,060
$4,328
$695
1998
$5,469
$1,010
$1,797
$597
$2,394
$1,196
$3,590
$1,132
$4,721
$748
1999
$5,909
$1,153
$2,012
$641
$2,653
$1,274
$3,927
$1,199
$5,126
$783
2000
$6,424
$1,337
$2,267
$688
$2,955
$1,358
$4,314
$1,276
$5,590
$834
The IRS changed methodology, so data above and below this line are not strictly comparable.
2001
$6,116
$492
$1,065
$1,934
$666
$2,600
$1,334
$3,933
$1,302
$5,235
$881
2002
$5,982
$421
$960
$1,812
$660
$2,472
$1,339
$3,812
$1,303
$5,115
$867
2003
$6,157
$466
$1,030
$1,908
$679
$2,587
$1,375
$3,962
$1,325
$5,287
$870
2004
$6,735
$615
$1,279
$2,243
$725
$2,968
$1,455
$4,423
$1,403
$5,826
$908
2005
$7,366
$784
$1,561
$2,623
$778
$3,401
$1,540
$4,940
$1,473
$6,413
$953
2006
$7,970
$895
$1,761
$2,918
$841
$3,760
$1,652
$5,412
$1,568
$6,980
$990
2007
$8,622
$1,030
$1,971
$3,223
$905
$4,128
$1,770
$5,898
$1,673
$7,571
$1,051
2008
$8,206
$826
$1,657
$2,868
$905
$3,773
$1,782
$5,555
$1,673
$7,228
$978
2009
$7,579
$602
$1,305
$2,439
$878
$3,317
$1,740
$5,058
$1,620
$6,678
$900
2010
$8,040
$743
$1,517
$2,716
$915
$3,631
$1,800
$5,431
$1,665
$7,096
$944
2011
$8,317
$737
$1,556
$2,819
$956
$3,775
$1,866
$5,641
$1,716
$7,357
$961
2012
$9,042
$1,017
$1,977
$3,331
$997
$4,328
$1,934
$6,262
$1,776
$8,038
$1,004
2013
$9,034
$816
$1,720
$3,109
$1,034
$4,143
$2,008
$6,152
$1,844
$7,996
$1,038
Table 4. Total Income Tax after Credits, 1980–2013 (in Billions of Dollars)
Year
Total
Top 0.1%
Top 1%
Top 5%
Between 5% & 10%
Top 10%
Between 10% & 25%
Top 25%
Between 25% & 50%
Top 50%
Bottom 50%
Source: Internal Revenue Service.
1980
$249
$47
$92
$31
$123
$59
$182
$50
$232
$18
1981
$282
$50
$99
$36
$135
$69
$204
$57
$261
$21
1982
$276
$53
$100
$34
$134
$66
$200
$56
$256
$20
1983
$272
$55
$101
$34
$135
$64
$199
$54
$252
$19
1984
$297
$63
$113
$37
$150
$68
$219
$57
$276
$22
1985
$322
$70
$125
$41
$166
$73
$238
$60
$299
$23
1986
$367
$94
$156
$44
$201
$78
$279
$64
$343
$24
The Tax Reform Act of 1986 changed the definition of AGI, so data above and below this line are not strictly comparable.
1987
$369
$92
$160
$46
$205
$79
$284
$63
$347
$22
1988
$413
$114
$188
$48
$236
$85
$321
$68
$389
$24
1989
$433
$109
$190
$51
$241
$93
$334
$73
$408
$25
1990
$447
$112
$195
$52
$248
$97
$344
$77
$421
$26
1991
$448
$111
$194
$56
$250
$96
$347
$77
$424
$25
1992
$476
$131
$218
$58
$276
$97
$374
$78
$452
$24
1993
$503
$146
$238
$60
$298
$101
$399
$80
$479
$24
1994
$535
$154
$254
$64
$318
$108
$425
$84
$509
$25
1995
$588
$178
$288
$70
$357
$115
$473
$88
$561
$27
1996
$658
$213
$335
$76
$411
$124
$535
$95
$630
$28
1997
$727
$241
$377
$82
$460
$134
$594
$102
$696
$31
1998
$788
$274
$425
$88
$513
$139
$652
$103
$755
$33
1999
$877
$317
$486
$97
$583
$150
$733
$109
$842
$35
2000
$981
$367
$554
$106
$660
$164
$824
$118
$942
$38
The IRS changed methodology, so data above and below this line are not strictly comparable.
2001
$885
$139
$294
$462
$101
$564
$158
$722
$120
$842
$43
2002
$794
$120
$263
$420
$93
$513
$143
$657
$104
$761
$33
2003
$746
$115
$251
$399
$85
$484
$133
$617
$98
$715
$30
2004
$829
$142
$301
$467
$91
$558
$137
$695
$102
$797
$32
2005
$932
$176
$361
$549
$98
$647
$145
$793
$106
$898
$33
2006
$1,020
$196
$402
$607
$108
$715
$157
$872
$113
$986
$35
2007
$1,112
$221
$443
$666
$117
$783
$170
$953
$122
$1,075
$37
2008
$1,029
$187
$386
$597
$115
$712
$168
$880
$117
$997
$32
2009
$863
$146
$314
$502
$101
$604
$146
$749
$93
$842
$21
2010
$949
$170
$355
$561
$110
$670
$156
$827
$100
$927
$22
2011
$1,043
$168
$366
$589
$123
$712
$181
$893
$120
$1,012
$30
2012
$1,185
$220
$451
$699
$133
$831
$193
$1,024
$128
$1,152
$33
2013
$1,232
$228
$466
$721
$139
$860
$203
$1,063
$135
$1,198
$34
Table 5. Adjusted Gross Income Shares, 1980–2013 (Percent of Total AGI Earned by Each Group)
Year
Total
Top 0.1%
Top 1%
Top 5%
Between 5% & 10%
Top 10%
Between 10% & 25%
Top 25%
Between 25% & 50%
Top 50%
Bottom 50%
Source: Internal Revenue Service.
1980
100%
8.46%
21.01%
11.12%
32.13%
24.57%
56.70%
25.62%
82.32%
17.68%
1981
100%
8.30%
20.78%
11.20%
31.98%
24.69%
56.67%
25.59%
82.25%
17.75%
1982
100%
8.91%
21.23%
11.03%
32.26%
24.53%
56.79%
25.50%
82.29%
17.71%
1983
100%
9.29%
21.74%
11.04%
32.78%
24.44%
57.22%
25.30%
82.52%
17.48%
1984
100%
9.66%
22.19%
11.06%
33.25%
24.31%
57.56%
25.00%
82.56%
17.44%
1985
100%
10.03%
22.67%
11.10%
33.77%
24.21%
57.97%
24.77%
82.74%
17.26%
1986
100%
11.30%
24.11%
11.02%
35.12%
23.92%
59.04%
24.30%
83.34%
16.66%
The Tax Reform Act of 1986 changed the definition of AGI, so data above and below this line are not strictly comparable.
1987
100%
12.32%
25.67%
11.23%
36.90%
23.85%
60.75%
23.62%
84.37%
15.63%
1988
100%
15.16%
28.51%
10.94%
39.45%
22.99%
62.44%
22.63%
85.07%
14.93%
1989
100%
14.19%
27.84%
11.16%
39.00%
23.28%
62.28%
22.76%
85.04%
14.96%
1990
100%
14.00%
27.62%
11.15%
38.77%
23.36%
62.13%
22.84%
84.97%
15.03%
1991
100%
12.99%
26.83%
11.37%
38.20%
23.65%
61.85%
23.01%
84.87%
15.13%
1992
100%
14.23%
28.01%
11.21%
39.23%
23.25%
62.47%
22.61%
85.08%
14.92%
1993
100%
13.79%
27.76%
11.29%
39.05%
23.40%
62.45%
22.63%
85.08%
14.92%
1994
100%
13.80%
27.85%
11.34%
39.19%
23.45%
62.64%
22.48%
85.11%
14.89%
1995
100%
14.60%
28.81%
11.35%
40.16%
23.21%
63.37%
22.09%
85.46%
14.54%
1996
100%
16.04%
30.36%
11.23%
41.59%
22.73%
64.32%
21.60%
85.92%
14.08%
1997
100%
17.38%
31.79%
11.03%
42.83%
22.22%
65.05%
21.11%
86.16%
13.84%
1998
100%
18.47%
32.85%
10.92%
43.77%
21.87%
65.63%
20.69%
86.33%
13.67%
1999
100%
19.51%
34.04%
10.85%
44.89%
21.57%
66.46%
20.29%
86.75%
13.25%
2000
100%
20.81%
35.30%
10.71%
46.01%
21.15%
67.15%
19.86%
87.01%
12.99%
The IRS changed methodology, so data above and below this line are not strictly comparable.
2001
100%
8.05%
17.41%
31.61%
10.89%
42.50%
21.80%
64.31%
21.29%
85.60%
14.40%
2002
100%
7.04%
16.05%
30.29%
11.04%
41.33%
22.39%
63.71%
21.79%
85.50%
14.50%
2003
100%
7.56%
16.73%
30.99%
11.03%
42.01%
22.33%
64.34%
21.52%
85.87%
14.13%
2004
100%
9.14%
18.99%
33.31%
10.77%
44.07%
21.60%
65.68%
20.83%
86.51%
13.49%
2005
100%
10.64%
21.19%
35.61%
10.56%
46.17%
20.90%
67.07%
19.99%
87.06%
12.94%
2006
100%
11.23%
22.10%
36.62%
10.56%
47.17%
20.73%
67.91%
19.68%
87.58%
12.42%
2007
100%
11.95%
22.86%
37.39%
10.49%
47.88%
20.53%
68.41%
19.40%
87.81%
12.19%
2008
100%
10.06%
20.19%
34.95%
11.03%
45.98%
21.71%
67.69%
20.39%
88.08%
11.92%
2009
100%
7.94%
17.21%
32.18%
11.59%
43.77%
22.96%
66.74%
21.38%
88.12%
11.88%
2010
100%
9.24%
18.87%
33.78%
11.38%
45.17%
22.38%
67.55%
20.71%
88.26%
11.74%
2011
100%
8.86%
18.70%
33.89%
11.50%
45.39%
22.43%
67.82%
20.63%
88.45%
11.55%
2012
100%
11.25%
21.86%
36.84%
11.03%
47.87%
21.39%
69.25%
19.64%
88.90%
11.10%
2013
100%
9.03%
19.04%
34.42%
11.45%
45.87%
22.23%
68.10%
20.41%
88.51%
11.49%
Table 6. Total Income Tax Shares, 1980–2013 (Percent of Federal Income Tax Paid by Each Group)
Year
Total
Top 0.1%
Top 1%
Top 5%
Between 5% & 10%
Top 10%
Between 10% & 25%
Top 25%
Between 25% & 50%
Top 50%
Bottom 50%
Source: Internal Revenue Service.
1980
100%
19.05%
36.84%
12.44%
49.28%
23.74%
73.02%
19.93%
92.95%
7.05%
1981
100%
17.58%
35.06%
12.90%
47.96%
24.33%
72.29%
20.26%
92.55%
7.45%
1982
100%
19.03%
36.13%
12.45%
48.59%
23.91%
72.50%
20.15%
92.65%
7.35%
1983
100%
20.32%
37.26%
12.44%
49.71%
23.39%
73.10%
19.73%
92.83%
7.17%
1984
100%
21.12%
37.98%
12.58%
50.56%
22.92%
73.49%
19.16%
92.65%
7.35%
1985
100%
21.81%
38.78%
12.67%
51.46%
22.60%
74.06%
18.77%
92.83%
7.17%
1986
100%
25.75%
42.57%
12.12%
54.69%
21.33%
76.02%
17.52%
93.54%
6.46%
The Tax Reform Act of 1986 changed the definition of AGI, so data above and below this line are not strictly comparable.
1987
100%
24.81%
43.26%
12.35%
55.61%
21.31%
76.92%
17.02%
93.93%
6.07%
1988
100%
27.58%
45.62%
11.66%
57.28%
20.57%
77.84%
16.44%
94.28%
5.72%
1989
100%
25.24%
43.94%
11.85%
55.78%
21.44%
77.22%
16.94%
94.17%
5.83%
1990
100%
25.13%
43.64%
11.73%
55.36%
21.66%
77.02%
17.16%
94.19%
5.81%
1991
100%
24.82%
43.38%
12.45%
55.82%
21.46%
77.29%
17.23%
94.52%
5.48%
1992
100%
27.54%
45.88%
12.12%
58.01%
20.47%
78.48%
16.46%
94.94%
5.06%
1993
100%
29.01%
47.36%
11.88%
59.24%
20.03%
79.27%
15.92%
95.19%
4.81%
1994
100%
28.86%
47.52%
11.93%
59.45%
20.10%
79.55%
15.68%
95.23%
4.77%
1995
100%
30.26%
48.91%
11.84%
60.75%
19.62%
80.36%
15.03%
95.39%
4.61%
1996
100%
32.31%
50.97%
11.54%
62.51%
18.80%
81.32%
14.36%
95.68%
4.32%
1997
100%
33.17%
51.87%
11.33%
63.20%
18.47%
81.67%
14.05%
95.72%
4.28%
1998
100%
34.75%
53.84%
11.20%
65.04%
17.65%
82.69%
13.10%
95.79%
4.21%
1999
100%
36.18%
55.45%
11.00%
66.45%
17.09%
83.54%
12.46%
96.00%
4.00%
2000
100%
37.42%
56.47%
10.86%
67.33%
16.68%
84.01%
12.08%
96.09%
3.91%
The IRS changed methodology, so data above and below this line are not strictly comparable.
2001
100%
15.68%
33.22%
52.24%
11.44%
63.68%
17.88%
81.56%
13.54%
95.10%
4.90%
2002
100%
15.09%
33.09%
52.86%
11.77%
64.63%
18.04%
82.67%
13.12%
95.79%
4.21%
2003
100%
15.37%
33.69%
53.54%
11.35%
64.89%
17.87%
82.76%
13.17%
95.93%
4.07%
2004
100%
17.12%
36.28%
56.35%
10.96%
67.30%
16.52%
83.82%
12.31%
96.13%
3.87%
2005
100%
18.91%
38.78%
58.93%
10.52%
69.46%
15.61%
85.07%
11.35%
96.41%
3.59%
2006
100%
19.24%
39.36%
59.49%
10.59%
70.08%
15.41%
85.49%
11.10%
96.59%
3.41%
2007
100%
19.84%
39.81%
59.90%
10.51%
70.41%
15.30%
85.71%
10.93%
96.64%
3.36%
2008
100%
18.20%
37.51%
58.06%
11.14%
69.20%
16.37%
85.57%
11.33%
96.90%
3.10%
2009
100%
16.91%
36.34%
58.17%
11.72%
69.89%
16.85%
86.74%
10.80%
97.54%
2.46%
2010
100%
17.88%
37.38%
59.07%
11.55%
70.62%
16.49%
87.11%
10.53%
97.64%
2.36%
2011
100%
16.14%
35.06%
56.49%
11.77%
68.26%
17.36%
85.62%
11.50%
97.11%
2.89%
2012
100%
18.60%
38.09%
58.95%
11.22%
70.17%
16.25%
86.42%
10.80%
97.22%
2.78%
2013
100%
18.48%
37.80%
58.55%
11.25%
69.80%
16.47%
86.27%
10.94%
97.22%
2.78%
Table 7. Dollar Cut-Off, 1980–2013 (Minimum AGI for Tax Returns to Fall into Various Percentiles; Thresholds Not Adjusted for Inflation)
Year
Top 0.1%
Top 1%
Top 5%
Top 10%
Top 25%
Top 50%
Source: Internal Revenue Service.
1980
$80,580
$43,792
$35,070
$23,606
$12,936
1981
$85,428
$47,845
$38,283
$25,655
$14,000
1982
$89,388
$49,284
$39,676
$27,027
$14,539
1983
$93,512
$51,553
$41,222
$27,827
$15,044
1984
$100,889
$55,423
$43,956
$29,360
$15,998
1985
$108,134
$58,883
$46,322
$30,928
$16,688
1986
$118,818
$62,377
$48,656
$32,242
$17,302
The Tax Reform Act of 1986 changed the definition of AGI, so data above and below this line are not strictly comparable.
