Peter L. Berger's Blog, page 148

Fact-Based Health Care Reform

In a highly partisan political act, President Obama and a Democrat-dominated Congress established the Affordable Care Act (ACA) in 2010. The law aimed first and foremost to reduce the uninsured population. It did so by expanding government insurance programs and regulatory authority over U.S. health care via new mandates, regulations, and taxes. The two major elements of the law—a significant Medicaid expansion for non-disabled adults and subsidies for exchange-based private insurance—will each be funded with almost $1 trillion of taxpayer money over a decade, according to January 2017 CBO analysis. Just as the ACA’s supporters passed it despite the widely anticipated failures of the law, advocates of a single payer system today ignore the well-documented half century of failures of nationalized health care.

The harmful impacts of this ill-conceived approach are now well documented: Insurance premiums have skyrocketed; many insurers have withdrawn from the state marketplaces; and for those with coverage, doctor and hospital choices have narrowed dramatically. The ACA will also undoubtedly accelerate the development of the kind of two-tiered health care system characteristic of other nationalized systems, where people with money or power are able to circumvent the substandard government systems that the lower classes must endure. The result will be an end to the superior access, broad freedom of choice, and exceptional quality of care that distinguishes American health care from the centralized systems that are failing the world over.

Time is running out to fix these problems. Yet politicians on both sides of the aisle continue to erroneously focus on increasing the ranks of the insured as the primary goal for health policy. To be sure, this helps politicians appear to be doing something good for voters, while in reality this is misguided, and at times counterproductive to the goals of correct health policy.

We already know that categorizing someone as “insured” is not the same thing as facilitating timely, high quality health care. America’s veterans, after all, are “universally insured,” but the disgraceful failures of that particular single-payer system are now obvious (and ironically are being remedied by allowing care outside that system). Should we pretend we have cause to celebrate our government-centralized Medicaid program for the poor, even though only half of doctors accept patients under that system (not to mention that HHS’s own data reveal that half of all doctors who have signed up to accept Medicaid patients do not actually do so)? Should we deny that Medicaid’s universal insurance delivers worse outcomes—including more in-hospital deaths and adverse events, more complications from surgery, shorter survival after treatment, and longer hospital stays—than private insurance covering medically similar patients?

Shouldn’t we also examine the actual data from nationalized systems with universal insurance? In those countries with the longest experience of guaranteed insurance, epitomized by the UK’s National Health Service, their “fully insured” patients have far worse access to care and worse outcomes than did Americans before the ACA. Published data demonstrates massive waiting lists and unconscionable delays in the NHS that are unheard of in the United States, including for even the sickest patients, like those referred by doctors for “urgent treatment” for already diagnosed cancer (18 percent wait more than two months) and recommended brain surgery (17 percent wait more than four months).

U.S. media outrage was widespread when 2009 data showed that time-to-appointment for Americans averaged 20.5 days for five specialties. That selective reporting failed to note that those waits were for healthy check-ups in almost all cases, by definition the lowest medical priority, and were actually significantly shorter than for seriously ill patients in universal insurance systems, including Brits needing heart surgery (57 days), or Canadians with “probable cancer” of the gastrointestinal tract (26 days) or proven GI bleeding (71 days). Even for physical exams and purely elective, routine appointments, U.S. wait times before ObamaCare were shorter than for seriously ill patients in countries with nationalized insurance. Patients in those systems, despite their universal insurance, also experience delayed access compared to Americans for important medications. To no one’s surprise, the consequences are factually worse outcomes from virtually all serious diseases, including cancer, heart disease, stroke, high blood pressure, and diabetes compared to Americans. Contrary to the logic of those advocating for government-sponsored, single-payer health care for America, and despite the intuitive attractiveness of the concept, having insurance is absolutely not synonymous with having access to quality medical care.

More fundamentally, the truth is that costly health insurance premiums are largely a secondary manifestation of other factors, chiefly the cost of medical care and, to a lesser extent, the regulatory environment for insurance. While emerging GOP proposals rightfully strip back some of the ACA’s harmful regulations and taxes, reducing the cost of health care itself is the critical pathway to more affordable, broader access to quality medical care, lower insurance premiums, and ultimately better health. By ignoring the root problem and instead continuing to focus on making current insurance “more affordable,” mainly through subsidies to consumers, such policies artificially further the misguided incentives in our current system. Subsidies prop up insurance premiums for coverage that typically reduces out-of-pocket payment and covers care that many people would never choose to buy. This prevents patients from caring about price of the care covered by insurance, and it consequently eliminates the incentives for medical care providers to compete on price.

Lowering the cost of medical care, though, is fraught with peril. It must be achieved without harming patients: without jeopardizing quality, restricting access, or inhibiting the critical innovation dynamic within American medical care. But it can be done; read on and you will learn how.

The Urgency of Reform

Health care reform cannot wait, despite the excellence of American medical care. America is facing its greatest health care challenges in history, as enormous fiscal stresses combine with daunting demographic realities that threaten to overwhelm the system unless it changes fundamentally from the dysfunctional mess it has gotten itself into.

Partly due to features and regulations of the Affordable Care Act (ACA), such as the significant expansion of Medicaid for adults and substantial subsidies for exchange-based private coverage, health care financing has shifted further toward the government. According to CMS, the government-paid share of health spending (Federal, state, and local) accounted for 45.8 percent of all health spending in 2015, dwarfing both the 27.7 percent share of spending by households and the 19.9 percent by private business as the largest single source of funding. Medicaid, originally a program with only about 250,000 low-income beneficiaries at a cost of less than $1 billion in 1966, has expanded to cover over 74 million people; program costs totaled $574.2 billion in FY 2016, about 60 percent of which comes from Federal taxes. Medicare spent less than $1 billion in its first year of existence on hospital benefits for seniors, but today it spends over $191 billion annually on hospital benefits alone and $679 billion in total. As the Medicare beneficiary population explodes with the aging of the baby boomers, the growing costs of the program in its current form seem unsustainable when one understands that in 1965, at the start of Medicare, workers paying taxes for the program numbered 4.6 per beneficiary, whereas that number will decline to 2.4 in 2030. The latest Annual Medicare Trustees report also projects that the Hospitalization Insurance (HI) trust fund will face depletion in 2029.

Adding to its fiscal fragility, the Medicare program is fraught with errors, fraud, and waste to the tune of $60 billion per year, according to the Government Accountability Office. Even before any trust fund depletion, Medicare and Medicaid must compete with other spending in the Federal budget. America’s national health expenditures (NHE) now total over $3.2 trillion per year, or over 17.8 percent of GDP, and are projected to reach 19.9 percent GDP by 2025. Without changes, Federal expenditures for health care and social security project will consume all federal revenues by 2049, eliminating capacity for national defense, interest on the debt, or any other domestic program.

Beyond the dismal projections about the fiscal burden of taxpayer-funded health care is the impending explosion of demand for costly medical care our society faces. The Department of Health and Humans Services’ Administration on Aging and the U.S. Census Bureau document that the number of Americans 65 and older has exploded by a full six million in the past decade alone, while the population of “oldest old”—those 85 and older—has increased by a factor of ten from only 500,000 in the 1950s to today’s six million. The positive implications of lengthening lifespans are not as simple as one might initially suppose. Older people harbor the most disabling diseases, including heart disease, cancer, stroke, and dementia—the diseases that depend most on specialist care, complex technology, and novel drugs for diagnosis and treatment. Alzheimer’s Disease alone already affects over five million Americans, and in 2050, nearly 15 million will have it, including one in three elderly Americans. In 2050, the direct financial burden shouldered by Americans from Alzheimer’s projects to exceed $1 trillion, with over $750 billion expected from Medicare and Medicaid in that single year.

Simultaneously, obesity, America’s most serious self-inflicted health problem, has increased to crisis levels in both adults and children. Because of obesity’s high prevalence and its proven association with multiple chronic diseases, worse treatment results, and more complications from even the best medical care, Hammond and Levine calculate that the annual U.S. societal costs of obesity now exceed $215 billion. Given the documented lag time for such risk factors to fully affect health, the totality of obesity’s cumulative health and economic harms will dramatically increase over the next several decades.

As policymakers grapple with these formidable challenges, Americans are entering a truly remarkable era of medical diagnosis and therapy. Innovative clinical applications of molecular biology, advanced medical technologies, new drug discoveries, and minimally invasive treatments promise earlier, more accurate diagnoses and safer, more effective cures. The possibilities of improving health through medical advances have never been greater. Yet such extraordinary technologies are undeniably costly to develop in both time and money. Any changes to U.S. health care must be done with care, specifically avoiding significant harm to the incentives for continued innovation, if America’s next generations are to continue to benefit from such extraordinary advances.

The Pathway to Lower Cost, Quality Health Care

The central principle of successful health care reform lies in reducing the cost of medical care without restricting care or creating obstacles to innovation. This objective is fundamental, although it is partly intertwined with other necessary changes to insurance regulations and taxes that have undeniably hurt consumers. The way to bring down health care prices without damaging quality and without limiting access is the question, but the answer is clear-cut. It requires creating conditions long proven to bring down prices while improving quality: facilitating competition among providers, and incentivizing consumers to seek value.

Incentivize and Equip Consumers to Consider Price and Seek Value

First and foremost, consumers must have strong incentives to consider price when seeking medical care, and they must have the tools to do so. This is obviously critical for generating consumer value in any good or service, yet incentives to consider price are uniquely missing from the health care system. Although begun decades ago, the ACA furthered the inappropriate construct that insurance should minimize out-of-pocket payment and subsidize all medical care. The ACA’s broad coverage requirements directly caused more widespread adoption of bloated insurance. This further shielded patients from paying directly for health care. With patients having virtually no incentive to consider value, and when health care prices and doctor qualifications are essentially invisible, providers don’t need to compete on price. The consequences are the overuse and misuse of health care resources and unrestrained costs.

For consumers to incorporate price and value into decisions to buy health care, the system must first give consumers an expanded role in paying directly for care. Beyond paying directly, they also must personally gain from paying less. That new, value-seeking behavior is the essential lever to force competition among health care providers.

But is it realistic to suggest that people could shop for medical care and consider price, as Americans do for virtually every other good and service? Aside from emergency care, which represents only 6 percent of health care expenditures, the answer is a resounding yes. Among privately insured adults under age 65, almost 60 percent of all health expenditures is for elective outpatient care; only 20 percent is spent on inpatient care and 21 percent on medications. Likewise, 60 percent of Medicaid money is spent for outpatient care. Even in the elderly, almost 40 percent of expenses are for outpatient care. Of the top 1 percent of spenders, the group responsible for more than 25 percent of all health spending at an average of $100,000 per person per year, a full 45 percent of spending is also outpatient. Outpatient health care services dominate America’s health spending, and these services are absolutely amenable to value- and price-based decisions.

