This introduction is from John Mauldin’s Outside the Box. There he writes: What are we to make of the prospects for recovery over the next decade? Not much, if we listen to Professor Paul Krugman of Princeton. He suggests that the developed world could be entering a lost decade, just like Japan after their crash. Let me quickly point out that I routinely disagree with Krugman on a large number of issues. And I usually know why I disagree and believe his policy suggestions are wrong.

That being said, it is always important to occasionally look at ideas and thinkers that we may not always agree with. Krugman certainly qualifies on that front for me. However, it must be admitted that he is a very smart man. Further, his thinking is important, because it somewhat reflects the thinking of that part of the establishment that is in charge of the Fed and the Treasury. And while we are not getting gloomy long-term forecasts from either the Fed or the Treasury, I find it remarkable that Krugman is less sanguine than his peers. And there is much (certainly not all!) within this interview that I find myself in surprising agreement with. This one made me think as I read and reread it.

If he is correct, the rosy recovery assumptions built into the already bloated budget projections are going to be far too optimistic, not just for the US, but throughout Europe as well. Krugman is interviewed very capably by Will Hutton, a veteran writer and economist for the UK Guardian (a bastion of liberal politics). … Reposted from The Guardian/UK.

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Fear for a Lost Decade

An Interview of Paul Krugman

by Will Hutton

As analysts and media hailed the tentative emergence of green shoots last week, Nobel Prize-winning economist Paul Krugman caused international shock with a prediction that the world economy would stagnate just as badly, and for just as long, as Japan’s did in the 1990s. In an exclusive interview, he talks to Will Hutton about his anxiety for the future.

Will Hutton: You are warning that what happened to Japan could happen to the whole world. Japan’s GDP at the end of this year will be no higher than it was in 1992 — 17 lost years. You are saying that this is an ongoing risk, certainly for the North Atlantic economy – – maybe the world economy.

Paul Krugman: Yes. It’s not that the risk of the Japan syndrome has receded very much. The risk of a full, all-out Great Depression – – utter collapse of everything – – has receded a lot in the past few months. But this first year of crisis has been far worse than anything that happened in Japan during the last decade, so in some sense we already have much worse than anything the Japanese went through. The risk for long stagnation is really high.

WH: So what is the heart of your pessimism? The bust banking system? A critic would say: “Hold on, Paul Krugman. Japan is a special case. It had an overblown export sector that had become too large for an American market it had saturated. The yen was very, very overvalued. And this interacted with a credit crunch and bust banking system. Its policy response was consistently behind the curve. That’s not the story of the United States or the United Kingdom.”

PK: The thing about Japan, as with all of these cases, is how much people claim to know what happened, without having any evidence. What we do know is that recessions normally end everywhere because the monetary authority cuts interest rates a lot, and that gets things moving. And what we know in Japan was that eventually they cut their interest rates to zero and that wasn’t enough. And, so far, although we made the cuts faster than they did and cut them all the way to zero, it isn’t enough. We’ve hit that lower bound the same as they did. Now, everything after that is more or less speculation.

For example, were the problems with the Japanese banks the core problem? There are some stories about credit rationing, but they are not overwhelming. Certainly, when we look at the Japanese recovery, there was not a great surge of business investment. There was primarily a surge of exports. But was fixing the banks central to export growth?
In their case, the problems had a lot to do with demography. That made them a natural capital exporter, from older savers, and also made it harder for them to have enough demand. They also had one hell of a bubble in the 1980s and the wreckage left behind by that bubble – – in their case a highly leveraged corporate sector – – was and is a drag on the economy.

The size of the shock to our systems is going to be much bigger than what happened to Japan in the 1990s. They never had a freefall in their economy – – a period when GDP declined by 3%, 4%. It is by no means clear that the underlying differences in the structure of the situation are significant. What we do know is that the zero bound is real. We know that there are situations in which ordinary monetary policy loses all traction. And we know that we’re in one now.

WH: So your point is that the crisis in Japan was about excess debt, excess leverage and lack of demand – – reinforced by the fallout from the asset bubble collapsing. They didn’t have credit contraction on anything like our scale, but even so, zero interest rates were just unable to turn the economy around.

PK: That’s right, that’s right.

WH: But an optimist would say that there are signs all around of the traction that you say doesn’t exist is working. The stockmarkets in London and Wall Street – – along with most world markets – – are up a solid 20% to 25%. You’ve got all these improving business confidence indicators. You’ve got the first signs of the housing market bottoming in both the UK and the United States. This is what the optimists would tell you.

PK: But all of that points to levelling off, rather than an actual recovery. Britain’s looking the best among the major European economies because it’s got a PMI [purchasing managers' index, a key measure of economic sentiment] that’s just above 50. In other words, Britain actually may have stopped contracting – – that’s the most positive thing one can say.

Who knows if the stockmarket makes sense or not? It was pricing in the possibility of an apocalypse a few months ago. That possibility seems to have receded, so it makes sense for the markets to come up, but that’s not saying that the economy is going to be great. If you do the comparison not with where they were three months ago, but where they were two years ago, then the markets still seem awfully depressed.

I hope I’m wrong but the question you always have to ask is: where do we think that this recovery’s going to come from? It’s not an easy story to tell.

WH: In your lectures, you drew attention to the importance of stressed balance sheets holding back consumers and business alike in their likely spending ambitions – – and thus dragging back economic activity. Is this going to be a balance-sheet-constrained recovery?

PK: It’s probably true that households have been impoverished a lot by the fall of the housing and stock prices. And that it’s likely that households, with all of this debt, are going to have trouble spending. And yes, the North Atlantic economy was supported quite a lot by gigantic housing booms. Here in the UK you have had the house price surge without very much construction. Economists have a well-developed theory about how balance-sheet problems can cause financial and economic crises, but we thought of it in terms of third world countries with foreign-currency debt. We didn’t realise that there were lots of other ways in which that can happen.

WH: So, one way to think about it is that self-reinforcing financial crises rooted in overstretched, overborrowed companies and governments in less developed countries – – like those in Argentina and Indonesia, which were amazingly destructive in the 1990s and 2000s, but localised – – are now playing out in the developed world?

PK: There are really two stories. One is the Japan-type story where you run out of room to cut interest rates. And the other is the Indonesia- and Argentina-type story where everything falls apart because of balance-sheet problems.

WH: So in a nutshell your story is …

PK: The “Nipponisation” of the world economy with a bunch of “Argentinafications” playing a role in the acute crisis. But even after those are over, we have the Nipponisation of the world economy. And that’s really something.

WH: What was the heart of the Japanese problem? What was at the heart of their 17 years of going nowhere?

PK: Well, my guess is that it was that the balance-sheet problems took a very long time to resolve. And it is difficult to get enough demand in an economy where you have really very adverse demography …

WH: So, which countries look closest to being Nipponised – – combining balance-sheet problems and ageing populations?

PK: Well, the US doesn’t have the same combination. But in Europe, Germany and Italy look comparable. France is better and Europe as a whole is considerably better.
WH: Germany matches Japan to an uncanny degree. You talk about the Nipponisation of the world economy: I’m not so sure. But I would talk about the Nipponisation of Europe via a German economy at its centre in the grip of the same problem – – and that starts to be a global problem.

PK: Germany has huge inadequacy of domestic demand. Their economic recovery in the first seven years of this decade rested on the emergence of gigantic current account surplus.

How is it possible that Germany, which did not have a house price bubble, is having a steeper GDP fall than anyone else in the major economies?

The answer is that they depended upon exporting to the bubble regions of Europe, so they actually got side-swiped by the loss of those exports worse than the bubble regions themselves got hit.