1987
$139,289
$68,414
$52,921
$33,983
$17,768
1988
$157,136
$72,735
$55,437
$35,398
$18,367
1989
$163,869
$76,933
$58,263
$36,839
$18,993
1990
$167,421
$79,064
$60,287
$38,080
$19,767
1991
$170,139
$81,720
$61,944
$38,929
$20,097
1992
$181,904
$85,103
$64,457
$40,378
$20,803
1993
$185,715
$87,386
$66,077
$41,210
$21,179
1994
$195,726
$91,226
$68,753
$42,742
$21,802
1995
$209,406
$96,221
$72,094
$44,207
$22,344
1996
$227,546
$101,141
$74,986
$45,757
$23,174
1997
$250,736
$108,048
$79,212
$48,173
$24,393
1998
$269,496
$114,729
$83,220
$50,607
$25,491
1999
$293,415
$120,846
$87,682
$52,965
$26,415
2000
$313,469
$128,336
$92,144
$55,225
$27,682
The IRS changed methodology, so data above and below this line are not strictly comparable.
2001
$1,393,718
$306,635
$132,082
$96,151
$59,026
$31,418
2002
$1,245,352
$296,194
$130,750
$95,699
$59,066
$31,299
2003
$1,317,088
$305,939
$133,741
$97,470
$59,896
$31,447
2004
$1,617,918
$339,993
$140,758
$101,838
$62,794
$32,622
2005
$1,938,175
$379,261
$149,216
$106,864
$64,821
$33,484
2006
$2,124,625
$402,603
$157,390
$112,016
$67,291
$34,417
2007
$2,251,017
$426,439
$164,883
$116,396
$69,559
$35,541
2008
$1,867,652
$392,513
$163,512
$116,813
$69,813
$35,340
2009
$1,469,393
$351,968
$157,342
$114,181
$68,216
$34,156
2010
$1,634,386
$369,691
$161,579
$116,623
$69,126
$34,338
2011
$1,717,675
$388,905
$167,728
$120,136
$70,492
$34,823
2012
$2,161,175
$434,682
$175,817
$125,195
$73,354
$36,055
2013
$1,860,848
$428,713
$179,760
$127,695
$74,955
$36,841
Table 8. Average Tax Rate, 1980–2013 (Percent of AGI Paid in Income Taxes)
Year
Total
Top 0.1%
Top 1%
Top 5%
Between 5% & 10%
Top 10%
Between 10% & 25%
Top 25%
Between 25% & 50%
Top 50%
Bottom 50%
Source: Internal Revenue Service.
1980
15.31%
34.47%
26.85%
17.13%
23.49%
14.80%
19.72%
11.91%
17.29%
6.10%
1981
15.76%
33.37%
26.59%
18.16%
23.64%
15.53%
20.11%
12.48%
17.73%
6.62%
1982
14.72%
31.43%
25.05%
16.61%
22.17%
14.35%
18.79%
11.63%
16.57%
6.10%
1983
13.79%
30.18%
23.64%
15.54%
20.91%
13.20%
17.62%
10.76%
15.52%
5.66%
1984
13.68%
29.92%
23.42%
15.57%
20.81%
12.90%
17.47%
10.48%
15.35%
5.77%
1985
13.73%
29.86%
23.50%
15.69%
20.93%
12.83%
17.55%
10.41%
15.41%
5.70%
1986
14.54%
33.13%
25.68%
15.99%
22.64%
12.97%
18.72%
10.48%
16.32%
5.63%
The Tax Reform Act of 1986 changed the definition of AGI, so data above and below this line are not strictly comparable.
1987
13.12%
26.41%
22.10%
14.43%
19.77%
11.71%
16.61%
9.45%
14.60%
5.09%
1988
13.21%
24.04%
21.14%
14.07%
19.18%
11.82%
16.47%
9.60%
14.64%
5.06%
1989
13.12%
23.34%
20.71%
13.93%
18.77%
12.08%
16.27%
9.77%
14.53%
5.11%
1990
12.95%
23.25%
20.46%
13.63%
18.50%
12.01%
16.06%
9.73%
14.36%
5.01%
1991
12.75%
24.37%
20.62%
13.96%
18.63%
11.57%
15.93%
9.55%
14.20%
4.62%
1992
12.94%
25.05%
21.19%
13.99%
19.13%
11.39%
16.25%
9.42%
14.44%
4.39%
1993
13.32%
28.01%
22.71%
14.01%
20.20%
11.40%
16.90%
9.37%
14.90%
4.29%
1994
13.50%
28.23%
23.04%
14.20%
20.48%
11.57%
17.15%
9.42%
15.11%
4.32%
1995
13.86%
28.73%
23.53%
14.46%
20.97%
11.71%
17.58%
9.43%
15.47%
4.39%
1996
14.34%
28.87%
24.07%
14.74%
21.55%
11.86%
18.12%
9.53%
15.96%
4.40%
1997
14.48%
27.64%
23.62%
14.87%
21.36%
12.04%
18.18%
9.63%
16.09%
4.48%
1998
14.42%
27.12%
23.63%
14.79%
21.42%
11.63%
18.16%
9.12%
16.00%
4.44%
1999
14.85%
27.53%
24.18%
15.06%
21.98%
11.76%
18.66%
9.12%
16.43%
4.48%
2000
15.26%
27.45%
24.42%
15.48%
22.34%
12.04%
19.09%
9.28%
16.86%
4.60%
The IRS changed methodology, so data above and below this line are not strictly comparable.
(1) For data prior to 2001, all tax returns that have a positive AGI are included, even those that do not have a positive income tax liability. For data from 2001 forward, returns with negative AGI are also included, but dependent returns are excluded. (2) Income tax after credits (the measure of “income taxes paid” above) does not account for the refundable portion of EITC. If it were included, the tax share of the top income groups would be higher. The refundable portion is classified as a spending program by the Office of Management and Budget and therefore is not included by the IRS in these figures. (3) The only tax analyzed here is the federal individual income tax, which is responsible for about 25 percent of the nation’s taxes paid (at all levels of government). Federal income taxes are much more progressive than payroll taxes, which are responsible for about 20 percent of all taxes paid (at all levels of government), and are more progressive than most state and local taxes. (4) AGI is a fairly narrow income concept and does not include income items like government transfers (except for the portion of Social Security benefits that is taxed), the value of employer-provided health insurance, underreported or unreported income (most notably that of sole proprietors), income derived from municipal bond interest, net imputed rental income, and others. (5) The unit of analysis here is that of the tax return. In the figures prior to 2001, some dependent returns are included. Under other units of analysis (like the Treasury Department’s Family Economic Unit), these returns would likely be paired with parents’ returns. (6) These figures represent the legal incidence of the income tax. Most distributional tables (such as those from CBO, Tax Policy Center, Citizens for Tax Justice, the Treasury Department, and JCT) assume that the entire economic incidence of personal income taxes falls on the income earner.
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Obama unleashes 3,853 regs, 18 for every law, record 97,110 pages of red tape
By PAUL BEDARD(@SECRETSBEDARD)•12/30/16 9:28 AM
President Obama‘s lame duck administration poured on thousands more new regulations in 2016 at a rate of 18 for every new law passed, according to a Friday analysis of his team’s expansion of federal authority.
While Congress passed just 211 laws, Obama’s team issued an accompanying 3,852 new federal regulations, some costing billions of dollars.
The 2016 total was the highest annual number of regulations under Obama. Former President Bush issued more in the wake of 9/11.
The proof that it was an overwhelming year for rules and regulations is in the Federal Register, which ended the year Friday by printing a record-setting 97,110 pages, according to the analysis from the Competitive Enterprise Institute.
Stay abreast of the latest developments from nation’s capital and beyond with curated News Alerts from the Washington Examiner news desk and delivered to your inbox.
The annual “Unconstitutional Index” from Clyde Wayne Crews, CEI’s vice president for policy, said that it was much higher under Obama than under former President George W. Bush.
“The multiple did tend to be higher during Obama administration. Bush’s eight years averaged 20, while Obama’s almost-eight have averaged 29,” said his report, first provided to Secrets.
His index is meant to show that it is the federal bureaucracy, not Congress, that levies the most rules. “There’s no pattern to any of this, since the numerators and denominators can vary widely; there had been 114 laws in 2015, and a multiple of 39. The multiple can be higher with fewer laws, or with more regulations, holding the other constant. The point is that agencies do the bulk of lawmaking, no matter the party in power,” he wrote.
President-elect Trump has promised to slash federal regulations, even pledging to cut two current rules for every one he imposes. Congressional leaders have also promised to slash rules and regulations that have escalated under Obama.
Steve Davies and Dave Rubin: Brexit, Classical Liberalism, Libertarianism (Full Interview)
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Epic Rant – ‘Nigel Farage Was Right!’
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Dawn of the New World Order: 2017 will be the year EVERYTHING changes
A NEW World Order is set to emerge next year as huge political changes sweep across Europe including the rise of the mega-alliance under Vladimir Putin and Donald Trump.
By Henry Holloway / Published 29th December 2016
GETTY/DSNEW WORLD ORDER: Vladimir Putin and Donald Trump will trigger a revolution across EuropePutin’s growing power and Trump’s extraordinary US Election victory are both herald’s of a growing movement against the established world governments.Anti-establishment parties raging against the political class could sweep to victory in a swathes of elections next year and change the face of the West.
From Germany, to France, to the Netherlands – fringe and extremist parties are gaining momentum hand over fist and looked primed to seize power.
Notable victories have already been won – with a shocking referendum win in Italy causing Prime Minister Matteo Renzi to resign in a move said to pave the way for the collapse of the EU.
DSEND OF THE EU: Anti-establishment parties are set to sweep to power in Europe
“The new axis between Trump’s America, Putin’s Russia, and European populists represents a toxic mix”
Fredrik Wesslau
Fredrik Wesslau, from the European Council of Foreign Relations, predicted the “unthinkable is now thinkable” after Trump was swept into the White House.
He said the political parties are trying to unseat the “liberal order” in a campaign backed by Putin and Trump.
Politicians look to overthrow the established order are hailing Trump’s election victory as the beginning of the “Patriotic Spring”.
There are six key elections coming up in 2017 which could very easily be won by right-wing parties with nationalist policies which would spell the end of the EU.
GETTYGOLDEN DAWN: The Neo-nazi movement in Greece is the most extreme example
Brexit aftershocks: Who’s next to leave the EU?
Wednesday, 29th June 2016
After Britain voted to leave the EU, we look at which European countries want to hold their own EU referendum.
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EXPRESS
Frexit, Nexit or Auxit? Who will be next to leave the EU
Marine Le Pen, leader of France’s National Front, could be poised to take power after the election in May in a move which could pull France out of the EU.
She has described the coming year as a “global revolution” after the election of Trump and the victory of Brexit.Mrs Le Pen has promised to pull france out of NATO and “push migrants who want to come to Europe back into international waters”.The alliance is feared to be a further casualty of the looming political shift – with NATO bosses “preparing for the worst” as they fear Putin will invade Eastern Europe and Trump will pull all US support.GETTYMARINE LE PEN: France’s National Front leader could seize power next yearGEERT WILDERS: The Netherlands’ Party for Freedom leader has compared the Koran to Mein KampfMeanwhile, anti-Islam and anti-migrant leader of the Party of Freedom Geert Wilders ended 2016 leading the polls in the Netherlands – contesting the general election in March.He tweeted a picture of Angela Merkel with blood on her hands following the Berlin Christmas market attack – and shared the message “they hate and kill us. An nobody protects us”.He has also compared the Koran to Adolf Hitler’s book Mein Kampf – campaigning to have the Muslim holy book banned – and coined the phrase “patriotic spring”.FRAUKE PETRY: Angela Merkel faces losing Chancellor’s seat next year after major unrestFrauke Petry is also contesting the German federal election next year as the aftermath of the Berlin attack rocks the government of Angelea Merkel.While she does not have a seat in the Bundestag – the German parliament – approval of her Alternative for Germany party has been swelling in wake of backlash against refugees following terrorist attacks.In her first election manifesto she declared “Islam is not part of Germany” and has previously called on border guard to use “firearms if necessary” when dealing with refugees. GETTYGERMANY: Unrest is sweeping across the European nation after terror attacksGETTYBEPE GRILLO: This comedian turned politician has already struck a blow to the EULeader of Italy’s Five Star Movement TV comedian Beppe Grillo has already caused a stir as the the Italian government lost a key referendum.Savagedly anti-EU, he has said “political amateurs are conquering the world”, called Trump’s victory an “extraordinary turning point” and his party won two key mayoral seats in Turin and Rome.He has been called the “Italian Donald Trump” and his party could be a key player with elections expected to be held in 2017.GETTYJIMMIE AKESSON: Sweden Democrats’ outspoken leader led a campaign against migrantsThe Czech Republic is also set to hold elections in 2017 while Sweden goes to the polls in 2018, both with own Trump-esque leaders who could make a shocking grab for power.Andrej Babis, the second richest man in the Czech Republic, is expected to win the general election for the ANO party and has been reported to have close ties to Putin’s Russia.While in Sweden, anti-immigration Jimmie Akesson of the Sweden Democrats is gaining in popularity – campaigning against his nation’s membership of the EU and advocating a campaign to tell people not to come to Sweden.With Europe’s biggest economies set to go to the polls, struggling Greece could also follow suit.The extreme right fringes of their politics is dominated by the neo-nazi party Golden Dawn – who have launched attacks on refugee camps.While it is very unlikely they have any chance at power, their nationalist cause is of the most intense and hate-filed in Europe.Centre-right party New Democracy is the most likely to unseat the government should a snap election be called.The former EU diplomat Wesslau said: “The new axis between Trump’s America, Putin’s Russia, and European populists represents a toxic mix for the liberal order in Europe.”He added: “Within Europe, populists on the left and right are trying to roll back the liberal order.”This insurgency is being actively backed by Putin’s Russia, and, now, it seems, Trump’s America.”The European Union itself risks being an early casualty.”RELATED ARTICLES
Trump’s populist views of self-determination are sweeping the planet and the elite are in a sheer panic. Only a few weeks ago, the sheep of the planet were being marched to their Armageddon. The dumbed down masses have managed to mount a ninth inning rally that have sent the elite into frenzy.
Hillary Clinton Was Supposed to Usher in the New World Order Through the Fall of America
The lies are exposed. Hillary and Bill cannot unring the bill, the truth has been exposed for millions of people to see.
Two months ago, I called upon the Independent Media to step up their attacks on Hillary Clinton’s criminal behavior in a last-ditch and desperate effort to derail her presidential aspirations. After issuing my plea, I can happily report that I got more than I had hoped for. Merely a year ago, I was one of the few voices that was pounding away at Hillary Clinton’s sociopathic behavior. Today, the attacks are so bombastic and vitriolic, that I am joyfully reporting that I feel that my voice is being drowned out by a relentless chorus of voices that has Hillary Clinton in a death grip and they won’t let go. This is a great time for humanity. Even if the criminal elite unleash genocidal hell on Earth, at least humanity will die on their feet. There is absolutely no way that the criminal elite can stem the tide of rebellion against their corrupt and satanically inspired rule over the people.
The criminal elite had pinned their hopes on Hillary Clinton ushering in the NWO by tearing down what was left of American sovereignty. From a Bilderberg, Trilateral and CFR perspective, this woman was sociopathic enough to do what would need to be done to complete this task. However, the criminal elite forgot to do one thing. They neglected to manage her public image. It is leaders like Clinton and Cameron which have awakened the masses, through their abject criminality, and the people are saying enough is enough.
Clinton’s role in the emails, her treason by selling uranium to the Russians to raise money for her foundation, the Benghazi affair, etc., etc, are exploding on the national scene. Former Clinton campaign leaders and Secret Service personnel are speaking out against this despot. The genie will not fit back into the bottle. The elite know this and they are on the verge of a mass nervous breakdown. The playground bully has just been punched in the nose by the 98 pound weakling.
Zbigniew Brzezinski saw this awakening coming in 2011 which prompted him to say the following:
This is what wounded animals do, they lash out in an uncontrollable manner.
The following op-ed piece written for the Council on Foreign Relations captures the criminal elite’s sense of desperation.
The Face of Global Elite Arrogance
Meet the face of global pomposity and unbridled arrogance. His disdain for “your type” is noteworthy and speaks to the desperation of global criminal elite.
His name is James Traub and he and his kind are the absolute enemy of every American. He is the heir to the Bloomingdale industries and a prominent member of the Council on Foreign Relations (CFR).
Traub’s elitist views leave nothing to the imagination. Writing for the mouthpiece of The Council on Foreign Relations, he leaves little doubt that the the evil empire is going to strike back.
