Friday, December 10, 2004

We're Waiting . . .

It's been about a week since incoming Senate Minority Leader Harry Reid of Nevada referred to Justice Clarence Thomas as "an embarrassment." Since Tim Russert failed to ask the rather obvious follow-up to determine which opinions provide evidence of incompetence, we've been left hanging. Somewhere, there's got to be a reporter willing to ask Reid to further explain his remarks. The intrepid reporter will have to immediately give up Washington reporting for another line of work, so we may be waiting for a long time.

Death of the Dimebag

The HairBands and MetalBoys were hot during my adolescence in the 80's. Accordingly, an old friend wrote to ask why I hadn't blogged about the death of metal guitar legend "Dimebag" Darrell Abbott of Pantera. The reason is simple. I was never a great metal aficionado. I pretty much zoomed from top 40 pop to heavy cool college stuff like REM and The Smiths. These days I enjoy a very eclectic mix of music with special affinity for electronica. What I recall about the old friend (and roommate) is that he was a big fan of the band W.A.S.P. and often had one of their albums, featuring a cover of a codpiece with a buzzsaw emerging from it, laying about the dorm room. I recall the name of the album, but it is unfortunately unsuitable for the blog's audience.

Lileks book

Hunter says, "The Lileks book is a gift for Christmas."

Thanks, Hunter! How did you know I wanted it?—STK

The Book Exhibitionist

My wife doesn't want to talk about it at home, so I'll share my bibliophilia with you on a slow posting Friday. Here's the substance of my latest Amazon order:

Uneasy in Babylon: Southern Baptist Conservatives and American Culture (Religion and American Culture) [Paperback] By: Barry Hankins

Interior Desecrations : Hideous Homes from the Horrible '70s [Hardcover] By: JAMES LILEKS

The New Crusades, the New Holy Land: Conflict in the Southern Baptist Convention, 1969-1991 [Paperback] By: David T. Morgan

Fundamentalism and American Culture [Paperback] By: George Marsden

The Kingdom of God in America [Paperback] By: H. Richard Niebuhr

The Lileks book is a gift. The rest are for me.

The Rudy Question

I thought Rudy Giuliani was the strongest speaker at the Republican National Convention. He followed McCain and made everyone forget about him. To me, he looked like Teddy Roosevelt declaiming from the stage. Impressive stuff. Hi-ever (as a southern military man I knew used to say), I don’t think he can win the nomination without seriously revisiting his stances on the social issues.

He doesn’t necessarily have to change, but he does need to be very careful in his framing. My suggestion would be to focus hard on security and economics and basically give uninteresting answers to questions about everything else. On the other hand, he could argue, for instance, in favor of a renewed commitment to federalism in which the states would be free to embrace their own moral frameworks and prove to the world what works. Remember Tommy Thompson and John Engler on welfare reform?

My own preference for 2008? Gimme Jeb. I think he’s actually the most talented Bush progeny and would make a superb President.

Thursday, December 09, 2004

Famous Atheist Changes His Mind

The venerable British philosopher Antony Flew, long a prominent champion of atheism, has decided that an intelligent God of some sort does indeed exist, in fact must exist. Flew hastens to point out that he does not see this God as being in the Christian or Muslim mold, as an "Oriental potentate," as he describes the notion, nor does he believe in an afterlife. Nonetheless, Flew, now 81 years old, has decided that the arguments of the Intelligent Design theorists are in fact correct, that his famous "Presumption of Atheism" thesis has in fact been overcome.

According to AP, Flew says, in a new video called Has Science Discovered God?, that biologists' investigation of DNA "has shown, by the almost unbelievable complexity of the arrangements which are needed to produce (life), that intelligence must have been involved." This is a fascinating event which will engender much discussion. Read the AP story about it here.

The Book on Bonds and Steroids

I’m tired of hearing that steroids may have helped Barry Bonds mount an assault on Hank Aaron’s home run record, but that they don’t account for his high batting average. After all, they say, bigger muscles don’t help you hit a major league fastball. This kind of flimsy logic is pretty typical of sports reporting and comment and it just ain’t true. If steroids can help turn doubles and long fly balls into home runs, then it stands to reason that they can also make a line drive leave the infield a little faster and make a grounder hotter. In other words, more bat speed will make a difference on both the chance to make contact and how hard the ball will be hit, both major factors in the ability to make base hits instead of easy outs. If steroids are responsible for Bonds’ rise from a superb player to the best of all time, then the whole record is corrupted, not just the home runs.