Widely available higher deductible insurance plans (HDHPs) are one critical piece of the puzzle to position more patients as direct payers for a higher proportion of their medical care. Higher deductibles necessitate direct patient payment for care up to the deductible. Moreover, high deductibles restore the fundamental true purpose of health insurance: to reduce the financial risk of large and unanticipated medical expenses. Instead, under the misguided assertion of then HHS Secretary Sibelius who claimed that high-deductible coverage is not true insurance, the ACA furthered the flawed model that insurance should minimize out-of-pocket payment and cover the entire range of medical services, including lower cost routine and elective care.

A second highly effective tool to motivate and enable patients to seek value and consider price is large, liberalized health savings accounts (HSAs). These accounts are tax-sheltered as they grow by contribution or investment. They are generally used to pay for non-catastrophic health expenses, which form the bulk of medical care. Better than tax deductions that reduce net cash outflow for a given medical expense but ultimately motivate more spending on health care, HSAs introduce something unique—they incentivize saving.

Large HSAs are not a panacea, but when coupled with higher deductible coverage, they are proven to effectively motivate patients to consider price in their health purchases. We know that health spending of those with HDHPs paired with HSAs decreased at least 15 percent annually in a March 2015 study. When people have savings to protect in HSAs, the cost of care comes down without harmful impact on health. More than one-third of the savings by enrollees in such coverage reflected value-based decision-making by consumers, i.e. prices matter. System-wide health expenditures would fall by an estimated $57 billion per year if even half of Americans with employer-sponsored insurance enrolled in plans combining HSAs with high deductibles.

The issue is not whether these vehicles are effective; it is how to maximize their adoption and eliminate the government rules that serve as obstacles to their growing to scale.

First, it is essential to permit limited-mandate, high-deductible plans in every state and for every consumer. By empowering all health care consumers, including the elderly and other high-frequency users of medical care, with the same tools and incentives to seek value for their money, price-conscious behavior will become more fully leveraged.

HDHPs should be made as attractive as possible for all those who might consider such coverage, if their impact on lowering costs is to be maximized. HDHP premiums are generally less expensive, but regulations have counterproductively limited their availability and raised their premiums. Based on my analysis of Employer Health Benefits Annual Survey data from the Kaiser Family Foundation, the premiums for HDHPs rose from two to five times faster than premium increases of any other type of coverage after ACA passage. Excess mandated coverage that made HDHP insurance less attractive should be rolled back, including Obamacare’s “essential benefits” that increased premiums by almost 10 percent, and the 2,270 state coverage mandates for everything from acupuncture to marriage therapy. To make HDHP coverage even more affordable, we should remove the 3:1 ACA age rating that raised premiums for younger enrollees by 19-35 percent, many of whom would consider low-premium, HDHP coverage.

Second and at the same time, HSAs should be reconfigured to permit broader use and more impact on prices. HSAs should be automatically opened for every citizen with a social security number or at birth, and owned by individuals rather than be tied to employers. HSAs should be available to all Americans, including seniors on Medicare. Given that seniors are the biggest users of health care, motivating them to seek value is crucial to driving prices lower.

Moreover, life expectancy from age 65 has increased by 25 percent to 19.1 years since 1972; today’s seniors need to save for decades of future health care. Raising maximums and catch-up contributions at least to those of IRA limits is one obvious step, but more deregulation should also occur. We should eliminate the counterproductive, arbitrary requirement of owning coverage with government-defined deductibles to open an HSA. HSA payments should be allowed for the health expenses of the holder’s elderly parents. To further the incentive to contribute to HSAs without risk of forfeiture on death, permitting rollovers to surviving family members is a step to take immediately. We should also remove ACA-specified limits to financial incentives from employers, including deposits into employee HSAs, as powerful motivators for employees to participate in wellness programs proven to reduce health costs and improve health.

Third, it is obvious that the visibility of information that patients require for assessing value must be radically improved for patients to be capable of assessing value. Data from magnetic resonance imaging (MRI) and outpatient surgery show that introducing price transparency encourages price comparisons by patients. Given the tools, consumers make value-based decisions when purchasing health care. It goes without saying that consumers must know the prices of medical care before any decision is made to buy it. Indeed, it is virtually unimaginable that anyone would buy something without knowing its cost…unless they thought someone else was paying, which is the perception in typical health insurance.

Likewise, patients must be readily aware of some straightforward indicators of relative quality, such as doctor qualifications and experience. Although one might be tempted to insist on new regulations to force price transparency, such laws are uncommon and perhaps unnecessary. Clearly, the demand for price information to inform their decisions will grow as consumers take on a more direct role in paying for their care through high deductible coverage and HSAs. The most compelling motivation for doctors and hospitals to post prices would be their understanding that they are suddenly competing for price-conscious patients empowered with control of the money.

Reform the Tax Code

The tax code must play an important role in realigning consumer incentives to put downward pressure on medical prices. One clear caveat is to avoid interposing misincentives that counterproductively encourage higher spending, particularly for insurance that minimizes out of pocket spending. We need look no further than the income exclusion for unlimited health spending to find one of the great mistakes of U.S. tax policy, costing approximately $250 billion in 2013, according to the CBO; 85 percent of the subsidy goes to the top one-half of earners. Beyond the numbers, the tax exclusion created perverse incentives. It encouraged higher demand for care, regardless of cost, while distorting insurance into covering almost all services, greatly increasing health care costs. Rational tax reform should limit eligibility for tax exclusions to HSA contributions and high deductible catastrophic coverage premiums – why incentivize broad coverage that eliminates incentives to care about price? If health care deductions or exclusions are maintained, they should be universal, regardless of employment status, to level the playing field. Additionally, limits on health deductions should be set, for example, to the maximum allowable HSA contribution.

Importantly, any plan for cash subsidies for low deductible, broad coverage to consumers other than for the poor should be eliminated. Such subsidies not only ignore the root problems of high medical care prices and overregulation, but they also disincentivize competition among providers. Insurance premium subsidies like the tax credits proposed by the House and the Senate artificially prop up high insurance premiums for bloated coverage that minimizes out-of-pocket payment. This prevents patients from caring about price and value of the care covered by insurance, and thereby eliminates the incentives for doctors and hospitals to compete on price. Moreover, tax credits would create yet another government entitlement, at a time when entitlement reform in the opposite direction is already urgent. Tax credits further complicate a monstrously complex tax code. Tax credits further expand the far-too-dominant IRS’s mission from collecting revenues to doling out money to favorite economic activities. Moreover, we must know by now that entitlement costs, including health care entitlements, always—always—expand far beyond projections.

Increase the Supply of Medical Care and Stimulate Competition

Even if buyers have control of the money and an incentive to save money on their purchases, there must also be sufficient supply and availability of alternatives (in this case, health care providers) to establish a competitive environment. The supply of medical care must be significantly yet strategically increased, so consumers can impose their power as they seek out the best value for their money without diminishing the world-leading quality of American doctors, technology, and drugs. Simultaneously, archaic obstacles to competition among medical care providers must be eliminated.

Private sector clinics staffed by nurse practitioners and physician assistants can provide much of routine primary care, including flu shots, blood pressure monitoring, dispensing common drugs, and other relatively straightforward care. In a 2011 review, 88 percent of visits to retail clinics involved relatively simple care, 30-40 percent cheaper than at physician offices and about 80 percent cheaper than at emergency departments. Patients report high levels of satisfaction with their care at these clinics, which can potentially save hundreds of millions of dollars per year, according to some projections, while increasing neighborhood access. To propagate such clinics, we need to eliminate government and special interest obstacles and simplify credentialing requirements for their reimbursement. In addition, states should remove outmoded scope-of-practice limits on qualified nurse practitioners and physician assistants.

Increasing provider supply is not only essential in primary care. Although less publicized, almost two-thirds of the 2025 projected doctor shortage of 124,000 will be in specialists, not primary care. Nearly all patients with serious diseases today are cared for by specialists, because specialists have the necessary expertise to use today’s complex diagnostics, procedures, and treatments. It remains extraordinarily difficult for residency training programs to increase the number of their trainees, even when paying fully for the additional residency positions. Medical specialty societies that set restrictive quotas harm consumers by artificially limiting the supply of doctors and consequently restricting competition among doctors. States should also modernize physician licensing by considering a national license. Non-reciprocal licensing by states unnecessarily limits patient care, especially as interstate telemedicine proliferates.

Now is also the time to reconsider practices that limit overall physician supply for the next generation. It would be wise to encourage streamlined doctor training, such as already initiated at NYU, Texas Tech, and other medical schools. Even before considering new training models, we need to look at medical school graduation numbers. These have stagnated for almost 40 years and protectionist residency restrictions have been in place for decades. These longstanding anti-consumer practices of medical schools and training programs should at least be opened to public scrutiny, even without imposing overt regulatory oversight by non-expert government bureaucrats.

In addition to increasing the doctor supply, we should eradicate barriers to medical services that impede competition and therefore raise prices. Although originally intended to “restrain health care facility costs and facilitate coordinated planning of new services and facility construction”, the federal government first, and subsequently the states, set up certificate-of-need (CON) requirements that limit important diagnostic equipment and other health care services. This inhibits competition, raises costs, and ultimately hurts patients. CON regulations are just another example of archaic bureaucratic overregulation with unintended consequences, and are still in place in 34 states, Puerto Rico, the U.S. Virgin Islands, and the District of Columbia.

Many politicians, including both Democrats and Republicans, have called for price caps on drugs, a notion popular with many voters in the wake of several highly visible cases of price gouging, as well as inflammatory comments by pharma CEO Martin Shkreli and others. We already know from history, however, that price caps don’t provide the desired products at lower prices; instead, caps always restrict the availability of the product. Drugs are no different. Cockburn used data on launches of 642 new drugs in 76 countries to show that price regulation strongly delays drug launches. Abbott has shown that pharmaceutical price controls significantly diminish the incentives to undertake early-stage R&D investment. In that study, cutting prices by 40 to 50 percent in the United States will lead to 30 to 60 percent fewer early-stage R&D projects. And Santerre calculated that drug price controls would have led to 198 fewer new drugs being brought to the U.S. market from 1981 to 2000—at a societal cost to Americans of about $100 billion more than the estimated consumer savings from those drug price controls. In other words, even in financial terms alone, the benefits of encouraging new drug development vastly outweigh the putative cost savings of price controls.

