The Reckoning

I have little respect for Flatheads – you know, the Steve Forbes and and Herman Cains of the world, people who believe Americans are so frustrated with the complexity and corruption of our tax code that they can sell an even worse version simply because there will be less math involved.

But simplification - not simplicity - I'm down with. Yesterday's strategic leak of Tim Geithner’s “thinking” on tax reform to the New York Times marked the start of a new phase of the 2012 campaign, with Newt Romtorum promising a counter volley during the Michigan primary. Get your popcorn, wake up the kids: The Battle of the Tax Reform Plans is about to begin.

It is worthwhile, then, considering how the tax reform has played in recent campaigns. First, aforementioned the Flatheads:

Steve Forbes famous “Flat Tax” – first unsheathed in his 1996 bid to buy the presidency – would keep the first $33,000 of income tax except, then levy a 17 percent tax on all other corporate and individual income (capital gains and inheritance taxes being cast onto the ash bin of history).

Rick Perry, famous for his original thinking, essentially purloined this as his own plan for his 2010 satirical campaign, with predictable results, since by anyone’s accounting, even Donald Trump’s, the Flat Tax plan puts the United States on the road to Greece.

Herman Cain, at least, put a new twist on it: 9-9-9 would have levied a 9 percent tax on business transactions, 9 percent on income, and slapped a new 9 percent federal sales tax on consumer purchases.

The bet here is that the electorate would focus on the fact that they would only be paying 9 percent of their income to the IRS, and possibly confuse the new 9 percent federal sales tax with a minor increase to the existing sales tax they pay. But that, of course, is a state tax – it’s 6.35% in Connecticut, 4% in Georgia, 6% in Idaho, etc. etc … the 9 percent is on top of the current levy, and would, in effect, mean yet another enormous transfer of the national tax burden onto the backs of people making less than 100,000 a year – let’s call them the 99.9 percent. I say, “nein, nein, nein.”

GOP primary voters, amazingly since they would have been prime targets of the hare brained scheme, seemed to be saying “ja, ja, ja!” – that is, until another bit of arithmetic intervened: 1.

One is the number of women, other than your wife, who can accuse you of sleeping with her before your campaign implodes. (This is the Clinton Principle; the number of women increases by a factor of 1 once in office, and by an additional 1 for each ten-percentage points the president’s approval ratings stand above 50 percent. That’s the Oval Office Corollary).

As anyone who knows me will tell you, I’m all about facing less math, having written my way out of school and into a host of jobs. But math is a fact of life, and love it, like it or not, America’s salvation when it comes to fiscal policy.

So let’s talk sense for a moment. We’re getting very close to the day when Democrats will have to stop pretending that the Republican Party is going to forfeit the election this time around, as much as it has seemed possible at time (like, for instance, right now). Romney still seems the likely default candidate to me, with Rick Santorum is the Catholic second coming of Barry Goldwater – sometimes interesting, always fervent and controversial, but a miserable choice for a national standard bearer.

The GOP must know that, right?

That leaves Romney v Obama. For all the talk of the need for a deficit reduction plan, a reform of the American tax code really is a prerequisite. The tax code is the fuel system of government and its lines and hoses have been spliced and redirected so many times since the last reform, the Tax Reform Act of 1986, that it has no logical fiscal, economic or philosophical consistency. It’s merely a collection of favors and blackmail payments made to lobbyists and House members in the years since Bill Bradley, then a US Senator from New Jersey, and Ronald Reagan, then a president from Hollywood, hacked through the existing mess with a machete. 

The focus of Obama’s (read: Geithner’s) plans to date has been the corporate tax – the plan leaked to the Times suggests a 28 percent rate (down from 35 percent), with incentives that could drop that to 25 percent for the manufacturing sector.

This is a smart political tack for a variety of reasons. First, this will be a move even the GOP House will have trouble resisting – supported as it is by the US Chamber of Commerce and a host of other business interests. Secondly, it will highlight the pragmatic side of Obama, perhaps angering some on the left of his base, but more importantly appealing to the great American middle – the real prize in any US presidential election.

With the revelations that General Electric in 2010 not only brought 'good things to light' but also avoided paying a single dime of tax – all while earning whopping profits and standing as the country’s largest manufacturing company – it will not be hard to counter claims that corporate America is overtaxed. This Center for Budget and Policy Priorities chart provides added perspective:

In fact, far from being overtaxed, corporate America is incompetently taxed, which is worse. Corporations have loopholes galore to shelter their revenues, but they also face a perverse and ever changing set of priorities and incentives that doesn’t always cause them to act in a way that is best for either business or the larger economy.

(For a tremendous primer on the difference between over-taxation and over regulation – the latter being an absolute evil – see the Economist’s recent special report. You can still be in favor of financial reform or Obama’s health care plan and be shocked at the inane implementation of both. To wit: “Next year the number of federally mandated categories of illness and injury for which hospitals may claim reimbursement will rise from 18,000 to 140,000. There are nine codes relating to injuries caused by parrots, and three relating to burns from flaming water-skis.”