Wednesday, December 08, 2004

Hamburger's Masterpiece

No, I'm not talking about the latest culinary offering by Hardee's. My review of the paperback edition of Philip Hamburger's defining history of church-state separation in America is out in the Autumn issue of the Journal of Church and State. The issue isn't on the web, yet, so here it is reproduced with only slight variations from the final text:

Separation of Church and State. By Philip Hamburger. Cambridge: Harvard University Press, 2004. 528 pp. $19.95.

The U.S. Supreme Court has often been accused of engaging in historical scholarship without a license. For that reason, Philip Hamburger has performed a great service by delivering a well-researched political history of church-state separation as it has evolved in the United States. The result is thought-provoking and challenging to the exalted place separation now holds in the American polity.

In Hamburger’s telling, Jefferson gains significance in the annals of separation for more than his wall metaphor. In response to preaching by Federalist clergy in New England against their man during the election of 1800, Jefferson’s Republicans began to demand separation of religion and government over and above mere anti-establishmentarianism. The account undercuts the status of separation as an American piety because it demonstrates how the principle was employed early on for a political purpose. In this case, advocates of separation sought to shield Jefferson from the attacks of those who labeled him an “infidel.”

The political uses of separation of church and state are a recurring motif throughout the book. Hamburger pays close attention to the call for separation as a method for marginalizing the political aspirations of Catholic immigrants. Through careful documentation of the various strains of American Protestant nativism, one obtains a clear picture of what separation of church and state meant to many citizen groups. For them, the term “separation” carried much of its identity as juxtaposed against Catholic predispositions toward theocracy. So, public schools could have Bible readings, prayer, and any other element of Protestant hegemony as long as no particular denomination (or “Catholic sect”) held a dominant position. Protestantism was seen as synonymous with freedom, while Catholicism carried the burden of holding its adherents in thrall. Along with a determined group of secularists (who had a more consistent approach to separation), many nativist groups sought to use the “wall of separation” as a hedge against feared papal influence.

Perhaps more interestingly as a matter of constitutional interpretation, both groups felt they needed to amend the Constitution to bring about their desired version of separation. Protestants pursued the Blaine amendment that failed at the federal level, but is now in place in several states. Secularists had their own proposed federal amendment that was unable to garner necessary support. Only after fruitlessly seeking amendment did advocates of separation begin to claim that the Establishment and Free Exercise clauses already provided for the political and social outcomes they sought. As we now know, the strategy of interpretation proved successful as the Supreme Court sought to apply the First Amendment to the states.

Hamburger’s critical history of American church-state separation raises important questions the author chooses not to answer in any detail. If not separation, then what? Is true anti-establishmentarianism adequate? Having undercut the position of separation in the American decalog, one would like to see a more legal and policy oriented book from the author as a follow-up.

The Decline of Sportsmanship

Reid Collins has written the best analysis I have yet read of what was behind the recent brawl at an NBA game between the Indiana Pacers and Detroit Pistons, for the American Spectator online. Collins points out the general decline of sportsmanship in American life during the past few decades, and identifies a concurrent deification of athletes. It is an excellent reminder of how much our society has changed in the past half-century. Read it here.

Tuesday, December 07, 2004

Books that Are Worth Reading . . .

Found in my rumbles through used bookstore stacks, a perfect trifecta of highbrow conservative cultural criticism:

1. Roger Kimball's The Long March
2. Hilton Kramer's The Twilight of the Intellectuals
3. Norman Podhoretz's Ex-Friends

These three are fun reads, particularly if you like seeing liberal (or according to Mr. Karnick, illiberal) icons receive their comeuppance. Norman Mailer comes in for particularly brutal treatment, as I recall. Podhoretz's is the most interesting because his book gets into the substance of his personal relationships with many of the figures he analyzes.

Books Books Books

I have come to the sad conclusion that sometime near the beginning of the millennium we reached the point where there are now more books than readers in the world. As publishing becomes more economically efficient and intellectually deficient, each year there are tens of thousands of new books, and only a tiny, tiny minority are worth anything at all. Joseph Bottum's annual Year in Review essay for the Weekly Standard documents this trend superbly, and this year's installment indicates that the ratio of worthy books to dreck is probably lower than ever. Favorite line: "In mysteries and thrillers, there were a few hints this year that the serial-killer subgenre may actually come to end within our lifetime. (And some people think that God doesn't exist.)"

Read it and weep, and laugh if you can.