To reduce drug prices, many leading Democrats have called for expanding the negotiating power of the Federal government through Medicare. In doing so they are disregarding established facts and ignoring decades of experience from other countries like the UK, Canada, and Sweden on how government-dominated drug pricing has harmed patients. Indeed, Sweden finally privatized their pharmacies after decades of government ownership in response to severe problems with drug availability. Despite already delayed access to drugs, NHS England introduced a new “Budget Impact Test” earlier this year to cap drug prices in order to further restrict drug access, even though doing so will break their own NHS Constitution pledges to their citizens. In the same way, if a buyer is as dominant as is Medicare, essentially a monopsony, price negotiation might reduce prices, but only at the expense of other baleful effect like severely restricted drug availability. We patients would bear virtually all the risk of these unintended consequences.

Instead of looking to add even more regulation the Trump Administration should focus its policy efforts on enhancing competition, the single most important way to alleviate high prices for prescription drugs. Although it remains a winning message on the campaign trail, price constraints—as well as unfair “negotiation” by a dominant Federal payer—would harm consumers.

The first, most-urgent step is to pare down the massive regulatory bureaucracy that has delayed or denied the entry of new drugs to market. The cost of these bureaucratic hurdles for new drug development have led on average to more than 14 years and a $2.5 billion price tag for new drug development and approval (delays which are now far longer than those even in Europe). This cost that has multiplied by a factor of ten in the past decade, according to the Tufts Center for the Study of Drug Development. Deregulation is the top goal for expediting new drugs and reducing drug costs. The appointment of Scott Gottlieb as FDA Commissioner is a very positive step in the right direction.

The second step is to facilitate the arrival of generic drugs on the market; this remains the most powerful price competition to prescription drugs. We know that, over the past decade, development costs for generics has quintupled, while time-to-market has increased from 16 months to 42 months, according to Commissioner Gottlieb. According to FDA analysis, the first generic competitor reduces prices only slightly. However, a second generic manufacturer reduces the average price by nearly half. For products that attract a large number of generic manufacturers, the average generic price falls to 20 percent of the branded price or lower. Let’s streamline the FDA approval process for lower cost generic drugs and also allow selective re-importation, limited to generic drugs, which introduce neither new intellectual property issues nor new active substance risks.

Finally, we must repeal the various taxes and misguided regulations of the ACA that counterproductively raise prices on health care. For instance, it should be relatively simple to forge a consensus to eliminate the taxes on medical devices and brand name drugs. In addition to hurting job creation in these high-paying sectors, taxes and regulation raise prices of care, as their costs are easily transferred to consumers utilizing these vital goods and services.

As others have recognized, the ACA regulatory environment has also encouraged consolidation of physicians’ practices and hospitals to create quasi-monopolies. Hospital mergers have been on a blistering pace, as reported by Leemore Dafny in the New England Journal of Medicine. In the five years leading up to the ACA’s passage, there were about 56 hospital mergers per year on average; in the five years since the ACA, that number has nearly doubled. Although the rate of mergers has begun to slow somewhat in recent years, the pace in 2015 was the highest in 15 years. The impact of these mergers shouldn’t be hard to guess: The last period of hospital mergers in the late 1990s increased medical care prices substantially, at times more than 20 percent, according to Martin Gaynor and Robert Town’s report for the Robert Wood Johnson Foundation.

ACA regulations on insurers and on physician practices are also driving historic merger activity among physicians’ practices. This also raises prices significantly for patients. James Robinson and Kelly Miller reported that, when hospitals owned doctors’ groups, per patient expenditures were 10-20 percent higher, or an extra $1,200-$1,700 per patient per year. Cory Capps, David Dranove, and Christopher Ody found in 2015 that physician prices increased on average by 14 percent for medical groups acquired by hospitals; specialist services prices increased by 34 percent after joining a health system.

A decade prior to passage of the ACA, the ambitious World Health Report 2000, which ranked the health care systems of nearly 200 nations, provided what appeared to be a data-driven argument for dramatic health reforms in the United States. Its most notorious finding—the relatively low U.S. ranking (37th) in “overall performance” as defined by WHO—has been repeatedly offered as objective evidence of the overall failure of U.S. health care by advocacy groups.

Contrary to the naively drawn inferences from that study, the WHO study’s methods and conclusions were heavily criticized in a body of peer-reviewed literature by international academic experts who examined the study in detail. Fundamental flaws in methodology, large margins of error in data, overreliance on markedly flawed measures of health care quality, and highly subjective inputs based on ideological bias put forth as data—even in cases when no actual data was available—have undermined the legitimacy of the WHO’s comparative rankings. The World Health Report 2000 can be considered, at best, deceptive—a document that was essentially a ranking of countries based on their alignment with a specific political and economic ideology—socialized medicine—rather than an objective measurement of health system quality. Indeed, Mark Pearson, head of health for the Organization for Economic Cooperation and Development, when asked about the WHO report, told the Wall Street Journal in October 2009, “Health analysts don’t like to talk about it in polite company. It’s one of those things that we wish would go away.”

Beyond the scandalous bias of the WHO document, the facts throughout the world’s leading medical journals disproved the false narrative that was promulgated through the popular press to justify the ACA. The distortions continue today, as our politicians push for a single payer system. Yet peer-reviewed data consistently demonstrate that access to care, as well as quality of care, are factually worse in single-payer systems than they were in pre-ACA America.

Americans need to see past the fear mongering about the need to preserve certain parts of the law and understand that the ACA indeed must be eliminated and replaced. Its misguided amalgam of regulations generated skyrocketing insurance premiums, reduced patient choice in doctors, funneled millions more poor people into substandard programs, and accelerated consolidation throughout the health care industry—all of which are serious consequences that directly harmed patients.

Reducing the price of medical care in a more freely functioning market represents the fundamental basis for improving access to affordable, high quality care without eliminating the choice that Americans demand, and without impeding the innovations in health care that we all hope for and need. Broadly available options for cheaper, limited mandate, high deductible coverage; markedly expanded HSAs; and targeted tax incentives to leverage their use are keys to increasing price sensitivity and reducing health care prices. Adding new incentives to consider costs with reforms to strategically increase the supply of medical care would generate significant competition and reduce the price of health care overall.

A comprehensive reform plan joining these important incentives with common-sense deregulation would achieve high quality health care at reduced cost. Such a plan would conservatively decrease private expenditures by $2.7 trillion and federal spending by $1.5 trillion, shifting the policy paradigm from one of “raising taxes or reducing benefits” to one using incentives to achieve quality and value. These should be the goals of any reform, but unfortunately the debate about proper health policy has been derailed by politics. Somehow, handing out subsidies and expanding government programs have become the chief standards by which health reforms are judged. Health policy should be based on fundamentals and facts; partisan and political concerns should have no place in such impactful and complex policy decisions. Lives depend on it.

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China Opens First Overseas Military Base

Only a few miles down the road from the U.S. base at Camp Lemmonier, China has just announced the opening of its first overseas military base in the tiny nation of Djibouti on the Bab al-Mandeb straits at the southern end of the Red Sea. As Reuters reports:

China formally opened its first overseas military base on Tuesday with a flag raising ceremony in Djibouti in the Horn of Africa, the same day as the People’s Liberation Army marks its 90th birthday, state media said.

Djibouti’s position on the northwestern edge of the Indian Ocean has fueled worry in India that it would become another of China’s “string of pearls” military alliances and assets ringing India, including Bangladesh, Myanmar and Sri Lanka.

China began construction of a logistics base in Djibouti last year. It will be used to resupply navy ships taking part in peacekeeping and humanitarian missions off the coasts of Yemen and Somalia, in particular.

China secured rights to the base, which can house up to 10,000 troops, through at least 2026 by granting loans to Djiboutian government that amount to 60% of Djibouti’s GDP on top of $20 million per year in rent and billions of dollars on Djiboutis infrastructure. China claims that the base is a “logistics and fast evacuation base.” That has some merit to it. Chinese nationals, often working for state-owned companies, do business in some incredibly dangerous parts of the region long after Western corporations have deemed them unsafe. Lacking a regional military presence, China was forced to evacuate 35,000 of its citizens from Libya in 2011 by privately chartered boats and planes. That experience, which prompted the Chinese to consider an overseas base in the wider African and Middle East region, has been repeated on a smaller scale in countries like Yemen and South Sudan.

Of course, those Chinese firms have that presence in the wider region as part of China’s overall geopolitical strategy. The base in Djibouti will likely be an endpoint of China’s string of pearls across the Indian ocean. It will also secure the enormous investments that China has made in East Africa, including the new Ethopia-Djibouti rail line and infrastructure projects binding the region together to guarantee China’s resource needs. It will also help China protect its oil imports going through the Mandeb Strait.

The United States and India will view the base as an unwanted intrusion and a potential source of conflict. Perhaps. It’s also the natural extension of a rising power into a region they’ve invested in and that the rest of the world has often ignored. It’s a big first step for a more globally-oriented China. And a globally-oriented China, that is by necessity forced to take on some of the responsibilities of a true world power, is not necessarily the worst thing in the world.

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Of Course the UAE Wanted a Taliban Embassy

The New York Times has obtained a series of apparently hacked emails from the United Arab Emirate’s Ambassador to the United States, Yousef al-Otaiba, showing that the UAE competed with Qatar for the “honor” of hosting the Taliban’s sole foreign diplomatic mission. The source of the emails is unknown—this is only the most recent batch of Otaiba’s emails to be released since an initial HuffingtonPost article in June revealed that they were being shopped around to U.S. media outlets. But the content and timing of the email releases is suspiciously beneficial to Qatar.

The Taliban embassy emails are intended to scandalize the American people, if not the Trump Administration itself, over the UAE’s eagerness to host the Taliban. After all, if the Taliban are the enemy of the U.S. in Afghanistan, and the Qataris are Bad Guys for hosting the Taliban embassy in Doha, then how dare the UAE try to host the Taliban embassy as well? The fact that Saudi Arabia and the UAE cite the Taliban embassy in Doha as evidence of Qatar’s collusion with extremists may now have been revealed as hypocrisy, but the Times downplays the key to understanding this story. The UAE and Qatar competed to open this embassy because that’s what the Obama Administration wanted:

“There is an article in the London Times that mentions US is backing setting up a Taliban embassy in Doha,” the diplomat, Mohamed Mahmoud al-Khaja, wrote to Jeffrey Feltman, then Assistant Secretary of State for Near East Affairs. He used the shorthand “HH,” presumably to refer to his boss, the foreign minister, His Highness Abdullah bin Zayed. “HH says that we were under the impression that Abu Dhabi was your first choice and this is what we were informed” [emphasis added] by the United Nations envoy to Afghanistan, Mr. Khaja said.

