Commentary by Amity Shlaes
Feb. 6 (Bloomberg) -- Cut the tax rate on capital gains to 5 percent. Halve the corporate tax rate. Fund a new, super-strong Securities and Exchange Commission to monitor anything that’s traded, including the haziest derivative.
Buy homeowners out of mortgages they can’t afford, and protect the rights of lenders. Make Social Security solvent by curtailing the annual growth in benefits. Forget one “S” word, stimulus, and learn to use two “R” words -- rent and recession.
Too costly, you might say, or too extreme. But the ideas above are neither costlier nor more extreme than the almost- trillion-dollar stimulus package moving through Congress. And they are more likely to bring long-term growth than the legislation advanced by President Barack Obama. Republicans know it, which is why they voted against the administration plan.
Still, there’s no great GOP hero yet making the case for putting growth first. Not even the modern-day supply siders, who so long served the Republicans by stressing the importance of low marginal tax rates for producers in setting the pace of economic growth.
Consider the recent appearance of the lion of the supply siders, Larry Lindsey, on “The Daily Show With Jon Stewart.” Lindsey -- author of a landmark study that showed the 1980s Reagan tax-rate cuts brought in more revenue than predicted -- made his case for a payroll-tax cut as stimulus.
Lindsey would halve the payroll tax, to give $1,500 to the average worker making $50,000. Buried in the plan is a genuine supply-side component: Higher earners would benefit from paying less in Social Security taxes, and the payroll tax cut would also reduce the cost of employment at a time when companies are deciding if and when to hire.
Obama Lite
Two problems. First, the supply-side aspect truly is buried. To the average TV viewer, a payroll-tax holiday is hard to distinguish from Obama’s proposed worker-tax rebate and so comes off as Obama Lite. It’s all about the worker -- in other words, a demand-side reform.
Second, a payroll-tax cut sends the message that suspending Social Security payments is acceptable at a time when the Social Security program itself is moving into deficit. Lindsey proposes a carbon tax as an offset. But the gist of his proposal is that entitlement shortfalls matter less than the current crisis. The opposite is true.
It’s clear why Lindsey offered his plan: it is doable. Still, maybe Republicans should be thinking, not doing, at this point.
There’s evidence they are doing some thinking, especially when it comes to two philosophies, one newer and one that updates supply-side theory by going back to its roots.
Public Choice
The first, known as public choice theory, holds that stimulus packages pretend to be about growth but, in reality, simply feed the government monster. Public choicers, many of whom come out of Virginia’s George Mason University, deem the phrase “reform government” an oxymoron. To them, government isn’t better than the private sector. Public and private are opponents in a perpetual power struggle, like two kindergartners battling it out on a mat.
Public choicers warn that politicians will always exploit an emergency to further unrelated goals. Rahm Emanuel’s statement of last fall -- that “you never want a serious crisis to go to waste” -- validated their nightmares. In their view, sometimes even a nasty but stable institution -- such as a super SEC -- is preferable to a protean one, such as the Troubled Asset Relief Program.
No Fantasy
Public choicers seek certainty from government, not constant fiddling. “Economists often fantasize that if only politicians would put us in charge of the economy, we could fix it. But the economy is too complex,” says Russ Roberts, a professor at George Mason. The hero of the public choicers is Roberts’ colleague, James Buchanan, who won the Nobel Prize in 1986.
The second philosophy can loosely be called classical economics. It is there the concept of supply side -- as opposed to demand side -- originates.
Classical economics says producers matter as much as consumers, sometimes more. It says government medicine is sometimes worse than any economic ill. It says setting prices -- even low ones for struggling securities -- can do more to bring recovery than any number of deals brokered by the Treasury, Federal Reserve or Federal Deposit Insurance Corp.
To the classical folks, entitlement reform matters because it will make the U.S. more competitive internationally. They acknowledge that outgrowing today’s deficits will be harder than outgrowing deficits was in the Gipper’s day.
‘Creative Destruction’
Appalled classical thinkers, led by John Cochrane of the University of Chicago Graduate School of Business, generated an anti-TARP petition last fall. Some of these scholars are “Austrians,” or followers of Joseph Schumpeter, who viewed recession as necessary “creative destruction.” Others prophesy that the trend of forgiving borrowers will cut the supply of mortgages later.
