Herbert London

Herbert London is author of Decade of Denial, published by Lexington Books, and publisher of American Outlook. He can be reached at: www.herblondon.org.

A 2007 Economic Forecast

With dark clouds on the horizon, economists--inclined to pessimism--have talked about the coming economic storm. A slowdown in the housing market and concern about weak growth have awakened fear the American economy is in for a hard landing.

At the risk of seeming Pollyannaish, there is, in my judgment, little evidence to support a recession scenario. The U.S. economy remains in transition to a slower pace of growth than we've known over the last few years. Consumer spending may slow down, but at a barely discernible pace. And even with mortgage rates higher than four years ago, a large inventory of affordable homes allows for some activity in this market. Average gasoline prices are 20 percent below August peak. Employment is still rising, albeit at a slower rate than before, and unemployment is at a record low level (4.5 percent). Real income growth should increase reflecting continued wage gains and a temporary decline in the inflation rate.

On the downside, overall wealth may decline as housing values decrease and overall spending is set for sub-par levels over the next few quarters. Corporate profit will probably slow down in the year ahead along with a deceleration in capital spending. With consumer spending and residential investment accounting for about three-quarters of gross domestic product, the overall economy will undoubtedly face tepid growth.

A U.S. slowdown and the possibility Chinese authorities will try to curb the growth of investment spending from its previously rapid pace, suggest the world economy may slow down as well, in what will be a pause in the international development trend.

U.S. investors have grown appropriately realistic about returns on investment after having been seduced by the vertiginous returns in the 1995 to 2000 period. In fact, what one observes in the market is investor skepticism about an equity rally. Over the last quarter there were net redemptions in the mutual fund industry.

While it is a given that long-term commodity prices will increase due to growing demand for resources, commodities in the short term will be affected by a global slowdown. Moreover, the dollar's relative interest rate advantage will continue to erode as well as its strength vis-a-vis the pound and the yen.

In general, this is neither a very bleak nor an exceedingly hopeful picture. But it surely does not infer recessionary pressure. The Fed may be prepared to lower rates again with attention given to weak corporate profits, but in my opinion this is a temporary move offset by inexorable inflationary pressure. Equities may be vulnerable because of earnings concerns, but they should trend higher if there is an end to Fed tightening.

As is always the case, there are risks to this outlook. A spike in inflation could alter the picture. Oil disruptions could dramatically affect the scenario. The housing downturn might prove to be more influential than anyone now anticipates. And there are always international events that could affect my economic profile. The geopolitical picture is an ongoing source of risk and uncertainly with a plenitude of imponderables.

Nonetheless, it is worth noting that the U.S. economy has shown itself to be highly resilient and adaptable to shock in recent years and there isn't any reason to believe things will be different in 2007.

Policy Conundrums

When it comes to public policy it is wise to remember the ancient Chinese maxim: "Be careful of what you wish for; you might get it."

There are several major issues facing the nation that defy consistent and rational explanation, hence the conundrum attribution.

It is asserted by the Bush administration that a reduction of imported foreign oil should be a feature of national energy policy. The argument is made that Americans are propagating terrorism through this reliance on Middle East oil, an argument--I should hastily note--with which I heartily agree.

On the other hand, there is a strong desire on the part of the American consumer for lower gas prices at the pump. In fact, this price issue will prove critical in the next election.

But here is the conundrum: In order to wean ourselves from foreign oil, the nation needs oil between $60 to $70 a barrel in order to make alternatives economically attractive. If one were to rely on the market for rational choice, high oil prices represent the incentive for energy innovation. Low oil prices--that can be manipulated by the OPEC oil cartel--suggest a continued reliance on foreign oil.

Politically you're damned if you want the price for a barrel of oil high and damned if you want it low.

For years I have heard the mantra in the academy that diversity has a desirable educational effect. The presumption is that people from different ethnic and racial backgrounds offer "spice" to the academic setting. As a consequence, decades ago affirmative action programs were instituted that mandated diversity. The plaintive cry for more Blacks or Hispanics was heard across the collegiate landscapes and recruitment efforts for designated minorities moved into third gear.

Now that there has been virtually universal compliance, diversity has been converted into homogeneity. Every campus looks the same; in fact, what would truly be different is a lily-white campus, albeit that isn't a position I am advocating.

What I am suggesting is that mandated efforts at diversity will inexorably become homogeneous. In fact, since they are mandated, no other result is possible.

The nation is also involved in a heated debate on illegal immigration. One side argues that the 12 million illegal immigrants are needed to sustain the economy. The other side contends that illegals have violated our sovereignty and should be deported. Leave aside the veracity of either position for the moment. If the illegals are necessary for the prosperity America enjoys, then there is an argument for porous borders. But it could also be maintained that offering privilege to those illegals who work in the United States suggests there are advantages for breaking the law.

In this conundrum economic motives run headlong into legal and national sovereignty concerns. Either Americans want illegals for menial jobs or they don't want illegals because they violate our laws. You simply cannot have it both ways.