A Fine Line of Film Criticism

In his most recent Weekly Standard film review, Jonathan Last's description of the new Mike Nichols movie Closer is a classic:

"Not since American Beauty has a film wanted to dive so deep into so shallow a pool."

That is one great sentence. Very insightful review, too, as usual.

Eliot Spitzer: Power Corrupts

UCLA law professor Stephen Bainbridge is nearly as critical of New York attorney general Eliot Spitzer as I am, as can be seen by typing “Spitzer” in the search box on his excellent blog, Steve recently uncovered the following gem about New York prosecutor Eliot Spitzer at yet another interesting blog,

There is an interesting letter to the editor from a former insurance industry executive published in the November 29 issue of Business Insurance (OK, I know I'm a geek for reading letters to the editor of Business Insurance -- it was an accident, alright?). The author, one Tom Harvey, who is identified as the former CEO of an insurance brokerage firm, thinks that Spitzer needs to pay more attention to the appearance of impropriety:

“Most of us associated with this industry are appalled by apparent bid rigging. But we view contingent commissions differently than Mr. Spitzer....

But without due process Mr. Spitzer has turned this industry on its head. There have been no court hearings, no testimony in front of appropriate agencies, yet market values of public brokers have plummeted, and thousands will likely lose their jobs. All due to the ‘appearance of impropriety.’

Speaking of ‘appearances,’ how about Mr. Spitzer's tennis pal, campaign contributor and former boss securing a 19% sweeter, all-cash deal for his company from Marsh & McLennan Cos. Inc., after Mr. Spitzer hit Marsh with a tsunami of subpoenas. Then, Mr. Spitzer's tennis buddy ends up as CEO after Mr. Spitzer says he "can't deal" with the current Marsh CEO. Later, Mr. Spitzer says it's OK for his tennis pal, now Marsh's CEO, to pay any potential fines from their contingent commissions, which Mr. Spitzer earlier alleged were ill gotten. Isn't this like the DA indicting someone for burglary and saying they can use the proceeds to cover any fines? Yeah, ‘appearances’ do matter, Eliot, and this does not look good.”

By contrast, Peter Elkind’s article about Spitzer the “crusader” was typical of the way the mainstream media argues that Spitzer’s ends justify any means:
“Why, critics ask, should the attorney general of New York State be allowed to interfere in longstanding insurance practices (or to use earlier examples, demand lower mutual fund fees, or change the structure of Wall Street research, or force drug companies to open up their clinical trials to public scrutiny)? If you define his mission traditionally, perhaps he should not. After the Marsh suit was filed, the Wall Street Journal editorial page pronounced itself troubled "about a public official unilaterally deciding that an industry's business model must change" and harrumphed that Spitzer "increasingly views himself as all three branches of government-- legislator, regulator, and judge." But as Spitzer pursues his prey, there's a rough-justice quality about what he accomplishes . . . and the businesses he targets are in no position to argue. It's indisputable that his method works.”

Such “rough justice” -- replacing the rule of law with trial by press release -- raises a vital question. How does Mr. Elkind’s rationale for Spitzer’s method differ from the infamous claim ( that Benito Mussolini’s rough justice was likewise acceptable because he made the trains run on time?

Monday, December 06, 2004

The Most Potent Blog Yet . . .

With all due respect to our own eminent economists, the most potent Econ. blog ever has opened for business. Nobel Prize winner Gary Becker and federal judge/innovator of the the highly influential law and economics movement Richard Posner have begun blogging. I normally hate all the self-referential "blogging is so important" language from many practitioners of the art, but this is a big, big deal and lends a lot of credibility to blogging as a means of communication. Posner is one prolific son of a gun. Heaven only knows how many millions of words he'll fling into cyberspace in the days to come.

What's All This Christian Stuff?

Now, I'm no exponent of the Christian America thesis, where we posture that every American founder was an orthodox Christian, but I do think the strict separationists and multi-cultural types go a bit far in their attempts to sanitize Christmas for the public. Christianity is a large and indelible part of America past and present. So, enough with renaming Christmas trees as Unity trees and similar nonsense. To do so is akin to striding about Dublin complaining about the prevalence of all the Irish stuff in abundance.

Hard Landing History

In December 1983, Stephen Marris of the Institute for International Economics wrote, "Crisis Ahead For The Dollar" for Fortune magazine. "When capital begins to flow out," Marris predicted, "U.S. interest rates will rise. And as the dollar goes down, inflation will accelerate." The dollar subsequently soared to astonishing heights for a couple of years and inflation fell by about ten percentage points.