“I got an angry call from [Abdullah bin Zayed] saying how come we weren’t told,” Mr. Otaiba wrote. “They want to be in the middle of everything those guys,” he added, referring to the Qataris. “So let them, it will eventually come back to bite them in the _____.”

Let’s go back to 2009-2012. Richard Holbrooke, appointed by then-President Obama as Special Representative for Afghanistan and Pakistan, was tasked with initiating peace talks with the Taliban. Though Holbrooke died at the end of 2010, his successor Marc Grossman succeeded in holding exploratory talks with the Taliban in 2011, and in 2012 the Taliban to agreed to open its embassy in Qatar. The Obama administration succeeded in bringing the Afghan government and the Taliban together for peace talks in Qatar despite serious objections from Afghanistan’s former President Hamid Karzai, not to mention the logistical challenge of getting the Taliban to the table. In other words, the Obama Administration wanted this office opened, they helped get it open, and it would not have opened were it not for U.S. pressure.

In that context, of course the Emiratis wanted the Taliban embassy in Abu Dhabi. Of course they were miffed that the Obama administration put the Embassy in Qatar. Diplomatically neutral sites for dealmaking and backchanneling carry great prestige. Think of Reagan and Gorbachev’s Reykjavik summit, or the reputation that Switzerland enjoys from all the treaties negotiated in Geneva.

Of all of the failings of the Obama Administration’s diplomatic efforts in the greater Middle East, their use of back channels is not one of them. In all of President Obama’s most notable uses of back channels—the Omani back channel to Iran, the Qatari back channel to the Taliban, and the Canadian back channel to Cuba—these were efforts by a sitting administration to establish a secret line of diplomacy to governments with which the United States has no formal relations. Of those three efforts, the talks with the Taliban, while arguably the least “successful,” might also have been the least problematic given how badly the Iran Nuclear deal and the Cuba deal were negotiated.

Failing to understand the purpose of back channels has consequences. The Trump Administration appears to have been taken in by the UAE and Saudi Arabia’s claims about Qatar. President Trump virtually admitted as much in his own self-serving way when he declared that he, personally, had decided to take action against Qatar after regional “leaders” (i.e. the Saudis and the Emiratis) pointed to Qatar as a funder of terrorism. That’s not to say that some of those claims aren’t true: Qatar does play a double game; and they do host and support Hamas and plenty of other bad actors. But if Qatar is so uniquely responsible for Taliban funding, one is left to wonder why the former leader of the Taliban, Mullah Mansour, travelled to Dubai 19 times before meeting his demise at the business end of a Hellfire missile.

After initially seeming to back the UAE and Saudi Arabia in their dispute with Qatar, President Trump in recent weeks seems to have deferred to Secretary of State Rex Tillerson in seeking a mediated solution to the crisis. That’s probably for the best. It’s certainly possible that Qatar is America’s most odious partner in the region; given the caliber of America’s “friends” in that part of the world, the Qataris face some stiff competition on that front. But as the Qatar crisis has drawn to a stalemate, it increasingly involves arguments between the two sides over whose hands are dirtier. That argument seems directed at an American audience, playing out in expensive TV ads and in email leaks to American media. Americans would do well to recognize it for the backbiting propaganda that it is.

The post Of Course the UAE Wanted a Taliban Embassy appeared first on The American Interest.

The Macron Factor

The rollercoaster electoral cycle that the French have endured for about a year under the scrutiny of the international media has finally come to an end, producing the swiftest and most thorough transformation of the French national political landscape since the beginning of the Fifth Republic nearly sixty years ago. It also holds the promise of long-delayed economic reforms in France and a new direction for Europe. At this early stage, whether Macron will deliver on his promises and start turning France around is everybody’s guess. Yet, the stakes for France and Europe could hardly be higher.

The election of Emmanuel Macron, the Obama-like 39 year-old relative political novice who ran as an anti-establishment, pro-European centrist, was a major surprise. Macron took advantage of the favorite center-right candidate’s embroilment in a scandal to appear as the best shield against a possible, although unlikely, victory of far-right populist Marine Le Pen. In the legislative elections that followed in June, Macron unexpectedly turned his fledgling 18 month-old grassroots political movement into one of the largest political majorities in modern French history, triggering an unprecedented renewal of the political class.

These two elections precipitated the collapse of the two parties that had dominated French political life for decades, the neo-Gaullist LR (Les Républicains) and PS (Parti Socialiste), as well as their respective leaders. Conversely, the far-right and far-left presidential candidates collected an unprecedented and ominous 44 percent of the vote. For the first time since De Gaulle’s return to power in 1958, France is now governed by the political center—the goal President Giscard d’Estaing failed to achieve in the 1970s. Macron improbably combines a Gaullist style with a political and philosophical centrism more typical of the Fourth Republic.

Macron’s impressive two-to-one margin of victory against far-right populist leader Marine Le Pen in the run-off of the presidential election has been celebrated internationally for stemming, at least temporarily, the seemingly unstoppable populist wave that had brought about Brexit and the election of Donald Trump in 2016. After Macron, almost single-handedly, ran as an unabashed pro-European candidate, his election helped dispel the gloomy image cast on the continent by the accumulation of crises such as the Euro-crisis and the refugee crisis as well as the threats of Vladimir Putin and Islamist terrorism, along with the rising anti-European Union sentiment in public opinion. Confidence that Europe might have a future after all has returned, but turning a hope into a reality depends on overcoming several challenges. France must revive economically, and Macron must cultivate enough common ground and resolve with Angela Merkel or Martin Schulz (depending on the outcome of the upcoming German elections) to reshape and rekindle the European project. Macron’s victory, as well as his first steps on the international scene, have already started to reshape the dynamics of European and transatlantic politics. But it has been only a start.

In France itself, the election of a young, charismatic, and reformist President, following the disastrous presidency of François Hollande and a lowbrow electoral campaign, is the rough equivalent of what John F. Kennedy’s election did in the United States in 1960. France’s international and self-image has benefited from its success in containing political extremism as well as Macron’s pro-European and pro-business orientation. From the outset, he successively embraced the “republican monarchical” demeanor the French have come to expect from their Presidents since de Gaulle.

Yet the French are all too aware that Macron’s success, in the midst of record ballot abstentions and rising extremism, rests on fragile foundations: the electoral cycle has further revealed as well as compounded the deep fractures that run through French society. This is why a majority desperately want Macron to succeed in bringing about promised change, all too aware of the consequences if he fails.

Macron’s mandate has crucially raised the prospect that the long-deferred and long-awaited economic reforms that France needs to rebound would finally be implemented. With a solid parliamentary majority, a results-oriented cabinet led by 46-year old Prime Minister Edouard Philippe, and economic growth gathering steam in Europe, Macron has seemingly no excuse to disappoint in the pursuit of his triple ambition: reforming the French economy, reconciling a fractured French society, and strengthening Europe—all closely interdependent goals. But a lingering doubt remains: Will he deliver on his promises or be another false hope, ten years after Nicolas Sarkozy?

Macron was a most improbable candidate to win the presidency: He hails from the discredited left; had been the protégé of the most unpopular President of the Fifth Republic, François Hollande, as well as the main shaper of his failed economic policies; he was an elitist “énarque” in an anti-establishment political environment; he ran as a centrist in a polarizing political culture and its two-round electoral system, and he had been an investment banker in a country wary of capitalism. Yet whereas his predecessors toiled their entire careers before reaching the supreme reward of politics, Macron succeeded at age 39, after a brief and meteoric rise and with his own brand new political movement. How to explain this very improbable success?

After the failed socialist presidency of François Hollande, voters expected a choice between a regular alternation of power from the socialists to the center-right and its candidate François Fillon on one hand, or a leap into the unknown with far-right populist candidate Marine Le Pen, on the other hand. With foresight and no shortage of luck, Macron’s youth, vision, and tactics prevailed. Macron sensed that Hollande would lack enough political support even to seek re-election, so in 2015 he took the bold step of launching a grass-roots political movement, “En Marche” (note Macron’s own initials), which was given virtually no chance to succeed by the sage observers of the French haute media. The confident Macron resigned as economics minister, criticizing Hollande’s timid economic reforms, before announcing his candidacy. Assiduously avoiding the trap of the socialist primaries, he instead pulled off a magic trick: He ran as an independent against the establishment he so perfectly incarnates.

Even skillful politicians need their share of luck to succeed. Macron would not have prevailed had three turns in the campaign not taken place, which he exploited with finesse. The first was the selection, in the primaries of the two mainstream parties, of candidates positioned on their respective outward fringes, which created a vast open space in the center. The second was the scandal that ruined the prospects of the center-right nominee François Fillon. Macron’s third bout of luck was paradoxically the qualification of Marine Le Pen as his opponent in the run-off. Macron’s job was “only” to cement a fractured but sufficiently large anti-Le Pen front on the left and center-right. Le Pen was too burdened by her unpopular proposal to exit the euro (opposed by more than 75 percent of voters) and her abysmal performance in the crucial television debate on the eve of the vote.

Such dramatic circumstances—and sheer luck—created the sense in public opinion that Macron owed his victory to Fillon’s scandal and the rejection of Le Pen more than to his own merits as a candidate or his policy agenda. That impression was compounded by the general feeling of a botched campaign centered on scandals and gossip instead of the thorough debate on France’s critical challenges the electorate had long sought, as well as an unusually low turnout. Macron’s narrow sociological base, “catch-all” electoral strategy and fuzzy agenda contributed to the criticism that the new President lacked a clear and strong mandate, if not outright political legitimacy.

Paradoxically, the unpredictable—and ultimately fortunate—emergence of Macron is the product of a long and deep political crisis in French politics. Beyond the upheavals of the campaign, French politics has undergone a profound transformation over the past fifteen years. The qualification of Jean-Marie Le Pen (Marine’s father and the founder of the far-right FN in the 1970s) in the run-off of the 2002 presidential election, at the expense of the expected socialist candidate, signaled the rise of the FN as the third pole of French politics, alongside the neo-Gaullists and Socialists. Most importantly, it put immigration, European integration and, more recently, the dangers of Islamist radicalism at the heart of the national public debate. Three years later in 2005, the failed referendum on the ratification of the European constitution highlighted the internal fracture of the mainstream parties over the direction of globalization and Europe. Under Sarkozy and Hollande, these parties emphasized neoliberal economic reforms (mostly on the right) as well as immigration and minority rights (mostly on the left), sending working-class voters into the arms of the FN, which opposed both. In less than twenty years, the more than century-old central cleavage in French politics shifted from the role of the state in the economy to the degree of economic and cultural openness.

