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ECONOMIC PASSAGES

Interest rates on cash investments have dropped precipitously in recent years. This is in
keeping with the government's stated policy of keeping interest rates low to encourage loan
activity and economic growth. The resulting focus on borrowers and their well-being,
however, obscures the impact of such interest rates on savers--many of whom look to interest
payments as an important source of income. President Clinton said that his budget proposal
has led to a 20-year low in mortgage rates, dramatically lower interest rates, and that we are
moving in the right direction. Such sentiment about the virtue of low rates has been echoed
throughout government for many years. And indeed, those with debts who can take advantage
of the lower rates have certainly benefited.

For savers, though, it is an entirely different story. When rates drop--whether by government
fiat or market forces--their earnings on interest-bearing investments also drop. The average
annual return on a taxable money market fund dropped 41% in 1992; interest rates on 3-
month CDs dropped 37%. This flip side to declining rates has received scant attention from
the government, but it has a direct impact on those, such as retirees, who rely on interest to
supplement their income. The net effect of lower interest rates is a redistribution of income,
with borrowers benefiting at the expense of savers. Declining rates convey a warning about
investing; now traditionally "safe" investments have significant dangers of their own, including
cash flow problems and narrow margins of return over inflation.

All savers are vulnerable to lower interest rates, but perhaps none more so than the elderly.
Few elderly people, comparatively speaking, have mortgages that they could refinance at
lower rates, but many do receive interest payments on a "nest egg" from the sale of a home
or years of dedicated saving. The recent drop in rates has shown how drastic an income
reduction can be for retirees who depend on savings income. For example, a retiree who
placed $100,000 from the sale of his house in 3-month CDs earned about $5,830 in 1991. In
1992, he would have made only about $3,680. Low rates also leave these savers vulnerable to
inflation. Historically, there has been a narrow margin between interest rates on cash
investments and inflation, about 1% to 1.5% during the past 40 years. The 1980s were an
exception to this and saw rates average 3.26% more than inflation. During the 1990s this gap
has narrowed dramatically; last year when the rate of inflation was 2.9%, the average return
on a taxable money market fund was only 0.47% higher. More startling was that by December
1992, the average taxable money market yield had dropped below the rate of inflation for the
year. This pattern has continued so far this year.

Investors who can do so have been getting out of low-interest money accounts and into
equities that give much higher total returns. Such investors are, in general, people who follow
these matters fairly closely, don't need the cash on a ready basis, and are willing to take the
risks inherent in stocks, which can go down as well as up. Also, such investors are usually
those who are willing and able to let their money ride for a period of years, to take advantage
of longer market cycles. Elderly investors don't fit this profile and are unwilling to abandon
investments that have repeatedly been described as safe, so they tighten their belts and stay
in low-interest cash accounts, hoping for a return of more favorable interest rates.

From G. Murdoch, "What's Wrong with Low Interest Rates?" (Consumer's Research, August 1993).

Passage IV (Questions 72 - 76)

One of the few things that Bill Clinton and Newt Gingrich have in common is that they both
got their jobs by promising fundamental reform of the political system. As the voters--not to
mention the roughly 50 percent of eligible citizens who don't vote--have made abundantly
clear in recent years, Americans are becoming deeply cynical about the way US democracy
operates. "Change" has become the shibboleth of virtually every politician. Yet somehow, real
reform never quite happens. Capitol Hill's recent refusal to pass even the most tepid
campaign finance reform measure is an indictment not only of our indentured legislators, but
of Bill Clinton's leadership.

Clinton made campaign reform a relatively low priority in his first two years of office. He
ended up backing a weak package proposed by congressional Democrats, and a look at the
fine print shows just how superficial the plan was. For example, in 1992 an average House
race cost $543,000. The Democrats proposed a starting cap of $600,000 on House races. Yet
even this placebo of a plan could not get through Congress because of both the Democrats'
lack of commitment and Gingrich's machinations. It seems that when former House Speaker
Tom Foley finally realized he had to deliver a bill, his team consulted Republican leaders, and
Gingrich offered specific recommendations that Foley and the Democrats included in the
proposal. But then Gingrich turned an about-face by calling Pat Robertson and Rush Limbaugh
to rally their troops against the very language that Newt had sponsored. With such game-
playing on both sides of the aisle, it's no wonder that Americans are disenchanted. What
would it take to overcome their cynicism and revitalize American democracy?