It’s Germany on a global scale that is the concern. We worry about the drag on world demand from the global savings coming out of east Asia and the Middle East, but within Europe there’s a European savings glut which is coming out of Germany. And it’s much bigger relative to the size of the economy.

WH: And on top there is an unique and unaddressed huge potential banking crisis. The Germans pride themselves on their three-legged banking system, but it is incredibly interlinked. The IMF warns that Germany could have to take at least $500bn of writedowns, which its banks have not begun to recognise. German banks hold a trillion dollars – – maybe more – – of maturing collateralised debt obligations that can only be refinanced by crystallising the losses. We’ve had RBS and you’ve had Citigroup. Germany’s GDP will fall 6% this year – – before the banking crisis has hit it.

PK: Yeah, that’s the financial view. Its important to keep track of the financial state of the banks. But one always has to keep track of the real side of the economy, too. It is a hypothesis that the problem is essentially financial. But it is by no means a hypothesis that we know is true.

WH: So even after what we’ve gone through, you say it’s just a hypothesis that the cause of the crisis is financial?
PK: That the cause is primarily financial. Certainly, Lehman and all of that alerted us all. And it did trigger an immediate drop in demand. But the housing bust was going to happen regardless.

The fall in business investment is at least to a large degree a response to excess capacity, which is the result of falling consumer demand and the housing bust. So we don’t know.
WH: I think we know more than that. The links between bank capital, loan losses, credit availability and economic activity and asset prices have never been clearer. That was why there was a threat of Depression.

PK: Clearly, re-establishing stability in the financial markets is a necessary condition for recovery. But we’re not sure it’s sufficient.

WH: That’s very scary.

PK: Well, that is part of the reason why I am so depressed.

WH: In one of your lecture charts you seemed to be suggesting that we’re 12 months into what you think could be a 36-month period of downturn, albeit at a slower rate.

PK: Easily.

WH: It’s quite shocking that you think it will be that severe.

PK: If we measure the 2001 US recession by when the labour market finally started to turn around, it was a 30-month recession. It was really 30 months in before you started to see the unemployment rate come down.

WH: In Britain, there is now a new consensus forming that the government’s economic forecasts, which were roundly mocked at the time of the April budget for being wildly optimistic, could be right – – that is, growth will start to resume in 2010, albeit at a very low rate.

PK: Well, the UK has achieved a lot of monetary traction in the way that no one else has through the depreciation of the pound. In effect, you’ve carried out a successful beggar-my-neighbour devaluation.

WH: So, the United Kingdom might actually get through this in reasonably good shape?

PK: Yeah. That’s why I’ve been watching with an outsider’s slight puzzlement, your bizarre political circus.

WH: Darling and Brown deserve more credit than they’re given?

PK: If the government can hold off having an election until next year, Labour might well be able to run as “we’re the people who brought Britain out of the slump”.

WH: So your advice to the Labour Party is: hold steady.

PK: Probably.

WH: Probably?

PK: I don’t know enough about the other aspects of politics, but I would guess that the option value is quite high that the economy might actually have turned a corner. That’s unique. That’s a uniquely British thing. None of the other G7 countries has anything like that.

WH: And that’s a combination of our big beggar-our-neighbour devaluation, aggressive monetary policy, successfully recapitalising our banks and our fiscal policy.

PK: There hasn’t been very much discretionary fiscal expansion when all’s said and done.

WH: Well, there was a £20bn temporary cut in VAT.

PK: Yeah.

WH: Which is non-trivial.

PK: Non-trivial. But not much [other spending], as I understand.

WH: Well, there was bringing forward £3-4bn of capital spending. Perhaps together in a full year the stimulus was 1.5% GDP. Maybe 2% at the outside.

PK: Monetary policy has been more aggressive – – though maybe less than the Fed – – and the depreciation of the pound is a nice thing from a UK point of view.

WH: So you remain committed to the key role of fiscal policy?

PK: Yeah. Fiscal policies are best; certainly something to do to mitigate recession. People say that the Japanese fiscal policy on all that infrastructure was wasted. But it did help sustain the economy and avoid a collapse. Fiscal policy can certainly do that: it gives the credit sector time to rebuild its balance sheets. There’s every reason to be expansive around the fiscal side now because even if you’re not sure that it provides a long-term solution, avoiding catastrophe is a big thing to do.

WH: If you believe that, is Obama doing enough on fiscal policy?

PK: Well we have a stimulus which is a little over 5% of one year’s GDP but some of it is not real – something that was going to happen anyway and not very stimulative. So it’s really about 4% of GDP of genuine stimulus, but spread over two and a half years. So, it’s actually quite a lot less than what I was arguing for.

WH: So, will it be sufficient?

PK: Well, sufficient to actually restore full employment would probably have to be 5% or more. More than we have would certainly be a good thing. It actually might happen. You know, the buzz I’m getting is that a second-round stimulus might well come on the agenda.

WH: Really? When you say “the buzz you’re getting”, have you been asked?

PK: Well, it’s what you hear from people who talk to people who talk to people.

WH: Who would argue for that? Would it be Larry Summers [director of the US National Economic Council]?

PK: I think Larry. I’m not sure Tim Geithner [US treasury secretary] would be opposed to it. Nor would Chrissie [Christine Romer, director of the Council of Economic Advisers] I’m sure they would be making similar judgements. It is actually a little spooky.

WH: They’re all people you know pretty well, who look at the world the same way, use the same tools and framework …

PK: Yeah. They may be sitting where they are, having some differences. Larry’s always more conventional than I am. Sometimes rightly. Sometimes wrongly. But they do operate in the same framework.
WH: How seriously do you take the argument that the growth of public debt on this scale will crowd out the spontaneous amount of growth of corporate and private debt? Is this already happening with the rise in long-term interest rates in the US?

PK: The thing about long-term interest rates is that they are a weighted average of future expected short-term interest rates. Movements in long-term rates are mostly about what people think the short rates are going to be. Look, real rates are barely up at all. What seems to have moved up is the expected rate of inflation, which is still below the Fed target. So it’s more like what the markets are doing is reducing their discounting of deflationary catastrophe. WH: how do you see the politics working out in the States and in the UK now? Your praise of Gordon Brown after the banks in October were recapitalised was front-page news. Are you still as well disposed?

PK: I still think his economic policies have been pretty good. They really kind of lost their nerve on fiscal policy, but I do understand it’s harder to do it here. I think the UK economy looks the best in Europe at the moment. I have no position on all of the crazy stuff. But I think the policies are intelligent. The fact of the matter is that Britain did manage to stabilise the banking situation. I’m not ecstatic, but I’m not sure I know what I could have done better.

WH: So where are you on the debate about various shape recoveries? V-shaped? L-shaped ? A W-shaped recovery?

PK: There is a possibility that we get some perk-up as the stimulus dollars start to flow and an almost mechanical bounceback in industrial production as inventories are built up. But then we slide down again. The idea that we sort of bounce along the bottom is all too easy to imagine.

WH: Is it just a story about the right dose of fiscal policy? What structural change would you advocate in the economy, to support recovery?

PK: Financial regulation. Rein in that monster. The huge increase in general private-sector leverage is at the core of how we got so vulnerable. We went for 50 years after the Great Depression without any major financial crises, and that, I think, was because we had a financial sector that didn’t let people get as deeply into debt as they have now.

WH: So rein in the financial monster and give a fiscal stimulus. So you would leave the American way of doing capitalism untouched?

PK: I’m not that cosmic in this stuff. But it is true that Gordon Gekko [the anti-hero of Oliver Stone's film Wall Street, motto: Greed is Good] went hand in hand with the wave of financialisation. Corporations got more brutal and fiercer.