It is clear that Traub and his fellow CFR elitist snobs are declaring war on any kind self-determination. He expects every Westerner to relish in their servitude to the globalists as he states the following in the article:
“the Brexit vote…utter repudiation of….bankers and economists”…
“…establishment political parties in major western countries must combine forces to keep out the nationalists”.
“…globalization means culture as well as economics: Older people whose familiar world is vanishing beneath a welter of foreign tongues and multicultural celebrations are waving their fists at cosmopolitan elites.”
“…(describes) the pro-Trump Republican base as “know nothing” voters…”
In one fell swoop, Traub validated several conspiracy theories, as being conspiracy facts as his statements admit to the following conspiratorial beliefs held by much of the Independent Media:
The bankers are involved in a conspiracy that work against the interests of the common man…all wars are bankers’ wars.
The Democrats and the Republicans are “establishment” parties and for all intents and purposes these two parties are two flavors of the same party.
There is an overt admission that illegal immigration is about decultralizing the west.
The “Know-nothing voters” who support Trump should be viewed with extreme disdain (e.g. extremists and domestic terrorists).
Conclusion
After reading Traub’s article, there is nothing left to the imagination, the elite are in absolute panic. This is what makes the criminal elite so very dangerous. It is my considered opinion that the panicked elite may resort to one of more of the following to reassert control over dumbed down masses, who are awake to the corruption that has ruled over them for so long:
False flag induced martial law, followed by mass incarcerations and genocide.
A complete economic collapse which will pit one useless eater vs. another useless eater.
Bankers start world wars of epic proportions. World War III could be right around the corner.
If this is not the future that you want for your children, you best get off of your backside and get involved in the planet-changing conflict.
And how moral psychology can help explain and reduce tensions between the two.
What on earth is going on in the Western democracies? From the rise of Donald Trump in the United States and an assortment of right-wing parties across Europe through the June 23 Brexit vote, many on the Left have the sense that something dangerous and ugly is spreading: right-wing populism, seen as the Zika virus of politics. Something has gotten into “those people” that makes them vote in ways that seem—to their critics—likely to harm their own material interests, at least if their leaders follow through in implementing isolationist policies that slow economic growth.
Most analyses published since the Brexit vote focus on economic factors and some version of the “left behind” thesis—globalization has raised prosperity all over the world, with the striking exception of the working classes in Western societies. These less educated members of the richest countries lost access to well-paid but relatively low-skilled jobs, which were shipped overseas or given to immigrants willing to work for less. In communities where wages have stagnated or declined, the ever-rising opulence, rents, and confidence of London and other super-cities has bred resentment.A smaller set of analyses, particularly in the United States, has focused on the psychological trait of authoritarianism to explain why these populist movements are often so hostile to immigration, and why they usually have an outright racist fringe.Globalization and authoritarianism are both essential parts of the story, but in this essay I will put them together in a new way. I’ll tell a story with four chapters that begins by endorsing the distinction made by the intellectual historian Michael Lind, and other commentators, between globalists and nationalists—these are good descriptions of the two teams of combatants emerging in so many Western nations. Marine Le Pen, the leader of the French National Front, pointed to the same dividing line last December when she portrayed the battle in France as one between “globalists” and “patriots.”But rather than focusing on the nationalists as the people who need to be explained by experts, I’ll begin the story with the globalists. I’ll show how globalization and rising prosperity have changed the values and behavior of the urban elite, leading them to talk and act in ways that unwittingly activate authoritarian tendencies in a subset of the nationalists. I’ll show why immigration has been so central in nearly all right-wing populist movements. It’s not just the spark, it’s the explosive material, and those who dismiss anti-immigrant sentiment as mere racism have missed several important aspects of moral psychology related to the general human need to live in a stable and coherent moral order. Once moral psychology is brought into the story and added on to the economic and authoritarianism explanations, it becomes possible to offer some advice for reducing the intensity of the recent wave of conflicts.Chapter One: The Rise of the GlobalistsAs nations grow prosperous, their values change in predictable ways. The most detailed longitudinal research on these changes comes from the World Values Survey, which asks representative samples of people in dozens of countries about their values and beliefs. The WVS has now collected and published data in six “waves” since the early 1980s; the most recent survey included sixty countries. Nearly all of the countries are now far wealthier than they were in the 1980s, and many made a transition from communism to capitalism and from dictatorship to democracy in the interim. How did these momentous changes affect their values?Each country has followed a unique trajectory, but if we zoom out far enough some general trends emerge from the WVS data. Countries seem to move in two directions, along two axes: first, as they industrialize, they move away from “traditional values” in which religion, ritual, and deference to authorities are important, and toward “secular rational” values that are more open to change, progress, and social engineering based on rational considerations. Second, as they grow wealthier and more citizens move into the service sector, nations move away from “survival values” emphasizing the economic and physical security found in one’s family, tribe, and other parochial groups, toward “self-expression” or “emancipative values” that emphasize individual rights and protections—not just for oneself, but as a matter of principle, for everyone. Here is a summary of those changes from the introduction to Christian Welzel’s enlightening book Freedom Rising:
…fading existential pressures [i.e., threats and challenges to survival] open people’s minds, making them prioritize freedom over security, autonomy over authority, diversity over uniformity, and creativity over discipline. By the same token, persistent existential pressures keep people’s minds closed, in which case they emphasize the opposite priorities…the existentially relieved state of mind is the source of tolerance and solidarity beyond one’s in-group; the existentially stressed state of mind is the source of discrimination and hostility against out-groups.
Democratic capitalism—in societies with good rule of law and non-corrupt institutions—has generated steady increases in living standards and existential security for many decades now. As societies become more prosperous and safe, they generally become more open and tolerant. Combined with vastly greater access to the food, movies, and consumer products of other cultures brought to us by globalization and the internet, this openness leads almost inevitably to the rise of a cosmopolitan attitude, usually most visible in the young urban elite. Local ties weaken, parochialism becomes a dirty word, and people begin to think of their fellow human beings as fellow “citizens of the world” (to quote candidate Barack Obama in Berlin in 2008). The word “cosmopolitan” comes from Greek roots meaning, literally, “citizen of the world.” Cosmopolitans embrace diversity and welcome immigration, often turning those topics into litmus tests for moral respectability.
For example, in 2007, former UK Prime Minister Gordon Brown gave a speech that included the phrase, “British jobs for British workers.” The phrase provoked anger and scorn from many of Brown’s colleagues in the Labour party. In an essay in Prospect, David Goodhart described the scene at a British center-left social event a few days after Brown’s remark:
The people around me entered a bidding war to express their outrage at Brown’s slogan which was finally triumphantly closed by one who declared, to general approval, that it was “racism, pure and simple.” I remember thinking afterwards how odd the conversation would have sounded to most other people in this country. Gordon Brown’s phrase may have been clumsy and cynical but he didn’t actually say British jobs for white British workers. In most other places in the world today, and indeed probably in Britain itself until about 25 years ago, such a statement about a job preference for national citizens would have seemed so banal as to be hardly worth uttering. Now the language of liberal universalism has ruled it beyond the pale.
The shift that Goodhart notes among the Left-leaning British elite is related to the shift toward “emancipative” values described by Welzel. Parochialism is bad and universalism is good. Goodhart quotes George Monbiot, a leading figure of the British Left:
Internationalism…tells us that someone living in Kinshasa is of no less worth than someone living in Kensington…. Patriotism, if it means anything, tells us we should favour the interests of British people [before the Congolese]. How do you reconcile this choice with liberalism? How…do you distinguish it from racism?
Monbiot’s claim that patriotism is indistinguishable from racism illustrates the universalism that has characterized elements of the globalist Left in many Western nations for several decades. John Lennon wrote the globalist anthem in 1971. After asking us to imagine that there’s no heaven, and before asking us to imagine no possessions, Lennon asks us to:
Imagine there’s no countries; it isn’t hard to do Nothing to kill or die for, and no religion too Imagine all the people living life in peace. You may say I’m a dreamer, but I’m not the only one. I hope some day you’ll join us, and the world will be as one.
This is a vision of heaven for multicultural globalists. But it’s naiveté, sacrilege, and treason for nationalists.
Chapter Two: Globalists and Nationalists Grow Further Apart on ImmigrationNationalists see patriotism as a virtue; they think their country and its culture are unique and worth preserving. This is a real moral commitment, not a pose to cover up racist bigotry. Some nationalists do believe that their country is better than all others, and some nationalisms are plainly illiberal and overtly racist. But as many defenders of patriotism have pointed out, you love your spouse because she or he is yours, not because you think your spouse is superior to all others. Nationalists feel a bond with their country, and they believe that this bond imposes moral obligations both ways: Citizens have a duty to love and serve their country, and governments are duty bound to protect their own people. Governments should place their citizens interests above the interests of people in other countries.There is nothing necessarily racist or base about this arrangement or social contract. Having a shared sense of identity, norms, and history generally promotes trust. Having no such shared sense leads to the condition that the sociologist Émile Durkheim described as “anomie” or normlessness. Societies with high trust, or high social capital, produce many beneficial outcomes for their citizens: lower crime rates, lower transaction costs for businesses, higher levels of prosperity, and a propensity toward generosity, among others. A liberal nationalist can reasonably argue that the debate over immigration policy in Europe is not a case of what is moral versus what is base, but a case of two clashing moral visions, incommensurate (à la Isaiah Berlin). The trick, from this point of view, is figuring out how to balance reasonable concerns about the integrity of one’s own community with the obligation to welcome strangers, particularly strangers in dire need.So how have nationalists and globalists responded to the European immigration crisis? For the past year or two we’ve all seen shocking images of refugees washing up alive and dead on European beaches, marching in long lines across south eastern Europe, scaling fences, filling train stations, and hiding and dying in trucks and train tunnels. If you’re a European globalist, you were probably thrilled in August 2015 when Angela Merkel announced Germany’s open-door policy to refugees and asylum seekers. There are millions of people in need, and (according to some globalists) national borders are arbitrary and immoral.But the globalists are concentrated in the capital cities, commercial hubs, and university towns—the places that are furthest along on the values shift found in the World Values Survey data. Figure 1 shows this geographic disjunction in the UK, using data collected in 2014. Positive sentiment toward immigrants is plotted on the Y axis, and desire for Britain to leave the EU on the X axis. Residents of Inner London are extreme outliers on both dimensions when compared to other cities and regions of the UK, and even when compared to residents of outer London.
But if you are a European nationalist, watching the nightly news may have felt like watching the spread of the Zika virus, moving steadily northward from the chaos zones of southwest Asia and north Africa. Only a few right-wing nationalist leaders tried to stop it, such as Victor Orban in Hungary. The globalist elite seemed to be cheering the human tidal wave onward, welcoming it into the heart of Europe, and then demanding that every country accept and resettle a large number of refugees.
And these demands, epicentered in Brussels, came after decades of debate in which nationalists had been arguing that Europe has already been too open and had already taken in so many Muslim immigrants that the cultures and traditions of European societies were threatened. Long before the flow of Syrian asylum seekers arrived in Europe there were initiatives to ban minarets in Switzerland and burkas in France. There were riots in Arab neighborhoods of Paris and Marseilles, and attacks on Jews and synagogues throughout Europe. There were hidden terrorist cells that planned and executed the attacks of September 11 in the United States, attacks on trains and buses in Madrid and London, and the slaughter of the Charlie Hebdo staff in Paris.By the summer of 2015 the nationalist side was already at the boiling point, shouting “enough is enough, close the tap,” when the globalists proclaimed, “let us open the floodgates, it’s the compassionate thing to do, and if you oppose us you are a racist.” Might that not provoke even fairly reasonable people to rage? Might that not make many of them more receptive to arguments, ideas, and political parties that lean toward the illiberal side of nationalism and that were considered taboo just a few years earlier?Chapter Three: Muslim Immigration Triggers the Authoritarian AlarmNationalists in Europe have been objecting to mass immigration for decades, so the gigantic surge of asylum seekers in 2015 was bound to increase their anger and their support for right-wing nationalist parties. Globalists tend to explain these reactions as “racism, pure and simple,” or as the small-minded small-town selfishness of people who don’t want to lose either jobs or benefits to foreigners.Racism is clearly evident in some of the things that some nationalists say in interviews, chant at soccer matches, or write on the Internet with the protection of anonymity. But “racism” is a shallow term when used as an explanation. It asserts that there are some people who just don’t like anyone different from themselves—particularly if they have darker skin. They have no valid reason for this dislike; they just dislike difference, and that’s all we need to know to understand their rage.But that is not all we need to know. On closer inspection, racism usually turns out to be deeply bound up with moral concerns. (I use the term “moral” here in a purely descriptive sense to mean concerns that seem—for the people we are discussing—to be matters of good and evil; I am not saying that racism is in fact morally good or morally correct.) People don’t hate others just because they have darker skin or differently shaped noses; they hate people whom they perceive as having values that are incompatible with their own, or who (they believe) engage in behaviors they find abhorrent, or whom they perceive to be a threat to something they hold dear. These moral concerns may be out of touch with reality, and they are routinely amplified by demagogues. But if we want to understand the recent rise of right-wing populist movements, then “racism” can’t be the stopping point; it must be the beginning of the inquiry.Among the most important guides in this inquiry is the political scientist Karen Stenner. In 2005 Stenner published a book called The Authoritarian Dynamic, an academic work full of graphs, descriptions of regression analyses, and discussions of scholarly disputes over the nature of authoritarianism. (It therefore has not had a wide readership.) Her core finding is that authoritarianism is not a stable personality trait. It is rather a psychological predisposition to become intolerant when the person perceives a certain kind of threat. It’s as though some people have a button on their foreheads, and when the button is pushed, they suddenly become intensely focused on defending their in-group, kicking out foreigners and non-conformists, and stamping out dissent within the group. At those times they are more attracted to strongmen and the use of force. At other times, when they perceive no such threat, they are not unusually intolerant. So the key is to understand what pushes that button.The answer, Stenner suggests, is what she calls “normative threat,” which basically means a threat to the integrity of the moral order (as they perceive it). It is the perception that “we” are coming apart:
The experience or perception of disobedience to group authorities or authorities unworthy of respect, nonconformity to group norms or norms proving questionable, lack of consensus in group values and beliefs and, in general, diversity and freedom ‘run amok’ should activate the predisposition and increase the manifestation of these characteristic attitudes and behaviors.
So authoritarians are not being selfish. They are not trying to protect their wallets or even their families. They are trying to protect their group or society. Some authoritarians see their race or bloodline as the thing to be protected, and these people make up the deeply racist subset of right-wing populist movements, including the fringe that is sometimes attracted to neo-Nazism. They would not even accept immigrants who fully assimilated to the culture. But more typically, in modern Europe and America, it is the nation and its culture that nationalists want to preserve.