That's just good stuff, huh?

But watch carefully over the next week. The Obama corporate tax leak provided no information on how personal income tax rates would be affected by a White House-led overhaul. We know about the Buffett rule (mostly politics, if also justice); we know the president wants the Bush tax cuts eliminate for anyone not making $1 million a year (or is it still $250,000? It is not at all clear).

But the red meat in any tax plan is how to graduate rates. At what income level do people begin paying, and at what rate? How many rate gradations will there be? Will home mortgage interest deductions survive (I say definitely yes)? Will there be a credit for sending a child to college? Incentives to give to charity? A capital gains tax hike? No real clarity from 1600 Pennsylvania Avenue (or from his neighbor, Tim, next door) on these questions.

Romney’s own plan remains inchoate, too. He wants a 25 percent corporate tax and an end to capital gains taxes of any kind for people making under $200,000. But he hasn’t explained how that prevents adding to the deficit (a bipartisan study by Congress’ the joint committee on taxation found that rates under 28 percent begin to add to the deficit).

So far, Romney’s eye is on Tea Party votes, not fiscal soundness, though he is said to be planning to put some skin on these rickety bones before Michigan votes next Tuesday.

Santorum, for his part, would cut capital gains from 15 percent to 12, create a two-their system (10 percent for poorer folks, 28 percent for the rest) and, presumably, cut government spending with the sword of the Archangel Michael.

Athens, here we come!

Michael Moran is Director and Editor-in-Chief of Renaissance Insights, at Renaissance Capital, the emerging markets investment bank. Follow him as @TheUnraveler on Twitter, subscribe to his Facebook feed, or preorder his book, "The Reckoning: Debt, Democracy and the Future of American Power," coming in April from Palgrave Macmillan.

They say money talks, bullshit walks – and they’re right.

After over a decade of prevaricating, the EU agreed recently to effectively swear off Iranian oil – no small thing, given the amount of oil some of its members import from that country. Whether it is too little, too late is hard to say at this point, but the difficulties it has caused for Tehran – and the wild incompetence of the Iran’s reaction so far (see my GlobalPost column) suggest sanctions finally looms as something more than an irritant in the halls of Mullahdom.

If it is “too little” and a military confrontation results instead of the negotiated settlement to the Iran nuclear question that should be in everyone’s interests, there will be plenty of blame to go around.

The US and Israel, rightfully wary of Iran’s intentions, have offered no real incentives for good behavior on Iran’s part, nor any creative way for Tehran to back down without looking like it has capitulated. Few people would regret the humiliation of the arrogant, shrill regime there, but if the goal is to actually get Iran to back down, then the strategy should include a carrot – hell, even a baby carrot – along with the stick.

China and Russia, of course, are obstructive and self-interested in all this, and other countries aspiring to new global roles prefer to hunker down than to choose sides.

But the real failure of US-EU diplomacy is in Asia. Taken together, Japan, South Korea, India and Taiwan account for about 38 percent of all Iranian export purchases. (Add China and the figure is 60 percent, but that’s a non-starter).

Western diplomacy, as usual a decade behind global trends, has focused on winning the support of the old G-7 nations (and even here, Japan’s only tentatively on board – Prime Minister Yoshihiko Nada saying only that “the trend is we’ll cut oil imports from Japan”).

South Korea, whose national security rests on five decades-old American troops deployment that has cost tens of billions of dollars, has said it may cut back, but is fiercely resisting anything approaching an embargo. 

Bluffs are there to be called, clearly.

Turkey, for its own reasons, also has decided not to embargo Iranian oil. Turkey has other fish to fry with Iran – leverage in Syria, where they are on opposite sides, and a mutual interest in rooting out the Kurdish PKK separatists in northern Iraq.

The US, however, is particularly perplexed by India, which it insists on viewing as bound to join a great "Club of Democracies" as John McCain once called it, that will perpetuate American influence. This fantasy has nine lives, apparently. As Washington found out in the run up to the foolish Iraq War, and then again last month when India spurned our bid to sell them fighter aircraft, New Dehli’s strategic vision does not include “recruit” in the global campaigns of Uncle Sam.

Nicholas Burns, a former Bush undersecretary of state and a man well-known in India for having negotiated the 2008 nuclear fuel deal (which has yet to win approval, btw), got front page play in the Times of India today for his normally low traffic column in “The Diplomat,” a kind of foreign service trade magazine, about New Dehli administering a “slap in the face” to India’s friends in Washington.

“This is bitterly disappointing news for those of us who have championed a close relationship with India. And, it represents a real setback in the attempt by the last three American Presidents to establish a close and strategic partnership with successive Indian governments,” he writes.