Right now, the public choicers, with their emphasis on the abuse of crises by politicians, seem more timely. They note that the Democrats will have a hard time reconciling a promise to put a leash on K Street with a stimulus package that feeds lobbyists as none before.
The consolation in being out of power is that you have time to try out improbable ideas, or refurbish old ones. Such time is the gift that President Obama has given Republicans, and they may well thank him for it.
CAYMAN FINANCIAL REVIEW
First Quarter 2009
Should you worry about holding the Cayman dollar? The short answer is no, and the following will explain why. The Cayman dollar has been “fixed” to the U.S. dollar since 1972, at a rate of $1.2
The Cayman Island Monetary Authority (CIMA) operates a “currency board” to ensure adequate backing for the
In 1971, the political leaders in Cayman and the
CIMA operates a currency board and not a traditional central bank like the U.S. Federal Reserve Bank or the Bank of England. Most central banks are wholly owned by the government and operate separately from the finance ministry. They have a monopoly on issuing legal tender (notes and coins). Legal tender is the term for the money in which government pays its bills and receives its taxes, and in which private parties must pay their debts (unless they have made other private arrangements to pay it in a foreign currency, gold, etc.).
Central banks operate what is known as “monetary policy” in which they decide how much money to create through the banking system. Monetary policy can have multiple targets, such as price stability and full employment (which is what the U.S. Fed is charged with), or the single target of price stability, which is the primary goal of the European Central Bank. Central banks did not become widespread until the 20th century and became very common after most countries abandoned the gold standard.
Modern day currency boards trace much of their heritage to currency boards established by the British in a number of their colonies. The local government officials could create a currency, usually with the symbols of the colony on the bank notes and coins, which was fixed to the pound sterling. That is, the local currency could be exchanged for the pound, and vice versa, at an agreed upon price. The currency board was normally required to hold 100 percent reserves in approved
Cayman has a classic currency board. Its “anchor” currency is the U.S. dollar. The Cayman currency board keeps more than 100 percent reserves in
The paper currency that Cayman uses is printed by the British bank note firm De La Rue. The basic ingredient in the paper note is not wood pulp, but cotton. Banknotes are a rather complex product in that they have to be made to be both flexible and stiff, and be sufficiently durable to handle abuse and hostile environments (e.g. damp and dirty clothing). They contain many anti-counterfeit measures, such as water marks, complex design, metallic threads that contain information, and some with even holograms. The higher the value of the banknote, the more costly anti-counterfeit measures are included in it. A $100 note will be made more counterfeit proof than a one dollar note. When deciding how many anti-counterfeit devices to put into a banknote, the Monetary Authority does a cost benefit analysis, given that the cost of a banknote can vary considerably depending upon what features it contains. Paper currency does wear out and CIMA regularly replaces dirty, torn, or worn bills.
Cayman has a unique advantage in that many tourists like to keep some of the Cayman currency as souvenirs, particularly the one dollar bills. When they do this, they are in effect giving Cayman a perpetual interest free loan. Thus it is important for Cayman to produce an interesting looking currency that people will want just because of its appearance. CIMA, unlike the money issuing authorities in some countries, maintains a “clean bill” standard, which gives a better image, and also makes it more desirable for people to want to hold the physical currency. However, the liability for non-redeemed banknotes is still kept on the books of the Cayman Monetary Authority.
The Cayman Monetary Authority also supplies coins in denominations of less than one dollar, plus occasional high value commemorative coins. Coins are expensive to produce but have the advantage of durability. As a result of inflation in the U.S. dollar and most other currencies, some low-value coins like the penny cost more to produce than they are worth. This problem has caused some countries to stop producing pennies and other low-value coins. The increasing movement to electronic forms of payment – credit, debit, and smart cards, etc. does serve to reduce the problem of the cost of coinage (and banknotes).
Currency boards need an anchor currency and/or gold or some other commodity. The choice of the anchor currency depends upon predominate economic relationships, expected stability, and international acceptability. The eastern European countries which have set up currency boards have now all opted for the euro as their anchor, even though many of them originally choose the D-mark.