In the Summer 1987 issue of Foreign Policy, Lester Thurow and Laura D'Andrea Tyson wrote the following warning about "The Economic Black Hole":

"The more Washington is forced to rely on a continuing fall of the dollar to restore the trade balance, the . . . more expensive imports will become with respect to exports. The drop in U.S. living standards will be consequently greater. A further drop in the dollar also threatens to touch off a worldwide recession and add instability to world financial markets . . . . As import prices continue to increase, the inflation rate will continue to accelerate."

In his 1988 book, America in The World Economy, C. Fred Bergsten wrote, “If foreign investors and central banks finally stop lending such quantities to the United States . . . the dollar will plunge and interest rates will soar."

Actually, the stock crash of October 1987 was as close as we ever got to a hard landing – not because the dollar had already fallen for more than two years (as a matter of deliberate G-7 and Fed policy), but because Treasury Secretary Baker then invited both U.S. and foreign investors to flee dollar-based investments by announcing in a TV interview that he wanted the dollar to drop even more. Significantly, the Fed had also raised the fed funds rate from 6.1 percent in January 1987 to 7.3 percent in October, which did not help. Even then, however, proponents of twin deficits and hard landings had it all wrong. The budget deficit in fiscal 1987 was sharply lower, not higher. And interest rates did not soar but fell in the wake of the October crash. The economy soon recovered and so did the dollar. We had recessions in 1990 and 2001, of course, but they too did not follow the hard landing script.

In short, the hard landing crowd has been very wrong for a very long time. Yet they keep peddling the same old story whenever (1) the U.S. economy is growing faster than others, and (2)there is a Republican in the White House.

So, the U.S. is once again said to be at grave risk if foreigners suddenly decide to sell their U.S. stocks and bonds. But if the current account deficit could not be financed then it could not exist. Hard landing zealots thus begin by fretting about the gap between imports and export and end by fretting that gap might disappear. They also claim trade deficits are bad because they will make the dollar fall; but the falling dollar is good because it will shrink the trade deficit.

If a falling dollar reduces the trade deficit and a shrinking trade deficit lifts the dollar, then it follows that a falling dollar must make the dollar rise. All of this makes as little sense as the related pretense that “restoring confidence” in a currency depends on higher taxes.

P.S., An apology is due to my old friend Bruce Bartlett, who’s earlier e-mail to me (mentioned in my previous blog) was, of course, a joke. I only meant to be teasing him about teasing me, nothing more.

Civil Libertarians for Christ in the Public Schools

Even the Illinois American Civil Liberties Union thinks it's all right for public schools to have Christian Christmas carols in school activities, according to this article in today's Chicago Tribune. "Christmas songs about Christ are fine at this time of year, [IACLU] spokesman Ed Yohnka said," the Tribune story noted.

But not all the news is good: a local suburban Chicago school, in a decision representative of policies in many schools across the nation, sponsored last week a very "inclusive" Chrismas celebration that entirely excluded any mention of Jesus Christ, as documented in the Tribune story mentioned above. Some muscular local Christians quickly raised a fuss, led by the Illinois Family Institute working with the national Alliance Defense Fund, and although the school's district superintendent denied any intent behind the omission and "said his teachers did nothing wrong this year," he added that "he would review the holiday programs next year to make sure Christians are not perceived to be slighted," according to the Tribune report.

It's interesting to see that the people we hire to run our public schools are more radical about excluding religion than even the local ACLU chapter is. As the Illinois Family Institute and Alliance Defense Fund have observed, it is essential that the public hold these people accountable for their actions and make sure that their programs and curricula truly reflect the beliefs of the persons who pay for this vital and highly expensive public service.

Christians Tired of "Getting Pushed Around"

Denver-area churches decided that the official, government-sanctioned secularization of the Christmas holiday had gone too far recently when the city's mayor replaced the traditional "Merry Christmas" banner atop the local City and County Building with a "Happy Holidays" greeting. Christians around the city rose up in protest by descending on the city's annual Christmas parade and sang carols emphasizing the Christian origins of the celebration, as noted in this surprisingly sympathetic account in the New York Times. "Like a spark in dry tinder, the result was a flare-up that caught even some church leaders by surprise. A holiday rite that had drawn thousands of paradegoers annually suddenly became a symbol, for many Christians, of secular society run amok." The article noted that the parade's organizers promised to reevaluate their policies and said the event may never be the same.