WH: But it is all connected. Without the leverage, there would have been no Gordon Gekkos. And leverage meant that predator companies had the firepower to launch contested hostile takeovers. The only way to fend off attack, or to make the sums work after an attack, was for companies to be more brutal and fierce – often breaking the promises to staff and suppliers that kept commitment and trust.

PK: All of that is true. I have a more mundane view about what we do. I just want a stronger welfare state and a little bit more social democracy. And some restoration of the labour movement as a counterweight.
I’m not sure – maybe I’m just not thinking about it deeply enough. I guess I’ve got the same attitude Keynes had, which was he was looking for almost technical fixes. You’re looking for ways to fix the parts that have gone wrong rather than replace the whole thing.

You know the human cost of this crisis is vastly worse in America than it is on this side of the Atlantic. So this is a good time to push for a better US social safety net too.

WH: And lastly – you’ve been critical about Obama. Your view now?

PK: I’m increasingly happy with him. I was unhappy; I think they could have gotten a bigger stimulus coming out the gate. But they’ve become more forceful. I would have been more aggressive on the banks; we’ll see if we need to re-fight that battle later on.

Healthcare is looking really good. I’m getting increasingly optimistic on healthcare reform. Climate change looks like it’s going to happen. So my odds that this will in fact be the kind of New Deal I was hoping for are rising. I had my scepticism, but he is smart. He’s impressive. And it is such a relief to have somebody whom you can respect in the White House.

Wise man Herman Daly was honored this past week for his many and longstanding contributions to the emerging science of ecological economics by the United States Society for Ecological Economics at their bi-annual conference at American University near Washington DC. We are fortunate that he was asked to give a speech with his recommendations for our human future.

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Abandoning Growth

A steady-state economy is incompatible with continuous growth-either positive or negative growth. The goal of a steady state is to sustain a constant, sufficient stock of real wealth and people for a long time. A downward spiral of negative growth, a depression such as we are entering now, is a failed growth economy, not a steady-state economy. Halting an accelerating downward spiral is necessary, but is not the same thing as resuming continuous positive growth. The growth economy now fails in two ways: (1) positive growth becomes uneconomic in our full-world economy; (2) negative growth, resulting from the bursting of financial bubbles inflated beyond physical limits, though temporarily necessary, soon becomes self-destructive. That leaves a non-growing or steady-state economy as the only long run alternative. The level of physical wealth that the biosphere can sustain in a steady state may well be below the present level. The fact that recent efforts at growth have resulted mainly in bubbles suggests that this is so. Nevertheless, current policies all aim for the full re-establishment of the growth economy. No one denies that our problems would be easier to solve if we were richer. The question is, does growth any longer make us richer, or is it now making us poorer?

I will spend a few more minutes cursing the darkness of growth, but will then try to light ten little candles along the path to a steady state. Some advise me to forget the darkness and focus on the policy candles. But I find that without a dark background the light of my little candles is not visible in the false dawn projected by the economists, whose campaigning optimism never gives hope a chance to emerge from the shadows.

We have many problems (poverty, unemployment, environmental destruction, budget deficit, trade deficit, bailouts, bankruptcy, foreclosures, etc.), but apparently only one solution: economic growth, or as the pundits now like to say, ìto grow the economy´– as if it were a potted plant with healing leaves, like aloe vera or marijuana.

But let us stop right there and ask two questions that all students should put to their economics professors.

First, there is a deep theorem in mathematics that says when something grows it gets bigger! So, when the economy grows it too gets bigger. How big can the economy be, Professor? How big is it now? How big should it be? Have economists ever considered these questions? And most pointedly, what makes them think that growth (i.e., physical expansion of the economic subsystem into the finite containing biosphere), is not already increasing environmental and social costs faster than production benefits, thereby becoming uneconomic growth, making us poorer, not richer? After all, real GDP, the measure of ìeconomic´ growth so-called, does not separate costs from benefits, but conflates them as ìeconomic´ activity. How would we know when growth became uneconomic? Remedial and defensive activity becomes ever greater as we grow from an ìempty-world´ to a ìfull-world´ economy, characterized by congestion, interference, displacement, depletion and pollution. The defensive expenditures induced by these negatives are all added to GDP, not subtracted. Be prepared, students, for some hand waving, throat clearing, and subject changing. But don´t be bluffed.

Second question; do you then, Professor, see growth as a continuing process, desirable in itself– or as a temporary process required to reach a sufficient level of wealth which would thereafter be maintained more or less in a steady state? At least 99% of modern neoclassical economists hold the growth forever view. We have to go back to John Stuart Mill and the earlier Classical Economists to find serious treatment of the idea of a non-growing economy, the Stationary State. What makes modern economists so sure that the Classical Economists were wrong? Just dropping history of economic thought from the curriculum is not a refutation!

Here are some reasons to think that the Classical Economists are right.

A long run norm of continuous growth could make sense, only if one of the three following conditions were true:

Let us consider each of these three logical alternatives. (If you can think of a fourth one let me know.)

(a) Some economists in fact think of nature as the set of extractive subsectors of the economy (forests, fisheries, mines, wells, pastures, and even agricultureÖ.). The economy, not the ecosystem or biosphere, is seen as the whole; nature is a collection of parts. If the economy is the whole then it is not a part of any larger thing or system that might restrain its expansion. If some extractive natural subsector gets scarce we will just substitute other sectors for it and growth of the whole economy will continue, not into any restraining biospheric envelope, but into sidereal space presumably full of resource-bearing asteroids and friendly highly-evolved aliens eager to teach us how to grow forever into their territory. Sources and sinks are considered infinite.

(b) Some economists say that what is growing in economic growth is value, and value is not reducible to physical units. The latter is true of course, but that does not mean that value is independent of physics! After all, value is price times quantity, and quantity is always basically physical. Even services are always the service of something or somebody for some time period, and people who render services have to eat. The value unit of GDP is not dollars, but dollar´s worth. A dollar´s worth of gasoline is a physical amount, currently about half a gallon. The aggregation of the dollar´s worth amounts of many different physical commodities (GDP) does not abolish the physicality of the measure even though the aggregate can no longer be expressed in physical units. True, $/q x q = $. But the fact that q cancels out mathematically does not mean that the aggregate measure, ìdollars´ worth´, is just a pile of dollars. And it doesn´t help to speak instead of ìvalue added´ (by labor and capital) because we must ask, to what is the value added? And the answer is natural resources, low-entropy matter/energy-not fairy dust or frog´s hair! Development (squeezing more welfare from the same throughput of resources) is a good thing. Growth (pushing more resources through a physically larger economy) is the problem. Limiting quantitative growth is the way to force qualitative development.

(c) If resources could be created out of nothing, and wastes could be annihilated into nothing, then we could have an ever-growing resource throughput by which to fuel the continuous growth of the economy. But the first law of thermodynamics says NO. Or if we could just recycle the same matter and energy through the economy faster and faster we could keep growth going. The circular flow diagram of all economics principles texts unfortunately comes very close to affirming this. But the second law of thermodynamics says NO.

So-if we can´t grow our way out of all problems, then maybe we should reconsider the logic and virtues of non-growth, the steady-state economy. Why this refusal by neoclassical economists both to face common sense, and to reconsider the ideas of the early Classical Economists?

I think the answer is distressingly simple. Without growth the only way to cure poverty is by sharing. But redistribution is anathema. Without growth to push the hoped for demographic transition, the only way to cure overpopulation is by population control. A second anathema. Without growth the only way to increase funds to invest in environmental repair is by reducing current consumption. Anathema number three. Three anathemas and you are damned-go to hell!