So publicly slapping them back makes sense?

Again, this is “old think,” the idea that because India is a democracy (or Brazil, or Turkey, or Indonesia or South Africa – the list goes on), it will plump for global crusades led by America. Unlike Europe after World War II, where the US template for global leadership was created, these are not prostrate democracies in danger of being overrun by a larger power.

Over the years – with encouragement, in fact, from decades of US rhetoric about self-determination and liberal market democracy in the old Third World – these countries have developed their own unique sense of national interests. They generally acknowledge that the surging growth rates of their economies owe a great deal to the world the US shaped and lorded it over from 1945 to 2008. But they don't regard that fact as granting Washington a carte blanche right to enlist them in trade embargos, covert action or war.

If the US is to forge a truly strategic relationship with India, it will have to be based on India’s national interests. Detaching ourselves from the absurd Alliance of the Blind with Pakistan would be a start. It would be too much to say India “has no dog” in the Iran fight – adding Iran to the list of global nuclear armed states holds no appeal to a country where Hindu-Muslim tensions and the rivalry over Kashmir with Pakistan are the two clearest risks to continued national prosperity.  But India also developed its own nuclear capability “off the books.” To this day, ironically, international inspectors have greater access to Iran’s program than to India’s.

It should be said, too, that replacing 280 million barrels of oil – roughly what India purchased from Iran – would not simply be a matter of an executive decision.*

Excess global capacity exists largely in Saudi Arabia, and while the Saudis claim they can make up for supplies to the EU and perhaps a few other places, not even the most optimistic estimates of excess global capacity predict that Saudi Arabia could compensate for a comprehensive embargo by Japan, South Korea and India. It may, frankly, be a blessing – not least to the American consumer – that India and Turkey aren't on the open market just now seeking to replace hundreds of millions of barrels of oil a year.

That sanctions are biting in Iran should be celebrated, but the real costs should also be tallied. Oil prices are rising and will rise further even without military action as the “replacement value” of non-Iranian oil spikes.

And diplomatically, pressure on India and Turkey to fall in line behind America where the benefits to  either aren’t completely clear will only diminish Washington’s influence going forward.

Correction, Feb. 20, 2012: This post originally mistakenly put the amount of oil purchased by India in the billions of barrels, instead of millions.

China's heir apparent made a minor splash last week in the United States, playing it safe in his Washington rounds and turning up seemingly genuine charm by visiting old friends he made 30 years ago in Iowa as a young man. But where he went next has received little attention - but merit some.

Ireland - yes, poor, bailed-out, austerity-afflicted Eire, was the place Xi Jingping, putative third (or fourth?) most powerful man in the world, chose as a next act. Not Brussels, Berlin, London or Paris. Not Moscow or Cairo, either.

Perhaps more relevantly, not Madrid, Rome, Lisbon or Athens, either - all places where officials have recently sent urgent inquiries to Beijing with regard to the prospect of a loan.

Xi, now China's vice president, is expected to succeed Hu Jintao when he retires as leader of the Communist Party this year and as president next year. With Europe figuring as China's number on export market, he has every reason to sincerely mean what he told the Irish Times Saturday -- that "the difficulties facing Europe are temporary, and the EU and the governments and people across Europe have the ability, the wisdom, and the means, to solve the sovereign debt problem and achieve economic recovery and growth."

We'll see about that. But what seems very clear is that Ireland, whose debt crisis is somewhat different in nature from that of its fellow "PIIGS," looks like a fairly good buy right now if you're an emerging power with cash laying around the old sovereign wealth fund. (China's SWF is thought to hold about $400 billion). Ireland also has a very healthy export sector.

Ireland, with its low corporate taxes and educated, English-speaking workforce, was laid low by a real estate bubble that forced the nationalization of its banks and destroyed the wealth of many people who had been sucked into the bubble. That said, Ireland's fiscal policies had not been reckless, nor are its growth prospects negligible (which is the main problem for Italy, Greece and Portugal) or its labor markets inflexible (the previously mentioned countries, plus Spain).

Comparitively speaking, Ireland has taken its bitter medicine and, while people rightly wonder about being brow-beaten into austerity by Berlin, Irish guilt or some other force apparently has kept political backlash to a minimum.

This makes Ireland a great deal more attractive as a base for Chinese investments than other ailing Eurozone nations. Xi made all the kinds of statements visiting dignitaries produce during these visits - praising Irish agriculture, claiming there's great opportunity in China for Irish companies.

But in all the talk of China riding to Europe's rescue recently, Beijing has done very little of substance. It may be that Xi's visit to the Emerald Island is a sign that China has chosen it port of entry.

Americans may have missed the Euro-kerfuffle that India started last week by choosing the French Dassault Rafale fighter over the Eurofighter Typhoon, produced by a British-led consortium that had acted as if the $20 billion order—and the resulting influence on an important rising power— was a sure-fire thing.