The growing chasm that split the mainstream parties down the middle, and separated them from the FN, goes a long way to explain the failures of the Sarkozy and Hollande presidencies. Sarkozy proved unable to reconcile his moderate wing, advocating economic reforms and open immigration policy, with his harder line that challenged the FN on its own pet issues. As for Hollande, after uniting the left around a fierce anti-Sarkozy rhetoric (“the president of the rich”; “our adversary is finance”) to win the presidency, he could not avoid splitting it by shifting to a pro-business agenda less than two years into his term. Such internal tensions prevented France’s last two presidents from pursuing a clear and successful agenda.

The recent presidential election was the last straw. The primaries, which were meant to re-unite both parties behind a consensual leader and agenda, resulted instead in a further aggravation of their divisions. Two former Presidents and three former Prime Ministers lost as candidates in one of the two ballots of the primaries or the election itself, and all but one ended his political career; for the first time since 1958, neither the Gaullist nor the Socialist candidate qualified for the run-off. The visions of Macron and Le Pen were predicated on the imminent collapse of both parties, yet, they were the mirror image of each other: Macron wanted to transcend the right/left divide by bringing the moderates of both sides together into a reformist center, while Le Pen offered a radical alternative to both right and left which, she believed, had both pursued the same failed pro-European and pro-immigration policies despite regular alternations between them. Macron’s offering won out: The French electorate punished the establishment parties not because it disagreed strongly with their objectives, but because they failed to achieve their objectives.

This election brought the far right and the center back to the forefront of French political life for the first time since the Vichy regime and the centrist-dominated Fourth Republic. Macron revived the political center from the left after former President Giscard d’Estaing and presidential candidates Jean Lecanuet and François Bayrou had failed from the right. The option of taking over the mainstream center-left party and reforming it from the inside, pursued by Bill Clinton, Tony Blair and Gerhard Schroeder in the 1990s, was not available to Macron, who had never been a party member, let alone an elected official. There are two main reasons why; first, the PS Mitterrand had repositioned on the left in 1971 was now beyond repair; Hollande was a more timid Schroeder who failed. But the second reason is that Macron has not been preceded by a reformer such as Ronald Reagan or Margaret Thatcher: He has to play that role himself! Like De Gaulle before him, he is doing it with a brand new party and with the broad support from right and left needed to overcome a national crisis. Macron’s Third Way seeks to reform France, not a political party. Macron espouses a Third Way philosophy but a Gaullist ambition.

For Macron to be able to govern, winning the presidency was only the first step. In order to have any chance of implementing his agenda, he had to secure a majority in the legislative elections, scheduled for only five weeks after the presidential vote. In such back-to-back elections, the French have invariably given their new President a majority to govern. However, the challenge this time looked unusually difficult, since Macron’s new party lacked incumbents. LR, which had just lost “the election it could not possibly lose,” thought it could force a “co-habitation” arrangement (the President on one side, the majority and the Prime Minister on the other) to implement its own program instead of Macron’s. While voters had rejected the scandal-ridden Fillon, they liked his vision of a radical break with past socialist policies; LR also enjoyed a large base of incumbents.

But the powerful winds of change prevailed: Voters rejected the incumbents in favor of a younger and more diverse generation of candidates. In the first ballot, EM gathered 32 percent of the votes, more than Macron’s own 24 percent seven weeks earlier, while the other parties scored below their presidential candidates’ tallies. Despite their gains in the presidential contest—about 41 percent of the total vote in the first round—the extreme right and left parties lost momentum after their defeat. In the decisive legislative run-off, Macron’s coalition carried 62 percent of the seats, absorbing most of the traditional LR and PS constituencies: LR lost 50 percent of its seats, PS 90 percent, while the FN and far-left LFI gained only a handful of seats from a very low base.

The new majority is one of the largest ever achieved in modern French political history. It compares only with the Gaullist majority of 1968, the Socialist victory of 1981, and the one achieved by the center-right in 1993 at the twilight of the Mitterrand presidency. On the back of the EM tsunami, the National Assembly underwent one of the most dramatic renewals of its deputies, on a par with the arrival on its benches of the victorious war veterans of 1919, the left’s “Popular Front” of 1936, the “Resistance leaders” of 1945, and the Gaullists in 1958 and 1968. A whopping 72 percent of seats shifted, a result magnified by a new ban on holding local executive offices (such as Mayor) jointly with a parliamentary seat, which eliminated 20 percent of the incumbents. The new Assembly is younger (bringing the average age from 54 to 48), more female (40 percent), more ethnically diverse, and more open to civil society. For the first time since 1958, civil servants do not make up the majority of deputies, a revolution in and of itself!

Yet these elections also point to the fragility of the new President’s political base and legitimacy. Abstention was unprecedentedly high at 57 percent, the result of the long electoral season and the anticipated victory of Macron’s party in the run-off. But it also signaled a lack of enthusiasm for Macron and persistent distrust of politics among large swaths of the population.

A second weakness is paradoxical: The level of educational achievement of the new deputies has never been so high, especially in the ranks of EM. Despite Macron’s pledge to bridge the divide between the winners and losers of globalization, the latter are even more sparsely represented among the political elites than before. This can hardly help the new leaders hear the concerns and priorities of the most challenged sections of the population, the very same ones already tempted by political withdrawal or radical populism.

Finally, the expected over-representation of the winning party in a majority-based electoral system was amplified this time by the position of EM candidates in the strategic center of the electoral field: In the run-off, the voters who backed the losing candidate in the first round were inclined to vote for EM against the candidate of the opposite party.

As a consequence, the EM coalition may be too large for its own good. Oversized majorities are expected to lack cohesion and discipline, which is even more likely in an eclectic majority made up of political novices, a sprinkling of old-time centrists, recycled socialists, and neo-Gaullists. Yet EM had anticipated that challenge: It insisted that its candidates pledge support to all six reforms at the top of Macron’s agenda, including the reforms of the labor market, employment benefits, or pensions. If necessary, Macron enjoys additional leverage through his proposed reduction by a third of the number of seats, as well as the introduction of term limits and of a dose of proportional representation. He has even threatened a national referendum in case the deputies prove overly recalcitrant

Too small and fragmented an opposition also invites risks. With few troops, the extremist parties will rely on the populist rhetoric of their newly elected leaders, Marine Le Pen and Jean-Luc Mélenchon. But their main asset will be their ability and willingness to mobilize grassroots supporters, alongside the most radical labor unions, to fight Macron’s liberal economic reforms. Moreover, with an opposition…split on both sides of the overwhelming centrist majority, any alternation of power is unlikely outside of the least desirable far right and far left. The fragmented centrist parties that made up the majorities of the Fourth Republic took advantage of that danger by constantly blackmailing the government. However, the political landscape will be in flux for years to come, as the different parties are only starting to remodel themselves. Macron has successfully split LR between a pro-Macron wing, a more radical one likely to find common ground on immigration and identity with a renovated FN, and a mainstream one trying to reaffirm its Gaullist identity. The Socialist Party, squeezed between EM and the radical left, has been diminished even further than most other European social democratic parties and is fighting for its life. Even the FN’s momentum has been shattered by Le Pen’s disappointing performance and results in the run-off election. Her political line over the past five years, which emphasized national sovereignty and statist economic policies, is being challenged by the advocates of a return to its staple issues of immigration and national identity. Le Pen is about to abandon her controversial proposal to exit the euro and even change the party’s name. But the party’s isolation begs a rapprochement with LR’s conservative wing. In the medium-term, Le Pen’s continued leadership is up in the air. If it is to bounce back, the FN needs a renovated program, allies from within LR and new leadership. That will take time.

The far-left LFI (La France Insoumise) might therefore be the best prepared and most motivated opposition to Macron: It has an undisputed and charismatic leader, an anti-capitalist ideology, and enough activists to overflow the streets with demonstrators. Its eclectic constituencies prevent it from embracing a clear line on Europe and immigration and in the debate between secularism (“laicité”) and multiculturalism. Nevertheless, should Macron fail, LFI and its populist leader Jean-Luc Mélenchon would be the most likely alternative. It is just as dangerous as the FN, if not more. In France, the radical left can be down, but it is never out.

But the main question of this post-electoral period is whether or not Macron’s first steps into his presidency will prove consistent with expectations. What pace and method will he choose to implement his first reforms, signaling the tone of his presidency? Will he follow in the footsteps of Gerhard Schroeder’s, the Chancellor who radically and durably turned the German economy around in the early 2000s? Macron appointed a discreet 46 year-old former center-right deputy and Mayor of the port city of Le Havre as Prime Minister, Edouard Philippe. Like Macron, Philippe is a graduate of the elite ENA graduate school, has had a stint in the private sector, and is versed in literature. The cabinet, made up equally of men and women, blends personalities from LR, PS, and centrist ranks as well as civil society. With the exception of the Economics Minister, Bruno Le Maire, none is a political heavyweight. The trait that most defines the new cabinet is its managerial character, which reflects its members’ background as well as Macron’s own concern with efficiency.

It is an understatement to say that Macron’s program was not front and center in his campaign. As one of his aides admitted, “the candidate is the program.” Macron deliberately pursued a catchall electoral strategy, carefully balancing ideas from right and left while avoiding the most controversial issues, such as the suppression of the 35-hour working week or the wealth tax. Compared with François Fillon’s program, Macron’s lacked detail, clarity, and ambition. His declared intention was to “adjust” rather than replace the failed “French social model,” in contrast with what his severe diagnosis of France’s faltering economy suggested. Margaret Thatcher is not Macron’s model!

Instead, Macron’s economic vision is a strange mix of the Californian and Scandinavian models: on the one hand, an embrace of start-up culture, a preference for entrepreneurship over rent-seeking, outsiders over insiders, and individual mobility over jobs-for-life; on the other, he evinces a belief in the positive role government can play to protect the weak and equalize access to opportunities. He wants to free companies from excessive bureaucratic costs and constraints in order to boost their competitiveness but has also pledged €50 billion of public investments. Overall, however, Macron’s pro-business attitude has few antecedents among past French Presidents: Only Georges Pompidou and Nicolas Sarkozy compare with him, and, like Pompidou, Macron has worked as an investment banker at Rothschild.