And without growth how will we build up arsenals to protect democracy (and remaining petroleum reserves)? How will we go to Mars and Saturn and ìconquer´ space? Where can technical progress come from if not from unintended spin-offs from the military and from space research? Gnostic techno-fantasies of escaping earth to outer space, and of abolishing disease and death itself, feed on the perpetual growth myth of no limits. Digital-brained tekkies, who have never heard of the problem of evil, see heaven on earth (eternal growth) just around the corner. Without growth we must face the difficult religious task of finding a different god to worship. Too scary, we say, let´s try to grow some more instead! Let´s jump-start the GDP and the Dow-Jones! Let´s build another tower of Babel with obfuscating technical terms like sub-prime mortgage, derivative, securitized investment vehicle, collateralized debt obligation, credit default swap, ìtoxic´ assets, and insider slang like the ìdead cat bounce´. (If you drop it from a high enough tower of Babel even a dead cat will bounce enough to make some profit.)

Well, let us not do that. Let us ignore the anathemas and instead think about what policies would be required to move to a steady-state economy. They are a bit radical by present standards, but not as insanely unrealistic as any of the three alternatives for validating continuous growth, just discussed.

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Let us look briefly at ten specific policy proposals for moving to a steady-state economy, i.e., an economy that maintains a constant metabolic flow of resources from depletion to pollution-a throughput that is within the assimilative and regenerative capacities of the ecosystem.

1. Cap-auction-trade systems for basic resources. Caps limit biophysical scale by quotas on depletion or pollution, whichever is more limiting. Auctioning the quotas captures scarcity rents for equitable redistribution. Trade allows efficient allocation to highest uses. This policy has the advantage of transparency. There is a limit to the amount and rate of depletion and pollution that the economy can be allowed to impose on the ecosystem. Caps are quotas, limits to the throughput of basic resources, especially fossil fuels. The quota usually should be applied at the input end because depletion is more spatially concentrated than pollution and hence easier to monitor. Also the higher price of basic resources will induce their more economical use at each upstream stage of production. It may be that the effective limit in use of a resource comes from the pollution it causes rather than from depletion-no matter, we indirectly limit pollution by restricting depletion of the resource that ultimately is converted into wastes. Limiting barrels, tons, and cubic feet of carbon fuels extracted will limit tons of CO2 emitted. This scale limit serves the goal of biophysical sustainability. Ownership of the quotas is initially public-the government auctions them to the individuals and firms. The revenues go to the treasury and are used to replace regressive taxes, such as the payroll tax, and to reduce income tax on the lowest incomes. Once purchased at auction the quotas can be freely bought and sold by third parties, just as can the resources whose rate of depletion they limit. The trading allows efficient allocation; the auction serves just distribution, and the cap serves the goal of sustainable scale. The same logic can be applied to limiting the off-take from fisheries and forests.

2. Ecological tax reform-shift tax base from value added (labor and capital) and on to ìthat to which value is added´, namely the entropic throughput of resources extracted from nature (depletion), and returned to nature (pollution). This internalizes external costs as well as raises revenue more equitably. It prices the scarce but previously un-priced contribution of nature. Value added is something we want to encourage, so stop taxing it. Depletion and pollution are things we want to discourage, so tax them. Ecological tax reform can be an alternative or a supplement to cap-auction-trade systems.

3. Limit the range of inequality in income distribution-a minimum income and a maximum income. Without aggregate growth poverty reduction requires redistribution. Complete equality is unfair; unlimited inequality is unfair. Seek fair limits to the range of inequality. The civil service, the military, and the university manage with a range of inequality of a factor of 15 or 20. Corporate America has a range of 500 or more. Many industrial nations are below 25. Could we not limit the range to, say, 100, and see how it works? People who have reached the limit could either work for nothing at the margin if they enjoy their work, or devote their extra time to hobbies or public service. The demand left unmet by those at the top will be filled by those who are below the maximum. A sense of community necessary for democracy is hard to maintain across the vast income differences current in the US. Rich and poor separated by a factor of 500 become almost different species. The main justification for such differences has been that they stimulate growth, which will one day make everyone rich. This may have had superficial plausibility in an empty world, but in our full world it is a fairy tale.

4. Free up the length of the working day, week, and year-allow greater option for part-time or personal work. Full-time external employment for all is hard to provide without growth. Other industrial countries have much longer vacations and maternity leaves than the US. For the Classical Economists the length of the working day was a key variable by which the worker (self-employed yeoman or artisan) balanced the marginal disutility of labor with the marginal utility of income and of leisure so as to maximize enjoyment of life. Under industrialism the length of the working day became a parameter rather than a variable (and for Karl Marx was the key determinant of the rate of exploitation). We need to make it more of a variable subject to choice by the worker. And we should stop biasing the laborñleisure choice by advertising to stimulate more consumption and more labor to pay for it. Advertising should no longer be treated as a tax deductible ordinary expense of production.

5. Re-regulate international commerce-move away from free trade, free capital mobility and globalization, adopt compensating tariffs to protect, not inefficient firms, but efficient national policies of cost internalization from standards-lowering competition. We cannot integrate with the global economy and at the same time have higher wages, environmental standards, and social safety nets than the rest of the world. Trade and capital mobility must be balanced and fair, not deregulated or ìfree´. Tariffs are also a good source of revenue that could substitute for other taxes.

6.Downgrade the IMF-WB-WTO to something like Keynes´ original plan for a multilateral payments clearing union, charging penalty rates on surplus as well as deficit balances-seek balance on current account, and thereby avoid large foreign debts and capital account transfers. For example, under Keynes´ plan the US would pay a penalty charge to the clearing union for its large deficit with the rest of the world, and China would also pay a similar penalty for its surplus. Both sides of the imbalance would be pressured to balance their current accounts by financial penalties, and if need be by exchange rate adjustments relative to the clearing account unit, called the bancor by Keynes. The bancor would serve as world reserve currency, a privilege that should not be enjoyed by any national currency. The IMF preaches free trade based on comparative advantage, and has done so for a long time. More recently the IMF-WB-WTO have started preaching the gospel of globalization, which, in addition to free trade, means free capital mobility internationally. The classical comparative advantage argument, however, explicitly assumes international capital immobility! When confronted with this contradiction the IMF waves its hands, suggests that you might be a xenophobe, and changes the subject. The IMF-WB-WTO contradict themselves in service to the interests of transnational corporations. International capital mobility, coupled with free trade, allows corporations to escape from national regulation in the public interest, playing one nation off against another. Since there is no global government they are in effect uncontrolled. The nearest thing we have to a global government (IMF-WB-WTO) has shown no interest in regulating transnational capital for the common good.

7. Move away from fractional reserve banking toward a system of 100% reserve requirements. This would put control of the money supply and seigniorage in hands of the government rather than private banks, which would no longer be able to create money out of nothing and lend it at interest. All quasi-bank financial institutions should be brought under this rule, regulated as commercial banks subject to 100% reserve requirements. Banks would earn their profit by financial intermediation only, lending savers´ money for them (charging a loan rate higher than the rate paid to savings account depositors) and providing checking, safekeeping, and other services. With 100% reserves every dollar loaned would be a dollar previously saved, re-establishing the classical balance between abstinence and investment. The government can pay its expenses by issuing more non interest-bearing fiat money to make up for the eliminated bank-created, interest-bearing money. However, it can only do this up to a strict limit imposed by inflation. If the government issues more money than the public wants to hold, the public will trade it for goods, driving the price level up. As soon as the price index begins to rise the government must print less and tax more. Thus a policy of maintaining a constant price index would govern the internal value of the dollar. The external value of the dollar could be left to freely fluctuating exchange rates (or preferably to the rate against the bancor in Keynes´ clearing union).