Stenner identifies authoritarians in her many studies by the degree to which they endorse a few items about the most important values children should learn at home, for example, “obedience” (vs. “independence” and “tolerance and respect for other people”). She then describes a series of studies she did using a variety of methods and cross-national datasets. In one set of experiments she asked Americans to read fabricated news stories about how their nation is changing. When they read that Americans are changing in ways that make them more similar to each other, authoritarians were no more racist and intolerant than others. But when Stenner gave them a news story suggesting that Americans are becoming more morally diverse, the button got pushed, the “authoritarian dynamic” kicked in, and they became more racist and intolerant. For example, “maintaining order in the nation” became a higher national priority while “protecting freedom of speech” became a lower priority. They became more critical of homosexuality, abortion, and divorce.One of Stenner’s most helpful contributions is her finding that authoritarians are psychologically distinct from “status quo conservatives” who are the more prototypical conservatives—cautious about radical change. Status quo conservatives compose the long and distinguished lineage from Edmund Burke’s prescient reflections and fears about the early years of the French revolution through William F. Buckley’s statement that his conservative magazine National Review would “stand athwart history yelling ‘Stop!’”Status quo conservatives are not natural allies of authoritarians, who often favor radical change and are willing to take big risks to implement untested policies. This is why so many Republicans—and nearly all conservative intellectuals—oppose Donald Trump; he is simply not a conservative by the test of temperament or values. But status quo conservatives can be drawn into alliance with authoritarians when they perceive that progressives have subverted the country’s traditions and identity so badly that dramatic political actions (such as Brexit, or banning Muslim immigration to the United States) are seen as the only remaining way of yelling “Stop!” Brexit can seem less radical than the prospect of absorption into the “ever closer union” of the EU.So now we can see why immigration—particularly the recent surge in Muslim immigration from Syria—has caused such powerfully polarized reactions in so many European countries, and even in the United States where the number of Muslim immigrants is low. Muslim Middle Eastern immigrants are seen by nationalists as posing a far greater threat of terrorism than are immigrants from any other region or religion. But Stenner invites us to look past the security threat and examine the normative threat. Islam asks adherents to live in ways that can make assimilation into secular egalitarian Western societies more difficult compared to other groups. (The same can be said for Orthodox Jews, and Stenner’s authoritarian dynamic can help explain why we are seeing a resurgence of right-wing anti-Semitism in the United States.) Muslims don’t just observe different customs in their private lives; they often request and receive accommodations in law and policy from their host countries, particularly in matters related to gender. Some of the most pitched battles of recent decades in France and other European countries have been fought over the veiling and covering of women, and the related need for privacy and gender segregation. For example, some public swimming pools in Sweden now offer times of day when only women are allowed to swim. This runs contrary to strong Swedish values regarding gender equality and non-differentiation.So whether you are a status quo conservative concerned about rapid change or an authoritarian who is hypersensitive to normative threat, high levels of Muslim immigration into your Western nation are likely to threaten your core moral concerns. But as soon as you speak up to voice those concerns, globalists will scorn you as a racist and a rube. When the globalists—even those who run the center-right parties in your country—come down on you like that, where can you turn? The answer, increasingly, is to the far right-wing nationalist parties in Europe, and to Donald Trump, who just engineered a hostile takeover of the Republican Party in America.The Authoritarian Dynamic was published in 2005 and the word “Muslim” occurs just six times (in contrast to 100 appearances of the word “black”). But Stenner’s book offers a kind of Rosetta stone for interpreting the rise of right-wing populism and its focus on Muslims in 2016. Stenner notes that her theory “explains the kind of intolerance that seems to ‘come out of nowhere,’ that can spring up in tolerant and intolerant cultures alike, producing sudden changes in behavior that cannot be accounted for by slowly changing cultural traditions.”She contrasts her theory with those who see an unstoppable tide of history moving away from traditions and “toward greater respect for individual freedom and difference,” and who expect people to continue evolving “into more perfect liberal democratic citizens.“ She does not say which theorists she has in mind, but Welzel and his World Values Survey collaborators, as well as Francis Fukuyama’s “end of history” thesis, seem to be likely candidates. Stenner does not share the optimism of those theorists about the future of Western liberal democracies. She acknowledges the general trends toward tolerance, but she predicts that these very trends create conditions that hyper-activate authoritarians and produce a powerful backlash. She offered this prophecy:
[T]he increasing license allowed by those evolving cultures generates the very conditions guaranteed to goad latent authoritarians to sudden and intense, perhaps violent, and almost certainly unexpected, expressions of intolerance. Likewise, then, if intolerance is more a product of individual psychology than of cultural norms…we get a different vision of the future, and a different understanding of whose problem this is and will be, than if intolerance is an almost accidental by-product of simple attachment to tradition. The kind of intolerance that springs from aberrant individual psychology, rather than the disinterested absorption of pervasive cultural norms, is bound to be more passionate and irrational, less predictable, less amenable to persuasion, and more aggravated than educated by the cultural promotion of tolerance [emphasis added].
Writing in 2004, Stenner predicted that “intolerance is not a thing of the past, it is very much a thing of the future.”
Chapter Four: What Now?The upshot of all this is that the answer to the question we began with—What on earth is going on?—cannot be found just by looking at the nationalists and pointing to their economic conditions and the racism that some of them do indeed display. One must first look at the globalists, and at how their changing values may drive many of their fellow citizens to support right-wing political leaders. In particular, globalists often support high levels of immigration and reductions in national sovereignty; they tend to see transnational entities such as the European Union as being morally superior to nation-states; and they vilify the nationalists and their patriotism as “racism pure and simple.” These actions press the “normative threat” button in the minds of those who are predisposed to authoritarianism, and these actions can drive status quo conservatives to join authoritarians in fighting back against the globalists and their universalistic projects.If this argument is correct, then it leads to a clear set of policy prescriptions for globalists. First and foremost: Think carefully about the way your country handles immigration and try to manage it in a way that is less likely to provoke an authoritarian reaction. Pay attention to three key variables: the percentage of foreign-born residents at any given time, the degree of moral difference of each incoming group, and the degree of assimilation being achieved by each group’s children.Legal immigration from morally different cultures is not problematic even with low levels of assimilation if the numbers are kept low; small ethnic enclaves are not a normative threat to any sizable body politic. Moderate levels of immigration by morally different ethnic groups are fine, too, as long as the immigrants are seen as successfully assimilating to the host culture. When immigrants seem eager to embrace the language, values, and customs of their new land, it affirms nationalists’ sense of pride that their nation is good, valuable, and attractive to foreigners. But whenever a country has historically high levels of immigration, from countries with very different moralities, and without a strong and successful assimilationist program, it is virtually certain that there will be an authoritarian counter-reaction, and you can expect many status quo conservatives to support it.Stenner ends The Authoritarian Dynamic with some specific and constructive advice:
[A]ll the available evidence indicates that exposure to difference, talking about difference, and applauding difference—the hallmarks of liberal democracy—are the surest ways to aggravate those who are innately intolerant, and to guarantee the increased expression of their predispositions in manifestly intolerant attitudes and behaviors. Paradoxically, then, it would seem that we can best limit intolerance of difference by parading, talking about, and applauding our sameness…. Ultimately, nothing inspires greater tolerance from the intolerant than an abundance of common and unifying beliefs, practices, rituals, institutions, and processes. And regrettably, nothing is more certain to provoke increased expression of their latent predispositions than the likes of “multicultural education,” bilingual policies, and nonassimilation.
If Stenner is correct, then her work has profound implications, not just for America, which was the focus of her book, but perhaps even more so for Europe. Donald Tusk, the current president of the European Council, recently gave a speech to a conclave of center-right Christian Democratic leaders (who, as members of the educated elite, are still generally globalists). Painfully aware of the new authoritarian supremacy in his native Poland, he chastised himself and his colleagues for pushing a “utopia of Europe without nation-states.” This, he said, has caused the recent Euroskeptic backlash: “Obsessed with the idea of instant and total integration, we failed to notice that ordinary people, the citizens of Europe, do not share our Euro-enthusiasm.”
Democracy requires letting ordinary citizens speak. The majority spoke in Britain on June 23, and majorities of similar mien may soon make themselves heard in other European countries, and possibly in the United States in November. The year 2016 will likely be remembered as a major turning point in the trajectory of Western democracies. Those who truly want to understand what is happening should carefully consider the complex interplay of globalization, immigration, and changing values.If the story I have told here is correct, then the globalists could easily speak, act, and legislate in ways that drain passions and votes away from nationalist parties, but this would require some deep rethinking about the value of national identities and cohesive moral communities. It would require abandoning the multicultural approach to immigration and embracing assimilation.The great question for Western nations after 2016 may be this: How do we reap the gains of global cooperation in trade, culture, education, human rights, and environmental protection while respecting—rather than diluting or crushing—the world’s many local, national, and other “parochial” identities, each with its own traditions and moral order? In what kind of world can globalists and nationalists live together in peace?
Jonathan Haidt is a social psychologist and professor in the Business and Society Program at New York University—Stern School of Business. He is the author of The Righteous Mind: Why Good People are Divided by Politics and Religion.
Lawrence B. Lindsey was director of the National Economic Council (2001–2002), and the assistant to the president on economic policy for the U.S. PresidentGeorge W. Bush. He played a leading role in formulating President Bush’s $1.35 trillion tax cut plan, convincing candidate Bush that he needed an “insurance policy” against an economic turndown. He left the White House in December 2002 and was replaced by Stephen Friedman after a dispute over the projected cost of the Iraq War. Lindsey estimated the cost of the Iraq War could reach $200 billion, while Defense SecretaryDonald Rumsfeld estimated that it would cost less than $50 billion.[1]
He is the author of The Growth Experiment: How the New Tax Policy is Transforming the U.S. Economy (Basic Books, New York, 1990, ISBN 978-0465050703), Economic Puppetmasters: Lessons from the Halls of Power (AEI Press, Washington, D.C., 1999, ISBN 978-0844740812), What A President Should Know …but most learn too late: An Insiders View On How To Succeed In The Oval Office (Rowman & Littlefield Publishers, Inc., Maryland, 2008, ISBN 978-0742562226), and Conspiracies of the Ruling Class: How to Break Their Grip Forever (Simon & Schuster, 2016, ISBN 978-1501144233). Also he has contributed numerous articles to professional publications. His honors and awards include the Distinguished Public Service Award of the Boston Bar Association, 1994; an honorary degree from Bowdoin College, 1993; selection as a Citicorp/Wriston Fellow for Economic Research, 1988; and the Outstanding Doctoral Dissertation Award from the National Tax Association, 1985.
During the Reagan Administration, he served three years on the staff of the Council of Economic Advisers as Senior Staff Economist for Tax Policy. He then served as Special Assistant to the President for Policy Development during the first Bush administration
Lindsey served as a Member of the Board of Governors of the Federal Reserve System for five years from November 1991 to February 1997. Additionally, Lindsey was Chairman of the Board of the Neighborhood Reinvestment Corporation, a national public/private community redevelopment organization, from 1993 until his departure from the Federal Reserve.
From 1997 to January 2001, Lindsey was a Resident Scholar and holder of the Arthur F. Burns Chair in Economics at the American Enterprise Institute in Washington, D.C. He was also Managing Director of Economic Strategies, an economic advisory service based in New York City. During 1999 and throughout 2000 he served as then-Governor George W. Bush’s chief economic advisor for his presidential campaign. He is a former associate professor of Economics at Harvard University.
Lindsey is Chief Executive Officer of the Lindsey Group, which he runs with a former colleague from the National Economic Council and writes for The Wall Street Journal, Weekly Standard and other publications. He is a visiting scholar at the American Enterprise Institute.
Controversies
Lindsey is famous for spotting the emergence of the late 1990s U.S. stock market bubble back in 1996 while a Governor of the Federal Reserve. According to the meeting transcripts for September of that year, Lindsey challenged the expectation that corporate earnings would grow 11½ percent a year continually. He said, “Readers of this transcript five years from now can check this fearless prediction: profits will fall short of this expectation.” According to the Bureau of Economic Analysis, corporate profits as a share of national income eroded from 1997 until 2001. Stock prices eventually collapsed, starting their decline in March 2000, though the S&P500 remained above its 1996 level, casting doubt on the assertion that there was a stock market bubble in 1996.
In contrast to Chairman Greenspan, Lindsey argued that the Federal Reserve had an obligation to prevent the stock market bubble from growing out of control. He argued that “the long term costs of a bubble to the economy and society are potentially great…. As in the United States in the late 1920s and Japan in the late 1980s, the case for a central bank ultimately to burst that bubble becomes overwhelming. I think it is far better that we do so while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights.” During the 2000 Presidential campaign, Governor Bush was criticized for picking an economic advisor who had sold all of his stock in 1998.[citation needed]
According to the Washington Post,[2] Lindsey was on an advisory board to Enron along with Paul Krugman before joining the White House. Lindsey and his colleagues warned Enron that the economic environment was riskier than they perceived.
Cost of the Iraq War
On September 15, 2002, in an interview with the Wall Street Journal, Lindsey estimated the high limit on the cost of the Bush administration’s plan in 2002 of invasion and regime change in Iraq to be 1–2% of GNP, or about $100–$200 billion.[3][4]Mitch Daniels, Director of the Office of Management and Budget, discounted this estimate as “very, very high” and Defense Secretary Donald Rumsfeld stated that the costs would be under $50 billion.[1] Rumsfeld called Lindsey’s estimate “baloney”.[5]
As of 2007 the cost of the invasion and occupation of Iraq exceeded $400 billion, and the Congressional Budget Office in August 2007 estimated that appropriations would eventually reach $1 trillion or more.[6]
In October 2007, the Congressional Budget Office estimated that by 2017, the total costs of the wars in Iraq and Afghanistan could reach $2.4 trillion. In response, DemocraticRepresentativeAllen Boyd criticized the administration for firing Lindsey, saying “They found him a job outside the administration.”[7]
References
^ Jump up to:abWolk, Martin (2006-05-17). “Cost of Iraq war could surpass $1 trillion”. MSNBC. Retrieved 2008-03-10. Back in 2002, the White House was quick to distance itself from Lindsey’s view. Mitch Daniels, director of the White House budget office, quickly called the estimate “very, very high.” Lindsey himself was dismissed in a shake-up of the White House economic team later that year, and in January 2003, Defense Secretary Donald Rumsfeld said the budget office had come up with “a number that’s something under $50 billion.” He and other officials expressed optimism that Iraq itself would help shoulder the cost once the world market was reopened to its rich supply of oil.
Arthur C. Brooks on the Battle Between Free Enterprise and Big Government
Why Capitalism Works
What Creates Wealth?
The War on Work
WSJ Opinion: Arthur Brooks: The Road to Freedom
The Road to Freedom: The Moral Case for Free Enterprise
Arthur C. Brooks On Glenn Beck Radio Book “The Road to Freedom” Win Fight for Free Enterprise
Arthur C. Brooks on The Secret to Happiness
Arthur Brooks on the Morality of Free Enterprise
An Evening with Arthur Brooks
Is Free Enterprise Moral?
A debate between Arthur Brooks, President, American Enterprise Institute, and Jim Wallis, President and CEO, Sojourners Inc.
November 30, 2011
The Morality of Capitalism – executive director of the Ayn Rand Institute, Yaron Brook
Dr. Yaron Brook – Free Market Revolution: Capitalism and Self Interest
The Power of Choice: The Life and Ideas of Milton Friedman
Milton Friedman Speaks: Equality and Freedom in the Free Enterprise System (B1238) – Full Video
Thomas Sowell — Dismantling America
Thomas Sowell Brings the World into Focus through an Economics Lens
Wealth, Poverty, and Politics
Hoover Institution fellow Thomas Sowell discusses poverty around the world and in the United States. Poverty in America, he says, compared to the rest of the world, is not severe. Many poor people in poverty in the United States have one or two cars, central heating, and cell phones. The real problem for the poor is the destruction of the family, which Sowell argues dramatically increased once welfare policies were introduced in the 1960s.
Four Horsemen – Feature Documentary – Official Version
The Real Adam Smith: Ideas That Changed The World – Full Video
The Real Adam Smith: Morality and Markets – Full Video
Adam Smith and the Birth of Economics | Lawrence Reed
The Division of Labor and Social Order | Jörg Guido Hülsmann
The Pin Factory
How Its Made Needles and Pins
Cato Events – On the Wealth of Nations
Increasing Returns and the New World of Business
W. Brian Arthur
Our understanding of how markets and businesses operate was passed down to us more than a century ago by a handful of European economists—Alfred Marshall in England and a few of his contemporaries on the continent. It is an understanding based squarely upon the assumption of diminishing returns: products or companies that get ahead in a market eventually run into limitations, so that a predictable equilibrium of prices and market shares is reached. The theory was roughly valid for the bulk-processing, smokestack economy of Marshall’s day. And it still thrives in today’s economics textbooks. But steadily and continuously in this century, Western economies have undergone a transformation from bulk-material manufacturing to design and use of technology—from processing of resources to processing of information, from application of raw energy to application of ideas. As this shift has occurred, the underlying mechanisms that determine economic behavior have shifted from ones of diminishing to ones of increasing returns.
Increasing returns are the tendency for that which is ahead to get further ahead, for that which loses advantage to lose further advantage. They are mechanisms of positive feedback that operate—within markets, businesses, and industries—to reinforce that which gains success or aggravate that which suffers loss. Increasing returns generate not equilibrium but instability: If a product or a company or a technology—one of many competing in a market—gets ahead by chance or clever strategy, increasing returns can magnify this advantage, and the product or company or technology can go on to lock in the market. More than causing products to become standards, increasing returns cause businesses to work differently, and they stand many of our notions of how business operates on their head.
Mechanisms of increasing returns exist alongside those of diminishing returns in all industries. But roughly speaking, diminishing returns hold sway in the traditional part of the economy—the processing industries. Increasing returns reign in the newer part—the knowledge-based industries. Modern economies have therefore bifurcated into two interrelated worlds of business corresponding to the two types of returns. The two worlds have different economics. They differ in behavior, style, and culture. They call for different management techniques, strategies, and codes of government regulation.
They call for different understandings.