A growing number of observers believe that a fundamental overhaul of American democracy is
in order. These people are supporters of a system of voting called proportional
representation, a more inclusive system of voting that would have the effect of opening up
the parties and increasing voter participation. Proponents say the fundamental flaw of
American democracy is the winner-take-all system of electing lawmakers. Consider the
following situation: In a US House race, the Democratic candidate finishes with 40% of the
vote. His Republican opponent gets 39%, and an independent candidate gets 11%. The
Democrat wins--but the majority of the voters in the district is left with no voice in
Washington. Is it any wonder that they feel alienated from the political system?

Proportional representation reflects the true political diversity of the electorate. Under it,
larger multi-member legislative districts replace smaller single-member districts. In a 10-
member district, any party that wins 10 percent of the vote is entitled to one seat, a party
that wins 20 percent is assigned two seats, and so on. Proportional representation is not a
radical idea. In fact, it is used in most of the world's democracies and is the reason Greens
and other new political movements are represented in many European legislatures. The new
South African constitution, for instance, mandates a sweeping system of proportional
representation to ensure that all political parties, races, and ethnic groups have a say in
government. This is not simply a matter of fairness. South Africans were well aware that a
winner-take-all election in nearby Angola had prompted rebel leader Jonas Savimbi to resume
violent struggle, after his election loss cut him out of the political process. Despite all their
promises, Bill Clinton and Newt Gingrich cannot be expected significantly to reform a system
that keeps their two parties in control of the country. Real election reform in the United
States will have to begin at the grass roots.

From M. Harvey, "Real Change for a Change" (Utne Reader, May-June 1995).


More than the poll-driven Contract with America, the Republican balanced-budget promise
has convinced many otherwise levelheaded conservatives that Gingrich is an American
Thatcher, a revolutionary leader dedicated to dissolving the "bureaucratic welfare state."
Others remain a bit more skeptical. To meet their budget goal, the Republicans must cut the
deficit by $1.3 trillion over seven years. That's twice as big as the cut in President Clinton's
1993 budget plan, which did more than half of the deficit-reducing with tax increases. The
Republicans say they will do it with spending cuts alone, while lowering taxes, and without
touching Social Security. How?

It's a good question to ask. There are, it turns out, plenty of ways to pretend to balance the
budget without really doing it. One thing you can do to show no deficit in 2002 is to push
losses back to 2003. The House Republicans’ tax proposals, for example, are heavily "back-
loaded," meaning their costs balloon over time. True, it will be hard to put off the day of
reckoning for a full seven years, but some GOP tax breaks actually generate money for a few
years before they become big losers. One provision would let you pay tax on your existing IRA
now, in exchange for withdrawing the money tax-free later. These tax-breaks can be delayed
so their revenue-producing years happen to coincide with 2002. Even better, the government
can sell a bunch of assets--broadcast frequencies, loan portfolios--just in time to eliminate
the deficit for a year. Another option defined by Gingrich is to take Medicare into a separate
box; he claims: "It should not be entangled in the budget debate." The Medicare trust fund is
scheduled to lose $161 billion between now and 2002. The "separate box" idea suggests a
subtle, yet effective, ruse. Republicans could note that the trust fund is going broke, then
call for a commission to "reinvent" the program and save, say, $250 billion over seven years.
Who could object if this Medicare commission--which Bob Dole has already called for--takes a
year or two to come up with its recommendations? In the meantime, the Republicans can
count the $250 billion in projected savings as part of their bold budget plan.

How can Republicans appear to control entitlement programs other than Medicare--programs
such as Medicaid, farm subsidies, civil service, and military pensions? By capping them. Write
a law saying their cost shall be held to--well, you can fill in any number you want. If costs
exceed that level, decree that the requisite amount will automatically be "sequestered." This
is the mechanism that the Gramm-Rudman bill tried to use to control the budget. The
approach failed, of course, because when the budget targets were breached and the time
came for a big sequester, Congress chickened out. "Entitlement caps" are not budget cuts;
they are a promise to make budget cuts at a later date. They allow Republicans to avoid
explaining to the voters all the nasty things budget cutting will actually require.