One of Macron’s priorities is to lower the un-employment rate (the only one in Europe which, until recently, had kept climbing since the 2008-09 recovery) from 10 percent to 7 percent, which would still be above the EU average and Germany’s less than 5 percent rate. In order to accomplish that, the mother of all reforms—for its political significance and its potential economic impact as well as its timing—pertains to the labor market, which needs much greater flexibility; employers will hire only if they can fire more easily. Macron also plans to shift negotiations on wages, benefits, and working conditions from the remote industry level, where labor unions enjoy maximum leverage, to the more concrete company level.

Here, Macron is in familiar territory. As Hollande’s Economics Minister, he had already spearheaded a labor market reform in 2015. But as a result of divisions in the socialist ranks and massive demonstrations by the radical left, the reform was watered-down. This time, the context could not be more different: Macron enjoys an electoral mandate for such reforms that Hollande never had. His main inspiration is the Danish model, which provides security to employees transitioning between jobs while letting companies adjust their job structure to the needs of the economy. This is Macron’s preferred method at work: He has set non-negotiable “red lines” while at the same time engaging in intense negotiations with labor leaders to preempt massive opposition. As announced during the campaign, when the prospect of having a parliamentary majority was slim, Macron plans to resort to executive decrees (which still must be authorized and ratified by parliament). He justifies circumventing the regular legislative process by the long 18-month delay before the first effects of the reform can be felt on the ground. But above all, Macron wants to avoid Gerhard Schroeder’s fate: his reforms paid off too late for his reelection and only benefitted his successor, Angela Merkel. But is Macron already conceding too much to the unions, as reformers and business interests fear? How successful will the radical labor unions and far left be in mobilizing opponents in the streets? Of course, Macron is keenly aware that his political credibility is at stake not just in France but in Brussels and in Berlin, and that disappointment could fatally compromise the rest of his presidency.

The same can be said of Macron’s fiscal agenda. France redistributes 56 percent of its GDP, on par with most Scandinavian countries, yet it paradoxically (and sadly!) combines high taxes with a debt of nearly 100 percent of GDP. Macron’s objective, over his five-year term, is to reduce the redistribution rate by 3 percent to 53 percent, as well as the budget deficit from 3 percent to 1 percent of GDP (Germany already has a surplus). Macron has been more specific and ambitious about taxes than on spending cuts. The general thrust of his tax cuts is to stimulate investment and consumption to boost economic growth: Local taxes will be lowered for 80 percent of residents, the corporate tax will be cut from 33 percent to 25 percent, a flat tax of about 30 percent—down from 50 percent—will apply to earnings from investments, and the reduction of payroll taxes paid by employers will be made permanent. However, those significant cuts are tempered by a campaign promise to raise an existing broad-based tax on all forms of income by 1.7 percent. Critics have pointed that Macron could have opted for spending cuts instead.

But until recently, Macron has refrained from emphasizing spending cuts and where the axe would ultimately fall. His five-year plan to eliminate 120,000 civil service jobs looked utterly modest compared with Fillon’s campaign promise of half a million.

It took the revelation by French public auditors in June that the 2017 deficit would slip from 2.8 percent to 3.2 percent due to Hollande’s election-year largesse for Macron’s conflicting budget priorities (and occasional lack of judgment) to become fully apparent. How was Macron going to decide between his budget commitment to Brussels and Berlin (if France failed to reach the 3 percent threshold, it would be the last country to comply now that Greece and Spain are expected to be under 3 percent this year) and the tax cuts he promised during the campaign? To the astonishment of most observers, Macron first announced he would postpone his tax cuts until 2019, therefore taking the risk of compromising his credibility in public opinion and among international investors, at a time when France is trying to lure bankers away from London following Brexit. Fortunately, he courageously backtracked four days later, realizing that cutting €5 billion in public spending was preferable to reneging on a fundamental political commitment. Yet as a result Macron suffered his first major political casualty with the resignation of the Chief of the Defense Staff, General Pierre de Villiers, who had challenged those unexpected spending cuts. But at least Macron did not repeat the mistake he and his boss François Hollande made in 2012-03, when massive tax hikes already aimed at bringing the budget deficit back to 3 percent of GDP stopped a fledgling economic recovery in its tracks, fueling record unemployment at a time when the rest of Europe and North America were reducing it.

Besides retooling the French economy for the long haul, another of Macron’s priorities is to reconcile a deeply fractured French society. Macron’s political centrism is an indication of his longing for common ground and his visceral dislike of conflict. Yet he has occasionally made comments hurtful to those stuck at the bottom of society. During the campaign, he provocatively affirmed there was “no French culture, only cultures in France” and, on Algerian soil, compared French colonization to a “crime against humanity.”

Macron’s campaign was focused on the candidate, the risk of electing Marine Le Pen, and the economy. As a result, Macron largely ignored the issues that preoccupy the electorate the most: immigration, crime, terrorism, and Islam. In a campaign dominated by scandals and personality clashes, these issues remained peripheral despite the continuing enforcement of the state of emergency triggered by the terrorist attacks of 2015-16. The only candidates to emphasize these topics, former Prime Ministers Manuel Valls and François Fillon, lost prematurely in the campaign for unrelated reasons. Even the FN preferred to dwell on its protectionist and anti-European agenda rather than capitalize on its traditional issues of immigration and radical Islam. However, a survey published in June titled “French fractures” confirmed that immigration, Islam, and the refugee crisis are the population’s number one concerns, ahead of unemployment: 65 percent of respondents think there are too many foreigners in France, 61 percent that they do not try hard enough to integrate into French society, while 74 percent believe Muslims are inclined to impose their way of life on others.

Such a backdrop seems to confirm the notion that Macron won the election by default. His emphasis on the necessary liberalization of the economy disproportionately reflects the preoccupations of the most urban, educated and prosperous sections of the population. But can Macron govern successfully in the long run while continuing to ignore such preeminent questions on the minds and in the lives of so many citizens, especially in rural and working-class France? Will this prove to be Macron’s Achilles’ heel? While he is about to unveil a reform to improve the efficacy of anti-terrorism policy, he has been reluctant to link terrorism with the growing presence of radical Islam inside and outside the banlieues. It could be that the constraints of political correctness, in France as well as in the United States and elsewhere, increase as generations turn, so that a youthful Macron’s sensibilities in this regard put him at some disadvantage politically.

For Macron, the recovery of the French economy and the protection of those left behind in the maelstrom of globalization will require more than domestic economic reforms. They also call for changes in the governance and policies of the European Union, as well as a restoration of French influence in Europe and the world.

Under the Hollande presidency, France’s influence in Europe was undermined by a weak economy and the lack of economic reforms. A stalwart European, Hollande had made the mistake of promising his anti-austerity constituents a renegotiation of the treaty on the European budget concluded just before his election. Not only did that attempt fail, but Hollande gradually lost the trust of Angela Merkel for not reducing the budget deficit fast enough and being too timid on reforms.

Like Giscard d’Estaing, Mitterrand, and Hollande, his most Europhile predecessors, Macron believes in a singular European civilization, Europe’s global role and its model of free markets tempered by a dose of welfare state regulation and redistribution. Far from being a political, economic, or cultural threat to France, Macron considers Europe the most effective way for France to leverage its power and influence. This is why restoring France’s damaged credibility with Brussels and Berlin is so crucial for him.

A relief and a promise, Macron’s victory has been welcomed enthusiastically throughout Europe, with reservations only in some east European countries. Macron has rebalanced and redefined the European and Transatlantic landscape. After Brexit and the election of Donald Trump, a victory by Marine Le Pen would have raised the specter of a major financial crisis in the Eurozone as well as the unravelling of the European Union. Macron also rebalanced Europe away from the conservative regimes of Poland and Hungary within its borders, and the authoritarian regimes of Putin and Erdogan at its gates. Macron’s emergence has strengthened Europe’s unity in the wake of Brexit and Trump, as well as its global influence at the expense of a newly unpredictable United States.

However, future success will depend on Macron’s contributions to a revitalized European economy, a stabilization of the Eurozone, and a potential new form of Franco-German leadership. Macron’s short- and mid-term goal is for Germany to regain confidence in France’s ability to reduce budget deficits and pursue energetic economic reforms. Parts of Merkel’s CDU and some in its SPD coalition are still skeptical about Macron’s resolve, which is also the case of the free-market FDP. Only after the September 24 German elections will we see whether Macron can convince the Chancellor of the benefits of reforming the governance of the Eurozone in order to stabilize it. France has long sought to balance the technocratic and German-influenced European Central Bank (ECB) with an “economic government” comprising a Finance Minister, a parliament, and a Eurozone budget. These reforms have been anathema to most Germans (who fear their savings would be used to prop up the inefficient economies of Southern Europe), as Schulz was reminded after making imprudent and subsequently retracted overtures in that direction. If Merkel wins big in September, she might be willing to spend some political capital on Macron’s requests. The expected retirement of Finance Minister Wolfgang Schäuble, the guardian of German monetary orthodoxy alongside the Bundesbank, would help. On this and other topics, it is ironic that France under Macron has embraced a more federalist vision of Europe, while Germany over the past few years has been sliding in the other direction, adopting a more intergovernmental approach. Perhaps they will seize a chance to meet in the middle.

A stronger France is in Germany’s utmost interest. France’s more than decade-long political and economic slide has left no option for Germany other than to lead more or less alone in Europe, a position it never sought or desired. Only a minority of countries, such as the Netherlands, Finland, and Austria, share Germany’s sense of fiscal rigor. Southern Europe has fought Germany’s monetary and budgetary priorities, and Eastern Europe opposed the refugee policy it imposed on the rest of the continent. In the past, joint Franco-German leadership allowed most countries a better chance at having their concerns taken into account or even shared. But conversely, Italy, Spain, and the smaller member-states often resented the exclusive dominance of the Franco-German duo. Today, most countries—even Poland, which fears being marginalized for not belonging to the Eurozone—agree that a broader leadership is necessary to manage the multiple and serious challenges facing Europe.