Alfred Marshall’s World
Let’s go back to beginnings—to the diminishing-returns view of Alfred Marshall and his contemporaries. Marshall’s world of the 1880s and 1890s was one of bulk production: of metal ores, aniline dyes, pig iron, coal, lumber, heavy chemicals, soybeans, coffee—commodities heavy on resources, light on know-how. In that world it was reasonable to suppose, for example, that if a coffee plantation expanded production it would ultimately be driven to use land less suitable for coffee. In other words, it would run into diminishing returns. So if coffee plantations competed, each one would expand until it ran into limitations in the form of rising costs or diminishing profits. The market would be shared by many plantations, and a market price would be established at a predictable level—depending on tastes for coffee and the availability of suitable farmland. Planters would produce coffee so long as doing so was profitable, but because the price would be squeezed down to the average cost of production, no one would be able to make a killing. Marshall said such a market was in perfect competition, and the economic world he envisaged fitted beautifully with the Victorian values of his time. It was at equilibrium and therefore orderly, predictable and therefore amenable to scientific analysis, stable and therefore safe, slow to change and therefore continuous. Not too rushed, not too profitable. In a word, mannerly. In a word, genteel.
With a few changes, Marshall’s world lives on a century later within that part of the modern economy still devoted to bulk processing: of grains, livestock, heavy chemicals, metals and ores, foodstuffs, retail goods—the part where operations are largely repetitive day to day or week to week. Product differentiation and brand names now mean that a few companies rather than many compete in a given market. But typically, if these companies try to expand, they run into some limitation: in numbers of consumers who prefer their brand, in regional demand, in access to raw materials. So no company can corner the market. And because such products are normally substitutable for one another, something like a standard price emerges. Margins are thin and nobody makes a killing. This isn’t exactly Marshall’s perfect competition, but it approximates it.
The Increasing-Returns World
What would happen if Marshall’s diminishing returns were reversed so that there were increasing returns? If products that got ahead thereby got further ahead, how would markets work?
Let’s look at the market for operating systems for personal computers in the early 1980s when CP/M, DOS, and Apple’s Macintosh systems were competing. Operating systems show increasing returns: if one system gets ahead, it attracts further software developers and hardware manufacturers to adopt it, which helps it get further ahead. CP/M was first in the market and by 1979 was well established. The Mac arrived later, but it was wonderfully easy to use. DOS was born when Microsoft locked up a deal in 1980 to supply an operating system for the IBM PC. For a year or two, it was by no means clear which system would prevail. The new IBM PC—DOS’s platform—was a kludge. But the growing base of DOS/IBM users encouraged software developers such as Lotus to write for DOS. DOS’s prevalence—and the IBM PC’s—bred further prevalence, and eventually the DOS/IBM combination came to dominate a considerable portion of the market. That history is now well known. But notice several things: It was not predictable in advance (before the IBM deal) which system would come to dominate. Once DOS/IBM got ahead, it locked in the market because it did not pay for users to switch. The dominant system was not the best: DOS was derided by computer professionals. And once DOS locked in the market, its sponsor, Microsoft, was able to spread its costs over a large base of users. The company enjoyed killer margins.
These properties, then, have become the hallmarks of increasing returns: market instability (the market tilts to favor a product that gets ahead), multiple potential outcomes (under different events in history, different operating systems could have won), unpredictability, the ability to lock in a market, the possible predominance of an inferior product, and fat profits for the winner. They surprised me when I first perceived them in the late 1970s. They were also repulsive to economists brought up on the order, predictability, and optimality of Marshall’s world. Glimpsing some of these properties in 1939, English economist John Hicks warned that admitting increasing returns would lead to “the wreckage of the greater part of economic theory.” But Hicks had it wrong: the theory of increasing returns does not destroy the standard theory—it complements it. Hicks felt repugnance not just because of unsavory properties but also because in his day no mathematical apparatus existed to analyze increasing-returns markets. That situation has now changed. Using sophisticated techniques from qualitative dynamics and probability theory, I and others have developed methods to analyze increasing-returns markets. The theory of increasing returns is new, but it already is well established. And it renders such markets amenable to economic understanding.
In 1939, English economist John Hicks warned that admitting increasing returns would lead to “the wreckage of the greater part of economic theory.” But Hicks had it wrong.
In the early days of my work on increasing returns, I was told they were an anomaly. Like some exotic particle in physics, they might exist in theory but would be rare in practice. And if they did exist, they would last for only a few seconds before being arbitraged away. But by the mid-1980s, I realized increasing returns were neither rare nor ephemeral. In fact, a major part of the economy was subject to increasing returns—high technology.
Why should this be so? There are several reasons:
Up-front Costs.
High-tech products—pharmaceuticals, computer hardware and software, aircraft and missiles, telecommunications equipment, bioengineered drugs, and suchlike—are by definition complicated to design and to deliver to the marketplace. They are heavy on know-how and light on resources. Hence they typically have R&D costs that are large relative to their unit production costs. The first disk of Windows to go out the door cost Microsoft $50 million; the second and subsequent disks cost $3. Unit costs fall as sales increase.
Network Effects.
Many high-tech products need to be compatible with a network of users. So if much downloadable software on the Internet will soon appear as programs written in Sun Microsystems’ Java language, users will need Java on their computers to run them. Java has competitors. But the more it gains prevalence, the more likely it will emerge as a standard.
Customer Groove-in.
High-tech products are typically difficult to use. They require training. Once users invest in this training—say, the maintenance and piloting of Airbus passenger aircraft—they merely need to update these skills for subsequent versions of the product. As more market is captured, it becomes easier to capture future markets.
In high-tech markets, such mechanisms ensure that products that gain market advantage stand to gain further advantage, making these markets unstable and subject to lock-in. Of course, lock-in is not forever. Technology comes in waves, and a lock-in such as DOS’s can last only as long as a particular wave lasts.
Some products—like the IBM PC—start in the increasing-returns world but later in their life cycle become virtual commodities that belong to Marshall’s processing world.
So we can usefully think of two economic regimes or worlds: a bulk-production world yielding products that essentially are congealed resources with a little knowledge and operating according to Marshall’s principles of diminishing returns, and a knowledge-based part of the economy yielding products that essentially are congealed knowledge with a little resources and operating under increasing returns. The two worlds are not neatly split. Hewlett-Packard, for example, designs knowledge-based devices in Palo Alto, California, and manufactures them in bulk in places like Corvallis, Oregon, or Greeley, Colorado. Most high-tech companies have both knowledge-based operations and bulk-processing operations. But because the rules of the game differ for each, companies often separate them—as Hewlett-Packard does. Conversely, manufacturing companies have operations such as logistics, branding, marketing, and distribution, which belong largely to the knowledge world. And some products—like the IBM PC—start in the increasing-returns world but later in their life cycle become virtual commodities that belong to Marshall’s processing world.
The Halls of Production and the Casino of Technology
Because the two worlds of business—processing bulk goods and crafting knowledge into products—differ in their underlying economics, it follows that they differ in their character of competition and their culture of management. It is a mistake to think that what works in one world is appropriate for the other.
There is much talk these days about a new management style that involves flat hierarchies, mission orientation, flexibility in strategy, market positioning, reinvention, restructuring, reengineering, repositioning, reorganization, and re-everything else. Are these new insights or are they fads? Are they appropriate for all organizations? Why are we seeing this new management style?
Let us look at the two cultures of competition. In bulk processing, a set of standard prices typically emerges. Production tends to be repetitive—much the same from day to day or even from year to year. Competing therefore means keeping product flowing, trying to improve quality, getting costs down. There is an art to this sort of management, one widely discussed in the literature. It favors an environment free of surprises or glitches—an environment characterized by control and planning. Such an environment requires not just people to carry out production but also people to plan and control it. So it favors a hierarchy of bosses and workers. Because bulk processing is repetitive, it allows constant improvement, constant optimization. And so, Marshall’s world tends to be one that favors hierarchy, planning, and controls. Above all, it is a world of optimization.
Competition is different in knowledge-based industries because the economics are different. If knowledge-based companies are competing in winner-take-most markets, then managing becomes redefined as a series of quests for the next technological winner—the next cash cow. The goal becomes the search for the Next Big Thing. In this milieu, management becomes not production oriented but mission oriented. Hierarchies flatten not because democracy is suddenly bestowed on the workforce or because computers can cut out much of middle management. They flatten because, to be effective, the deliverers of the next-thing-for-the-company need to be organized like commando units in small teams that report directly to the CEO or to the board. Such people need free rein. The company’s future survival depends upon them. So they—and the commando teams that report to them in turn—will be treated not as employees but as equals in the business of the company’s success. Hierarchy dissipates and dissolves.
Does this mean that hierarchy should disappear in meatpacking, steel production, or the navy? Contrary to recent management evangelizing, a style that is called for in Silicon Valley will not necessarily be appropriate in the processing world. An aircraft’s safe arrival depends on the captain, not on the flight attendants. The cabin crew can usefully be “empowered” and treated as human beings. This approach is wise and proper. But forever there will be a distinction—a hierarchy—between cockpit and cabin crews.
In fact, the style in the diminishing-returns Halls of Production is much like that of a sophisticated modern factory: the goal is to keep high-quality product flowing at low cost. There is little need to watch the market every day, and when things are going smoothly the tempo can be leisurely. By contrast, the style of competition in the increasing-returns arena is more like gambling. Not poker, where the game is static and the players vie for a succession of pots. It is casino gambling, where part of the game is to choose which games to play, as well as playing them with skill. We can imagine the top figures in high tech—the Gateses and Gerstners and Groves of their industries—as milling in a large casino. Over at this table, a game is starting called multimedia. Over at that one, a game called Web services. In the corner is electronic banking. There are many such tables. You sit at one. How much to play? you ask. Three billion, the croupier replies. Who’ll be playing? We won’t know until they show up. What are the rules? Those’ll emerge as the game unfolds. What are my odds of winning? We can’t say. Do you still want to play?
High technology, pursued at this level, is not for the timid.
In fact, the art of playing the tables in the Casino of Technology is primarily a psychological one. What counts to some degree—but only to some degree—is technical expertise, deep pockets, will, and courage. Above all, the rewards go to the players who are first to make sense of the new games looming out of the technological fog, to see their shape, to cognize them. Bill Gates is not so much a wizard of technology as a wizard of precognition, of discerning the shape of the next game.
Adaptation means watching for the next wave and positioning the company to take advantage of it. Adaptation is what drives increasing-returns businesses, not optimization.
We can now begin to see that the new style of management is not a fad. The knowledge-based part of the economy demands flat hierarchies, mission orientation, above all a sense of direction. Not five-year plans. We can also fathom the mystery of what I’ve alluded to as re-everything. Much of this “re-everything” predilection—in the bulk-processing world—is a fancy label for streamlining, computerizing, downsizing. However, in the increasing-returns world, especially in high tech, re-everything has become necessary because every time the quest changes, the company needs to change. It needs to reinvent its purpose, its goals, its way of doing things. In short, it needs to adapt. And adaptation never stops. In fact, in the increasing-returns environment I’ve just sketched, standard optimization makes little sense. You cannot optimize in the casino of increasing-returns games. You can be smart. You can be cunning. You can position. You can observe. But when the games themselves are not even fully defined, you cannot optimize. What you can do is adapt. Adaptation, in the proactive sense, means watching for the next wave that is coming, figuring out what shape it will take, and positioning the company to take advantage of it. Adaptation is what drives increasing-returns businesses, not optimization.
Playing the High-Tech Tables
Suppose you are a player in the knowledge-industry casino, in this increasing-returns world. What can you do to capitalize on the increasing returns at your disposal? How can you use them to capture markets? What strategic issues do you need to think about? In the processing world, strategy typically hinges upon capitalizing on core competencies, pricing competitively, getting costs down, bringing quality up. These are important also in the knowledge-based world, but so, too, are other strategies that make use of the special economics of positive feedbacks.
Two maxims are widely accepted in knowledge-based markets: it pays to hit the market first, and it pays to have superb technology. These maxims are true but do not guarantee success. Prodigy was first into the on-line services market but was passive in building its subscriber base to take advantage of increasing returns. As a result, it has fallen from its leading position and currently lags the other services. As for technology, Steve Jobs’s NeXT workstation was superb. But it was launched into a market already dominated by Sun Microsystems and Hewlett-Packard. It failed. A new product often has to be two or three times better in some dimension—price, speed, convenience—to dislodge a locked-in rival. So in knowledge-based markets, entering first with a fine product can yield advantage. But as strategy, this is still too passive. What is needed is active management of increasing returns.
One active strategy is to discount heavily initially to build up an installed base. Netscape handed out its Internet browser for free and won 70% of its market. Now it can profit from spin-off software and applications. Although such discounting is effective—and widely understood—it is not always implemented. Companies often err by pricing high initially to recoup expensive R&D costs. Yet even smart discounting to seed the market is ineffective unless the resulting installed base is exploited later. America Online built up a lead of more than 4.5 million subscribers by giving away free services. But because of the Internet’s dominance, it is not yet clear whether it can transform this huge base into later profits.
Let’s get a bit more sophisticated. Technological products do not stand alone. They depend on the existence of other products and other technologies. The Internet’s World Wide Web operates within a grouping of businesses that include browsers, online news, E-mail, network retailing, and financial services. Pharmaceuticals exist within a network of physicians, testing labs, hospitals, and HMOs. Laser printers are part of a grouping of products that include computers, publishing software, scanners, and photo-input devices. Unlike products of the processing world, such as soybeans or rolled steel, technological products exist within local groupings of products that support and enhance them. They exist in mini-ecologies.
This interdependence has deep implications for strategy. When, in the mid-1980s, Novell introduced its network-operating system, NetWare, as a way of connecting personal computers in local networks, Novell made sure that NetWare was technically superior to its rivals. It also heavily discounted NetWare to build an installed base. But these tactics were not enough. Novell recognized that NetWare’s success depended on attracting software applications to run on NetWare—which was a part of the ecology outside the company’s control. So it set up incentives for software developers to write for NetWare rather than for its rivals. The software writers did just that. And by building NetWare’s success, they ensured their own. Novell managed these cross-product positive feedbacks actively to lock in its market. It went on to profit hugely from upgrades, spin-offs, and applications of its own.
In the Case of Microsoft…
READ MORE
Another strategy that uses ecologies is linking and leveraging. This means transferring a user base built up upon one node of the ecology (one product) to neighboring nodes, or products. The strategy is very much like that in the game Go: you surround neighboring markets one by one, lever your user base onto them, and take them over—all the time enhancing your position in the industry. Microsoft levered its 60-million-person user base in DOS onto Windows, then onto Windows 95, and then onto Microsoft Network by offering inexpensive upgrades and by bundling applications. The strategy has been challenged legally. But it recognizes that positive feedbacks apply across markets as well as within markets.
In fact, if technological ecologies are now the basic units for strategy in the knowledge-based world, players compete not by locking in a product on their own but by building webs—loose alliances of companies organized around a mini-ecology—that amplify positive feedbacks to the base technology. Apple, in closing its Macintosh system to outsiders in the 1980s, opted not to create such a web. It believed that with its superior technology, it could hold its increasing-returns market to itself. Apple indeed dominates its Mac-based ecology. But this ecology is now only 8% of the personal computer business. IBM erred in the other direction. By passively allowing other companies to join its PC web as clones, IBM achieved a huge user base and locked in the market. But the company itself wound up with a small share of the spoils. The key in web building is active management of the cross-company mutual feedbacks. This means making a careful choice of partners to build upon. It also means that, rather than attempting to take over all products in the ecology, dominant players in a web should allow dependent players to lock in their dependent products by piggybacking on the web’s success. By thus ceding some of the profits, the dominant players ensure that all participants remain committed to the alliance.
Important also to strategy in knowledge-based markets is psychological positioning. Under increasing returns, rivals will back off in a market not only if it is locked in but if they believe it will be locked in by someone else. Hence we see psychological jockeying in the form of preannouncements, feints, threatened alliances, technological preening, touted future partnerships, parades of vaporware (announced products that don’t yet exist). This posturing and puffing acts much the way similar behavior does in a primate colony: it discourages competitors from taking on a potentially dominant rival. No moves need be made in this strategy of premarket facedown. It is purely a matter of psychology.
What if you hold a losing hand? Sometimes it pays to hold on for residual revenue. Sometimes a fix can be provided by updated technology, fresh alliances, or product changes. But usually under heavy lock-in, these tactics do not work. The alternatives are then slow death or graceful exit—relinquishing the field to concentrate on positioning for the next technology wave. Exit may not mean quitting the business entirely. America Online, Compuserve, Prodigy, and Microsoft Network have all ceded dominance of the on-line computer networking market to the Internet. But instead of exiting, they are steadily becoming adjuncts of the Net, supplying content services such as financial quotations or games and entertainment. They have lost the main game. But they will likely continue in a side game with its own competition for dominance within the Net’s ecology.