The decision by India late last week had British Prime Minister David Cameron particularly incensed because he insisted that the consortium that produces Eurofighter press its case separate of any other government promises of aid or future technology transfers. The French, of course, have never believed in doing anything for the sake of “Anglo”-style capitalist principle, and they promptly bagged the lucrative contract by packaging the already less expensive warplane with a $9.3 billion deal for two nuclear power stations and a nearly sealed contract to build diesel submarines for India. This is the dead hand of the state at its dirigiste best.

There could be something to Cameron's moans—on paper (and probably in the air, too) the Typhoon is a superior aircraft, if slightly more expensive. But Cameron’s insistence that India review its decision looks a lot like sour grapes; nothing's fair in war and arms sales. Still, the British media responded with the usual hackneyed clichés about the duplicitous French and the lack of tact and savvy displayed by Germans (who led the Eurofighter bid). The FT produced an admirable recounting of the competition, along with some analysis of what it means longer-term for European arms manufacturers (ex-France) given the chronic decline of their national budgets.

To my mind, though, the missing question—and forgive the parochialism here—is whether this competition would have played out completely differently had the Obama administration put America’s best foot forward. In an earlier round of this Spenglerian beauty context, the U.S.-built F-15 and F/A-18, which first flew in the 1970s, both got the thumbs down from India’s air chiefs (along with the Swedish Saab Grippen and Russia’s MiG-35).

This put Russian, Swedish, and American noses out of joint, of course. But at least the Russians and the Swedes entered their latest models. Would the competition had gone differently—along with the $20 billion in manufacturing jobs—had the F-35 Lightning II been the American entry?

I think so. Indeed, some analysts have argued that the F/A-18 probably outperforms any of the aircraft listed above, but that India’s air chiefs felt snubbed by the decision (made during the Bush administration and reaffirmed by Obama officials) not to offer the best export version of the F-35 to a country that the United States has been wooing for the past decade like a drunken freshman at his first mixer.

The F-35 Lightning has already been sold to Australia, Canada, Denmark, Italy, the Netherlands, Turkey, and the British (for the Royal Navy). Under what bizarre scenario did the U.S. military foresee its sale to India posing a threat to American national security? Pakistani sensibilities? If nothing else, the additional aircraft on the production lines might have helped bring down the ridiculous price of the F-35 program over time (though, admittedly, this could also have sunk the idea of selling it to India).

The British, at least, can say they tried—hey, we made the playoffs! The U.S. decision to withhold the F-35 was, in British parlance, an “own goal.” Nothing ventured, something lost.

I'd imagine my normally consensus-oriented readers will agree entirely with this analysis. I honestly hope not. I'd love to hear a good argument against entering the F-35. Bombs away!

BTW: In case anyone wondered, “Top Gun” in French, according to various translators, is something like fusil supérieur. But if that’s a mouthful for us ‘merkins, we can just say Rafale. One billion Indians—and $20 billion—can’t all be wrong.

Michael Moran is Director and Editor-in-Chief of Renaissance Insights, at Renaissance Capital, the emerging markets investment bank. Follow him on Twitter, subscribe to his Facebook feed, or preorder his book, "The Reckoning: Debt, Democracy and the Future of American Power," coming in April from Palgrave Macmillan.

The veto by Russia and China of an Arab League plan to prevent Syria's violence from spiraling into a full-fledged massacre of those demanding to be treated with dignity will be remembered by Syrians of all stripes for a generation. The majority of the country, which has pleaded for pressure from outside to stay the hand of the murderous Assad dynasty, now knows where its friends stand; so, too, the regime, given the green light by Moscow and Beijing to "restore order."

Whatever ugliness unfolds next for the unfortunate Syrians, the world can do itself a big favor by remembering this latest failure of character by the UN Security Council. It's not always the Russians or the Chinese - the U.S. casts its fair share of narrow, paranoid vetoes in the Council chambers, as do the British and French. But if the world wants a Security Council that works, the solution needs to be led by the U.S., and it needs to happen before American power erodes much further.

The Security Council remains the most obviously flawed major global institution in the world, reflecting the world of 1945 (or, at best, 1979 when China assumed Taiwan’s seat). Efforts to bring the Security Council into synch with the 21^st century fail largely because of the “veto” held by five nations – the U.S., Britain, France, Russia and China – which cannot agree on the set of new members that could be permanently at the top table.

Like trying to get the U.S. Congress to cut its own pay, the incentives are all wrong and the power in the wrong hands to make progress. Additionally, reform proposals get lost in a thicket of national jealousies when they focus on adding new permanant members rather than fixing the dynamic which already exists. Sure, Brazil, India, Japan, Germany and perhaps others should have a voice. But their voices won't make a difference if current rules apply. Adding all of them wouldn't have saved a single Syrian from the onslaught yesterday's vote will unleash.