8. Stop treating the scarce as if it were non-scarce, but also stop treating the non-scarce as if it were scarce. Enclose the remaining commons of rival natural capital (e.g. atmosphere, electromagnetic spectrum, public lands) in public trusts, and price it by a cap-auctionñtrade system, or by taxes, while freeing from private enclosure and prices the non-rival commonwealth of knowledge and information. Knowledge, unlike throughput, is not divided in the sharing, but multiplied. Once knowledge exists, the opportunity cost of sharing it is zero and its allocative price should be zero. International development aid should more and more take the form of freely and actively shared knowledge, along with small grants, and less and less the form of large interest-bearing loans. Sharing knowledge costs little, does not create un-repayable debts, and it increases the productivity of the truly rival and scarce factors of production. Existing knowledge is the most important input to the production of new knowledge, and keeping it artificially scarce and expensive is perverse. Patent monopolies (aka ìintellectual property rights´) should be given for fewer ìinventions´, and for fewer years. Costs of production of new knowledge should, more and more, be publicly financed and then the knowledge freely shared.

9. Stabilize population. Work toward a balance in which births plus in- migrants equals deaths plus out-migrants. This is controversial and difficult, but as a start contraception should be made available for voluntary use everywhere. And while each nation can debate whether it should accept many or few immigrants, such a debate is rendered moot if immigration laws are not enforced. Support voluntary family planning, and enforcement of reasonable immigration laws, democratically enacted in spite of the cheap labor lobby.

10. Reform national accounts-separate GDP into a cost account and a benefits account. Compare them at the margin, stop throughput growth when marginal costs equal marginal benefits. In addition to this objective approach, recognize the importance of the subjective studies that show that, beyond a threshold, further GDP growth does not increase self-evaluated happiness. Beyond a level already reached in many countries GDP growth delivers no more happiness, but continues to generate depletion and pollution. At a minimum we must not just assume that GDP growth is ìeconomic growth´, but prove it. And start by trying to refute the mountain of contrary evidence.

While these policies will appear radical to many, it is worth remembering that they are amenable to gradual application. One hundred percent reserves can be approached gradually, the range of distribution can be restricted gradually, caps can be adjusted gradually, etc. Also these measures are based on the conservative institutions of private property and decentralized market allocation. They simply recognize that private property loses its legitimacy if too unequally distributed, and that markets lose their legitimacy if prices do not tell the whole truth about opportunity costs. In addition, the macro-economy becomes an absurdity if its scale is structurally required to grow beyond the biophysical limits of the Earth. And well before reaching that radical physical limit we are encountering the conservative economic limit in which extra costs of growth become greater than the extra benefits, ushering in the era of uneconomic growth, so far unrecognized.

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Herman Daly is an American ecological economist and professor at the School of Public Policy of University of Maryland, College Park in the United States.

He was Senior Economist in the Environment Department of the World Bank, where he helped to develop policy guidelines related to sustainable development. While there, he was engaged in environmental operations work in Latin America.

Before joining the World Bank, Daly was Alumni Professor of Economics at Louisiana State University. He is a co-founder and associate editor of the journal, Ecological Economics.

He is also a recipient of, an Honorary Right Livelihood Award (the alternative Nobel Prize), the Heineken Prize for Environmental Science from the Royal Netherlands Academy of Arts and Sciences, the Sophie Prize (Norway), the Kenneth E. Boulding Award (1994) and the Leontief Prize from the Global Development and Environment Institute.

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You can read other papers by Herman Daly here (Steady-state) and here (credit crisis).

This is the transcript of the President’s speech at Cairo University in Cairo, Egypt on June 04, 2009. You can read it below, or view the video at the Whitehouse website.

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To Make a New Beginning

Good afternoon.  I am honored to be in the timeless city of Cairo, and to be hosted by two remarkable institutions.  For over a thousand years, Al-Azhar has stood as a beacon of Islamic learning; and for over a century, Cairo University has been a source of Egypt’s advancement.  And together, you represent the harmony between tradition and progress.  I’m grateful for your hospitality, and the hospitality of the people of Egypt.  And I’m also proud to carry with me the goodwill of the American people, and a greeting of peace from Muslim communities in my country:  Assalaamu alaykum.

We meet at a time of great tension between the United States and Muslims around the world — tension rooted in historical forces that go beyond any current policy debate.  The relationship between Islam and the West includes centuries of coexistence and cooperation, but also conflict and religious wars.  More recently, tension has been fed by colonialism that denied rights and opportunities to many Muslims, and a Cold War in which Muslim-majority countries were too often treated as proxies without regard to their own aspirations.  Moreover, the sweeping change brought by modernity and globalization led many Muslims to view the West as hostile to the traditions of Islam.

Violent extremists have exploited these tensions in a small but potent minority of Muslims.  The attacks of September 11, 2001 and the continued efforts of these extremists to engage in violence against civilians has led some in my country to view Islam as inevitably hostile not only to America and Western countries, but also to human rights.  All this has bred more fear and more mistrust.

So long as our relationship is defined by our differences, we will empower those who sow hatred rather than peace, those who promote conflict rather than the cooperation that can help all of our people achieve justice and prosperity.  And this cycle of suspicion and discord must end.

I’ve come here to Cairo to seek a new beginning between the United States and Muslims around the world, one based on mutual interest and mutual respect, and one based upon the truth that America and Islam are not exclusive and need not be in competition.  Instead, they overlap, and share common principles — principles of justice and progress; tolerance and the dignity of all human beings.

I do so recognizing that change cannot happen overnight.  I know there’s been a lot of publicity about this speech, but no single speech can eradicate years of mistrust, nor can I answer in the time that I have this afternoon all the complex questions that brought us to this point.  But I am convinced that in order to move forward, we must say openly to each other the things we hold in our hearts and that too often are said only behind closed doors.  There must be a sustained effort to listen to each other; to learn from each other; to respect one another; and to seek common ground.  As the Holy Koran tells us,
“Be conscious of God and speak always the truth.”  That is what I will try to do today — to speak the truth as best I can, humbled by the task before us, and firm in my belief that the interests we share as human beings are far more powerful than the forces that drive us apart.

Now part of this conviction is rooted in my own experience. I’m a Christian, but my father came from a Kenyan family that includes generations of Muslims.  As a boy, I spent several years in Indonesia and heard the call of the azaan at the break of dawn and at the fall of dusk.  As a young man, I worked in Chicago communities where many found dignity and peace in their Muslim faith.

As a student of history, I also know civilization’s debt to Islam.  It was Islam — at places like Al-Azhar — that carried the light of learning through so many centuries, paving the way for Europe’s Renaissance and Enlightenment.  It was innovation in Muslim communities — it was innovation in Muslim communities that developed the order of algebra; our magnetic compass and tools of navigation; our mastery of pens and printing; our understanding of how disease spreads and how it can be healed.  Islamic culture has given us majestic arches and soaring spires; timeless poetry and cherished music; elegant calligraphy and places of peaceful contemplation.  And throughout history, Islam has demonstrated through words and deeds the possibilities of religious tolerance and racial equality.

I also know that Islam has always been a part of America’s story.  The first nation to recognize my country was Morocco.  In signing the Treaty of Tripoli in 1796, our second President, John Adams, wrote,
“The United States has in itself no character of enmity against the laws, religion or tranquility of Muslims.”  And since our founding, American Muslims have enriched the United States.  They have fought in our wars, they have served in our government, they have stood for civil rights, they have started businesses, they have taught at our universities, they’ve excelled in our sports arenas, they’ve won Nobel Prizes, built our tallest building, and lit the Olympic Torch.  And when the first Muslim American was recently elected to Congress, he took the oath to defend our Constitution using the same Holy Koran that one of our Founding Fathers — Thomas Jefferson — kept in his personal library.