Last, with the war in the Middle East causing death and devastation, many people argue a ceasefire is necessary, i.e., peace will come when the shooting stops. But in this case, peace can only come when Hezbollah, the initiators of violence, are destroyed by the Israeli Defense Force. Hence peace, or stability, is a function of war. If you want peace in the Middle East, a decisive war is necessary; if you want a ceasefire, that is merely a prelude to the next war.

When it comes to public policy, it is worth recalling Emerson's caustic comment that "A foolish consistency is the hobgoblin of little minds. . ."

The Iraq Study Group Report and the Munich Accord

If the Iraq Study Group Report reveals anything it is that the Guns of August have succumbed to the Munich Accord. This report reveals fatigue, a national fatigue, with war, terrorism and sectarian differences. We want to get off this merry-go-round, but simply don't know how. And the Report--in my opinion--offers hope, but hope without satisfactory answers.

For example, the Executive Summary notes that "the United States cannot achieve its goals in the Middle East unless it deals directly with the Arab-Israeli conflict and regional instability." Assuming for a moment the Palestinian cause is just, what Israel can offer in order to maintain its security is not what the Arab world considers appropriate. Second, even if some understanding were achieved with Israel giving up Golan and the West Bank, regional instability would still exist since Ahmadinejad is intent on establishing a Shia crescent across the Middle East.

A new diplomatic initiative is called for in which all the parties in the area including Iran and Syria are asked to participate. I haven't any objection to talking, but what do we say? Is the price of Iranian involvement in establishing stability in Iraq averting our gaze to the enrichment of uranium program and development of nuclear weapons?

The Report argues that one incentive for Iranian and Syrian participation is that "Iraq . . . does not disintegrate and destabilize its neighbors and the region." Yet it is precisely this destabilization that Iran and Syria have engendered and their strategic vision is based on the installation of a puppet government in Iraq, not unlike the present effort with Hezbollah in Lebanon.

The Report also called for "political and economic reforms instead of advocating regime change." This is an artfully crafted diplomatic statement that means we will halt all efforts to displace Ahmadinejad through support of unions and student groups dissatisfied with the existing regime. In this one sentence, the Bush Doctrine of promoting democracy in the area is facing expiration.

Moreover, the Report calls on the United Nations to play a more active role, notwithstanding the fact that the oil-for-food scandal permitted by the UN allowed Saddam Hussein to rearm after his defeat in 1991, and the UN has displayed an unalloyed bias against Israel and, to a major degree, United States' interests.

The hot button, the truly significant recommendation in this report, is that "there must be a renewed and sustained commitment by the United States to a comprehensive Arab-Israeli peace on all fronts." This effort, the Report notes, should include the unconditional calling and holding of meetings, under the auspices of the United States or the Quartet (i.e., U.S., Russia, European Union and the UN) between Israel and Lebanon and Syria on the one hand, and Israel and Palestinians on the other. Yet the Report utters not a word on how "peace" can be achieved when violence promoted by the Arab and Persian protagonists has brought the region to the place where Israeli concessions are now being demanded. For Iranians, Hamas, Hezbollah and Syrians violence pays dividends.

Last, in a paragraph dealing with "a final peace settlement" one finds the words "the right of return." If there is a dagger placed right at the heart of Israel, it can be found in these four words. What they mean, if decoded, is that Israel should not exist as a Jewish state; i.e., Arabs displaced voluntarily or involuntarily in 1948 when Israel was recognized as a nation should have the right to return, swamping the tiny nation of Israel with those who would transform it into an Arab state.

As I see it, this report places Israel in the position of the Sudetenland of 2007, a pawn in the larger calculation of great powers. In 1938 the Munich Accord was heralded as the opening of "peace in our time." Of course, history shows it merely whetted Hitler's appetite for further conquest. Will the Iraq Study Group Report have the same affect on Iran and Syria? I find the answer quite obvious and equally frightening.

It May Be Too Late for Europe

European leaders are once again asking their citizens to vote on E.U. membership. Apparently you keep voting until you get it right. What was once rejected in France and Sweden will soon be on the ballot again.

Politically, Western Europe, notwithstanding the popularity of Sarkozy and Merkle, is poised to lurch to the left with the European Union standing as a symbol of the socialist embrace. For decades Europeans have been seduced by the cradle-to-grave welfare system that provides six-week vacations and retirement at 55. Some American analysts such as Jeremy Rifkin have argued this is the wave of the future.

Alas, they may be right. What these analysts and Western Europeans do not seem to appreciate is that the well has gone dry. The economies that grew at a double-digit rate after World War II are now limping along with an unfunded liability that staggers the imagination. All of these states look to the E.U. as the answer to their economic problems. If there were truth in expression, they would call this policy "beggar thy neighbor."

Adding to European woes is a welfare system that served as a magnet for Muslims from Morocco to Turkey. They are in Western Europe to stay and despite well-meaning efforts at integration, remain separate from the societies in which they find themselves. Their birthrate is twice that of the Europeans and, if demography is destiny, may soon become a third of the European population. This scenario of Eurabia described by Bernard Lewis and Bat Ye'or has gained prominence across the continent, but no one has the slightest idea of what to do about it.