But even a more influential France in Europe does not mean Macron will get his way on the governance of the euro or other topics at the top of his European agenda. He has repeated that he wants a “Europe that better protects ordinary citizens.” This is why he is seeking a new regime for “posted workers,” an EU policy that encourages labor mobility across Europe by allowing Europeans to work in another country under the wages and working conditions of their country of origin, usually in Eastern Europe. But domestic workers have perceived this initiative as inviting unfair competition at a time of high unemployment in France and elsewhere. Recently, Poland’s political leaders criticized Macron for declaring that Europe was “not a supermarket.” This issue, refugees, the rule of law, the Eurozone, and European defense, will continue to deepen tensions between Eastern and Western Europe. Will Merkel and Macron be able to reverse the drift between East and West, or will they accentuate it?

Macron has also proposed to his partners a “Buy European Act” on the model of the “Buy American Act” on public procurement. To protect strategic industries, he has been inspired by the Committee on Foreign Investment in the United States, which screens foreign (mostly Chinese and Middle Eastern) investment into strategic U.S. companies. On all of these topics, however, Macron was rebuffed at the June European summit. But he is still determined to prevail. At stake is stronger support for Europe—as well as for Macron, of course—on the part of the French public.

The new environment created by Brexit and the elections of Trump and Macron has contributed to redefining the prospects of a collective European defense. With the United Kingdom leaving the European Union, France will be the only remaining nuclear power and the only EU nation willing and able to project military power overseas. Brexit removes a nation skeptical of European defense, and Trump’s still unclear approach to NATO makes new initiatives all the more necessary to prepare for a more uncertain future. Eastern Europe especially has no option other than to rely on NATO. The French themselves are realistic about the lack of resolve of other Europeans. Under Hollande’s presidency, France has been frustrated by the lack of commitment of its European friends to assist in anti-terrorist military operations in Africa, either financially or on the ground. Macron hopes that as France tries to catch up on the economic front, Germany will gradually do the same on defense.

The only unity forged by Europeans since Macron’s election has been on a common position ahead of the Brexit negotiations. Although no additional country is considering leaving, Macron wants to make sure the UK does not enjoy the same privileges as a non-member as it did as a member. Yet the current unity is unlikely to last: The goal posts have been shifting on the British side since Theresa May lost her Conservative majority in recent elections. Moreover, fractures might resurface on immigration and refugees between Western and Eastern European nations, between Eurozone members and outsiders, and between Northern and Southern Europe on trade.

Since his election, Macron has wasted no time in establishing himself as a player on the international stage. Like De Gaulle and Mitterrand, Macron understands the symbolic dimension of power and seeks to reassert France’s traditional position as an independent power. Although a believer in multilateralism, he is a realist and a pragmatist. He has used the recent NATO, G7, and G20 summits, as well as lavish receptions of Putin and Trump in Paris, to gain credibility with other world leaders and get his message across. With Putin, he expressed strong condemnation of Russia’s annexation of Crimea and aggression in Ukraine, interference in the French election (contrary to Trump, Macron was not the Kremlin’s favorite) and the persecution of homosexuals in Chechnya. With Trump, who made clear his preference for Le Pen in the election, disagreements on trade and climate change are accepted. Macron has indicated he would encourage Europe to retaliate against the United States if its commercial interests were compromised by unilateral U.S. sanctions against China, Russia, Iran, or any other country.

In fact, Macron has been striving to prevent Trump’s isolation from Europe and beyond. With Theresa May embroiled in Brexit and Angela Merkel invested in Germany’s upcoming election, Macron wants to be Trump’s interlocutor of choice in Europe. He is trying to foster a level of trust between them, which is one reason why he invited Trump to Paris for Bastille Day. France still needs the United States as the indispensable partner in fighting ISIS and terrorism in Africa and the Middle East. France’s desire to influence Middle East diplomacy, especially in Syria, requires close cooperation with the U.S. administration; for example, both countries now agree that Bashar al-Assad’s departure should no longer be a precondition to a political settlement in Syria, and both are committed to resorting to military reprisals if Assad uses chemical weapons again. The French believe Trump will be eager to show he is not as “weak” as Obama was in August 2013.

Emmanuel Macron’s election has positively redefined the political landscape in France, Europe, and across the Atlantic. But to consolidate these gains, he has to show courage, resolve, and no little retail skill in delivering on his promises. Failure to do so would be another missed opportunity, this time with potentially catastrophic consequences.

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A Note To Our Readers

Dear Reader,

Walter’s increasingly busy schedule—and the pressure of a long overdue book manuscript—has forced him to take a step back from daily journalism—at least for now—so he has disengaged from our daily operations. As a result, we have retired “Via Meadia” and re-named it “The Daily Feed.” We’ll have more to say about how our coverage will evolve, but in the meantime please keep reading!

Charles Davidson

Publisher

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Will Donald Trump Arm Ukraine?

The Pentagon and State Department are cooking up a proposal to give Ukraine lethal defensive weapons, according to the Wall Street Journal:

American military officials and diplomats say the arms, which they characterized as defensive, are meant to deter aggressive actions by Moscow, which the U.S. and others say has provided tanks and other sophisticated armaments as well as military advisers to rebels fighting the Kiev government. […]

A senior administration official said there has been no decision on the armaments proposal and it wasn’t discussed at a high-level White House meeting on Russia last week. The official said President Donald Trump hasn’t been briefed on the plan and his position isn’t known. […]

A Pentagon spokeswoman, Lt. Col. Michelle L. Baldanza, said the U.S. has not “ruled out the option” of providing “lethal defensive weapons to Ukraine.” U.S. Defense Secretary James Mattis has endorsed the plan, according to U.S. officials.

The timing of the scoop here seems no accident: on the very same day that U.S. officials were dishing about arming Ukraine, Vice President Mike Pence was doing the rounds in Eastern Europe to reassure Russia’s anxious neighbors. In Estonia, Pence delivered a rousing speech celebrating NATO and denouncing Russia for seeking “to redraw international borders by force.” From there, the Vice President went on to Georgia and Montenegro, both countries that have been on the receiving end of Russia’s aggression.

Seen in that context, the strategically leaked rumors about arming Ukraine look like an attempt to reinforce Pence’s message that Trump will not abandon European allies threatened by Russia. And indeed, if Trump follows through on the plans to arm Ukraine, he will prove his bona fides in standing up to Russia in a way that his predecessor never did. (President Obama, after all, consistently resisted the advice of his own officials and Congress in refusing to send lethal weapons to Ukraine).

That said, and despite the support for the proposal from many quarters of the Trump Administration, this is no easy call. Arming Ukraine would inevitably further poison ties with Russia, but on the basis of a contentious gamble: that lethal weapons would “increase the costs” of Russian aggression and drive Moscow to the bargaining table. President Obama doubted that assumption, thinking that lethal aid would only needlessly escalate the conflict; he was joined in that view by France and Germany. If President Trump decides to send lethal weapons, he risks further jeopardizing relations with Paris and Berlin as well as Moscow—all for the sake of a country and conflict that he has shown little interest in making a priority.

Ultimately, the decision could come down to two conflicting impulses within the President: his desire to be tougher and stronger than Obama on the one hand, and his keen desire to improve relations with Moscow on the other. But with the U.S.-Russia relationship in a downward spiral anyway, Trump could plausibly conclude he has nothing to lose by turning up the heat.

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Saudi Arabia Welcomes Muqtada al-Sadr

Saudi Arabia’s cold war for Middle Eastern hegemony against Iran is not going well. Their war in Yemen is a deadly and costly quagmire. Bashar al-Assad, backed by Iranian militias, has all but won the war in Syria. The U.S. withdrawal from Iraq in 2011 has, in the words of one Iraqi politician, all but “handed the country over to Iran.” Saudi Arabia’s man in Beirut, Saad Hariri, may be prime minister, but it’s Hezbollah that clearly has the upper hand in Lebanon.

Of all of the possible fronts in which to contest Iranian superiority, Iraq might look like the worst option. Like most countries in the region, Iraq hasn’t had a proper census in decades, but the country is something like 60% Shia, 40% Sunni—a proportion that will swing even more Shia in the event of Kurdish independence. Where Saudi ties to Iraq were virtually cut off in 1990, Iran has steadily insinuated itself into Iraqi political, economic, and social life since the U.S. invasion in 2003 to such a degree that according to one official “except for oil, Iraq relies on Iran for everything.”

If that’s the case, Saudi Arabia doesn’t seem to have gotten the message. The Saudis appear to be in the midst of a rapid and significant move to counter Iranian influence over Iraq. Last year, they re-opened their embassy in Baghdad for the first time since 1990. In February, the Saudi foreign minister visited Baghdad, likewise for the first time since 1990. After Iraqi Prime Minister Haider al-Abadi’s trip to Saudi Arabia in June—his first since taking office three years ago—Saudi Arabia is now preparing to re-open its land border with Iraq for the first time since—you guessed it— 1990.

Leaving Iran aside for a moment, these are monumental changes for both countries. Iraq has the largest population and the biggest overall economy of any of Saudi Arabia’s neighbors. A normalized economic relationship between Iraq and Saudi could be an enormous boon to two economies that are otherwise engaged in a zero-sum battle for the oil market.

The Saudis of course are not willing to leave the Iran issue aside. Their seriousness about trying to muscle into Iraq was made clear yesterday by the warm and public reception they gave to Muqtada al-Sadr:

Vice Custodian of the Two Holy Mosques meets with Leader of the Sadrist movement in Jeddah . #SPAGOV pic.twitter.com/kNr560Z8fd

— SPAENG (@Spa_Eng) July 30, 2017

Sadr will be known to most Americans as the brutal leader of the Mahdi army. Aside from their extensive attacks on American forces (including 1,500 IED attacks in an 18 month period from 2007-2008), Sadr’s forces were accused of organizing death squads and sectarian cleansing of areas under their control. From The New York Times in 2006, at the height of Iraq’s sectarian civil war:

Around 9 on the night of the shrine bombing, a mob of black-clad men [suspected of being part of Sadr’s Mahdi Army] surrounded the Duleimi brothers, family members said[….] The next day, their bodies turned up in a drainage ditch near Sadr City, a stronghold of the Mahdi Army. All their fingers and toes had been sawed off.

That same day Mushtak al-Nidawi, 20, was kidnapped. According to an aunt, Aliah al-Bakr, he was chatting on his cellphone outside his home in Bayah when a squad of Mahdi militiamen marched up the street, shouting, “We’re coming after you, Sunnis!”

Ms. Bakr said they snatched Mr. Nidawi while his mother stood at the door. His body surfaced on the streets seven days later, his skin a map of bruises, his handsome face burned by acid, his fingernails pulled out.

Sadr has an enormous amount of blood on his hands. It’s awfully rich of the Saudis to fund ads in the United States labeling Qatar a host for terrorism while their crown prince smiles and takes photos with a cleric responsible for thousands of attacks on American troops.