The congregation that seems to have had a large part in sparking the reaction is led by a former Marine who served in Vietnam as a helicopter gunner, as the Times article reported. The article said members of his church described him as "not a man who likes getting pushed around." Personally, I am impressed and cheered by this revival of "muscular Christianity."

A liberal society certainly has room for reasonably inclusive expressions of its people's religious faith, and in my view, a local Christmas celebration, with the community allowed, and not required, by the government to acknowledge and commemorate the essential religious nature of the occasion, certainly falls into that category.

War on Terror Widens Again

Sen. Kerry's presidential campaign argument that the War on Terrorism is actually all about finding bin Laden and bringing him in for criminal prosecution was always absurd, in my view, but the recent attack on the American consulate in Jeddah, Saudi Arabia, as reported here in the Times of London, should explode that idea thoroughly. The network of terrorism that has set its eye on the United States, the West, and the rest of the modern world is far bigger than OBL and has to be attacked at the roots. The root of all this evil is state sponsorship of terrorism, for activities on this scale simply cannot occur unless some nations turn a blind eye to terrorists in their midst. We must always keep that in mind when considering what to do about terrorism today.

Reasonable people can disagree over whether an overthrow of Saddam Hussein's regime in Iraq was a necessary and appropriate part of the remedy, but what cannot be denied is that the War on Terror does and must range quite far, and that state sponsorship of terrorism must be halted entirely. In addition, it is also evident that only the United States has both the resources and national courage to lead such a fight and indeed, to go it alone if necessary. Whether we have the will is the only important question remaining.

Supreme Court Commentary: Clarence Thomas

Senator Harry Reid from Nevada told Tim Russert that Clarence Thomas is an embarrassment as a Supreme Court Justice. I'd love to know how he reaches that conclusion. He says Thomas' opinions are poorly written. Has he ever read one? I've certainly made my way through a few Thomas opinions and never saw the alleged lack of judicial intellect or temper. I suppose Earl Warren's opinions were better, the ones where he simply told his law clerks how he wanted the case to go and had them find a way to support it.

Sunday, December 05, 2004

Dollar Disorientation

In my latest column "Dollar Disorientation" I threatened to continue pursuing the muddled issues of twin deficits and dollar devaluation on this blog. Bruce Bartlett, who I criticzed rather sternly, e-mailed a suggestion that he could advise me of other topics to write about. Yet Bruce and I worked together at Polyconomics back in April 1989, when I was invited to present the following testimony at the Federal Reserve. My views have not changed much, but I gather his have.

The last section alluded to my "A Baedeker to Better Living" The Wall Street Journal, February 23, 1989.

I condensed this and took out refrences, but it's still complex. The main point is to show that these arguments have been going on for a long time. My next blog will be simpler, I promise.

Excerpts from
“International Economic Policy: Choices, Problems and Opportunities for the Bush Administration”

Testimony before the System Committee on International Economic Analysis
Board of Governors, Federal Reserve System

Alan Reynolds April 14, 1989

Policies that threaten recession or inflation are to be avoided, regardless of their promised effects on budget or trade deficits. Although a recession might reduce the trade deficit, it would surely increase the budget deficit. And although a weaker dollar might conceivably reduce the trade deficit, it would surely increase inflation.

So long as the U.S. is operating at high employment, a slowdown in the growth of government purchases and government-financed consumption would help free-up real resources, such as energy and labor, to expand private production. An increase in taxation, on the other hand, does not free-up resources for private production, but instead permanently transfers private resources toward government services (which are quite difficult to export).

The United Kingdom and Australia moved from budget deficit to surplus in the past few years, yet nonetheless have sizable current account deficits, high inflation and extremely high interest rates. Clearly, there is no automatic link between budget and trade deficits, or between budget deficits and inflation. The "policy mix" idea -- the theory that higher taxes are a substitute for prudent monetary policy -- is a proven recipe for stagflation. Easy money simply stimulates nominal GNP (demand), while higher tax rates suffocate real GNP (supply).

Many economists who did not anticipate the U.S. current account deficit nonetheless confidently "project" that it will continue indefinitely. The usual policy conclusion is that the dollar should be repeatedly devalued.

By accounting convention, the current account deficit equals investment minus private savings and government deficits. Many economists have emphasized "net" figures for investment and savings, often expressed in nominal terms and divided by gross national product. Regardless of the legitimacy of such statistical creativity, it is gross investment outlays that have to be financed from domestic or foreign wealth, not simply the net portion. Measured in 1982 dollars, gross private investment increased by 42% from 1980 to 1988, from $509 billion to $721 billion. Since it is highly unlikely that real savings could have increased that rapidly, particularly if marginal tax rates had been higher, the 1984-88 surge in investment was partly financed by reduced U.S. investment abroad (notably, fewer loans to LDCs) and by increased foreign investment in the United States.