Cayman quite appropriately selected the U.S. dollar as its anchor. The reason is obvious; most Cayman business is done in U.S. dollars, most of its imports come from the
Cayman, by using the dollar anchor, is held hostage to
Cayman could set up a classic central bank and try to run its own monetary policy. Virtually no small country has been successful at this over the long run, except for
In theory, Cayman could go on gold or some other commodity standard, but trying to do so alone, and given the country’s small size, it is not practically feasible. One only needs to look at the swings in world gold prices over the last several years to imagine the kinds of problems Cayman would subject itself to if it adopted such a standard.
Cayman could also drop its own currency and “dollarize” its economy, the way some other countries have done (such as
The tourist industry may be enjoying some additional benefit by Cayman having its own currency, because it makes the islands seem more “foreign” and exotic.
No-thought regulation
No-thought regulation
Richard W. Rahn
If you knew - "a few weeks ago, the federal government had to commit several hundred billion dollars for a guarantee of Citicorp's assets, though examiners from the Office of the Comptroller of the Currency (OCC) have been inside the bank full-time for years, supervising the operations of this giant institution, under the broad powers granted by the Federal Deposit Insurance Corporation Improvement Act of 1991 to bank supervisors" - what would you think about the effectiveness of U.S. bank regulation?
The above quote comes from a thoughtful and important new paper, "Regulation without Reason," by Peter J. Wallison, former general counsel of the U.S. Treasury and now a fellow at the American Enterprise Institute. Mr. Wallison warned for years - in books and articles - that Fannie Mae and Freddie Mac were headed for disaster, and now he is taking on the ill-thought out proposals to increase regulation of the financial industry, both by politicians and people who should know better.
The frightening thing is that many of the same intellectually and (alleged) financially corrupt politicians - e.g. Rep. Barney Frank and Sen. Chris Dodd - whose actions directly helped bring on the present crisis, have now been put in charge of the hen house and are tasked with "making reforms." Rather than acknowledge that their earlier poorly thought out "reforms" caused many of the current problems, they and the so-called "Group of 30" financial experts advocate expanding destructive bank regulation to healthy parts of the financial industry.
Those who are incapable of thinking through the consequences of their actions (like drunken teenagers with car keys) are likely to make matters worse rather than better, which characterizes all too many of the Washington elite - at the Fed, the Treasury, the Securities and Exchange Commission and particularly the Congress. It was they who created and then failed to supervise and provide adequate capital requirements for Freddie Mac and Fannie Mae. It was the members of Congress who, by not thinking through the consequences of their Community Reinvestment Act, forced banks to make loans to unqualified buyers. It was they who created the notorious Sarbanes-Oxley Act, a poorly thought out response to the Enron scandal. This act has driven accounting costs for businesses through the roof, destroying many hundreds of thousands of jobs in the process, forced companies to go private and driven the important initial public offering (IPO) market to London.
Last week the House of Representatives passed a "stimulus" bill that in actuality will slow the recovery and restoration of jobs. There is a "buy America" protectionist provision in the bill, which thoughtful and knowledgeable people understand will raise costs and destroy more jobs than it will create and invite destructive retaliation from foreign competitors. In their thoughtless vote for this bill, the vast majority of the Democrats in Congress ignored the lessons of the Great Depression with the disastrous Smoot-Hawley tariff, hundreds of years of economic history, and good economic theory.
Certain members of Congress have attacked foreign jurisdictions that have lower tax rates, and have proposed to penalize U.S. companies that use such jurisdictions in order to remain internationally competitive.
These members of Congress have shown themselves incapable of thinking through the ultimate consequences of their proposals, which include: making U.S. business less able to compete with foreign competitors that have lower tax burdens, reducing employment growth both in the United States and worldwide by increasing the cost of capital and its proper allocation, and undermining relations with many peaceful countries - which have a sovereign right to have any tax system and rates they so choose - and violating U.S. obligations under the World Trade Organization.