The solution is obvious - and like all good solutions, it will require a long-view and self-sacrifice on the part of the U.S.: eliminate the veto. The idea that any power should preempt a majority of the planet’s most powerful states simply by issuing a veto is the most egregious of all the anachronisms that have survived at the U.N.

The United States routinely finds itself backed into a corner on issues involving Israel, which, rather than being resolved through negotiations, wind up unresolved and subject to Washington’s imperious “no.” This veto power – far more than the theater of the absurd that is the General Assembly – do more to undermine the institution than any other single factor.

Once vetoes are gone, the addition of a set of emerging powers and a consolidation of the French and British seats into a single EU vote would be possible. Japan, Brazil, India, Indonesia, Nigeria, Egypt and perhaps South Africa added as permanent members would force real negotiations on the world’s most important issues, transforming the United Nations from a sideshow to the main show.

In such a forum, the United States’ ability to form coalitions and mediate disputes would be amplified, and while it would lose votes, too, this reform of the Security Council would stand as the ultimate democratizing moment of America’s years at the top of the heap. And those who fear setting inconvenient precedents -- like taking action against dictators massacring their own citizens - will simply be out of luck. And those who face the regime's tanks in Syria will not have died in vain.

Politics and cynicism go hand in hand - how else can someone survive the need to please electoral constituencies with diametrically opposed interests - American labor, for instance, and environmentalists in Obama's case, angry Tea Party voters and hedge fund managers for Team Romney. Half-truths and obfuscation in such a situation is a given, and after a few election cycles, even the most ardent supporter of one political pursuasion or the other comes to accept it as fact: Politicians lie.

That does not mean that politicians can't be tactical in doling out their promises, or exhibit a sense of timing. Friday brought an example of just how difficult the next few months will be for Romney.

Firstly, rather than savoring what should have been a knock-out punch delivered to his GOP opponents in Florida last weekend, Romney spent the week denying he would like to have poor people served at State dinners in a Romney White House. The gaff in question has been sliced and diced to death - somewhat cynically, I think, since it's clear that he was just trying, inarticularly, to say he would focus his efforts on helping America's rattled middle class. Even if the media has poured salt on the wound, though, Romney unholstered the gun, pointed it as his foot and fired.

As a result, this morning, as the monthly jobs figure loomed and surveys suggested good news for Obama, Google News results for "Romney" are a litany of stories like "Romney says he mispoke" (AP), "Trump Backs Romney As Defends Remark as 'Poor,' (BusinessWeek) and this an evisceration from Bush speech writer Michael Gerson in the Washington Post. My headline this this performance: Obama Trumps Trump.

Understand, this is not a post about economics - we're talking cynical, down and dirty politics. And in that sanse, Romney has a real problem. As Sebastian Mallaby points out in the Financial Times today, "Romney has an enemy more terrible than any mortal rival: he has a problem with the Vision Thing. Despite the fuss about his tax returns, his trouble is not that he made millions as a private equity baron. It’s that managerial credentials are all he has going for him. His campaign is devoid of an animating idea." Mallaby, who leads the Center for Geoeconomic Studies at the Council on Foreign Relations, goes on to advice Romney how he could address this problem - primarily by stressing long-term debt reduction.

Contrast that with Obama's "rope-a-dope" performance so far. Yes, he's been a mediocre wielder of the White House "bully pulpit" - generally failing to decisively outflank the House. But he also judged, rightly, that time is on his side. The GOP House is divided and deeply unpopular (as are many of its principles). With jobless numbers on a slow trajectory of improvement, putting himself out there on the campaign trail makes sense only in small doses.

And so, today, as Romney shifts uncomfortably in various interview chairs, Obama pops up on CNBC and other news channels right after today's positive jobs news (unemployment dropping to 8.3 from 8.5 percent) to associated himself with the event - and deliver an unspoken "I told you so."

There's a long way to go until November, and polls still suggest this is - or should be - a horse race. But Romney to date shows little of the agility he'll need to deal with the light-footed president. Whatever else you think of either man, or their particular brand of economics, they simply are not in the same class as campaigners. This leaves Obama free to pick his shots, practice looking presidential -- take a foreign trip or two -- while  House vents its spleen and Romney begins what will be an excruciating tack back toward the tolerance and reason that the country's moderates will demand in the general election.

Right now, you've gotta like Obama's chances.

Michael Moran is Director and Editor-in-Chief of Renaissance Insights, at Renaissance Capital, the emerging markets investment bank. Follow him on Twitter, subscribe to his Facebook feed, or preorder his book, "The Reckoning: Debt, Democracy and the Future of American Power," coming in April from Palgrave Macmillan.