So I have known Islam on three continents before coming to the region where it was first revealed.  That experience guides my conviction that partnership between America and Islam must be based on what Islam is, not what it isn’t.  And I consider it part of my responsibility as President of the United States to fight against negative stereotypes of Islam wherever they appear.

But that same principle must apply to Muslim perceptions of America.  Just as Muslims do not fit a crude stereotype, America is not the crude stereotype of a self-interested empire.  The United States has been one of the greatest sources of progress that the world has ever known.  We were born out of revolution against an empire.  We were founded upon the ideal that all are created equal, and we have shed blood and struggled for centuries to give meaning to those words — within our borders, and around the world.  We are shaped by every culture, drawn from every end of the Earth, and dedicated to a simple concept:  E pluribus unum — “Out of many, one.”

Now, much has been made of the fact that an African American with the name Barack Hussein Obama could be elected President. But my personal story is not so unique.  The dream of opportunity for all people has not come true for everyone in America, but its promise exists for all who come to our shores — and that includes nearly 7 million American Muslims in our country today who, by the way, enjoy incomes and educational levels that are higher than the American average.

Moreover, freedom in America is indivisible from the freedom to practice one’s religion.  That is why there is a mosque in every state in our union, and over 1,200 mosques within our borders.  That’s why the United States government has gone to court to protect the right of women and girls to wear the hijab and to punish those who would deny it.

So let there be no doubt:  Islam is a part of America.  And I believe that America holds within her the truth that regardless of race, religion, or station in life, all of us share common aspirations — to live in peace and security; to get an education and to work with dignity; to love our families, our communities, and our God.  These things we share.  This is the hope of all humanity.

Of course, recognizing our common humanity is only the beginning of our task.  Words alone cannot meet the needs of our people.  These needs will be met only if we act boldly in the years ahead; and if we understand that the challenges we face are shared, and our failure to meet them will hurt us all.

For we have learned from recent experience that when a financial system weakens in one country, prosperity is hurt everywhere.  When a new flu infects one human being, all are at risk.  When one nation pursues a nuclear weapon, the risk of nuclear attack rises for all nations.  When violent extremists operate in one stretch of mountains, people are endangered across an ocean.  When innocents in Bosnia and Darfur are slaughtered, that is a stain on our collective conscience. That is what it means to share this world in the 21st century.  That is the responsibility we have to one another as human beings.

And this is a difficult responsibility to embrace.  For human history has often been a record of nations and tribes — and, yes, religions — subjugating one another in pursuit of their own interests.  Yet in this new age, such attitudes are self-defeating.  Given our interdependence, any world order that elevates one nation or group of people over another will inevitably fail.  So whatever we think of the past, we must not be prisoners to it.  Our problems must be dealt with through partnership; our progress must be shared.

Now, that does not mean we should ignore sources of tension. Indeed, it suggests the opposite:  We must face these tensions squarely.  And so in that spirit, let me speak as clearly and as plainly as I can about some specific issues that I believe we must finally confront together.

The first issue that we have to confront is violent extremism in all of its forms.

In Ankara, I made clear that America is not — and never will be — at war with Islam. We will, however, relentlessly confront violent extremists who pose a grave threat to our security — because we reject the same thing that people of all faiths reject:  the killing of innocent men, women, and children.  And it is my first duty as President to protect the American people.

The situation in Afghanistan demonstrates America’s goals, and our need to work together.  Over seven years ago, the United States pursued al Qaeda and the Taliban with broad international support.  We did not go by choice; we went because of necessity. I’m aware that there’s still some who would question or even justify the events of 9/11.  But let us be clear:  Al Qaeda killed nearly 3,000 people on that day.  The victims were innocent men, women and children from America and many other nations who had done nothing to harm anybody.  And yet al Qaeda chose to ruthlessly murder these people, claimed credit for the attack, and even now states their determination to kill on a massive scale.  They have affiliates in many countries and are trying to expand their reach.  These are not opinions to be debated; these are facts to be dealt with.

Now, make no mistake:  We do not want to keep our troops in Afghanistan.  We see no military — we seek no military bases there.  It is agonizing for America to lose our young men and women.  It is costly and politically difficult to continue this conflict.  We would gladly bring every single one of our troops home if we could be confident that there were not violent extremists in Afghanistan and now Pakistan determined to kill as many Americans as they possibly can.  But that is not yet the case.

And that’s why we’re partnering with a coalition of 46 countries.  And despite the costs involved, America’s commitment will not weaken.  Indeed, none of us should tolerate these extremists.  They have killed in many countries.  They have killed people of different faiths — but more than any other, they have killed Muslims.  Their actions are irreconcilable with the rights of human beings, the progress of nations, and with Islam.  The Holy Koran teaches that whoever kills an innocent is as — it is as if he has killed all mankind.  And the Holy Koran also says whoever saves a person, it is as if he has saved all mankind. The enduring faith of over a billion people is so much bigger than the narrow hatred of a few. Islam is not part of the problem in combating violent extremism — it is an important part of promoting peace.

Now, we also know that military power alone is not going to solve the problems in Afghanistan and Pakistan.  That’s why we plan to invest $1.5 billion each year over the next five years to partner with Pakistanis to build schools and hospitals, roads and businesses, and hundreds of millions to help those who’ve been displaced.  That’s why we are providing more than $2.8 billion to help Afghans develop their economy and deliver services that people depend on.

Let me also address the issue of Iraq.  Unlike Afghanistan, Iraq was a war of choice that provoked strong differences in my country and around the world.  Although I believe that the Iraqi people are ultimately better off without the tyranny of Saddam Hussein, I also believe that events in Iraq have reminded America of the need to use diplomacy and build international consensus to resolve our problems whenever possible. Indeed, we can recall the words of Thomas Jefferson, who said:  “I hope that our wisdom will grow with our power, and teach us that the less we use our power the greater it will be.”

Today, America has a dual responsibility:  to help Iraq forge a better future — and to leave Iraq to Iraqis.  And I have made it clear to the Iraqi people — I have made it clear to the Iraqi people that we pursue no bases, and no claim on their territory or resources.  Iraq’s sovereignty is its own. And that’s why I ordered the removal of our combat brigades by next August.  That is why we will honor our agreement with Iraq’s democratically elected government to remove combat troops from Iraqi cities by July, and to remove all of our troops from Iraq by 2012. We will help Iraq train its security forces and develop its economy.  But we will support a secure and united Iraq as a partner, and never as a patron.

And finally, just as America can never tolerate violence by extremists, we must never alter or forget our principles.  Nine-eleven was an enormous trauma to our country.  The fear and anger that it provoked was understandable, but in some cases, it led us to act contrary to our traditions and our ideals.  We are taking concrete actions to change course.  I have unequivocally prohibited the use of torture by the United States, and I have ordered the prison at Guantanamo Bay closed by early next year.

So America will defend itself, respectful of the sovereignty of nations and the rule of law.  And we will do so in partnership with Muslim communities which are also threatened.  The sooner the extremists are isolated and unwelcome in Muslim communities, the sooner we will all be safer.

The second major source of tension that we need to discuss is the situation between Israelis, Palestinians and the Arab world.

America’s strong bonds with Israel are well known.  This bond is unbreakable.  It is based upon cultural and historical ties, and the recognition that the aspiration for a Jewish homeland is rooted in a tragic history that cannot be denied.