Any adjustment, even minor adjustments, in the welfare system is considered an act of betrayal. Europeans want the easy life and are unwilling to consider retrenchment even when conditions call for it. As a consequence, liberals and conservatives speak the same dirigiste language. Serious Europeans realize welfare reform is needed, but no one will risk a political career by saying so.

Some Americans observing political attitudes believe that Europeans deserve the disaster that lurks over the horizon. Yet this view is also short sighted. A Europe in disarray will have a direct and negative influence on the United States.

The nexus between generous welfare provisions and the so-called Muslim problem has by and large been ignored. In part, this is due to incrementalism. Muslims didn't swarm into Europe all at once; they came gradually until the numbers startled politicians. Cities like Marseille, Malmo and the periphery of Paris are ostensibly Muslim cities cut off from the rest of society through voluntary separation and a tolerance for Sharia.

But these separate enclaves have the same claims on the public purse as everyone else. They know it and European leaders know it. In fact, whenever there are riots, as there were in France last year, the government responds with a new housing program or a job creation project or health facilities, as if those tangible signs of government intervention will make a difference.

Why do I say it may be too late? I contend that is the case because a constituency for genuine reform doesn't exist. The tax base cannot expand rapidly enough for the demands placed on government. And the politicians cannot get elected unless they promise to maintain the present system. Muslims are in Europe because they too want the benefits a welfare state provides. Where then are the reformers?

Some might say they are on the right. But a Europe that swings in that direction has been seen before; its sanguinic legacy is etched into the history books as fascism. It is instructive, of course, that while contemporary fascists want to deport Muslims wholesale, they too share the command economy infatuation.

There is a certain inexorability to historical movement. A Europe that was once the inspiration for the world desperately needs inspiring today. The axis of power and vitality has moved from west to east. Unfortunately Europeans live with the illusion that their extended vacations on the Cote d'tzur will go on indefinitely. But the day of reckoning is coming and it won't be a pretty sight.

Complacency on Both Sides of the Atlantic

A Yeats observing the human condition today might well ask, "Can the center hold?" If one considers the assassination of Pierre Gamyel in Lebanon, the poisoning of Alexander Litvinenko and the massive slaughter of innocent lives in Baghdad, it is easy to arrive at the conclusion that entropy is inexorable.

One might also note that complacency is ubiquitous. Shoppers on Oxford Street in London are largely oblivious to the crime that was probably committed by Russian officials against a citizen of the United Kingdom. Is this a lack of concern, apathy, or events too grim to contemplate?

The answer may be a combination of "all of the above." Whether it is Tony Blair or George W. Bush, Western leaders are reluctant to talk seriously about malaise on the world stage. Jimmy Carter did it once and paid a heavy political price for it. Instead leaders say, go about your daily business, visit a mall, and consider gifts for the Christmas holiday.

A volunteer army makes it easy to ignore national duty. That is merely someone else's responsibility. Most Americans cannot locate Iraq on a map and the typical Englishman is more likely to know the name of a prominent footballer than the general leading British forces in the Middle East.

Popular culture seemingly dulls the capacity for serious thought. British talk show hosts are obsessed with the sexual exploits of their guests. And their American counterparts find humor in the most perverse aspects of cultural life. "Borat," the film, is a classic example of defining culture down to a level where one doesn't know whether to laugh or flee. Nothing is out of bounds, with the possible exception of suggesting global warming is grossly exaggerated. On both sides of the Atlantic the general public has been desensitized.

Every night maimed bodies are on camera revealing the deplorable state of dehumanization. At some point the real and unreal converge, making truth a casualty of television commentary.

With so much bloodletting, it is understandable many people prefer to wear metaphorical blinders. It is hard to imagine the worldview of a suicide bomber who is eager to kill himself and others. It is impossible for those in the West to contemplate the extent to which nihilism has gained traction in the Middle East.

We amuse ourselves to a level of false consciousness. By contrast our global enemies encourage youthful martyrs to blow themselves up willingly as long as they take the lives of "infidels" with them.

The question that remains is whether the West can recover from constant amusement and find the mind set for battle. That is the question that haunts us. The Islamic world is convinced the West has grown soft and malleable. Any random selection of Western television fare would confirm that judgment. The hope, however, is that any such conclusion is premature.

Presumably another 9/11 or worse would mobilize Western will. But that is a scenario any sensible person would hope to avoid. It seems that we are consumers of immediacy, taking each day as it comes, hoping for the best, but reacting ostrich-like to the parade of current events.

One may believe history is on our side. But history is a fickle master relying on handmaidens of destiny, those willing to shape their future. Are we the prospective victors or the progenitors of a fate shaped by complacency? The question begs a response. *

"'Trust but verify,' Reagan discovered, applied not only to the Soviets but also to the Democrats in Congress." ---Lyn Nofziger