We're easily distracted as a nation, especially by violence and intrigue. And so, for the past week, the very serious macroeconomic crisis mounting in Egypt—where the most important political transition since the collapse of the Soviet Union is unfolding—is being pushed out of the headlines by a diplomatic dispute over NGO activities and now an explosion of soccer hooliganism that could have happened as easily in Mexico or Russia or Britain as in Egypt.

So refocus, people. As a follow-up to this conversation on whether it makes sense at this point to put the Egyptian military on the spot to devote the yearly $1.3 million in aid to national priorities (i.e., the economy) rather than its own coffers (which I discussed in this post earlier this week), the Times has a smart, varied conversation in Room for Debate today along the same lines.

This is worth a look—four serious experts on the topic, each with a slightly different take. I particularly like the stress Khaled Fahmy, the American University of Cairo historian, puts on accountability: precisely what will not happen if we continue to shovel aid unencumbered by conditions down the gullet of the autocratic military.

"Egypt’s western allies could help by insisting that the economic aid they provide be subjected to close parliamentary scrutiny. They should be aware that without transparency and accountability, financial assistance can end up breeding corruption and cronyism, and thus undermine the very system it was intended to help."

Amen.

Meanwhile, both the EU and the IMF look like they may move more quickly than usual to shore up the dwindling Egyptian treasury. This is good news, of course—as the Journal pointed out recently, one more round of downgrades, and Egypt will lose all access to international markets. You think the soccer riots were ugly? Wait until the new government runs out of money to subsidize bread.

In the long run, Egypt should wean itself from such practices, of course. But history holds few good examples of newly established democracies that thrive as the nation teeters on bankruptcy. Such times breed false "saviors," military, religious, and otherwise.

The good news: Egypt's stock market is showing life, its recent history of macroeconomic stewardship is good, and many around the world wish it well, particularly in the MENA region, where an Egyptian collapse would have serious economic and political ramifications. As Fahmy says:

Egypt’s economic prospects are bright. With a large market, an expanding middle class, a cheap and skilled labor force, and a healthy financial sector, the country has great economic potential.

If a stable transition can be made, global capital will follow.

Michael Moran is Director and Editor-Chief of Renaissance Insight, a new division of the global investment bank Renaissance Capital. Follow him on Twitter, subscribe to his Facebook feed, or preorder his book, The Reckoning: Debt, Democracy and the Future of American Power,coming in April from Palgrave Macmillan.

One of the most frustrating things about the otherwise uplifting experience of publishing my first book is the lag time between the submission of the manuscript and publication. Roughly speaking, five months will have elapsed since I turned my manuscript in—and with some exceptions during the copy editing and pagination process—I have really not been able to adjust for fast changing realities.

So far, I feel sanguine about that: My analysis is holding true, both in terms of the U.S. economy's challenges, the blinders worn by our political elites when they present their views of America's longer-term prospects, and even the unpredictable Arab Spring. (I may be tempting fate, of course: The book's not out until April 10.)

But this week, Paul Krugman wrote a column that so neatly encapsulates something in my book that I might as well get it out there—if only so, once the book appears in print, it won't seem like plagiarism. In his column Monday, Krugman pointed out that those who advocate radical austerity right now for the U.S. economy need only look at Britain for an example of how that might play out. In this, I believe he is absolutely correct: The mania for cutting public spending, both in Britain and the Eurozone, "represents a stunning failure of policy."

While Bloomberg accused Krugman in a rather pissy editorial Wednesday of telling half-truths, in fact, the credit crunch and malaise in the U.K. today was predicted back in 2010 by another economist who doesn't get a shout out from Krugman: David Blanchflower.

And here we pick up the story, as I wrote so many months ago, and which will eventually be published under my name a few months hence:

The current British economy offers a living, bleeding case study of that very result.  Subjected to austerity policies by the Conservative Party government of Prime Minister David Cameron starting in late 2010, Britain’s economic recovery promptly stalled and dove toward “double dip” recession. David Blanchflower, arguably the world’s leading labor economist, had warned the UK government’s top economic policy official, Chancellor of the Exchequer David Osborne, that deep austerity on the heels of a deep recession was a historic policy mistake that could permanently lower the “speed limit” of British GDP growth. By the middle of the next summer, the nightmare was unfolding. “Osborne's policies will be responsible for the worst recession in a century—and maybe it should be named the "Second Great Depression," he wrote in July when statistics showed Britain’s once robust growth was on tract to lag even the pace of recovery from 1930-1934.