If the Republicans really did balance the federal budget, of course, interest rates would drop.
Economic growth would probably increase. This would itself have a positive impact on the
budget, as interest on the debt fell and tax receipts rose. The Congressional Budget Office
has estimated this "bonus" effect would amount to a $170 billion improvement in the budget
between now and 2002. The great temptation will be for the Republicans to award
themselves this bonus simply because they have promised to cut the budget, and to count it
as the last $170 billion in deficit reduction.

From M. Kaus, "Ruse You Can Use" (New Republic, May 22, 1995).

HISTORY
The Maya achieved the high point of their civilization more than a thousand years ago in the
remote jungles of Mexico and Central America, but with every passing year, their society is
looking more and more like ours. As recently as 30 years ago, many archaeologists imagined
the Maya as peaceful mystics, their lives centered on stately ceremonial centers. But that
picture faded in the 1960s as a breed of anthropologists known as epigraphers cracked the
complex hieroglyphic system of Maya writing. The glyphs told a lively story of politics and
warfare, and the ceremonial centers became quarrelsome city-states. Now, with a new
reading of texts from sites throughout the Maya heartland, the Maya have taken another step
toward modernity. Epigraphers Simon Martin and Nikolai Grube see many of the individual
city-states tied in two large, durable alliances. Like NATO and the Warsaw Pact, each alliance
was led by a dominant power: the great city of Tikal in Guatemala and an even larger
metropolis in Yucatan called Calakmul. These powers fought wars through proxy states and
preserved the allegiance of their vassal city-states through force and intermarriage.

Previously, most scholars saw Maya political organization as a mosaic of weak city-states no
more than a day's walk in radius. A few Mayanists had advocated the idea of larger states, but
they made little headway against this dominant view. Without the force of the texts behind
their interpretation, they failed to convince many of their colleagues. Still, scholars
deciphering the histories recorded on the carved stone slabs called stelae and on temple
reliefs were aware that some city-states had stronger ties to others than the picture of
independent city-states seemed to allow. For instance, inscriptions from Dos Pilas
demonstrate a constant presence of Calakmul. Other researchers had seen hints that
Calakmul enlisted allies in its wars against Tikal. But most Maya scholars saw these links as
temporary strategic alliances--not lasting political formations.

Drawing an eerie parallel to the fall of the Soviet Union, the researchers speculate that the
collapse of one great alliance--Calakmul's--could have contributed to the political
fragmentation and widespread warfare that followed. If they are right, Martin and Grube will
have shed light on one of the enduring mysteries of classic Maya civilization: its collapse in
about AD 800. What they saw was two far-flung networks that included cities adjacent to
Tikal and Calakmul, but that also extended to distant satellite states. By 730 AD, it seems
that there was not one single state in the Maya lowlands that was not in a political sphere.
Although vassal kings generally ruled without overt interference, the alliances shaped the
city-states' relations with one another.

Calakmul held the upper hand over Tikal for more than 150 years, then the evidence indicates
that Calakmul tried to unify the whole lowlands into a network of states under its sway. But
somehow, it overreached. Around 740 or 750, the Tikal kings had acquired enough power to
beat Calakmul in a series of conflicts. After that date, references to Calakmul disappear at
distant sites. Those defeats may have opened the way for the collapse of the Maya civilization
that followed. Calakmul's decline, along with Tikal's inability to consolidate its hold over
Calakmul's former territory, may have helped trigger political fragmentation. With the
fragmentation came violence and social breakdown. Villages were transformed into
fortresses, and there was a precipitous drop in population. In Dos Pilas, it could be that the
power and prestige of the king depended on the power and prestige of Calakmul. Another
theory that some scholars believe is that the breakup of the alliances may not have been the
only factor--or even the primary one--in the collapse of classic Maya civilization. The political
collapse may have been just a manifestation of a longer term malaise connected to an
overstressed environment and a burgeoning population.

From J. Doe, "Clashing Maya Superpowers Emerge from a New Analysis" (Science, November 1994).