U.S. officials are trying to require foreign entities that bring badly needed foreign investment into the United States (through "QI procedures") to use only U.S. auditors. This is not only offensive to foreign friends but violates their own laws in many cases. How would the United States react to a requirement that companies operating in this country but sending passive foreign investment abroad be forced to use only foreign auditors? These thoughtless and destructive proposals will only damage international relations, which President Obama said he wants to improve, and to reduce investment in the U.S., which in turn will reduce both productivity growth and job creation.
Having previously spent several years as a financial regulator myself, I am keenly aware that regulation can be more destructive than beneficial. Regulation adds to systemic risk in that it reduces market discipline when people think the government is "protecting" them. Regulation favors large over small firms because the costs are more easily borne by large entities, and this in turn causes more industry concentration than is desirable (resulting in the "too big to fail" syndrome).
Regulation often impairs innovation by driving up costs and often adds costs not justified by the benefits, and all these additional costs are ultimately borne by consumers in higher prices, which mean a lower standard of living.
The current rush to regulate, without calmly and adequately thinking through the full ramifications and likely costs associated with each new regulatory proposal, is likely to end in another round of financial disasters.
Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.
Keynes can't help us now
Keynes can't help us now
It began as a subprime surprise, became a credit crunch and then a global financial crisis. At last week's World Economic Forum in Davos, Switzerland, Russia and China blamed America, everyone blamed the bankers, and the bankers blamed you and me. From where I sat, the majority of the attendees were stuck in the Great Repression: deeply anxious but fundamentally in denial about the nature and magnitude of the problem.
Some foretold the bottom of the recession by the middle of this year. Others claimed that India and China would be the engines of recovery. But mostly the wise and powerful had decided to trust that John Maynard Keynes would save us all.
I heard almost no criticism of the $819-billion stimulus package making its way through Congress. The general assumption seemed to be that practically any kind of government expenditure would be beneficial -- and the bigger the resulting deficit the better.
There is something desperate about the way economists are clinging to their dogeared copies of Keynes' "General Theory." Uneasily aware that their discipline almost entirely failed to anticipate the current crisis, they seem to be regressing to macroeconomic childhood, clutching the Keynesian "multiplier effect" -- which holds that a dollar spent by the government begets more than a dollar's worth of additional economic output -- like an old teddy bear.
They need to grow up and face the harsh reality: The Western world is suffering a crisis of excessive indebtedness. Governments, corporations and households are groaning under unprecedented debt burdens. Average household debt has reached 141% of disposable income in the United States and 177% in Britain. Worst of all are the banks. Some of the best-known names in American and European finance have liabilities 40, 60 or even 100 times the amount of their capital.
The delusion that a crisis of excess debt can be solved by creating more debt is at the heart of the Great Repression. Yet that is precisely what most governments propose to do.
The United States could end up running a deficit of more than 10% of GDP this year (adding the cost of the stimulus package to the Congressional Budget Office's optimistic 8.3% forecast). Nor is that all. Last year, the Bush administration committed $7.8 trillion to bailout schemes, in the form of loans, investments and guarantees.
Now the talk is of a new "bad bank" to buy the toxic assets that the Troubled Asset Relief Program couldn't cure. No one seems to have noticed that there already is a "bad bank." It is called the Federal Reserve System, and its balance sheet has grown from just over $900 billion to more than $2 trillion since this crisis began, partly as a result of purchases of undisclosed assets from banks.
Just how much more toxic waste is out there? New York University economistNouriel Roubini puts U.S. banks' projected losses from bad loans and securities at $1.8 trillion. Even if that estimate is 40% too high, the banks' capital will still be wiped out. And all this is before any account is taken of the unfunded liabilities of the Medicare and Social Security systems. With the economy contracting at a fast clip, we are on the eve of a public-debt explosion. And similar measures are being taken around the world.
The born-again Keynesians seem to have forgotten that their prescription stood the best chance of working in a more or less closed economy. But this is a globalized world, where uncoordinated profligacy by national governments is more likely to generate bond-market and currency-market volatility than a return to growth.
There is a better way to go: in the opposite direction. The aim must be not to increase debt but to reduce it.
This used to happen in one of two ways. If, say, Argentina had an excessively large domestic debt, denominated in Argentine currency, it could be inflated away -- Argentina just printed more money. If it were an external debt, the government defaulted and forced the creditors to accept less.