Since the current account deficit is mainly a real phenomenon -- an increase of real investment that exceeded the increase in real savings -- it follows that depreciating the dollar could only help by reducing real investment or (less likely) increasing real savings. Another big drop in the dollar could indeed cut real capital investment, and thus narrow the gap between investment and savings. It would do so because taxes on real profits and capital gains increase with inflation, reducing the incentive to invest. Moreover, the Federal Reserve would be likely to respond to the inflation by temporarily raising interest rates, thus causing households and firms to postpone purchases of durable goods and structures.

A familiar academic point is that a one-time depreciation of the dollar merely results in a one-time increase in the level of prices, not an ongoing increase in the rate of inflation. Yet a one-time increase in the price level certainly looks just like inflation to the public and the politicians, so the Fed feels compelled to react to past depreciation of the dollar by a subsequent freeze on bank reserves. The resulting lucrative real return on cash makes it impossible for producers of, say, houses and cars, to recover past costs that had been inflated by the previous devaluation. This results in squeezed profit margins, and cutbacks in investment and employment. In this way, a lower dollar may indeed reduce the trade deficit, but it does so by provoking contraction.

Commodities priced in dollars can normally be expected to increase with a lower dollar -- including the price of oil -- since such commodities become cheaper to foreign countries which therefore purchase more. The increased cost of imported commodities, as well as reduced competitive pressure from imports, can be expected to increase prices of U.S. exports. Once dollar prices of imported commodities and exported finished goods have been inflated by the lower dollar, the net effect on the volume or value of imports and exports is ambiguous. Since there is little spare capacity to quickly expand the volume of exports, devaluing the dollar for that purpose mainly boosts prices. On the import side, there is no certainty that reduced quantities of imports will ever outweigh the increased price, particularly for essential imports such as oil or nickel. Since a drop in the dollar strengthens foreign demand for oil and other commodities that the U.S. imports, bidding-up their prices, that effect alone can make dollar depreciation counterproductive.

On the other hand, efforts to deliberately slow the U.S. economy, through monetary stringency or surtaxes, could likewise prove dangerous, particularly for foreign countries dependent on net exports for employment. One immediate effect would be to reduce output more rapidly than employment, causing falling productivity, rising unit labor costs and falling profit margins. Another effect would be cancellation of contracts and orders for plant and equipment, needed to expand capacity for export and for import-substitution. The resulting reduction of potential supply and productivity are harmful to the longer-run inflation outlook, even though prices might be temporarily depressed by going-out-of-business sales.

There are also practical difficulties with the using dollar devaluation as a trade weapon. Toyota has not been able to raise prices enough to compensate for the stronger yen, because of competition from Korea, Mexico, Brazil, Canada, and U.S. plants making Japanese cars. The weaker dollar reduced the cost of commodities to Japan, making price restraint feasible for finished goods. Japanese and European producers of autos, electronics and chemicals also responded by moving more production inside the United States, but that means more imported machinery and materials which increase the U.S. trade deficit in the short run. Indeed, the U.S. has virtually imported entire factories.

Another reason such capital surpluses and trade deficits are self-correcting is that the relative improvement in U.S investment opportunities must eventually face diminishing returns. As plant and equipment becomes more abundant in the U.S., and relatively scarcer in capital-exporting countries, the relative return on additional investment will begin to look more attractive elsewhere.

So long as capital is free to move between countries, the old idea that current accounts "should" be balanced is literally impossible -- it implies zero capital flows. Chronic current account surpluses are a symptom of relatively poor after-tax real returns on capital. The best solution to so-called "imbalances" of trade and investment flows is to improve investment opportunities elsewhere -- particularly in Continental Europe, Latin America and Africa.

In short, the main challenge to the new Administration, and to the Federal Reserve, is to continue to lead the world toward expanding opportunities for investment, employment and trade. That requires secure property rights, including money that is expected to hold its value over time, predictable regulations, reasonable taxation and free trade. The more countries that follow such policies, including Marxist economies, the less burden on the United States and Japan to serve as locomotives for the cabooses. This is no time to make a fetish of mere instruments and symptoms, such as budget or trade gaps, at the expense of the broader picture.