Above all, strategy in the knowledge world requires CEOs to recognize that a different kind of economics is at work. CEOs need to understand which positive and negative feedback mechanisms are at play in the market ecologies in which they compete. Often there are several such mechanisms—interbraided, operating over different time frames, each needing to be understood, observed, and actively managed.
What About Service Industries?
So far, I’ve talked mainly about high tech. Where do service industries such as insurance, restaurants, and banking fit in? Which world do they belong to? The question is tricky. It would appear that such industries belong to the diminishing-returns, processing part of the economy because often there are regional limits to the demand for a given service, most services do consist of “processing” clients, and services are low-tech.
The truth is that network or user-base effects often operate in services. Certainly, retail franchises exist because of increasing returns. The more McDonald’s restaurants or Motel 6 franchises are out there geographically, the better they are known. Such businesses are patronized not just for their quality but also because people want to know exactly what to expect. So the more prevalent they are, the more prevalent they can become. Similarly, the larger a bank’s or insurance company’s customer base, the more it can spread its fixed costs of headquarters staff, real estate, and computer operations. These industries, too, are subject to mild increasing returns.
So we can say more accurately that service industries are a hybrid. From day to day, they act like bulk-processing industries. But over the long term, increasing returns will dominate—even though their destabilizing effects are not as pronounced as in high tech. The U.S. airline business, for example, processes passengers day to day. So it seemed in 1981 that deregulation should enhance competition, as it normally does under diminishing returns. But over the long term, airlines in fact experience a positive feedback: under the hub-and-spoke system, once an airline gets into trouble, it cannot work the feeder system for its routes properly, its fleet ages, it starts a downward spiral, and it loses further routes. The result of deregulation over the long term has been a steady decline in large carriers, from 15 airlines in 1981 to approximately 6 at present. Some routes have become virtual monopolies, with resulting higher fares. None of this was intended. But it should have been predicted—given increasing returns.
In fact, the increasing-returns character of service industries is steadily strengthening. One of the marks of our time is that in services everything is going software—everything that is information based. So operations that were once handled by people—designing fancy financial instruments or automobiles or fashion goods, processing insurance claims, supplying and inventorying in retail, conducting paralegal searches for case precedents—are increasingly being handled by software. As this reengineering of services plays out, centralized software facilities come to the fore. Service providers become hitched into software networks, regional limitations weaken, and user-base network effects kick in.
This phenomenon can have two consequences. First, where the local character of service remains important, it can preserve a large number of service companies but clustered round a dominant software provider—like the large numbers of small, independent law firms tied in to the dominant computer-search network, Lexis-Nexis. Or physicians tied in to an HMO. Second, where locality is unimportant, network effects can transform competition toward the winner-take-most character we see in high tech. For example, when Internet-based retail banking arrives, regional demand limitations will vanish. Each virtual bank will gain in advantage as its network increases. Barring regulation, consumer banking will then become a contest among a few large banking networks. It will become an increasing-returns business.
Services belong to both the processing and the increasing-returns world. But their center of gravity is crossing over to the latter.
Thoughts for Managers
Where does all this leave us? At the beginning of this century, industrial economies were based largely on the bulk processing of resources. At the close of the century, they are based on the processing of resources and on the processing of knowledge. Economies have bifurcated into two worlds—intertwined, overlapping, and different. These two worlds operate under different economic principles. Marshall’s world is characterized by planning, control, and hierarchy. It is a world of materials, of processing, of optimization. The increasing-returns world is characterized by observation, positioning, flattened organizations, missions, teams, and cunning. It is a world of psychology, of cognition, of adaptation.
Many managers have some intuitive grasp of this new increasing-returns world. Few understand it thoroughly. Here are some questions managers need to ask themselves when they operate in knowledge-based markets:
Do I understand the feedbacks in my market?
In the processing world, understanding markets means understanding consumers’ needs, distribution channels, and rivals’ products. In the knowledge world, success requires a thorough understanding of the self-negating and self-reinforcing feedbacks in the market—the diminishing-and increasing-returns mechanisms. These feedbacks are interwoven and operate at different levels in the market and over different time frames.
Which ecologies am I in?
Technologies exist not alone but in an interlinked web, or ecology. It is important to understand the ecologies a company’s products belong to. Success or failure is often decided not just by the company but also by the success or failure of the web it belongs to. Active management of such a web can be an important magnifier of increasing returns.
Do I have the resources to play?
Playing one of the increasing-returns games in the Casino of Technology requires several things: excellent technology, the ability to hit the market at the right time, deep pockets, strategic pricing, and a willingness to sacrifice current profits for future advantage. All this is a matter not just of resources but also of courage, resolution, will. And part of that resolution, that courage, is also the decisiveness to leave the market when increasing returns are moving against one. Hanging on to a losing position that is being further eroded by positive feedbacks requires throwing reinforcements into a battle already lost. Better to exit with financial dignity.
What games are coming next?
Technology comes in successive waves. Those who have lost out on this wave can position for the next. Conversely, those who have made a killing on this cycle should not become complacent. The ability to profit under increasing returns is only as good as the ability to see what’s coming in the next cycle and to position oneself for it—technologically, psychologically, and cooperatively. In high tech, it is as if we are moving slowly on a ship, with new technologies looming, taking shape, through a fog of unknowingness. Success goes to those who have the vision to foresee, to imagine, what shapes these next games will take.
These considerations appear daunting. But increasing-returns games provide large payoffs for those brave enough to play them and win. And they are exciting. Processing, in the service or manufacturing industries, has its own risks. Precisely because processing is low-margin, operations must struggle to stay afloat. Neither world of business is for the fainthearted.
In his book Microcosm, technology thinker George Gilder remarked, “The central event of the twentieth century is the overthrow of matter. In technology, economics, and the politics of nations, wealth in the form of physical resources is steadily declining in value and significance. The powers of mind are everywhere ascendant over the brute force of things.” As the economy shifts steadily away from the brute force of things into the powers of mind, from resource-based bulk processing into knowledge-based design and reproduction, so it is shifting from a base of diminishing returns to one of increasing returns. A new economics—one very different from that in the textbooks—now applies, and nowhere is this more true than in high technology. Success will strongly favor those who understand this new way of thinking.
A version of this article appeared in the July–August 1996 issue of Harvard Business Review.
W. Brian Arthur is the Dean and Virginia Morrison Professor of Economics and Population Studies at Stanford University in Stanford, California, and Citibank Professor at Santa Fe Institute in Santa Fe, New Mexico. He is the author of Increasing Returns and Path Dependence in the Economy (University of Michigan Press, 1994). His Web site is http://www.santafe.edu/arthur.
Two hundred years after Thomas Robert Malthus published An Essay on the Principle of Population, demographers, ecologists, economists, biologists and policymakers still debate his theory of population. Leading foundations spend scores of millions of dollars on population programs, while the United Nations holds international conferences on the topic and even has a specialized agency, the United Nations Population Fund, devoted to the issue. Last year the Fund portentously declared that the world’s population reached six billion on October 12. Every year, hundreds of weighty studies and books pour from the universities and think tanks discussing what is to be done.Malthus advanced two propositions that he regarded as completely self-evident. First, that “food is necessary for the existence of man”, and second, that “the passion between the sexes is necessary and will remain nearly in its present state.” Based on these propositions, Malthus famously concluded that “the power of population is indefinitely greater than the power in the earth to produce subsistence for man. Population, when unchecked, increases in a geometrical ratio. Subsistence increases only in an arithmetical ratio. A slight acquaintance with numbers will show the immensity of the first power in comparison with the second.”
Malthus illustrated his hypothesis using two sets of numbers: “the human species would increase in the ratio of—1, 2, 4, 8, 16, 32, 64, 128, 256, 512, &c. and subsistence as—1, 2, 3, 4, 5, 6, 7, 8, 9, 10, &c.” He further asserted that “population does invariably increase where there are the means of subsistence.” Malthus’ dismal summary of the situation in which humanity finds itself is that some portion of mankind must forever be starving to death; and, further, efforts to aid the starving will only lead to more misery, as those initially spared from famine bear too many children to feed with existing food supplies.
In his first edition of the Essay, Malthus argued that there were two “checks” on population, “preventive” and “positive.” Preventive checks, those that prevent births, include abortion, infanticide and prostitution; positive checks include war, pestilence and famine. In later editions, he added a third check that he called “moral restraint”, which includes voluntary celibacy, late marriage and the like. Moral restraint is basically just a milder version of the earlier preventive check. If all else fails to keep human numbers under control, Malthus chillingly concludes,
“Famine seems to be the last, the most dreadful resource of nature. The power of population is so superior to the power in the earth to produce subsistence for man, that premature death must in some shape or other visit the human race. The vices of mankind are active and able ministers of depopulation. They are the precursors in the great army of destruction, and often finish the dreadful work themselves. But should they fail in this war of extermination, sickly seasons, epidemics, pestilence, and plague, advance in terrific array, and sweep off their thousands and ten thousands. Should success be still incomplete, gigantic inevitable famine stalks in the rear, and with one mighty blow, levels the population with the food of the world.”
Malthus’ principle of population has proved to be one of the most influential and contested theories in history. It provided a crucial insight for Charles Darwin as he was developing his theory of natural selection. In his autobiography, Darwin wrote that in October 1838,
“I happened to read for amusement Malthus on Population, and being well prepared to appreciate the struggle for existence which everywhere goes on, from long-continued observation of the habits of animals and plants, it at once struck me that under these circumstances favourable variations would tend to be preserved, and unfavourable ones would be destroyed. The result of this would be the formation of a new species. Here, then, I had at last got a theory by which to work.”
Naturalists, biologists and ecologists have since applied Malthusian theory not only to animals and plants, but to humans as well. Undeniably, his principle of population has an appealing simplicity, and has proved a fruitful hypothesis for ecology and population biology. It undergirds such biological concepts as carrying capacity, which is a measure of the population that a given ecosystem can support. The Kaibab Plateau deer, for example, is a famous case of an animal population outstripping its food supply. In the 1920s, the deer population expanded dramatically. In the absence of predators, a forage shortage ensued, which in turn led to a dramatic reduction of the deer population.
If the concept of carrying capacity can explain fluctuations in animal populations, some intellectuals have reasoned in the second half of the twentieth century, it should apply equally well to human populations. As Stanford University entomologist Paul Ehrlich has explained: “To ecologists who study animals, food and population often seem like sides of the same coin. If too many animals are devouring it, the food supply declines; too little food, the supply of animals declines… . Homo sapiens is no exception to that rule, and at the moment it seems likely that food will be our limiting resource.”
In the late 1960s, Ehrlich was one of many biologists and agronomists who began to issue dire warnings about human “overpopulation”, the most famous of which appeared in his book, The Population Bomb (1968). “The battle to feed all of humanity is over”, Ehrlich wrote. “In the 1970s, the world will undergo famines—hundreds of millions of people are going to starve to death in spite of any crash programs embarked on now.” Later, in an article for the first Earth Day in 1970, Ehrlich outlined a horrific scenario in which 65 million Americans and 4 billion other people would die of starvation in a “Great Die-Off” between 1980 and 1989. And in 1990 Ehrlich and his wife Anne published The Population Explosion, where they once again asserted that, “One thing seems safe to predict: starvation and epidemic disease will raise the death rates over most of the planet.” In these gloomy forecasts, Ehrlich was far from alone. In 1967, William and Paul Paddock asserted in their book, Famine 1975!, that, “The famines which are now approaching … are for a surety, inevitable… . In fifteen years the famines will be catastrophic.” Today, the Worldwatch Institute, a Washington, dc environmentalist advocacy group chaired by Lester Brown, still has a solid Malthusian focus.
Food is not the only resource said to be in short supply. In 1972 the Club of Rome, a group of politicians, businessmen and senior international bureaucrats, famously commissioned The Limits to Growth report, which concluded: “If the present growth trends in world population, industrialization, pollution, food production, and resource depletion continue unchanged, the limits to growth on this planet will be reached sometime in the next one hundred years. The probable result will be a rather sudden and uncontrollable decline in both population and industrial capacity.”
This is Malthus writ large: not only will humanity run out of food, but it will also run out of non-renewable resources like minerals and fossil fuels… .
The Primacy of Ideas
For decades, economists essentially used a two-factor model in which economic growth was accounted for by adding more labor and more capital to create more goods. The problem with this model is that over time growth must halt when the marginal value of the goods produced equals the cost of the labor and capital used to produce them. This neoclassical model of economic growth was elaborated in the 1950s by Nobelist Robert Solow and his colleagues, and was later incorporated into The Limits to Growth computer model. Relying on it, MIT researchers predicted eventual collapse as the inevitable result of continued economic and population growth.
In the last two decades, economic forecasters, following the lead of economist Paul Romer, have made a conceptual breakthrough that has enabled them to describe more rigorously and accurately—and differently—how economic growth occurs and how, with the proper social institutions, it can continue for the foreseeable future. Romer explains this approach, which has come to be known as the New Growth Theory:
“New growth theorists now start by dividing the world into two fundamentally different types of productive inputs that can be called ‘ideas’ and ‘things. ’ Ideas are nonrival goods that could be stored in a bit string. Things are rival goods with mass (or energy). With ideas and things, one can explain how economic growth works. Nonrival ideas can be used to rearrange things, for example, when one follows a recipe and transforms noxious olives into tasty and healthful olive oil. Economic growth arises from the discovery of new recipes and the transformation of things from low to high value configurations.”
Decoding the clunky economic terminology, “rival” goods are simply things that cannot be used by two or more persons at once, e.g., cars, drill presses, computers, even human bodies and brains. “Nonrival” goods can be used by any number of people simultaneously, e.g., recipes for bread, blueprints for houses, techniques for growing corn, formulas for pharmaceuticals, scientific principles like the law of gravity, and computer programs.
To understand the potency of ideas, consider that a few decades ago silicon was used primarily to make glass. Today it is a crucial component in microchips and optical fibers. Again, until fairly recently petroleum was known mainly as a nuisance for people engaged in drilling water wells; its use as a cheap lighting replacement for increasingly scarce whale oil only began in the 1890s, and soon after came the internal combustion engine.
We make ourselves better off, then, not by increasing the amount of resources on planet earth—that is, of course, fixed—but by rearranging resources we already have available so that they provide us with more of what we want. This process of improvement has been going on ever since the first members of our species walked the earth. We have moved from heavy earthenware pots to ultrathin plastics and lightweight aluminum cans. To cook our food we have shifted from wood-intensive campfires to clean, efficient natural gas. By using constantly improving recipes, humanity has avoided the Malthusian trap while at the same time making the world safer and more comfortable for an ever larger portion of the world’s population.
In fact, increasing, rather than diminishing, returns characterize many economic activities. For example, it may cost $150 million to develop the first vial of a new vaccine to prevent Lyme disease. Yet every vial after that is essentially free. The same is true for computer programs: it may cost Microsoft $500 million for the first copy of Windows 98, but each subsequent copy is merely the cost of the disk on which it is stored. Or in the case of telecommunications, laying a fiber optic network may cost billions of dollars, but once operational it can transmit millions of messages at virtually no added cost. And the low costs of each of these inventions make it possible for the people who buy them to be even more productive in their own activities—by avoiding illness, expediting word processing, and drastically increasing the tempo of information exchanges.
What modern Malthusians who fret about the depletion of resources miss is that it is not oil that people want; they want to cool and heat their homes. It is not copper telephone lines that people want; they want to communicate quickly and easily with friends, family and businesses. They do not want paper; they want a convenient and cheap way to store written information. In short, what is important is not the physical resource but the function to be performed; and for that, ideas are the crucial input. Robert Kates notes that technological discoveries have “transformed the meaning of resources and increased the carrying capacity of the Earth”; economist Gale Johnson concludes that history has clearly confirmed that “no exhaustible resource is essential or irreplaceable”; and economist Dwight Lee asserts that “the relevant resource base is defined by knowledge, rather than by physical deposits of existing resources.”
Romer sums it up this way: “Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. The difficulty is the same one we have with compounding. Possibilities do not add up. They multiply.”
This, it should be noted, is the mirror image of Malthus’ argument about exponential growth. Here, however, ideas grow much faster than population.