In the United States, the lesson has failed to take. With the silly season of primaries looming, when rational thought takes a back seat to appeasing zealots, the GOP appears unwilling to address the British debacle. Instead, an intellectually dishonest ditty from the Grand Old Hymnal, “What Would Reagan Do?” wafts up from the party’s rank-and-file. Whether the 1980/2012 comparison is relevant or not (the case is dubious at best), contemporary Republicans seem unable to grasp what Reagan actually did do. So thick is the propaganda around “The Gipper” that no one recalls how, faced with a difficult economy and divided government himself in the 1980s, Reagan chose to mix tax cuts with stimulus spending and, yes, tax increases, too. Bruce Bartlett, an economic advisor to Reagan and a Treasury official under George H.W. Bush, professes amazement at the twisting of the historical record by those who allegedly idolize his former boss. Bartlett reminds us, “the cumulative legislated tax increase during his administration came to $132.7 billion as of 1988 ($367 billion today). This compared to a gross tax cut of $275.1 billion. Thus Reagan took back about half the 1981 tax cut with subsequent tax increases.”

Think about it, America: You "let Reagan be Reagan"; the least you could do is let our next president, whether its Obama or Romney, be a Gipper, too.

Michael Moran is Director and Editor-Chief of Renaissance Insight, a new division of the global investment bank Renaissance Capital. Follow him on Twitter, subscribe to his Facebook feed, or preorder his book, "The Reckoning: Debt, Democracy and the Future of American Power," coming in April from Palgrave Macmillan.

It is winter again in Cairo. Amid continued civil disobedience, backsliding by the military “transitional” government and souring attitudes, people rightly took time this week to celebrate the rising that ejected Hosni Mubarak’s despotic regime a year ago.

But the country is in crisis. While political activists and military men debate the direction of the revolution, Egyptian bankers finally acted on the threat to Egypt’s future: its collapsing economy.

Last week, Egypt asked the IMF for a $3.2 billion loan to prevent the country from running out of hard currency – a reasonable definition for bankruptcy in a country that imports a good deal of its food. Some believe it could take months, given the uncertain state of the country’s government, for the IMF to agree to such a loan. A devaluation looms for the Egyptian pound, propped up by the central bank with the country’s dwindling dollar reserves. If not handled properly, a technical default, followed by massive government layoffs, food riots or worse, could follow.

I’ve always regarded the worst-case scenarios for Egypt – renouncing Camp David, the rise of a puritanical Islamic regime – as bordering on delusional. Those who have spent time in Egypt know that extremism exists there, as in most places, but also that Egypt is too complex a society, with its deep and conflicting strains of liberalism, militarism, socialism, Coptic Christianity, Wahabbism – to name just a few - to embrace blanket intolerance. (Note to outside analysts: Pointing out that Ayman al-Zawahiri is Egyptian is no more profound that noting that Stalin came from Georgia or that Tim McVeigh once served in the US Army. They had to come from somewhere).  

That said, with Egypt’s first presidential election expected in the summer, an economic crisis right now courts disaster. No act of God or man could do more to make the paranoid worst-case scenarios a reality than a collapse of Egypt’s economy during the country’s first democratic campaign election. If you think the Great Recession has cheapened the American political dialogue, just watch what ugly populism does to Egypt.

Egyptians already suffer from dashed expectations following Mubarak’s ouster – primarily because the military leadership stupidly spurned an IMF loan offer last year, as well as loans proffered by a host of Gulf emirates. After years of very reputable macroeconomic policymaking at Egypt’s central bank, the past year, under the thumb of Field Marshal Husain Tantawi, has been a disaster. Sadly, the “self-reliance” fallacy runs deep in Arab militaries, particularly among officers reared in Nasser’s day. 

But herein lay an opportunity for Washington. Cairo, as the State Department made clear yesterday, has picked an unwise fight with the US over the activities of congressionally funded pro-democracy groups, the National Republican Institute and the National Democratic Institute. That led President Obama to publicly threaten – for the first time – to make the $1.3 billion in military aid the US hands to Egypt each year contingent on the country’s progress toward democracy.

This $1.3 billion in military aid has been handed over to Cairo yearly since 1979 as a kind of ransom payment to secure the Camp David peace with Israel. (Israel, of course, receives even larger military aid packages annually as part of the deal – some $2.7 billion in 2011). 

This year, as usual, the US foreign aid budget includes that $1.3 billion for Cairo, along with another $250 million in economic aid for the country. While some fear any conditionality placed on the military aid payment could imperil Camp David, a far wiser way to handle the issue would be to convert the aid entirely to economic assistance.

The army, of course, would be livid – and might struggle to pay its salaries. But reforming Egypt’s army – indeed, taking it down a peg or two – is a prerequisite for making progress toward an Egyptian democracy. Like many armies in countries run by dictators, Egypt’s was bought off over the years with the transfer of huge swaths of the national economy to military control. They may, indeed, constitute a reasonably good fighting force (we don’t really know – they last time they went to war was in the 1991 Gulf War, when Egypt sent a brigade of US-supplied tanks to help eject Saddam from Kuwait). What we do know is that they have done a miserable job running the Egyptian economy.