Today, America is Argentina. Europe is Argentina. Former investment banks and ordinary households are Argentina. But it will not be so easy for us to inflate away our debts. The deflationary pressures unleashed by the financial crisis are too strong -- consumer prices in the U.S. have been falling for three consecutive months. Nor is default quite the same for banks and households as it is for governments. Understandably, monetary authorities are anxious to avoid mass bankruptcies of banks and households, not least because of the downward spiral caused by distress sales.
So what can we do? First, banks that are de facto insolvent need to be restructured, not nationalized.(The last thing the U.S. needs is to have all of its banks run like Amtrak or, worse, the IRS.) Bank shareholders will have to face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks. Government will take control in return for a substantial recapitalization, but only after losses have been meaningfully written down. Those who hold the banks' debt, the bondholders, may have to accept a debt-for-equity swap or a 20% "haircut" -- a disappointment, but nothing compared with the losses suffered when Lehman Bros. went under.
State life-support for dinosaur banks should not and must not impede the formation of new banks by the private sector. It is vital that state control does not give the old, moribund banks an unfair advantage. So recapitalization must be a once-only event, with no enduring government guarantees or subsidies. And there should be a clear timetable for "re-privatization" -- within, say, 10 years.
The second step we must take is a generalized conversion of American mortgages to lower interest rates and longer maturities. About 2.3 million U.S. households face foreclosure. That number is certain to rise as more adjustable-rate mortgages reset, driving perhaps 8 million more households into foreclosure and causing home prices to drop further. Few of those affected have any realistic prospect of refinancing at more affordable rates. So, once again, what is needed is state intervention.
Purists say this would violate the sanctity of the contract. But there are times when the public interest requires us to honor the rule of law in the breach. Repeatedly in the course of the 19th century, governments changed the terms of bonds that they issued through a process known as "conversion." A bond with a 5% return was simply exchanged for one with a 3% return, to take account of falling market rates and prices. Such procedures were seldom stigmatized as default.
Another objection to such a procedure is that it would reward the imprudent. But moral hazard only really matters if bad behavior is likely to be repeated, and risky adjustable-rate mortgages aren't coming back soon.
The issue, then, becomes one of fairness: Why help the imprudent when the prudent are struggling too?
One solution would be for the government-controlled mortgage lenders and guarantors, Fannie Mae and Freddie Mac, to offer all borrowers -- including those with fixed rates -- the same deal. Permanently lower monthly payments for a majority of U.S. households almost certainly would do more to stimulate consumer confidence than all the provisions of the stimulus package, including tax cuts.
No doubt those who lost by such measures would not suffer in silence. But the benefits would surely outweigh the costs to bank shareholders, bank bondholders and the owners of mortgage-backed securities.
Americans, Winston Churchill once remarked, will always do the right thing -- after they have exhausted all other alternatives. If we are still waiting for Keynes to save us when Davos comes around next year, it may well be too late. Only a Great Restructuring can end the Great Repression. It needs to happen soon.
Niall Ferguson is a professor at Harvard University and Harvard Business School, a Fellow of Jesus College, Oxford, and a senior fellow of the Hoover Institution. His latest book is "The Ascent of Money: A Financial History of the World."
Economics focus
Burger-thy-neighbour policies
Attacks on China’s cheap currency are overdone
CHINA has been accused of “manipulating” its currency by Tim Geithner, America’s new treasury secretary, and this week Dominique Strauss-Kahn, the managing director of the IMF, said that it was “common knowledge” that the yuan was undervalued. You would assume that such strong claims were backed by solid proof, but the evidence is, in fact, mixed.
Of course China manipulates its exchange rate—in the sense that the level of the yuan is not set by the market, but influenced by foreign-exchange intervention. The real issue is whether Beijing is deliberately keeping the yuan cheap to give exporters an unfair advantage. From July 2005, when it abandoned its fixed peg to the dollar, Beijing allowed the yuan to rise steadily, but since last July it has again been virtually pegged to the greenback. And there are concerns that China may allow the yuan to depreciate to help its exporters—with worrying echoes of the beggar-thy-neighbour policies that exacerbated the Depression. But American politicians are wrong to focus only on the yuan’s dollar exchange rate. Since July the yuan has gained 10% in trade-weighted terms. It is up 23% against the euro, and 30% or more against the currencies of many other emerging economies.