By using a number of simple calculations, Romer illustrates the point that the number of possible discoveries and inventions is incomprehensibly vast. Take, for example, the chemical combinations one can derive from the periodic table of elements. There are about 100 different elements and if one serially combined any four, one would get about 94 million combinations. Romer further assumes that these elements could be combined in differing proportions ranging from 1 to 10. This yields 3,500 proportions times 94 million combinations and provides 330 billion different recipes in total. At the rate of 1,000 recipes per day, it would take scientists nearly a million years to evaluate them all. What is more, this vastly underestimates the actual number of combinations available, since one could combine more than four elements, in different proportions, at different temperatures and pressures—and so on and on.
Again, consider the number of computer programs that could be installed on a single computer hard disk drive. Romer calculates that the number of distinct software programs that can be put on a one-gigabyte hard disk is roughly one followed by 2.7 billion zeros. By comparison, the total number of seconds that have elapsed since the beginning of the universe is only about 1 followed by 17 zeros, and the total number of atoms in the universe is equal to about 1 followed by 100 zeros.
In short, then, people possess a nearly infinite capacity to rearrange physical objects by creating new recipes for their use. Yet some committed Malthusians object that Romer and others who hold that economic growth is potentially limitless not only violate the law of diminishing returns but transgress an even more fundamental physical law: the second law of thermodynamics. According to the second law, in a closed system disorder tends to increase. Think of a droplet of ink as a highly ordered pigment that is diluted when it is dropped into a ten-gallon aquarium. When the pigment’s molecules spread evenly throughout the water, disorder is at a maximum—that is, it becomes virtually impossible to reconstitute the droplet. The idea, then, is that the maintenance of order in one part of the system (heating a house) requires an increase of disorder elsewhere (burning oil).
In fact, the solution to the puzzle of life and of a growing economy is that the earth is not a closed system—the energy that drives it comes principally from the sun. It is true that the sun’s energy is being dissipated. But it will not burn out for another four to five billion years. Hence, the recipes that humans could devise for obtaining and using energy are for all practical purposes limitless. Until medieval times, people inefficiently heated and cooked with open fires in their homes. Then someone in Europe invented the chimney, which dramatically increased the efficiency of heating and cooking. In the eighteenth century, Benjamin Franklin invented the cast iron stove, which again boosted efficiency—and so on, to today’s modern electric heat pumps and gas furnaces. And new ideas and designs continue to be developed all the time, among them passive solar homes, solar cells, fuel cells and nuclear power plants. It seems safe to conclude that so long as the sun shines, the second law of thermodynamics is not terribly relevant.
Indeed, trying to forecast today the energy mix for the next hundred years, especially given the current rate of technological innovation, is as fruitless as someone in 1900 trying to predict our current energy requirements. A person in 1900 would surely not have anticipated scores of millions of automobiles and trucks, thousands of jet planes, and millions of refrigerators. Because of this, the wisest course is for humanity to support institutions and incentive systems that will encourage future scientists, inventors and entrepreneurs to discover, finance and build the technologies that will supply human needs and protect the natural world in the coming century.
Reframing the Problems
Insights from New Growth Theory reframe many environmental problems and suggest some surprising solutions. For example, one of the global environmental problems most commonly attributed to population and economic growth is the loss of tropical forests. But is growth really to blame? According to the Consultative Group on International Agricultural Research, the chief factor that drives deforestation in developing countries is not commercial logging but “poor farmers who have no other option to feeding their families other than slashing and burning a patch of forest… . Slash-and-burn agriculture results in the loss or degradation of some 25 million acres of land per year.”
By contrast, the United States today farms less than half of the land that it did in the 1920s but produces far more food now than it did then. The key, of course, is technology. In fact, available farming technology from developed countries could prevent, and in many cases reverse, the loss of tropical forests and other wildlife habitat around the globe. Unfortunately, institutional barriers, the absence of secure property rights, corrupt governments and a lack of education prevent its widespread diffusion and, hence, environmental restoration.
Another environmental problem frequently attributed to population growth is pollution. In 1972 The Limits to Growth computer model projected that pollution would skyrocket as population increased: “Virtually every pollutant that has been measured as a function of time appears to be increasing exponentially.” But once again, the new Malthusians had things exactly backward. Since 1972, America’s population has risen 26 percent and its economy has more than doubled. Western Europe and Japan have experienced similar rates of growth. Yet, instead of increasing as predicted, air pollutants have dramatically declined.
In fact, a growing body of literature suggests that in most cases there are thresholds of wealth at which the amount of a pollutant begins to decline. Department of Interior analyst Indur Goklany calls these thresholds the “environmental transition.” What this means is that when people rise above mere subsistence, they begin demanding amenities such as clean air and water. The first environmental transition is clean drinking water. Goklany has found that the level of fecal coliform bacteria in rivers, which is a good measure of water pollution, peaks when average per capita incomes reach $1,400 per year. The next transition occurs when particulates like smoke and soot peak at $3,200. And again, levels of sulfur dioxide peak at about $3,700.
Not surprisingly, committed Malthusians reject such findings. Paul Ehrlich, for instance, stubbornly insists that, “Most people do not recognize that, at least in rich nations, economic growth is the disease, not the cure.” [emphasis in original] To counteract the “disease” of economic growth, Maurice King recommends that people in the “privileged North” should engage in “the deliberate quest of poverty” to curb their “luxurious resource consumption.”
The favored target of such critiques is the United States, whose citizens are supposedly consuming more than their fair share of the world’s goods and causing more than their fair share of its ills. The average American, however, is not only a consumer but a producer of both goods and ideas. Americans and Europeans get more done with relatively less because of their higher levels of education, greater access to productive tools, superior infrastructure, democratic governments and free markets. As a consequence, output per hour of labor in the United States today is ten times what it was a hundred years ago. Thus, the average Westerner creates far more resources, especially knowledge and technology, than she or he consumes. Thus, too, both Western economies and environments are improving simultaneously.
All that said, if the right social institutions are lacking—democratic governance, secure private property, free markets—it is possible for a nation to fall into the Malthusian trap of rising poverty and increasing environmental degradation. The economies of many countries in Africa are declining, not because of high population growth rates or lack of resources, but because they have failed to implement the basic policies for encouraging economic growth: namely, widespread education, secure property rights and democratic governance.
Democratic governance and open markets have in fact proved indispensable for the prevention of famine in modern times. Nobel Prize-winning economist Amartya Sen notes that “in the terrible history of famines in the world, there is hardly any case in which a famine has occurred in a country that is independent and democratic, with an uncensored press.” Why is this? Because, says Sen, “So long as famines are relatively costless for the government, with no threat to its survival or credibility, effective actions to prevent famines do not have the urgency to make them inescapable imperatives for the government.”6 Along with Romer and other theorists, Sen also argues that general economic growth, not just growth in food output, is crucial to ending the threat of famine in Africa. He calls “for measures to encourage and enhance technical change, skill formation and productivity—both in agriculture and in other fields.”
Contemporary Malthusians liken humanity to a car travelling one hundred miles per hour on a foggy road. And they warn of dire consequences if we do not slow down. But if we adopt institutions and regulations that slow the pace of innovation, we may find ourselves depleting our current energy supplies before they can be replaced by new ones. New Growth Theory suggests that a better analogy might be that human society is an airplane cloaked in clouds flying at a speed of six hundred miles per hour. If the plane slows down, it will lose air speed and may crash before arriving safely at its destination.
We cannot deplete the supply of ideas, designs and recipes. They are immaterial and limitless, and therefore not bound in any meaningful sense by the second law of thermodynamics. Surely no one believes that humanity has already devised all of the methods to conserve, locate and exploit new sources of energy, or that the flow of ideas to improve houses, transportation, communications, medicine and farming has suddenly dried up. Though far too many of our fellow human beings are caught in local versions of the Malthusian trap, we must not mistake the situation of that segment as representing the future of all of humanity and the earth itself; it is, instead, a dwindling remnant of an unhappy past. Misery is not the inevitable lot of humanity, nor is the ruin of the natural world a foregone conclusion.
In economics, returns to scale and economies of scale are related but different terms that describe what happens as the scale of production increases in the long run, when all input levels including physical capitalusage are variable (chosen by the firm). The term returns to scale arises in the context of a firm’s production function. It explains the behavior of the rate of increase in output (production) relative to the associated increase in the inputs (the factors of production) in the long run. In the long run all factors of production are variable and subject to change due to a given increase in size (scale). While economies of scale show the effect of an increased output level on unit costs, returns to scale focus only on the relation between input and output quantities.
The laws of returns to scale are a set of three interrelated and sequential laws: Law of Increasing Returns to Scale, Law of Constant Returns to Scale, and Law of Diminishing returns to Scale. If output increases by that same proportional change as all inputs change then there are constant returns to scale (CRS). If output increases by less than that proportional change in inputs, there are decreasing returns to scale(DRS). If output increases by more than that proportional change in inputs, there are increasing returns to scale (IRS). A firm’s production function could exhibit different types of returns to scale in different ranges of output. Typically, there could be increasing returns at relatively low output levels, decreasing returns at relatively high output levels, and constant returns at one output level between those ranges.[citation needed]
In mainstream microeconomics, the returns to scale faced by a firm are purely technologically imposed and are not influenced by economic decisions or by market conditions (i.e., conclusions about returns to scale are derived from the specific mathematical structure of the production function in isolation).
Example
When all inputs increase by a factor of 2, new values for output will be:
Twice the previous output if there are constant returns to scale (CRS)
Less than twice the previous output if there are decreasing returns to scale (DRS)
More than twice the previous output if there are increasing returns to scale (IRS)
Assuming that the factor costs are constant (that is, that the firm is a perfect competitor in all input markets), a firm experiencing constant returns will have constant long-run average costs, a firm experiencing decreasing returns will have increasing long-run average costs, and a firm experiencing increasing returns will have decreasing long-run average costs.[1][2][3] However, this relationship breaks down if the firm does not face perfectly competitive factor markets (i.e., in this context, the price one pays for a good does depend on the amount purchased). For example, if there are increasing returns to scale in some range of output levels, but the firm is so big in one or more input markets that increasing its purchases of an input drives up the input’s per-unit cost, then the firm could have diseconomies of scale in that range of output levels. Conversely, if the firm is able to get bulk discounts of an input, then it could have economies of scale in some range of output levels even if it has decreasing returns in production in that output range.
Formal definition
Formally, a production function {\displaystyle \ F(K,L)} is defined to have:
Constant returns to scale if (for any constant a greater than 0) {\displaystyle \ F(aK,aL)=aF(K,L)}
Increasing returns to scale if (for any constant a greater than 1) {\displaystyle \ F(aK,aL)>aF(K,L),}
Decreasing returns to scale if (for any constant a greater than 1) {\displaystyle \ F(aK,aL)<aF(K,L)}
where K and L are factors of production—capital and labor, respectively.
In a more general set-up, for a multi-input-multi-output production processes, one may assume technology can be represented via some technology set, call it {\displaystyle \ T}, which must satisfy some regularity conditions of production theory.[4][5][6][7][8] In this case, the property of constant returns to scale is equivalent to saying that technology set {\displaystyle \ T} is a cone, i.e., satisfies the property {\displaystyle \ aT=T,\forall a>0}. In turn, if there is a production function that will describe the technology set {\displaystyle \ T} it will have to be homogeneous of degree 1.
Formal example
The Cobb-Douglas functional form has constant returns to scale when the sum of the exponents adds up to one. The function is:
{\displaystyle \ F(K,L)=AK^{b}L^{1-b}}
where {\displaystyle A>0} and {\displaystyle 0<b<1}. Thus
“A nation can be one or the other, a democracy or an imperialist, but it can’t be both.
If it sticks to imperialism, it will, like the old Roman Republic, on which so much of our system was modeled, lose its democracy to a domestic dictatorship.”
~ Chalmers Johnson
(1931-2010)
Remembering Chalmers Johnson and Frank W. Lewis
Chalmers Johnson, 1931-2010, on the Last Days of the American Republic
Chalmers Johnson – Speaking Freely
Domestic Democracy or Foreign Imperialism
DECLINE of EMPIRES: The Signs of Decay
TalkingStickTV – Chalmers Johnson – The Sorrows of Empire
The Bases Are Loaded: US Permanent Military Presence in Iraq
Chalmers Johnson: Militarism and the End of the Empire
What Does Blowback Mean in Politics?
Chalmers Johnson on the American Empire (2000)
The BLOWBACK SYNDROME: Oil Wars and Overreach
Conversations with History: Chalmers Johnson
Chalmers Johnson on American Hegemony
The Bully! Pulpit Show Classics: Mark Joseph Interviews Chalmers Johnson
Are We Rome? Ben Powell Compares the U.S. with the Roman Empire
Thomas F. Madden (born 1960) is an American historian, a former Chair of the History Department at Saint Louis University in St. Louis, Missouri, and Director of Saint Louis University’s Center for Medieval and Renaissance Studies.[1] A specialist on the Crusades, he has often commented in the popular media after the events of September 11, to discuss topics such as how Muslims have viewed the medieval Crusades and their parallels to today’s interventions in the Middle East.[2][3][4][5] He has frequently appeared in the media, as a consultant for various programs on the History Channel and National Public Radio.[6] In 2007, he was awarded the Haskins Medal from the Medieval Academy of America, for his book Enrico Dandolo and the Rise of Venice, also a “Book of the Month” selection by the BBC History magazine. In 2012, he was named a Fellow of theJohn Simon Guggenheim Memorial Foundation.
Madden is active in the Society for the Study of the Crusades in the Latin East,[7] and organizes panels for the Annual Symposium on Medieval and Renaissance Studies in Saint Louis, Missouri.[8] He is the Director of the Crusades Studies Forum and the Medieval Italy Prosopographical Database Project, both housed at Saint Louis University.
2013 Fellow of the Medieval Academy of America[11]
2015 American Council of Learned Societies, Fellow[12]
Writing
Madden has written numerous books and journal articles, including the “Crusades” entry for the Encyclopædia Britannica. His research specialties are ancient and medieval history, including the Fourth Crusade, as well as ancient and medieval Italian history. His 1997 book The Fourth Crusade: The Conquest of Constantinople was a selection of the History Book Club. He is also known for speaking about the ways that the history of the Crusades is often used for manipulation of modern political agendas.[13] His book, The New Concise History of the Crusades has been translated into seven foreign languages.
His book Enrico Dandolo and the Rise of Venice won multiple awards, including the 2007 Haskins Medal from the Medieval Academy of America and the Otto Gründler Prize from the Medieval Institute.[9][10] According to the Medieval Review, with this book “Madden more than ever stakes out his place as one of the most important medievalists in America at present.”[14]
His 2008 book, Empires of Trust, was a comparative study that sought elements in historic republics that led to the development of empires. In the case of Rome, he argued that their citizens and leaders acquired a level of trust among allies and potential enemies that was based upon an unusual rejection of hegemonic power. His most recent book, Venice: A New History is the culmination of decades of work in the archives and libraries of Venice.
Books
Venice: A New History, 2012, Viking
Crusades: Medieval Worlds in Conflict, 2010 Ashgate
Empires of Trust, 2008, Dutton/Penguin
The Fourth Crusade: Event, Aftermath, and Perceptions, 2008, Ashgate
Crusades: The Illustrated History, 2005, University of Michigan Press
Enrico Dandolo and the Rise of Venice, 2003, Johns Hopkins University Press
The Crusades: The Essential Readings, 2002, Blackwell
The New Concise History of the Crusades, 1999, Rowman & Littlefield
Medieval and Renaissance Venice, 1999, University of Illinois Press
The Fourth Crusade: The Conquest of Constantinople, 1997, University of Pennsylvania Press
“The Venetian Version of the Fourth Crusade: Memory and the Conquest of Constantinople in Medieval Venice,” Speculum 87 (2012): 311-44.
“The Latin Empire of Constantinople’s Fractured Foundation: The Rift Between Boniface of Montferrat and Baldwin of Flanders,” in The Fourth Crusade: Event, Aftermath, and Perceptions (Brookfield: Ashgate Publishing, 2008): 45-52.
“Food and the Fourth Crusade: A New Approach to the ‘Diversion Question,'” in Logistics of Warfare in the Age of the Crusades, John H. Pryor, ed. (Brookfield: Ashgate Publishing, 2006): 209-28.
“Venice, the Papacy, and the Crusades before 1204,” in The Medieval Crusade, Susan J. Ridyard, ed. (Woodbridge: Boydell and Brewer, 2004): 85-95.
“The Chrysobull of Alexius I Comnenus to the Venetians: The Date and the Debate,” Journal of Medieval History 28 (2002): 23-41.