Around the world, the Jewish people were persecuted for centuries, and anti-Semitism in Europe culminated in an unprecedented Holocaust.  Tomorrow, I will visit Buchenwald, which was part of a network of camps where Jews were enslaved, tortured, shot and gassed to death by the Third Reich.  Six million Jews were killed — more than the entire Jewish population of Israel today.  Denying that fact is baseless, it is ignorant, and it is hateful.  Threatening Israel with destruction — or repeating vile stereotypes about Jews — is deeply wrong, and only serves to evoke in the minds of Israelis this most painful of memories while preventing the peace that the people of this region deserve.

On the other hand, it is also undeniable that the Palestinian people — Muslims and Christians — have suffered in pursuit of a homeland.  For more than 60 years they’ve endured the pain of dislocation.  Many wait in refugee camps in the West Bank, Gaza, and neighboring lands for a life of peace and security that they have never been able to lead.  They endure the daily humiliations — large and small — that come with occupation.  So let there be no doubt:  The situation for the Palestinian people is intolerable.  And America will not turn our backs on the legitimate Palestinian aspiration for dignity, opportunity, and a state of their own.

For decades then, there has been a stalemate:  two peoples with legitimate aspirations, each with a painful history that makes compromise elusive.  It’s easy to point fingers — for Palestinians to point to the displacement brought about by Israel’s founding, and for Israelis to point to the constant hostility and attacks throughout its history from within its borders as well as beyond.  But if we see this conflict only from one side or the other, then we will be blind to the truth:  The only resolution is for the aspirations of both sides to be met through two states, where Israelis and Palestinians each live in peace and security.

That is in Israel’s interest, Palestine’s interest, America’s interest, and the world’s interest.  And that is why I intend to personally pursue this outcome with all the patience and dedication that the task requires. The obligations — the obligations that the parties have agreed to under the road map are clear.  For peace to come, it is time for them — and all of us — to live up to our responsibilities.

Palestinians must abandon violence.  Resistance through violence and killing is wrong and it does not succeed.  For centuries, black people in America suffered the lash of the whip as slaves and the humiliation of segregation.  But it was not violence that won full and equal rights.  It was a peaceful and determined insistence upon the ideals at the center of America’s founding.  This same story can be told by people from South Africa to South Asia; from Eastern Europe to Indonesia.  It’s a story with a simple truth:  that violence is a dead end.  It is a sign neither of courage nor power to shoot rockets at sleeping children, or to blow up old women on a bus.  That’s not how moral authority is claimed; that’s how it is surrendered.

Now is the time for Palestinians to focus on what they can build.  The Palestinian Authority must develop its capacity to govern, with institutions that serve the needs of its people. Hamas does have support among some Palestinians, but they also have to recognize they have responsibilities.  To play a role in fulfilling Palestinian aspirations, to unify the Palestinian people, Hamas must put an end to violence, recognize past agreements, recognize Israel’s right to exist.

At the same time, Israelis must acknowledge that just as Israel’s right to exist cannot be denied, neither can Palestine’s.  The United States does not accept the legitimacy of continued Israeli settlements. This construction violates previous agreements and undermines efforts to achieve peace.  It is time for these settlements to stop.

And Israel must also live up to its obligation to ensure that Palestinians can live and work and develop their society.  Just as it devastates Palestinian families, the continuing humanitarian crisis in Gaza does not serve Israel’s security; neither does the continuing lack of opportunity in the West Bank. Progress in the daily lives of the Palestinian people must be a critical part of a road to peace, and Israel must take concrete steps to enable such progress.

And finally, the Arab states must recognize that the Arab Peace Initiative was an important beginning, but not the end of their responsibilities.  The Arab-Israeli conflict should no longer be used to distract the people of Arab nations from other problems.  Instead, it must be a cause for action to help the Palestinian people develop the institutions that will sustain their state, to recognize Israel’s legitimacy, and to choose progress over a self-defeating focus on the past.

America will align our policies with those who pursue peace, and we will say in public what we say in private to Israelis and Palestinians and Arabs.  We cannot impose peace.  But privately, many Muslims recognize that Israel will not go away.  Likewise, many Israelis recognize the need for a Palestinian state.  It is time for us to act on what everyone knows to be true.

Too many tears have been shed.  Too much blood has been shed.  All of us have a responsibility to work for the day when the mothers of Israelis and Palestinians can see their children grow up without fear; when the Holy Land of the three great faiths is the place of peace that God intended it to be; when Jerusalem is a secure and lasting home for Jews and Christians and Muslims, and a place for all of the children of Abraham to mingle peacefully together as in the story of Isra  — as in the story of Isra, when Moses, Jesus, and Mohammed, peace be upon them, joined in prayer.

The third source of tension is our shared interest in the rights and responsibilities of nations on nuclear weapons.

This issue has been a source of tension between the United States and the Islamic Republic of Iran.  For many years, Iran has defined itself in part by its opposition to my country, and there is in fact a tumultuous history between us.  In the middle of the Cold War, the United States played a role in the overthrow of a democratically elected Iranian government.  Since the Islamic Revolution, Iran has played a role in acts of hostage-taking and violence against U.S. troops and civilians.  This history is well known.  Rather than remain trapped in the past, I’ve made it clear to Iran’s leaders and people that my country is prepared to move forward.  The question now is not what Iran is against, but rather what future it wants to build.

I recognize it will be hard to overcome decades of mistrust, but we will proceed with courage, rectitude, and resolve.  There will be many issues to discuss between our two countries, and we are willing to move forward without preconditions on the basis of mutual respect.  But it is clear to all concerned that when it comes to nuclear weapons, we have reached a decisive point.  This is not simply about America’s interests.  It’s about preventing a nuclear arms race in the Middle East that could lead this region and the world down a hugely dangerous path.

I understand those who protest that some countries have weapons that others do not.  No single nation should pick and choose which nation holds nuclear weapons.  And that’s why I strongly reaffirmed America’s commitment to seek a world in which no nations hold nuclear weapons. And any nation — including Iran — should have the right to access peaceful nuclear power if it complies with its responsibilities under the nuclear Non-Proliferation Treaty.  That commitment is at the core of the treaty, and it must be kept for all who fully abide by it. And I’m hopeful that all countries in the region can share in this goal.

The fourth issue that I will address is democracy.

I know — I know there has been controversy about the promotion of democracy in recent years, and much of this controversy is connected to the war in Iraq.  So let me be clear: No system of government can or should be imposed by one nation by any other.

That does not lessen my commitment, however, to governments that reflect the will of the people.  Each nation gives life to this principle in its own way, grounded in the traditions of its own people.  America does not presume to know what is best for everyone, just as we would not presume to pick the outcome of a peaceful election.  But I do have an unyielding belief that all people yearn for certain things:  the ability to speak your mind and have a say in how you are governed; confidence in the rule of law and the equal administration of justice; government that is transparent and doesn’t steal from the people; the freedom to live as you choose.  These are not just American ideas; they are human rights.  And that is why we will support them everywhere.

Now, there is no straight line to realize this promise.  But this much is clear:  Governments that protect these rights are ultimately more stable, successful and secure.  Suppressing ideas never succeeds in making them go away.  America respects the right of all peaceful and law-abiding voices to be heard around the world, even if we disagree with them.  And we will welcome all elected, peaceful governments — provided they govern with respect for all their people.

This last point is important because there are some who advocate for democracy only when they’re out of power; once in power, they are ruthless in suppressing the rights of others.  So no matter where it takes hold, government of the people and by the people sets a single standard for all who would hold power:  You must maintain your power through consent, not coercion; you must respect the rights of minorities, and participate with a spirit of tolerance and compromise; you must place the interests of your people and the legitimate workings of the political process above your party.  Without these ingredients, elections alone do not make true democracy.