In early 2005 two American senators brought a bill to Congress that threatened a tariff of 27.5% on all Chinese imports unless the yuan was revalued by that amount. This curiously precise figure was the midpoint of a range of estimates (15-40%) of the yuan’s undervaluation. The bill was dropped, but the yuan has since risen by that magic amount in real trade-weighted terms (see left-hand chart, below). So how much further should it rise?
Those who argue that the yuan is still too cheap point to three factors: China’s foreign-exchange reserves have surged; it has a huge current-account surplus; and prices are much cheaper in China than in America. Start with official reserves. If China had not bought lots of dollars over the past few years, the yuan’s exchange rate would have risen by more. So does the yuan’s fixed level against the dollar in recent months mean that intervention has risen? On the contrary, in the fourth quarter of 2008, China’s reserves barely rose, despite a record current-account surplus. This suggests that private capital is now flowing out of China.
Charles Dumas, an economist at Lombard Street Research, argues that outflows of hot money could become a flood if China did not have capital controls. Currency “manipulation” amounts to more than foreign-exchange intervention; China also has strict capital controls which, although leaky, keep private savings at home. If Beijing scrapped those controls, firms and households would want to invest abroad to diversify their assets. In other words, if the value of the yuan was not “manipulated” and instead was set entirely by the free market, it might fall, not rise.
Some argue that China’s large current-account surplus is incontrovertible proof that the yuan is too cheap. Morris Goldstein and Nicholas Lardy, at the Peterson Institute for International Economics in Washington, DC, estimate that the yuan’s real trade-weighted value needs to rise by another 10-20% to eliminate the surplus. But other economists say it is wrong to define the yuan’s fair value by the revaluation required to eliminate the current-account surplus. Trade does not have to be perfectly balanced to be fair. And China’s surplus partly reflects its high saving rate. A stronger yuan will help to shift growth away from exports towards domestic consumption, but is unlikely to do so on its own. In 2005 Messrs Goldstein and Lardy reckoned that the yuan was 20-25% undervalued; it has since risen by that, yet the surplus has doubled. To reduce China’s external gap, policies to boost domestic spending will be more important than its exchange rate.
Beefing up the argument
An alternative way of defining the “fair” value of a currency is purchasing-power parity (PPP): the idea that, in the long run, exchange rates should equalise prices across countries. The Economist’s Big Mac index offers a crude estimate of how far exchange rates are from PPP. Our January update found that a Big Mac cost 48% less in China than in America, which might suggest that the yuan is 48% undervalued against the dollar. But by this gauge, the currencies of virtually all low-income countries are undervalued, since prices are generally lower in these countries than in rich ones (see right-hand chart, above). This is the basis of the Balassa-Samuelson theory which holds that average prices will be higher in countries with higher productivity (ie, high GDP per head), because higher wages will push up prices in labour-intensive goods and services. This implies that it is natural for China’s exchange rate to be below its PPP, but as it gets richer and productivity rises, its real exchange rate should rise.
PPP is a long-term concept. However, the relationship between prices and GDP per head can be used to estimate the short-term fair value of a currency relative to others. Using a simple model, which adjusts the Big Mac index for differences in countries’ GDP per head and relative labour costs, gives the result that the yuan is now less than 5% undervalued.
A new study* by Yin-Wong Cheung, Menzie Chinn and Eiji Fujii arrives at a similar result using World Bank price data across the whole economy. Previous assessments of such data had found that the yuan was around 40% undervalued. But the latest price surveys have raised the estimated price level in China (and so reduced GDP per head measured at PPP). The authors conclude that the yuan was 10% undervalued against the dollar in 2006, which means that it might now be close to parity.
The evidence that the yuan is significantly undervalued is hardly rock-solid. It probably is still a bit too cheap, and it would certainly be a mistake for Beijing to allow it to fall, not least because this would risk a protectionist backlash from abroad. In the longer term, the yuan needs to keep rising against a basket of currencies. But for now, some of the accusations being thrown at China are wide of the mark.