“Venice’s Hostage Crisis: Diplomatic Efforts to Secure Peace with Byzantium between 1171 and 1184,” in Ellen E. Kittell and Thomas F. Madden, eds., Medieval and Renaissance Venice (Urbana: University of Illinois Press, 1999): 96-108.
“Venice and Constantinople in 1171 and 1172: Enrico Dandolo’s Attitude towards Byzantium,” Mediterranean Historical Review 8 (1993): 166-85.
“Vows and Contracts in the Fourth Crusade: The Treaty of Zara and the Attack on Constantinople in 1204,” The International History Review 15 (1993): 441-68.
“Father of the Bride: Fathers, Daughters, and Dowries in Late Medieval and Early Renaissance Venice,” Renaissance Quarterly 46 (1993): 685-711. (with Donald E. Queller)
“The Fires of the Fourth Crusade in Constantinople, 1203-1204: A Damage Assessment,” Byzantinische Zeitschrift 84/85 (1992): 72-93.
“The Serpent Column of Delphi in Constantinople: Placement, Purposes, and Mutilations,” Byzantine and Modern Greek Studies 16 (1992): 111-45.
He wrote numerous books including, most recently, three examinations of the consequences of American Empire: Blowback, The Sorrows of Empire, and Nemesis: The Last Days of the American Republic. A former cold warrior, his fears for the US changed:
“A nation can be one or the other, a democracy or an imperialist, but it can’t be both. If it sticks to imperialism, it will, like the old Roman Republic, on which so much of our system was modeled, lose its democracy to a domestic dictatorship.”[4]
Biography
Johnson was born in 1931 in Phoenix, Arizona. He earned a BA in economics in 1953 and an M.A. and a Ph.D. in political science in 1957 and 1961 respectively. Both of his advanced degrees were from the University of California, Berkeley. Johnson met his wife Sheila, a junior at Berkeley, in 1956, and they were married in Reno, Nevada in May 1957.[5]
During the Korean War, Johnson served as a naval officer in Japan.[6] He was the communications officer on a ship (the LST 883) “tasked with ferrying Chinese prisoners of war from South Korea back to North Koreanports.”[5] He taught political science at the University of California from 1962 until he retired from teaching in 1992. He was best known early in his career for his scholarship on the subjects of China and Japan.[7]
Johnson set the agenda for 10 or 15 years in social science scholarship on China with his book on peasant nationalism. His book MITI and the Japanese Miracle, on the Japanese Ministry of International Trade and Industry was the preëminent study of the country’s development and it created the subfield of what could be called, the political economy of development. He coined the term “developmental state“. As a public intellectual, he first led the “Japan revisionists” who critiqued American neoliberal economics with Japan as a model; their arguments faded from view as the Japanese economy stagnated in the mid-90s and beyond. During this period, Johnson acted as a consultant for the Office of National Estimates, part of the CIA, contributing to analysis of China and Maoism.[8]
Johnson was elected a Fellow of the American Academy of Arts and Sciences in 1976. He served as Director of the Center for Chinese Studies (1967–72[2]) and Chair of the Political Science Department at Berkeley, and held a number of important academic posts in area studies. He was a strong believer in the importance of language and historical training for conducting serious research. Late in his career he became well known as a critic of “rational choice” approaches, particularly in the study of Japanese politics and political economy.
Johnson is, perhaps, best known today as a sharp critic of American imperialism. His book Blowback (2000) won a prize in 2001 from the Before Columbus Foundation, and was re-issued in an updated version in 2004. Sorrows of Empire, published in 2004, updated the evidence and argument from Blowback for the post-9/11 environment, and Nemesis concludes the trilogy. Johnson was featured as an expert talking head in the Eugene Jarecki-directed film Why We Fight,[3] which won the 2005 Grand Jury Prize at theSundance Film Festival. In the past, Johnson has also written for the Los Angeles Times, the London Review of Books, Harper’s Magazine, and The Nation.
The Blowback series
Johnson believed that the enforcement of American hegemony over the world constitutes a new form of global empire. Whereas traditional empires maintained control over subject peoples via colonies, since World War II the US has developed a vast system of hundreds of military bases around the world where it has strategic interests. A long-time Cold Warrior, he applauded the dissolution of the Soviet Union: “I was a cold warrior. There’s no doubt about that. I believed the Soviet Union was a genuine menace. I still think so.”[9] At the same time, however, he experienced a political awakening after the dissolution of the Soviet Union, noting that instead of demobilizing its armed forces, the US accelerated its reliance on military solutions to problems both economic and political. The result of this militarism (as distinct from actual domestic defense) is more terrorism against the U.S. and its allies, the loss of core democratic values at home, and an eventual disaster for the American economy. Of four books he wrote on this topic, the first three are referred to as The Blowback Trilogy:
Blowback: The Costs and Consequences of American Empire
Chalmers Johnson summarized the intent of Blowback in the final chapter of Nemesis.
“In Blowback, I set out to explain why we are hated around the world. The concept “blowback” does not just mean retaliation for things our government has done to and in foreign countries. It refers to retaliation for the numerous illegal operations we have carried out abroad that were kept totally secret from the American public. This means that when the retaliation comes – as it did so spectacularly on September 11, 2001 – the American public is unable to put the events in context. So they tend to support acts intended to lash out against the perpetrators, thereby most commonly preparing the ground for yet another cycle of blowback. In the first book in this trilogy, I tried to provide some of the historical background for understanding the dilemmas we as a nation confront today, although I focused more on Asia – the area of my academic training – than on the Middle East.”[10]
The Sorrows of Empire: Militarism, Secrecy, and the End of the Republic
Chalmers Johnson summarizes the intent of The Sorrows of Empire in the final chapter of Nemesis.
“The Sorrows of Empire was written during the American preparations for and launching of the invasions and occupations of Afghanistan and Iraq. I began to study our continuous military buildup since World War II and the 737 military bases we currently maintain in other people’s countries. This empire of bases is the concrete manifestation of our global hegemony, and many of the blowback-inducing wars we have conducted had as their true purpose the sustaining and expanding of this network. We do not think of these overseas deployments as a form of empire; in fact, most Americans do not give them any thought at all until something truly shocking, such as the treatment of prisoners at Guantanamo Bay, brings them to our attention. But the people living next door to these bases and dealing with the swaggering soldiers who brawl and sometimes rape their women certainly think of them as imperial enclaves, just as the people of ancient Iberia or nineteenth-century India knew that they were victims of foreign colonization.”[10]
Nemesis: The Last Days of the American Republic
Chalmers Johnson summarizes the intent of the book Nemesis.
“In Nemesis, I have tried to present historical, political, economic, and philosophical evidence of where our current behavior is likely to lead. Specifically, I believe that to maintain our empire abroad requires resources and commitments that will inevitably undercut our domestic democracy and in the end produce a military dictatorship or its civilian equivalent. The founders of our nation understood this well and tried to create a form of government – a republic – that would prevent this from occurring. But the combination of huge standing armies, almost continuous wars, military Keynesianism, and ruinous military expenses have destroyed our republican structure in favor of an imperial presidency. We are on the cusp of losing our democracy for the sake of keeping our empire. Once a nation is started down that path, the dynamics that apply to all empires come into play – isolation, overstretch, the uniting of forces opposed to imperialism, and bankruptcy. Nemesis stalks our life as a free nation.”[10]
Dismantling the Empire: America’s Last Best Hope
Johnson outlines how the United States can reverse American hegemony and preserve the American state. Dismantling the Empire was listed by the CIA in “The Intelligence Officer’s Bookshelf: Intelligence in Recent Public Literature”,[11] compiled and reviewed by Hayden B. Peake.[12]
Jump up^Chalmers Ashby Johnson. Blowback, Second Edition: The Costs and Consequences of American Empire (January 4, 2004 ed.). Holt Paperbacks. p. 288. ISBN0-8050-7559-3.
Story 1: 12 Dallas Police Officers Shot In Ambush Assassination with 5 Killed –Shooter Killed By Robot With Explosive Device — Black Lives Matters Provoking Black Racism — Lying Lunatic Left — Dallas Police Chief Brown, Former President George W. Bush and President Barack Obama Speech at Dallas Memorial Service Honoring Police Officers — Videos
DALLAS, TX – JULY 12: Police officers arrive at an interfaith memorial service, honoring five slain police officers, at the Morton H. Meyerson Symphony Center on July 12, 2016 in Dallas, Texas. A sniper opend fire following a Black Lives Matter march in Dallas killing five police officers and injuring 12 others. (Photo by Tom Pennington/Getty Images)
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bama Spy Scandal: Obama Administration Officials Including National Security Adviser Rice, CIA Director Brennan and United Nations Ambassador Power Spied On American People and Trump Campaign By Massive Unmasking Using Intelligence Community For Political Purposes — An Abuse of Power and Felonies Under U.S. Law — Videos
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![[icon]](https://en.wikipedia.org/wiki/File:Wiki_letter_w_cropped.svg){kind=small}
is defined to have:
, which must satisfy some regularity conditions of production theory.
. In turn, if there is a production function that will describe the technology set 
and 
. Thus
then there are increasing returns if b + c > 1 but decreasing returns if b + c < 1, since
as b+c is greater or less than one.
The Pronk Pops Show — Week in Review — November 6 -13, 2017 — Videos
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The Pronk Pops Show Podcasts
Pronk Pops Show 1000, November 13, 2017
Pronk Pops Show 999, November 10, 2017
Pronk Pops Show 998, November 9, 2017
Pronk Pops Show 997, November 8, 2017
Pronk Pops Show 996, November 6, 2017
Pronk Pops Show 995, November 3, 2017
Pronk Pops Show 994, November 2, 2017
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Pronk Pops Show 944, August 10, 2017
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Pronk Pops Show 942, August 8, 2017
Pronk Pops Show 941, August 7, 2017
Pronk Pops Show 940, August 3, 2017
The Pronk Pops Show 1000
November 13, 2017
Story 1: The People of Alabama Will Decide Who Will Represent Them As Their Senator — Not Kentucky Senator Mitch McConnell — Videos —
Story 2: Follow The Money — The Bought and Paid For Political Elitist Establishment of The Two Party Tyranny — Video —
Story 3: Independents United — Independence Party Time — Videos
For additional information and videos:
https://pronkpops.wordpress.com/2017/11/14/the-pronk-pops-show-1000-november-13-20017-story-1-the-people-of-alabama-will-decide-who-will-represent-them-in-the-senator-not-kentucky-senator-mitch-mcconnell-videos-story-2-follow-the/
The Pronk Pops Show 999
November 10, 2017
Story 1: President Trump Delivers America First Address With Bilateral Trade Agreements With Nations That Want Free But Fair Trade At The Asia-Pacific Economic Cooperation (APEC) Summit in Da Nang, Vietnam — Videos —
Story 2: From Crying To Screaming — Big Lie Media Joins Lying Lunatic Left Losers — Sky Screaming — Trump Still President — Videos —
Story 3: Let Voters of Alabama Decide Who They Want For Their Senator — Alabama Republican Senate Candidate, Roy Moore, Denies Accusations Made in Washington Post Attack Article vs. Democratic Senate Candidate, Doug Jones, Supporter for Pro Abortion Planned Parenthood and Women Should Have The Right To Choose Killing Their Babies in The Womb — Denies Civil Rights Protection of Life To Babies Before Birth — Videos
Story 4: Remembering The Veterans in Music — Lili Marleen — We’ll Meet Again — Sky Pilot — We Gotta Get Out Of This Place — Paint it Black – – War — Where Have All the Flowers Gone? — Blowing In The Wind –Videos
For additional information and videos:
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The Pronk Pops Show 998
November 9, 2017
Story 1: President Trump’s Address to South Korea’s National Assembly — Great Speech — Americans and Koreans Loved It — Every Breath You Take — Videos —
Story 2: President Trump Tells It Like It Is — Does Not Blame China For Hugh Trade Deficits But Past Administrations — Videos —
Story 3: Republican Party Senate Bill Wants To Delay Tax Cuts To 2019 Instead of Cutting Spending Now — Need New Political Party Advocating Balanced Budgets, Broad Based Consumption Tax,and Term Limits — Voters Will Stay Home Election Day, November 6, 2018 If Congress Does Not Completely Repeal Obamacare and Enact Fundamental Reform of Tax System — Videos —
Story 4: Alabama Republican Candidate for Senator, Roy Moore, Accused of Sexual Misconduct in 1979 — Desperate Democratic Dirt — Let The Voters of Alabama Decide — Accusations Are Not Evidence — Videos
For additional information and videos
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The Pronk Pops Show 997
November 8, 20017
Story 1: Communist Chinese Connection To Trade — Nuclear Proliferation — and — Terrorism (TNT) — Peace or War — China Must Destroy North Korea Nuclear Weapons and Missiles or Face The Consequences of Overthrow of Communist Party — U.S.Complete Embargo on All Chinese Trade and Investment —
Story 2: President Trump Meets With Japanese Prime Minster Shinzo Abe and President Moon Jai-in As U.S. Navy Flexes Air Power — All Options Are On The Table — Video —
Story 3: Saudi Arab On The Brink of War With Lebanon Controlled By Iran-backed Lebanese Shi‘ite group Hezbollah — Saudi Arab Blames Iran For Yemen Missile Attack — Purge and Roundup of Royal Prince Continues — Videos —
For additional information and videos:
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The Pronk Pops Show 996
November 6, 2017
Story 1: Atheist Security Guard Dressed In Black and Wearing Body Armor, Devin Patrick Kelley, 26, Entered The First Baptist Church and Shoot and Killed 26, Including 8 Members of A Single Family with Pregnant Mother, Victim Range in Age From 18 Months to 77 Years and Wounded 20, in The Texas Small Town of Sutherland Springs, Population 400, A Nearby Neighbor, Stephen Willeford, 55, Shot Killer With His Rifle,Three Times, Twice in The Neck and Once in The Side, Killer Died of Wounds, After Brief High Speed Car Chase — The Times They Are A Changin — Blowing In The Wind — Videos
For additional information and videos:
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The Pronk Pops Show 995
November 3, 2017
Story 1: Democrats (Liberal, Progressive & Socialist Wing) and Republicans (Liberal & Progressive Wing) of The Two Party Tyranny Are All Marxist Now — Big Government Bubble Tax Surcharge of 6% Increases Rate From 39.6% to 45.6% — Class Warfare — Eat The Rich — Videos — Part 2 of 2 —
Story 2: Republican Tax Cut Will Not Make America Great Again — Missing Is Real Government Spending Cuts That Results in A Balanced Budget By 2020 or 2024 — Spending Addiction Disorder (SAD) or Government Spending Obesity — Alive and Well — Videos —
Story 3: A Broad Based Consumption Tax Replacing The Current U.S. Income Tax System Along The Lines of The FairTax or Fair Tax Less With Generous Monthly Tax Prebates and Limiting Federal Government Expenditures to 90% of Taxes Collected Will Make America Great Again — Videos
For additional information and videos:
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The Pronk Pops Show 994
November 2, 2017
Story 1: President Trump Nominates Fed Governor Jerome Powell To Chair Federal Reserve Board of Governors — Expect Continuation of Interventionist Easy Monetary Policy — More Money Creation or Quantitative Easing When Economy Enters Next Recession in 2018-2019 — Videos —
Part 1 of 2 — Story 2: No Tax Reform By Changing From Income Tax System to Broad Based Consumption Tax — The FairTax or Fair Tax Less — No Middle Class Tax Relief From Payroll Taxes — No Real Cuts in Federal Spending As Budget Deficits Rise with Rising National Debt and Unfunded Liabilities — Spending Addiction Disorder — Government Obesity — Crash Diet of Balanced Budgets Required — Videos
For additional information and videos:
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The Pronk Pops Show 993
November 1, 2017
Story 1: Update of Radical Islamic Terrorist Jihadist Attack in New York City — President Trump “Send Him To Gitmo” as Enemy Combatant and Get Rid of Chain Migration and Diversity Lottery Immigration Program and Replace With Merit Based System of Immigration — Videos — Breaking —
Story 2: Trump Expected To Name Jerome Powell As Next Federal Reserve Chairman Replacing Chair Janet Yellen — A Dove or Continuation of Interventionist Easy Monetary Policy — Better Choice Was John Taylor — Taylor For Fed Chair and Powell for Vice Chair — Videos
For additional information and videos:
https://pronkpops.wordpress.com/2017/11/01/the-pronk-pops-show-993-november-2-2017-story-1-update-of-radical-islamic-terrorist-jihadist-attack-in-new-york-city-president-trump-send-him-to-gitmo-as-enemy-combatant-and-get-rid-of-chai/