The fifth issue that we must address together is religious freedom.

Islam has a proud tradition of tolerance.  We see it in the history of Andalusia and Cordoba during the Inquisition.  I saw it firsthand as a child in Indonesia, where devout Christians worshiped freely in an overwhelmingly Muslim country.  That is the spirit we need today.  People in every country should be free to choose and live their faith based upon the persuasion of the mind and the heart and the soul.  This tolerance is essential for religion to thrive, but it’s being challenged in many different ways.

Among some Muslims, there’s a disturbing tendency to measure one’s own faith by the rejection of somebody else’s faith.  The richness of religious diversity must be upheld — whether it is for Maronites in Lebanon or the Copts in Egypt. And if we are being honest, fault lines must be closed among Muslims, as well, as the divisions between Sunni and Shia have led to tragic violence, particularly in Iraq.

Freedom of religion is central to the ability of peoples to live together.  We must always examine the ways in which we protect it.  For instance, in the United States, rules on charitable giving have made it harder for Muslims to fulfill their religious obligation.  That’s why I’m committed to working with American Muslims to ensure that they can fulfill zakat.

Likewise, it is important for Western countries to avoid impeding Muslim citizens from practicing religion as they see fit — for instance, by dictating what clothes a Muslim woman should wear.  We can’t disguise hostility towards any religion behind the pretence of liberalism.

In fact, faith should bring us together.  And that’s why we’re forging service projects in America to bring together Christians, Muslims, and Jews.  That’s why we welcome efforts like Saudi Arabian King Abdullah’s interfaith dialogue and Turkey’s leadership in the Alliance of Civilizations.  Around the world, we can turn dialogue into interfaith service, so bridges between peoples lead to action — whether it is combating malaria in Africa, or providing relief after a natural disaster.

The sixth issue — the sixth issue that I want to address is women’s rights.

I know –- I know — and you can tell from this audience, that there is a healthy debate about this issue.  I reject the view of some in the West that a woman who chooses to cover her hair is somehow less equal, but I do believe that a woman who is denied an education is denied equality. And it is no coincidence that countries where women are well educated are far more likely to be prosperous.

Now, let me be clear:  Issues of women’s equality are by no means simply an issue for Islam.  In Turkey, Pakistan, Bangladesh, Indonesia, we’ve seen Muslim-majority countries elect a woman to lead.  Meanwhile, the struggle for women’s equality continues in many aspects of American life, and in countries around the world.

I am convinced that our daughters can contribute just as much to society as our sons. Our common prosperity will be advanced by allowing all humanity — men and women — to reach their full potential.  I do not believe that women must make the same choices as men in order to be equal, and I respect those women who choose to live their lives in traditional roles. But it should be their choice.  And that is why the United States will partner with any Muslim-majority country to support expanded literacy for girls, and to help young women pursue employment through micro-financing that helps people live their dreams.

Finally, I want to discuss economic development and opportunity.

I know that for many, the face of globalization is contradictory.  The Internet and television can bring knowledge and information, but also offensive sexuality and mindless violence into the home.  Trade can bring new wealth and opportunities, but also huge disruptions and change in communities.  In all nations — including America — this change can bring fear.  Fear that because of modernity we lose control over our economic choices, our politics, and most importantly our identities — those things we most cherish about our communities, our families, our traditions, and our faith.

But I also know that human progress cannot be denied.  There need not be contradictions between development and tradition. Countries like Japan and South Korea grew their economies enormously while maintaining distinct cultures.  The same is true for the astonishing progress within Muslim-majority countries from Kuala Lumpur to Dubai.  In ancient times and in our times, Muslim communities have been at the forefront of innovation and education.

And this is important because no development strategy can be based only upon what comes out of the ground, nor can it be sustained while young people are out of work.  Many Gulf states have enjoyed great wealth as a consequence of oil, and some are beginning to focus it on broader development.  But all of us must recognize that education and innovation will be the currency of the 21st century — and in too many Muslim communities, there remains underinvestment in these areas.  I’m emphasizing such investment within my own country.  And while America in the past has focused on oil and gas when it comes to this part of the world, we now seek a broader engagement.

On education, we will expand exchange programs, and increase scholarships, like the one that brought my father to America.  At the same time, we will encourage more Americans to study in Muslim communities.  And we will match promising Muslim students with internships in America; invest in online learning for teachers and children around the world; and create a new online network, so a young person in Kansas can communicate instantly with a young person in Cairo.

On economic development, we will create a new corps of business volunteers to partner with counterparts in Muslim-majority countries.  And I will host a Summit on Entrepreneurship this year to identify how we can deepen ties between business leaders, foundations and social entrepreneurs in the United States and Muslim communities around the world.

On science and technology, we will launch a new fund to support technological development in Muslim-majority countries, and to help transfer ideas to the marketplace so they can create more jobs.  We’ll open centers of scientific excellence in Africa, the Middle East and Southeast Asia, and appoint new science envoys to collaborate on programs that develop new sources of energy, create green jobs, digitize records, clean water, grow new crops.  Today I’m announcing a new global effort with the Organization of the Islamic Conference to eradicate polio.  And we will also expand partnerships with Muslim communities to promote child and maternal health.

All these things must be done in partnership.  Americans are ready to join with citizens and governments; community organizations, religious leaders, and businesses in Muslim communities around the world to help our people pursue a better life.

The issues that I have described will not be easy to address.  But we have a responsibility to join together on behalf of the world that we seek — a world where extremists no longer threaten our people, and American troops have come home; a world where Israelis and Palestinians are each secure in a state of their own, and nuclear energy is used for peaceful purposes; a world where governments serve their citizens, and the rights of all God’s children are respected.  Those are mutual interests.  That is the world we seek.  But we can only achieve it together.

I know there are many — Muslim and non-Muslim — who question whether we can forge this new beginning.  Some are eager to stoke the flames of division, and to stand in the way of progress.  Some suggest that it isn’t worth the effort — that we are fated to disagree, and civilizations are doomed to clash. Many more are simply skeptical that real change can occur.  There’s so much fear, so much mistrust that has built up over the years.  But if we choose to be bound by the past, we will never move forward.  And I want to particularly say this to young people of every faith, in every country — you, more than anyone, have the ability to reimagine the world, to remake this world.

All of us share this world for but a brief moment in time. The question is whether we spend that time focused on what pushes us apart, or whether we commit ourselves to an effort — a sustained effort — to find common ground, to focus on the future we seek for our children, and to respect the dignity of all human beings.

It’s easier to start wars than to end them.  It’s easier to blame others than to look inward.  It’s easier to see what is different about someone than to find the things we share.  But we should choose the right path, not just the easy path.  There’s one rule that lies at the heart of every religion — that we do unto others as we would have them do unto us. This truth transcends nations and peoples — a belief that isn’t new; that isn’t black or white or brown; that isn’t Christian or Muslim or Jew.  It’s a belief that pulsed in the cradle of civilization, and that still beats in the hearts of billions around the world.  It’s a faith in other people, and it’s what brought me here today.

We have the power to make the world we seek, but only if we have the courage to make a new beginning, keeping in mind what has been written.

The Holy Koran tells us:  “O mankind!  We have created you male and a female; and we have made you into nations and tribes so that you may know one another.”

The Talmud tells us:  “The whole of the Torah is for the purpose of promoting peace.”

The Holy Bible tells us:  “Blessed are the peacemakers, for they shall be called sons of God.”

The people of the world can live together in peace.  We know that is God’s vision.  Now that must be our work here on Earth.

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