Children of the revolution
Young Iranians
Children of the revolution
Iran’s young people have mixed feelings about the country’s 30-year-old revolution
THE old American embassy in Tehran is known as the “nest of spies”. On its walls are lurid murals depicting the Statue of Liberty with a ghastly skull for a face and guns decorated with the stars and stripes. It was here that a group of students held 52 American diplomats hostage for 444 days from November 1979. The remaking of Iran was in its early months, following the overthrow of Shah Mohammad Reza Pahlavi and the establishment of the Islamic Republic in February that year. The hostage crisis helped to seal the world’s view of post-revolution Iran as a country of religious fundamentalists.
Iran’s relations with America and the rest of the outside world have improved a little since then but any hopes of a greater thaw under America’s new president, Barack Obama, received an early hit. An American women’s badminton team were denied visas to visit Iran for a tournament starting on Friday February 6th timed to celebrate the revolution. And on the same day the offices of the British Council, a cultural organisation that seeks to build links, particularly between young people from both countries, was forced to close by the Iranian authorities after months of intimidation and harassment.
Iran’s curtailment of outside influences on its numerous students and young people belies their important role in the downfall of the shah 30 years ago. The hostage–taking showed just how far Iranian youth was prepared to go in support of change in the country. But three decades on, the children of the revolution feel differently about the upheaval in Iran.
Iran has a overwhelmingly youthful population. Some 60% of its 70m citizens are now under 30. This group did not experience the revolution directly. Nor did they suffer under the Shah’s rule that preceded it. They did not fight in Iran’s brutal and lengthy war with Iraq. They have grown up exclusively under Iran’s strange blend of theocracy and democracy and they are far from happy with it.
Since 1979 governments have varied in how much they have sought to control the lives of ordinary Iranians. Under the reformist rule of Muhammad Khatami, president between 1997 and 2005, young Iranians experienced the “Tehran spring”, a period of cautious political liberalisation that was accompanied by a slight relaxation of the strict rules governing behaviour. With the election of Mahmoud Ahmadinejad as president in 2005, that largely came to an end.
Young people have suffered disproportionately from their government’s economic failures. Iranians are generally extremely well-educated with high literacy rates and a soaring number of students. But once finished with university, many graduates struggle to find a job. With inflation running at around 25% and an estimated 3m unemployed, it is the young who are most affected. The rapid growth in population after the revolution was accompanied by rapid urbanisation: seven in ten Iranians now live in towns and cities. This has made it even harder for young people to find work.
With young people representing such a huge constituency, politicians are naturally anxious to win their support, particularly as presidential elections are due in June. Mr Ahmadinejad has established a $1.3 billion “love fund”, to subsidise marriage for poor Iranians. Without jobs or incomes, it is nigh on impossible to wed. Populist initiatives like this go down well but ultimately do little to address young Iranians’ more pressing concerns.
Many of Iran's youth are disenchanted with the revolution. The “Islamic democracy” offered by Mr Khatami failed to address their desire for a freer society. Mr Ahmadinejad’s conservatism has added to their woes. Young Iranians find a multiplicity of ways to rebel against the regime’s control: with alcohol fuelled parties, painted nails or flirtatious behaviour on the street.
Many outsiders, who dislike the regime and wish to see it fall, hope that Iran’s disaffected youth could bring about its demise. But the anger that many young people share at the failures of their government is unlikely to topple it. Though they may chafe at its restraints, religion remains important to many young Iranians. By and large, they do not wish to see Iran become a secular country and few would describe themselves as atheists. But they would rather see Islam confined to their private lives and eliminated from the public sphere.
More importantly, young Iranians have a strong sense of national pride. They may grumble about the strictures of the Islamic Republic and the failings of Mr Ahmadinejad but there is little sign that they want to dispense with the revolution just yet. Like the founding fathers of the revolution, they resent fiercely any hint of Western meddling in Iranian affairs. They may be unhappy with their leaders and resent their rule, but they will rally round them in the face of outside attack.
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