Egypt may not secure the $3.2 billion it needs from the IMF in time to forestall an economic crisis, or the $500 million its seeking from the World Bank. But Washington can ensure that a bridging loan – say, $1.3 billion – is made available to the Egyptian central bank almost immediately. If Egypt truly is taking control of its own destiny, then expecting the United States to pay a $1.3 billion ransom to its generals every year to do something that is in their national interest anyway – namely, NOT attack Israel – makes less sense than ever. The US should put that money where it will do some good – or at least, where it will prevent something bad.

How wonderful it must look from Riyadh: With Iran’s customer base crumbling under threat of U.S. legal action and EU sanctions, and the Iranian rial losing value faster than a Las Vegas condo, the “Kingdom” finds itself, once again, in an enviable situation.

Iran has responded to its self-inflicted isolation with its usual mix of bombast and economic mismanagement. In the past few days, since the EU voted in an effective ban on Iranian oil exports, the Iranian currency’s gradual decline became a bobsled ride, forcing the central bank to intervene and devalue the official rate from 9,000/USD to 12,600. This would be significant but not devastating if it were not for the fact that foreign hard currency has grown increasingly scarce—almost out of the reach of the Iranian middle class who depend on dollars, euros, and other foreign notes to purchase the small luxuries like electronics, vacations, and foreign educations that make life under the Mullahs almost bearable. In fact, according to Bloomberg, the actual black market rate for the rial plummeted to 23,000/USD. In effect, Iranians who had kept faith with their government and saved in the local currency just saw 80 percent of their nest egg disappear.

No wonder Iran’s rhetoric has sounded increasingly desperate and disjointed: On the one hand, in a great example of cutting off one’s nose to spite one’s face, Iran threatens to shut down Gulf shipping lanes and ban exports of oil to Europe; on the other, it has today offered to restart talks on its nuclear program.

Whichever path Iran takes, however, the Saudis can feel sanguine. After a year that saw some of the royal family’s closest allies vanquished by the Arab Spring and its ties with Washington strained anew over the GCC intervention in Bahrain, Saudi Arabia is suddenly the indispensible American ally once more.

Intolerant or not, the regime knows it is the only one in the world that can prevent the economic fallout from the showdown with Iran from becoming economically intolerable to the West (not to mention to China, Japan, and the rest of East Asia). The Saudi offer to make up for any shortfall in global supplies as result of actions by—or against—Iran was a prerequisite for making the sanctions strategy as pursued by the Obama administration viable. This gives the Saudis new influence in Washington. And, by my analysis at least, they’re in a win-win-win situation in the Gulf, too.

Sure, this new sanctions clampdown could all go badly wrong—at least from the view of those outside Saudi Arabia. But consider the fallout for the Saudis in a few of the more likely scenarios:

• Scenario 1: Iran loses the EU, Japan, and South Korea as markets for its oil, and the resulting scarcity in international markets a) raises prices and b) provides justification for near maximum capacity output by the Saudis and other OPEC states. Result: Capital flows to the Gulf from East Asia and the developed world.

• Scenario 2: Iran’s regime, feeling desperate, tries to block the Strait of Hormuz. The resulting spike in oil prices enriches Saudi Arabia as prices for oil already in en route (i.e., outside the Gulf) hit record levels. Further, the rash action alienates China, Japan, and India, who are dependent on Gulf supplies, and their voices are added to the calls for military action. The United States promptly obliges, and the Iranian nuclear program is set back grievously (if, indeed, the regime survives at all).

• Scenario 3:  Serious unrest erupts inside Iran as savings erode and commerce grinds to a halt, with urban, liberal elites this time joined by the enormous merchant and trading class that had stuck with the regime to date. This, too, benefits the Saudis as Iran turns inward and the Gulf (i.e., GCC) huddles around Iran’s chief rival for protection. The Saudis, for all their innate fear of the Arab Spring’s implications, view monarchy as the more resilient way to weather such storms and have sold that fact hard ever since the Jasmine Revolution took out Tunisia’s secular dictatorship in late 2010. (To that point, not one “king” was overthrown this year; only in Bahrain was a serious challenge mounted to a monarchy, and after the GCC put down the unrest, the Bahraini monarchy enacted real reforms and ramped up subsidies, echoing moves taken by monarchs in Morocco, the Gulf emirates, Oman, and Jordan.)

Even a more-radical Scenario 4, whereby Israel finally strikes (something the Saudis have apparently been petitioning Allah for ever since Saddam’s demise), leaves the kingdom in relatively good shape. (Does anyone doubt they would grant overflight permission?) Happily, the ailing Iranian economy suggests that Obama has been right to push diplomacy over military force. The desperation of recent Iranian moves bear out the arguments of those who see, in Tehran, a rational actor interested more in self-preservation and holding onto power than in sewing nuclear Armageddon. It’s far too early to declare victory, but when the currency begins to collapse and oil revenue starts drying up, one way or another, the end is nigh.

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