But as head of a major political movement, Sadr is also a potential kingmaker in Iraqi politics. He’s a difficult man to pin down ideologically. He’s received support and shelter from Iran, but his movement has taken a nationalist turn. After they stormed the International Zone last year, his supporters chanted “Iran Out! Out!” His party at times has been a part of the governing parliamentary bloc (which he has renounced and rejoined several times), but he has also been the government’s chief critic. A fierce sectarian, he announced at the end of last month that he was forming a political alliance with the secularist, nationalist former Prime Minister Ayad Allawi, whose loss to Nouri al-Maliki in the 2010 elections was largely engineered by Iran in a deal they negotiated in part with… Muqtada al-Sadr.

In other words, Muqtada al-Sadr stands for Muqtada al-Sadr and little else.

To the Saudis that may be useful. If they want to contest Iranian influence in Iraq it will be through some combination of Iraqi Sunnis, nationalist politicians like Allawi and Sadr, and relatively pro-U.S. politicians like Abadi. The interests of these groups are often in total contradiction. While Abadi wants U.S. troops to stay in the country, Sadr has declared that U.S. troops are a valid target for attacks. But in a country where the sectarian odds are stacked so heavily against them, fostering Iraqi nationalism is the logical choice for the Saudis, however complicated that coalition may be.

The Saudi meeting with Sadr should be a reminder that the Sunni-Shia split doesn’t always determine regional politics. It’s also a reminder that as the U.S. looks to withdraw from the region, even U.S. allies will be working to work with U.S. enemies.

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How America Is Taking the Wind Out of Saudi Aramco’s IPO

Saudi Arabia’s state-owned oil company, Saudi Aramco, is going public next year. The company’s spokespeople believe this public offering will be record breaking, and expect the five percent of the company expected to be on offer will be sold at a price high enough to value the firm at $2 trillion. If that’s true (a big if, according to most outside observers), it would make Saudi Aramco the most valuable publicly traded company on the planet. Unfortunately for Riyadh, weak oil prices aren’t the only thing working against this landmark IPO. As the WSJ reports, a boom in the U.S. petrochemicals industry—one of the offshoots of the shale boom—is blunting Saudi Aramco’s efforts to move down the oil supply chain:

The shale revolution means the U.S. is already much less reliant on Saudi Arabia for its oil needs. Less appreciated is the threat it also poses to Saudi Aramco’s plan to diversify downstream into chemicals and plastics production, likely a central pillar of the energy giant’s pitch to investors ahead of its probable initial public offering next year.

By the time Aramco has ramped up its downstream capacity—it plans to nearly triple petrochemical output by 2030—if may find it has diversified from one oversupplied market—crude—into another—petrochemicals.

Fracking’s effect on American oil and gas production is common knowledge at this point, but some of its impact on the petrochemical industry remains underreported. Oil and gas drilling also produces liquid hydrocarbons that can be used as feedstock for companies like Dow Chemical, and the shale revolution has kicked off a mini-boom in that industry, with $185 billion in new projects currently in the works.

That’s been a big boon for American manufacturing, but increasingly it’s looking to shake up the global petrochemicals market. According to IHS Markit (h/t the WSJ), net U.S. petrochemical exports are expected to grow by an order of magnitude over the next ten years.

And as welcome as that news is to the United States, it’s going to be poorly received by Saudi Arabia, which has pinned much of its hopes for next year’s IPO on its plan to expand into a market that America is already moving into.

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Trump’s Uneasy Equilibrium

The night of Donald Trump’s election, stock markets plunged and respected pundits warned of a recession brought about by the unpredictable and potentially lawless incoming administration.

Soon thereafter, investor worries abated and markets began to soar. The new narrative was that Trump’s promised Keynesian agenda—tax cuts and infrastructure spending—would lead to bigger profits and faster growth, and that the prospect of a unified Republican government juicing the economy overwhelmed worries about the worrying proclivities of the incoming President.

In the last few months, however, Trump’s ability to deliver on his market-friendly campaign platform has been (to put it mildly) called into question. No one who has watched the GOP clown show try to push through its signature pledge—Obamacare repeal—can believe with any confidence that the administration will be able to deliver a major tax reform, much less an infrastructure package. So we are left with a chaotic president and no guarantee that even full Republican control of the government will produce major, lasting policy changes.

And yet … by most major market indicators, the economy is still performing quite well—far better than most mainstream commentators would have imagined on the night of Trump’s electoral coup.

Trump hammered this point home at this morning’s press conference following the swearing-in of John Kelly, the former general and homeland security secretary, as his chief of staff. “I think we’ve done very well,” Trump said. “Stock market’s the highest it’s ever been, unemployment lowest in 17 years … business spirit is the highest it’s ever been, according to polls” (that last point is standard Trumpian hyperbole, but it is true that the NFIB business confidence index is higher than at any point since the Great Recession). He could have added that low-income wages are rising and quarterly economic growth just clocked in at a solid 2.6 percent.

The truth is that Trump probably doesn’t have much to do with this—presidents always take more credit than they deserve for a strong economy and more blame than they deserve for a weak one. But Trump’s rattling off economic indicators against the backdrop of a White House in chaos, an ongoing investigation of his campaign’s potential collusion with Russia, and widespread fears that he will fire DoJ officials to try to protect himself and his family from accountability underscores the strange dissonance between the apparent health of the economy and the health of the political system.

In a way, Trump and the economy are locked into an uneasy equilibrium: The scandals, impulsivity, and potential criminality that characterize the administration are not sufficient to knock the economy off balance, as so many pundits were sure that it would. Meanwhile, the economy is not strong enough to make the administration politically invulnerable, so Trump’s erratic behavior still represents a major threat to his presidency.

A genuinely authoritarian president—one who flouted the Supreme Court, ordered the Secret Service raid unfriendly media outlets, or used the Department of Justice to reward business cronies and punish political enemies—would almost certainly throw the economy into a recession. America’s free enterprise system depends on a guarantee that rules will be enforced impartially and that the political system will be basically stable. Even the “constitutional crisis” that pundits are warning about would probably make a mark on the Dow and quarterly growth numbers. But this has yet to materialize.

Meanwhile, if the economy were experiencing white-hot four percent growth—a Jeb! campaign pledge—and wages were rising enough for middle-class people to feel it, Trump’s presidency would to be on much more solid footing despite the constant scandal consuming Washington. Tax reform would be easier because revenues would be growing on their own; health reform would be less of a challenge because everyone would be feeling richer; rising prosperity would lessen Trump’s need to whip up support from his base with nastiness and symbolism. But the economy isn’t growing at four percent; growth is still tepid by historical standards. This is a major reason Trump is still unpopular, politically vulnerable, and unable to expand his base.

Six months in to this presidency, then, Trump isn’t menacing enough to undermine the economy, and economic indicators are just strong enough for Trump to hold on. This equilibrium might not be stable—Trump could well do something radical that sends businesses running for the hills, and a business-cycle recession could crater Trump’s political base—but it’s the one we are stuck with for now, and that best explains Trump’s political fortunes as he undertakes a major White House shakeup. Despite all the noise, the fundamentals show a Trump train that is still clinging to the tracks, even if the wheels could fall off at any time.

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Say Hello to Chairman Xi

The People’s Liberation Army celebrated its 90th anniversary in fine form on Sunday, with an impressive military parade designed to show off China’s newest weaponry. But it was Chinese President Xi Jinping who stole the show, appearing in camouflage uniform to bolster his image as commander in chief and deliver a not-so-subtle message about the party’s control over the military. The New York Times:

Wearing his mottled green uniform as commander in chief of the People’s Liberation Army, Mr. Xi watched as 12,000 troops marched and tanks, long-range missile launchers, jet fighters and other new weapons drove or flew past in impeccable arrays.

Mao famously said political power comes from the barrel of a gun, and Mr. Xi signaled that he, too, was counting on the military to stay ramrod loyal while he chooses a new leading lineup to be unveiled at a Communist Party congress in the autumn.

“Troops across the entire military, you must be unwavering in upholding the bedrock principle of absolute party leadership of the military,” Mr. Xi said at the parade, held on a dusty training base in Inner Mongolia region, 270 miles northwest of Beijing. “Always obey and follow the party. Go and fight wherever the party points.”

The audience cannot have missed Xi’s message: the Chinese military should stay firmly under the thumb of the party, and by extension under the thumb of Xi himself. That has not always been the case; China has a complicated history of civil-military relations, with the powerful PLA leadership often acting independently from party leaders. But after purging dozens of top officers and implementing controversial military reforms, Xi has clearly consolidated his control, and wants the top brass to understand that his authority shall not be questioned.

Sunday’s spectacle was only the latest display of political theater designed to strengthen Xi’s standing ahead of this fall’s Party Congress. During his visit to Hong Kong last month, Xi similarly presided over a display of military might while warning the city’s independence activists against challenging Chinese authority. On that occasion, Chinese troops first began referring to Xi as “Chairman” rather than “Commander”—a rhetorical tribute to Xi’s authority over the Central Military Commission and a significant callback to Mao Zedong’s title, which was repeated during Sunday’s parade.

Meanwhile, Chinese state media have been carefully preparing the public for Xi to assume even greater authority, with coverage sometimes hinting at a cult of personality. A recent editorial in the influential Study Times, for instance, offers a hagiographic treatment of Xi’s record, singing his praises for his ideological devotion to the party and his shrewd leadership as President, including his anti-corruption drive and his personal involvement in the South China Sea. Experts expect more of these laudatory personal tributes in the months to come, as Xi seeks to carefully cultivate his public image ahead of the Party Congress.

As for the Party Congress itself, the date is still not set, and it is impossible to know exactly who will be elevated to the Politburo and its Standing Committee. But recent events suggest that Xi is already pulling the strings to ensure that his loyalists get promoted. Until recently, Sun Zhengcai, a popular party secretary linked to Hu Jintao, was expected to be promoted to a top national post—but then he was suddenly ensnared by Xi’s anti-corruption drive, clearing the way for a Xi protege to replace him.  The unexpected incident is already being read as a sign that Xi will get exactly what he wants at the Party Congress.

In short, then, Xi Jinping has consolidated control over the military, begun a personalized campaign of self-promotion in the media, and is stacking the deck to elevate his loyalists within the party’s top leadership. Xi has long harbored ambitions to be China’s most consequential ruler in decades—and judging by the events of recent weeks, he may be closer to that goal than ever before.

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